Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Pentair plc and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2018, the Company’s internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2018. That attestation report is set forth immediately following this management report.

John L. Stauch		Mark C. Borin
President and Chief Executive Officer		Executive Vice President and Chief Financial Officer

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Pentair plc

London, United Kingdom

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Pentair plc and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule listed in the Index at Item 15 as of and for the year ended December 31, 2018, of the Company and our report dated February 19, 2019 expressed an unqualified opinion on those financial statements and financial statement schedule.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

February 19, 2019

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Pentair plc

London, United Kingdom

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Pentair plc and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related Consolidated Statements of Operations and Comprehensive Income, Changes in Equity, and Cash Flows for each of the three years in the period ended December 31, 2018, the related notes, and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 19, 2019 expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

February 19, 2019

We have served as the Company’s auditor since 1977.

Pentair plc and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

	Years ended December 31
In millions, except per-share data	2018			2017			2016
Net sales	$	2,965.1		$	2,845.7		$	2,780.6
Cost of goods sold	1,917.4			1,858.2			1,821.5
Gross profit	1,047.7			987.5			959.1
Selling, general and administrative	534.3			536.0			531.4
Research and development	76.7			73.2			73.3
Operating income	436.7			378.3			354.4
Other (income) expense
Loss on sale of businesses	7.3			4.2			3.9
Loss on early extinguishment of debt	17.1			101.4			—
Net interest expense	32.6			87.3			140.1
Other (income) expense	(0.1		)	12.6			(10.5		)
Income from continuing operations before income taxes	379.8			172.8			220.9
Provision for income taxes	58.1			58.7			42.7
Net income from continuing operations	321.7			114.1			178.2
Income from discontinued operations, net of tax	25.7			371.3			343.4
Gain from sale / impairment of discontinued operations, net of tax	—			181.1			0.6
Net income	$	347.4		$	666.5		$	522.2
Comprehensive income, net of tax
Net income	$	347.4		$	666.5		$	522.2
Changes in cumulative translation adjustment (inclusive of divestiture of business reclassified to gain from sale of $374.2 for the year ended December 31, 2017)	10.0			497.5			(83.0		)
Changes in market value of derivative financial instruments, net of tax	4.8			(4.6		)	(8.3		)
Comprehensive income	$	362.2		$	1,159.4		$	430.9
Earnings per ordinary share
Basic
Continuing operations	$	1.83		$	0.63		$	0.98
Discontinued operations	0.15			3.04			1.90
Basic earnings per ordinary share	$	1.98		$	3.67		$	2.88
Diluted
Continuing operations	$	1.81		$	0.62		$	0.97
Discontinued operations	0.15			3.01			1.88
Diluted earnings per ordinary share	$	1.96		$	3.63		$	2.85
Weighted average ordinary shares outstanding
Basic	175.8			181.7			181.3
Diluted	177.3			183.7			183.1

See accompanying notes to consolidated financial statements.

Pentair plc and Subsidiaries

Consolidated Balance Sheets

	December 31
In millions, except per-share data	2018			2017
Assets
Current assets
Cash and cash equivalents	$	74.3		$	86.3
Accounts receivable, net of allowances of $14.0 and $14.2, respectively	488.2			483.1
Inventories	387.5			356.9
Other current assets	89.4			114.5
Current assets held for sale	—			708.0
Total current assets	1,039.4			1,748.8
Property, plant and equipment, net	272.6			279.8
Other assets
Goodwill	2,072.7			2,112.8
Intangibles, net	276.3			321.8
Other non-current assets	145.5			180.9
Non-current assets held for sale	—			3,989.6
Total other assets	2,494.5			6,605.1
Total assets	$	3,806.5		$	8,633.7
Liabilities and Equity
Current liabilities
Accounts payable	$	378.6		$	321.5
Employee compensation and benefits	111.7			115.8
Other current liabilities	328.4			401.3
Current liabilities held for sale	—			360.8
Total current liabilities	818.7			1,199.4
Other liabilities
Long-term debt	787.6			1,440.7
Pension and other post-retirement compensation and benefits	90.0			96.4
Deferred tax liabilities	105.9			108.6
Other non-current liabilities	168.2			213.8
Non-current liabilities held for sale	—			537.0
Total liabilities	1,970.4			3,595.9
Equity
Ordinary shares $0.01 par value, 426.0 authorized, 171.4 and 180.3 issued at December 31, 2018 and December 31, 2017, respectively	1.7			1.8
Additional paid-in capital	1,893.8			2,797.7
Retained earnings	169.2			2,481.7
Accumulated other comprehensive loss	(228.6		)	(243.4		)
Total equity	1,836.1			5,037.8
Total liabilities and equity	$	3,806.5		$	8,633.7

See accompanying notes to consolidated financial statements.

Pentair plc and Subsidiaries

Consolidated Statements of Cash Flows

	Years ended December 31
In millions	2018			2017			2016
Operating activities
Net income	$	347.4		$	666.5		$	522.2
Income from discontinued operations, net of tax	(25.7		)	(371.3		)	(343.4		)
Gain from sale / impairment of discontinued operations, net of tax	—			(181.1		)	(0.6		)
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities of continuing operations
Equity income of unconsolidated subsidiaries	(8.4		)	(1.3		)	(4.3		)
Depreciation	49.7			50.8			53.0
Amortization	34.9			36.4			35.4
Loss on sale of businesses	7.3			4.2			3.9
Deferred income taxes	(4.1		)	(18.0		)	1.2
Share-based compensation	20.9			39.6			34.2
Trade name and other impairment	12.0			15.6			—
Loss on early extinguishment of debt	17.1			101.4			—
Excess tax benefits from share-based compensation	—			—			(8.0		)
Changes in assets and liabilities, net of effects of business acquisitions
Accounts receivable	(15.3		)	(13.4		)	16.6
Inventories	(40.1		)	(20.5		)	33.9
Other current assets	31.2			(13.0		)	2.1
Accounts payable	58.3			15.6			22.8
Employee compensation and benefits	(0.6		)	(1.4		)	26.7
Other current liabilities	(3.3		)	(54.6		)	90.3
Other non-current assets and liabilities	(23.2		)	23.1			(106.1		)
Net cash provided by operating activities of continuing operations	458.1			278.6			379.9
Net cash provided by (used for) operating activities of discontinued operations	(19.0		)	341.6			481.5
Net cash provided by operating activities	439.1			620.2			861.4
Investing activities
Capital expenditures	(48.2		)	(39.1		)	(43.3		)
Proceeds from sale of property and equipment	0.2			3.7			18.8
(Payments due to) proceeds from sale of businesses and other	(12.8		)	2,759.4			(5.1		)
Acquisitions, net of cash acquired	(0.9		)	(45.9		)	(25.0		)
Net cash provided by (used for) investing activities of continuing operations	(61.7		)	2,678.1			(54.6		)
Net cash used for investing activities of discontinued operations	(7.1		)	(47.7		)	(67.2		)
Net cash provided by (used for) investing activities	(68.8		)	2,630.4			(121.8		)
Financing activities
Net receipts (repayments) of commercial paper and revolving long-term debt	39.7			(913.1		)	(385.3		)
Repayment of long-term debt	(675.1		)	(2,009.3		)	(0.7		)
Premium paid on early extinguishment of debt	(16.0		)	(94.9		)	—
Transfer of cash to nVent	(74.2		)	—			—
Distribution of cash from nVent	993.6			—			—
Shares issued to employees, net of shares withheld	13.3			37.2			20.7
Repurchases of ordinary shares	(500.0		)	(200.0		)	—
Dividends paid	(187.2		)	(251.7		)	(243.6		)
Other	(2.0		)	(0.8		)	8.8
Net cash used for financing activities	(407.9		)	(3,432.6		)	(600.1		)
Change in cash held for sale	27.0			(5.4		)	1.1
Effect of exchange rate changes on cash and cash equivalents	(1.4		)	56.8			(27.3		)
Change in cash and cash equivalents	(12.0		)	(130.6		)	113.3
Cash and cash equivalents, beginning of year	86.3			216.9			103.6
Cash and cash equivalents, end of year	$	74.3		$	86.3		$	216.9
Supplemental disclosure of cash flow information:
Cash paid for interest, net	$	43.7		$	107.2		$	143.4
Cash paid for income taxes, net	92.9			362.1			145.1

See accompanying notes to consolidated financial statements.

Pentair plc and Subsidiaries

Consolidated Statements of Changes in Equity

In millions	Ordinary shares					Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total
Number		Amount
Balance - December 31, 2015	180.5		$	1.8		$	2,860.3		$	1,791.7		$	(645.0	)	$	4,008.8
Net income	—		—			—			522.2			—			522.2
Other comprehensive loss, net of tax	—		—			—			—			(91.3		)	(91.3		)
Tax benefit of share-based compensation	—		—			5.5			—			—			5.5
Dividends declared	—		—			—			(245.8		)	—			(245.8		)
Exercise of options, net of shares tendered for payment	1.0		—			31.6			—			—			31.6
Issuance of restricted shares, net of cancellations	0.5		—			—			—			—			—
Shares surrendered by employees to pay taxes	(0.2	)	—			(10.8		)	—			—			(10.8		)
Share-based compensation	—		—			34.2			—			—			34.2
Balance - December 31, 2016	181.8		$	1.8		$	2,920.8		$	2,068.1		$	(736.3	)	$	4,254.4
Net income	—		—			—			666.5			—			666.5
Other comprehensive income, net of tax	—		—			—			—			492.9			492.9
Dividends declared	—		—			—			(252.9		)	—			(252.9		)
Share repurchase	(3.0	)	—			(200.0		)	—			—			(200.0		)
Exercise of options, net of shares tendered for payment	1.2		—			45.6			—			—			45.6
Issuance of restricted shares, net of cancellations	0.4		—			—			—			—			—
Shares surrendered by employees to pay taxes	(0.1	)	—			(8.3		)	—			—			(8.3		)
Share-based compensation	—		—			39.6			—			—			39.6
Balance - December 31, 2017	180.3		$	1.8		$	2,797.7		$	2,481.7		$	(243.4	)	$	5,037.8
Net income	—		—			—			347.4			—			347.4
Cumulative effect of accounting changes	—		—			—			(214.0		)	—			(214.0		)
Other comprehensive income, net of tax	—		—			—			—			62.6			62.6
Distribution to nVent	—		—			(438.2		)	(2,291.0		)	(47.8		)	(2,777.0		)
Dividends declared	—		—			—			(154.9		)	—			(154.9		)
Share repurchases	(10.2	)	(0.1		)	(499.9		)	—			—			(500.0		)
Exercise of options, net of shares tendered for payment	0.9		—			24.3			—			—			24.3
Issuance of restricted shares, net of cancellations	0.5		—			—			—			—			—
Shares surrendered by employees to pay taxes	(0.1	)	—			(11.0		)	—			—			(11.0		)
Share-based compensation	—		—			20.9			—			—			20.9
Balance - December 31, 2018	171.4		$	1.7		$	1,893.8		$	169.2		$	(228.6	)	$	1,836.1

See accompanying notes to consolidated financial statements.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

1.	Basis of Presentation and Summary of Significant Accounting Policies

Business

Pentair plc and its consolidated subsidiaries (“we,” “us,” “our,” “Pentair” or the “Company”) is a pure play water company comprised of three reporting segments: Aquatic Systems, Filtration Solutions and Flow Technologies.

Electrical separation

On April 30, 2018, Pentair completed the separation of its 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 Electric plc (“nVent”) and the issuance by nVent of ordinary shares directly to Pentair shareholders (the “Distribution”). On May 1, 2018, following the Separation and Distribution, nVent became an independent publicly traded company, trading on the New York Stock Exchange under the symbol “NVT.”

The Company did not retain any equity interest in nVent. nVent’s historical financial results are reflected in the Company’s consolidated financial statements as a discontinued operation. Refer to Note 2 for further discussion.

In connection with the Distribution of nVent, the Company and nVent entered into several agreements covering administrative and tax matters to provide or obtain services on a transitional basis, as needed, for varying periods after the Distribution. The administrative agreements cover various services such as information technology, human resources and finance. The Company expects all services to be substantially complete within one year after the Distribution.

Basis of presentation

The accompanying consolidated financial statements include the accounts of Pentair and all subsidiaries, both the United States (“U.S.”) and non-U.S., which we control. Intercompany accounts and transactions have been eliminated. Investments in companies of which we own 20% to 50% of the voting stock or have the ability to exercise significant influence over operating and financial policies of the investee are accounted for using the equity method of accounting and as a result, our share of the earnings or losses of such equity affiliates is included in the Consolidated Statements of Operations and Comprehensive Income.

The consolidated financial statements have been prepared in U.S. dollars (“USD”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Fiscal year

Our fiscal year ends on December 31. We report our interim quarterly periods on a calendar quarter basis.

Use of estimates

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include our accounting for valuation of goodwill and indefinite lived intangible assets, estimated losses on accounts receivable, estimated realizable value on excess and obsolete inventory, percentage of completion revenue recognition, assets acquired and liabilities assumed in acquisitions, estimated selling proceeds from assets held for sale, contingent liabilities, income taxes, pension and other post-retirement benefits and the estimated impact of the new lease standard, discussed below. Actual results could differ from our estimates.

Revenue recognition

Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those goods or providing services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

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

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for purposes of revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, standalone selling price is generally readily observable.

Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from goods and services transferred to customers at a point in time accounted for 92.5%, 92.4% and 94.0% of our revenue for the twelve months ended December 31, 2018, 2017 and 2016, respectively. Revenue on these contracts is recognized when obligations under the terms of the contract with our customer are satisfied; generally this occurs with the transfer of control upon shipment.

Revenue from products and services transferred to customers over time accounted for 7.5%, 7.6% and 6.0% of our revenue for the twelve months ended December 31, 2018, 2017 and 2016, respectively. For the majority of our revenue recognized over time, we use an input measure to determine progress towards completion. Under this method, sales and gross profit are recognized as work is performed generally based on the relationship between the actual costs incurred and the total estimated costs at completion (“the cost-to-cost method”) or based on efforts for measuring progress towards completion in situations in which this approach is more representative of the progress on the contract than the cost-to-cost method. Contract costs include labor, material, overhead and, when appropriate, general and administrative expenses. Changes to the original estimates may be required during the life of the contract, and such estimates are reviewed on a regular basis. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs. These reviews have not resulted in adjustments that were significant to our results of operations. For performance obligations related to long term contracts, when estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.

On December 31, 2018, we had $57.2 million of remaining performance obligations on contracts with an original expected duration of one year or more. We expect to recognize the majority of our remaining performance obligations on these contracts within the next 12 to 18 months.

Sales returns

The right of return may exist explicitly or implicitly with our customers. Our return policy allows for customer returns only upon our authorization. Goods returned must be product we continue to market and must be in salable condition. When the right of return exists, we adjust the transaction price for the estimated effect of returns. We estimate the expected returns based on historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer and a projection of this experience into the future.

Pricing and sales incentives

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

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

Pricing is established at or prior to the time of sale with our customers, and we record sales at the agreed-upon net selling price. However, one of our businesses allows customers to apply for a refund of a percentage of the original purchase price if they can demonstrate sales to a qualifying end customer. We use the expected value method to estimate the anticipated refund to be paid based on historical experience and reduce sales for the probable cost of the discount. The cost of these refunds is recorded as a reduction of the transaction price.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Volume-based incentives involve rebates that are negotiated at or prior to the time of sale with the customer and are redeemable only if the customer achieves a specified cumulative level of sales or sales increase. Under these incentive programs, at the time of sale, we determine the most likely amount of the rebate to be paid based on forecasted sales levels. These forecasts are updated at least quarterly for each customer, and the transaction price is reduced for the anticipated cost of the rebate. If the forecasted sales for a customer change, the accrual for rebates is adjusted to reflect the new amount of rebates expected to be earned by the customer.

Shipping and handling costs

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

Contract assets and liabilities

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

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

Contract assets and liabilities consisted of the following:

	December 31
In millions	2018			2017				$ Change			% Change
Contract assets	$	36.5		$	51.5			$	(15.0	)	(29.1	)%
Contract liabilities	32.8			29.2				3.6			12.3	%
Net contract assets	$	3.7		$	22.3			$	(18.6	)	(83.4	)%

The $18.6 million decrease in net contract assets from December 31, 2017 to December 31, 2018 was primarily the result of timing of milestone payments. Approximately 70% of our contract liabilities at December 31, 2017 were recognized in revenue during the twelve months ended December 31, 2018. There were no impairment losses recognized on our contract assets for the twelve months ended December 31, 2018.

Practical expedients and exemptions

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

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

Revenue by category

We disaggregate our revenue from contracts with customers by segment, geographic location and vertical, as we believe these best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Refer to Note 14 for revenue disaggregated by segment.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Geographic net sales information for continuing operations, based on geographic destination of the sale, was as follows:

	Years ended December 31
In millions	2018			2017			2016
U.S.	$	1,858.1		$	1,752.7		$	1,690.0
Western Europe	402.7			381.9			377.7
Developing (1)	476.5			478.2			492.0
Other Developed (2)	227.8			232.9			220.9
Consolidated net sales (3)	$	2,965.1		$	2,845.7		$	2,780.6
(1) Developing includes China, Eastern Europe, Latin America, the Middle East and Southeast Asia.
(2) Other Developed includes Australia, Canada and Japan.
(3) Net sales held in Ireland, for each of the years presented, were not material.

Vertical net sales information was as follows:

	Years ended December 31
In millions	2018			2017			2016
Residential	$	1,665.9		$	1,579.0		$	1,498.7
Commercial	630.7			604.4			586.5
Industrial	668.5			662.3			695.4
Consolidated net sales	$	2,965.1		$	2,845.7		$	2,780.6

Research and development

We conduct research and development (“R&D”) activities primarily in our own facilities, which mostly consist of development of new products, product applications and manufacturing processes. We expense R&D costs as incurred. R&D expenditures from continuing operations during 2018, 2017 and 2016 were $76.7 million, $73.2 million and $73.3 million, respectively.

Cash equivalents

We consider highly liquid investments with original maturities of three months or less at the date of acquisition to be cash equivalents.

Trade receivables and concentration of credit risk

We record an allowance for doubtful accounts, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for doubtful accounts are based on current trends, aging of accounts receivable, periodic credit evaluations of our customers’ financial condition, and historical collection experience. We generally do not require collateral.

Inventories

Inventories are stated at the lower of cost or market with substantially all inventories recorded using the first-in, first-out (“FIFO”) cost method.

Property, plant and equipment, net

Property, plant and equipment is stated at historical cost. We compute depreciation by the straight-line method based on the following estimated useful lives:

	Years
Land improvements	5 to 20
Buildings and leasehold improvements	5 to 50
Machinery and equipment	3 to 15

Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the recorded cost of the assets and their related accumulated depreciation are removed from the Consolidated Balance Sheets and any related gains or losses are included in income.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

The following table presents geographic Property, plant and equipment, net by region as of December 31:

In millions	2018			2017
U.S.	$	156.9		$	151.9
Western Europe	76.6			82.8
Developing (1)	28.8			33.0
Other Developed (2)	10.3			12.1
Consolidated (3)	$	272.6		$	279.8
(1) Developing includes China, Eastern Europe, Latin America, the Middle East and Southeast Asia.
(2) Other Developed includes Australia, Canada and Japan.
(3) Property, plant and equipment, net held in Ireland, for each of the years presented, were not material.

We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets. We recorded no long-lived asset impairment charges in 2018, 2017, or 2016 in conjunction with restructuring activities.

Goodwill and identifiable intangible assets

Goodwill

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

Goodwill is tested 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 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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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 was 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 cap, regulatory and environmental issues, macro-economic conditions, industry and market considerations, raw material 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. This non-recurring fair value measurement is a “Level 3” measurement under the fair value hierarchy described in Note 9.

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 described in Note 9.

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.

Income taxes

We use the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. We maintain valuation allowances unless it is more likely than not that all or a portion of the deferred tax assets will be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Pension and other post-retirement plans

We sponsor U.S. and non-U.S. defined-benefit pension and other post-retirement plans. The pension and other post-retirement benefit costs for company-sponsored benefit plans are determined from actuarial assumptions and methodologies, including discount rates and expected returns on plan assets. These assumptions are updated annually and are disclosed in Note 11.

We recognize changes in the fair value of plan assets and net actuarial gains or losses for pension and other post-retirement benefits annually in the fourth quarter each year (“mark-to-market adjustment”) and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension and other post-retirement plans or when assumptions change, as they may each year. The remaining components of pension expense, including service and interest costs and estimated return on plan assets, are recorded on a quarterly basis.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Insurance subsidiary

We insure certain general and product liability, property, workers’ compensation and automobile liability risks through our regulated wholly-owned captive insurance subsidiary, Penwald Insurance Company (“Penwald”). Reserves for policy claims are established based on actuarial projections of ultimate losses. As of December 31, 2018 and 2017, reserves for policy claims were $60.9 million, of which $13.2 million was included in Other current liabilities and $47.7 million was included in Other non-current liabilities, and $61.5 million, of which $13.2 million was included in Other current liabilities and $48.3 million was included in Other non-current liabilities, respectively.

Share-based compensation

We account for share-based compensation awards on a fair value basis. The estimated grant date fair value of each option award is recognized in income on an accelerated basis over the requisite service period (generally the vesting period). The estimated fair value of each option award is calculated using the Black-Scholes option-pricing model. From time to time, we have elected to modify the terms of the original grant. These modified grants are accounted for as a new award and measured using the fair value method, resulting in the inclusion of additional compensation expense in our Consolidated Statements of Operations and Comprehensive Income.

Restricted share awards and units (“RSUs”) are recorded as compensation cost over the requisite service periods based on the market value on the date of grant.

Performance share units (“PSUs”) are stock awards where the ultimate number of shares issued will be contingent on the Company’s performance against certain financial performance targets. The fair value of each PSU is based on the market value on the date of grant. We recognize expense related to the estimated vesting of our PSUs granted. The estimated vesting of the PSUs is based on the probability of achieving certain financial performance thresholds over the specified performance period.

Earnings per ordinary share

We present two calculations of earnings per ordinary share (“EPS”). Basic EPS equals net income divided by the weighted-average number of ordinary shares outstanding during the period. Diluted EPS is computed by dividing net income by the sum of weighted-average number of ordinary shares outstanding plus dilutive effects of ordinary share equivalents.

Derivative financial instruments

We recognize all derivatives, including those embedded in other contracts, as either assets or liabilities at fair value in our Consolidated Balance Sheets. If the derivative is designated and is effective as a cash-flow hedge, the effective portion of changes in the fair value of the derivative are recorded in Accumulated other comprehensive income (loss) (“AOCI”) as a separate component of equity in the Consolidated Balance Sheets and are recognized in the Consolidated Statements of Operations and Comprehensive Income when the hedged item affects earnings. If the underlying hedged transaction ceases to exist or if the hedge becomes ineffective, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings. For a derivative that is not designated as or does not qualify as a hedge, changes in fair value are reported in earnings immediately.

Gains and losses on net investment hedges are included in AOCI as a separate component of equity in the Consolidated Balance Sheets.

We use derivative instruments for the purpose of hedging interest rate and currency exposures, which exist as part of ongoing business operations. We do not hold or issue derivative financial instruments for trading or speculative purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of and have been designated as, normal purchases or sales. Our policy is not to enter into contracts with terms that cannot be designated as normal purchases or sales. From time to time, we may enter into short duration foreign currency contracts to hedge foreign currency risks.

Foreign currency translation

The financial statements of subsidiaries located outside of the U.S. are generally measured using the local currency as the functional currency, except for certain corporate entities outside of the U.S. which are measured using USD. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income (Loss) and expense items are translated at average monthly rates of exchange. The resultant translation adjustments are included in AOCI, a component of equity.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

New accounting standards

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, “Leases” (“the new lease standard” or “ASC 842”), which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The new lease standard requirements are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted the new lease guidance as of January 1, 2019, using the transition method of adoption applied to those leases which were not completed as of that date. Under the transition method of adoption, comparative periods will not be restated for the new standard. We also elected the package of practical expedients permitted under the transition guidance, which among other things allowed us to carry forward the historical lease classification. In preparation for adoption of the new guidance, we have implemented appropriate changes to our business processes, systems and controls to support preparation of financial information and have reached conclusions on key accounting assessments related to the standard. As a result of these assessments, we anticipate the adoption of the new standard to increase assets and liabilities on the consolidated balance sheet by approximately $75.0 million as of the adoption date. We currently do not expect ASC 842 to have a material effect on either our consolidated statements of operations and comprehensive income or consolidated statements of cash flows.

On January 1, 2018, we adopted ASU No. 2017-01, “Clarifying the Definition of a Business.” This ASU clarifies the definition of a business and provides guidance on whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption of the new standard did not have a material impact on our consolidated financial statements.

On January 1, 2018, we adopted ASU No. 2017-07, “Retirement Benefits-Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” As a result of the adoption, the interest cost, expected return on plan assets and net actuarial gain/loss components of net periodic pension and post-retirement benefit cost have been reclassified from Selling, general and administrative expense to Other (income) expense. Only the service cost component remains in Operating income and will be eligible for capitalization in assets on a prospective basis. The effect of the retrospective presentation change related to the net periodic cost of our defined benefit pension and other post-retirement plans on our Consolidated Statements of Operations and Comprehensive Income was a reclassification of expense of $13.9 million and income of $6.2 million for the years ended December 31, 2017 and 2016, respectively, from Selling, general and administrative expense to Other (income) expense.

On January 1, 2018, we adopted ASU No. 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” This ASU requires the tax effects of all intra-entity sales of assets other than inventory to be recognized in the period in which the transaction occurs. The adoption resulted in a $215.8 million cumulative-effect adjustment (of which $174.6 million related to nVent) recorded in retained earnings as of the beginning of 2018. The adjustment reflects a $254.3 million reduction of a prepaid long term tax asset, partially offset by the establishment of $38.5 million of deferred tax assets.

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

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

Pentair plc and Subsidiaries

Notes to consolidated financial statements

The cumulative effect of the changes made to our January 1, 2018 Consolidated Balance Sheet from the modified retrospective adoption of ASU 2016-16 and ASU 2014-09 was as follows:

Consolidated Balance Sheets
In millions	Balance at December 31, 2017			Adjustments due to ASU 2016-16			Adjustments due to ASU 2014-09			Balance at January 1, 2018
Assets
Accounts and notes receivable, net	$	483.1		$	—		$	2.7		$	485.8
Inventories	356.9			—			(1.6		)	355.3
Other current assets	114.5			—			1.6			116.1
Current assets held for sale	708.0			—			3.8			711.8
Other non-current assets	180.9			(44.9		)	—			136.0
Non-current assets held for sale	3,989.6			(201.6		)	—			3,788.0
Liabilities
Other current liabilities	401.3			—			2.7			404.0
Deferred tax liabilities	108.6			(3.7		)	0.1			105.0
Non-current liabilities held for sale	537.0			(27.0		)	0.4			510.4
Equity
Retained Earnings	2,481.7			(215.8		)	1.8			2,267.7

2.	Acquisitions and Discontinued Operations

Acquisitions

In January 2019, as part of Filtration Solutions, we entered into definitive agreements to acquire Aquion Inc. (“Aquion”) and Pelican Water Systems (“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 Water Systems provides residential whole home water treatment systems. These acquisitions are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

During 2017, our continuing operations completed acquisitions with purchase prices totaling $45.9 million in cash, net of cash acquired. Identifiable intangible assets acquired included $19.1 million of definite-lived customer relationships with an estimated useful life of 11 years.

In November 2016, our continuing operations completed an acquisition with a purchase price of $25.0 million in cash, net of cash acquired.

The pro forma impact of these acquisitions was not material.

Discontinued Operations

Electrical separation

On April 30, 2018, we completed the Separation and Distribution. The results of the Electrical business have been presented as discontinued operations and the related assets and liabilities were reclassified as held for sale for all periods presented. The Electrical business had been previously disclosed as a stand-alone reporting segment. Separation costs related to the Separation and Distribution were $84.2 million and $39.3 million for the twelve months ended December 31, 2018 and 2017, respectively. These costs are reported in discontinued operations as they represent a cost directly related to the Separation and Distribution and were included within Income from discontinued operations, net of tax presented below.

There were no separation costs related to the Separation and Distribution for the twelve months ended December 31, 2016.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Sale of Valves & Controls

On April 28, 2017, we completed the sale of the Valves & Controls business to Emerson Electric Co. for $3.15 billion in cash. The sale resulted in a gain of $181.1 million, net of tax. The results of the Valves & Controls business have been presented as discontinued operations. The Valves & Controls business was previously disclosed as a stand-alone reporting segment. Transaction costs of $56.4 million related to the sale of Valves & Controls were incurred during the year ended December 31, 2017 and were recorded within Gain from sale/impairment of discontinued operations before income taxes presented below.

Operating results of discontinued operations are summarized below:

	Years ended December 31
In millions	2018			2017			2016
Net sales	$	693.9		$	2,548.2		$	3,755.4
Cost of goods sold	424.0			1,596.2			2,457.1
Gross profit	269.9			952.0			1,298.3
Selling, general and administrative	237.8			589.2			803.2
Research and development	14.6			48.3			59.0
Operating income	$	17.5		$	314.5		$	436.1
Income from discontinued operations before income taxes	$	31.8		$	317.1		$	418.5
Income tax provision (benefit)	6.1			(54.2		)	75.1
Income from discontinued operations, net of tax	$	25.7		$	371.3		$	343.4
Gain from sale / impairment of discontinued operations before income taxes	$	—		$	183.5		$	0.6
Provision for income taxes	—			2.4			—
Gain from sale / impairment of discontinued operations, net of tax	$	—		$	181.1		$	0.6

The carrying amounts of major classes of assets and liabilities that were classified as held for sale on the Consolidated Balance Sheets were as follows:

	December 31
In millions	2017
Cash and cash equivalents	$	27.0
Accounts receivable, net	348.5
Inventories	224.1
Other current assets	108.4
Current assets held for sale	$	708.0
Property, plant and equipment, net	$	265.8
Goodwill	2,238.2
Intangibles, net	1,236.6
Other non-current assets	249.0
Non-current assets held for sale	$	3,989.6
Accounts payable	$	174.1
Employee compensation and benefits	70.8
Other current liabilities	115.9
Current liabilities held for sale	$	360.8
Pension and other post-retirement compensation and benefits	$	189.2
Deferred tax liabilities	286.2
Other non-current liabilities	61.6
Non-current liabilities held for sale	$	537.0

Pentair plc and Subsidiaries

Notes to consolidated financial statements

3. Earnings Per Share

Basic and diluted earnings per share were calculated as follows:

	Years ended December 31
In millions, except per share data	2018			2017			2016
Net income	$	347.4		$	666.5		$	522.2
Net income from continuing operations	$	321.7		$	114.1		$	178.2
Weighted average ordinary shares outstanding
Basic	175.8			181.7			181.3
Dilutive impact of stock options and restricted stock awards	1.5			2.0			1.8
Diluted	177.3			183.7			183.1
Earnings per ordinary share
Basic
Continuing operations	$	1.83		$	0.63		$	0.98
Discontinued operations	0.15			3.04			1.90
Basic earnings per ordinary share	$	1.98		$	3.67		$	2.88
Diluted
Continuing operations	$	1.81		$	0.62		$	0.97
Discontinued operations	0.15			3.01			1.88
Diluted earnings per ordinary share	$	1.96		$	3.63		$	2.85
Anti-dilutive stock options excluded from the calculation of diluted earnings per share	1.2			1.8			1.2

4. Restructuring

During 2018, 2017 and 2016, we initiated and continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. Initiatives during the years ended December 31, 2018, 2017 and 2016 included a reduction in hourly and salaried headcount of approximately 300 employees, 250 employees and 300 employees, respectively.

Restructuring related costs included in Selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income included costs for severance and other restructuring costs as follows:

	Years ended December 31
In millions	2018			2017			2016
Severance and related costs	$	13.2		$	27.3		$	12.2
Other	27.4			0.9			—
Total restructuring costs	$	40.6		$	28.2		$	12.2

Other restructuring costs primarily consist of asset impairment and various contract termination costs.

Restructuring costs by reportable segment were as follows:

	Years ended December 31
In millions	2018			2017			2016
Aquatic Systems	$	15.3		$	3.6		$	1.8
Filtration Solutions	14.6			13.0			7.4
Flow Technologies	9.3			7.0			1.3
Other	1.4			4.6			1.7
Consolidated	$	40.6		$	28.2		$	12.2

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Activity related to accrued severance and related costs recorded in Other current liabilities in the Consolidated Balance Sheets is summarized as follows:

	Years ended December 31
In millions	2018			2017
Beginning balance	$	34.5		$	15.1
Costs incurred	13.2			27.3
Cash payments and other	(20.6		)	(7.9		)
Ending balance	$	27.1		$	34.5

5.	Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 by reportable segment were as follows:

In millions	December 31, 2017			Foreign currency translation/other			December 31, 2018
Aquatic Systems	$	973.1		$	(7.2	)	$	965.9
Filtration Solutions	667.6			(24.1		)	643.5
Flow Technologies	472.1			(8.8		)	463.3
Total goodwill	$	2,112.8		$	(40.1	)	$	2,072.7

In millions	December 31, 2016			Acquisitions/ divestitures			Foreign currency translation/other			December 31, 2017
Aquatic Systems	$	918.7		$	—		$	54.4		$	973.1
Filtration Solutions	630.2			27.3			10.1			667.6
Flow Technologies	445.7			—			26.4			472.1
Total goodwill	$	1,994.6		$	27.3		$	90.9		$	2,112.8

There has been no impairment of goodwill for any of the years presented.

Identifiable intangible assets consisted of the following at December 31:

	2018										2017
In millions	Cost			Accumulated amortization			Net				Cost			Accumulated amortization			Net
Definite-life intangibles
Customer relationships	$	347.1		$	(247.9	)	$	99.2			$	360.9		$	(229.9	)	$	131.0
Trade names	0.4			(0.4		)	—				1.5			(1.4		)	0.1
Proprietary technology and patents	86.2			(68.4		)	17.8				117.0			(89.3		)	27.7
Total finite-life intangibles	433.7			(316.7		)	117.0				479.4			(320.6		)	158.8
Indefinite-life intangibles
Trade names	159.3			—			159.3				163.0			—			163.0
Total intangibles	$	593.0		$	(316.7	)	$	276.3			$	642.4		$	(320.6	)	$	321.8

Identifiable intangible asset amortization expense in 2018, 2017 and 2016 was $34.9 million, $36.4 million and $35.4 million, respectively.

There was no impairment charge for trade name intangible assets in 2018. In 2017, we recorded an impairment charge for trade name intangible assets of $8.8 million in Filtration Solutions and Flow Technologies. In 2016, there was no impairment charge for trade name intangible assets.

Estimated future amortization expense for identifiable intangible assets during the next five years is as follows:

In millions	2019			2020			2021			2022			2023
Estimated amortization expense	$	27.4		$	22.4		$	17.3		$	10.1		$	7.8

Pentair plc and Subsidiaries

Notes to consolidated financial statements

6. Supplemental Balance Sheet Information

	December 31
In millions	2018			2017
Inventories
Raw materials and supplies	$	191.3		$	190.8
Work-in-process	64.0			57.9
Finished goods	132.2			108.2
Total inventories	$	387.5		$	356.9
Other current assets
Cost in excess of billings	$	36.5		$	51.5
Prepaid expenses	36.7			51.4
Prepaid income taxes	8.5			7.8
Other current assets	7.7			3.8
Total other current assets	$	89.4		$	114.5
Property, plant and equipment, net
Land and land improvements	$	33.5		$	33.5
Buildings and leasehold improvements	178.9			184.3
Machinery and equipment	593.8			609.6
Construction in progress	35.7			23.7
Total property, plant and equipment	841.9			851.1
Accumulated depreciation and amortization	569.3			571.3
Total property, plant and equipment, net	$	272.6		$	279.8
Other non-current assets
Prepaid income taxes	$	—		$	52.8
Deferred income taxes	26.2			29.0
Deferred compensation plan assets	20.9			23.2
Other non-current assets	98.4			75.9
Total other non-current assets	$	145.5		$	180.9
Other current liabilities
Dividends payable	$	30.8		$	63.1
Accrued warranty	33.9			38.1
Accrued rebates	55.7			49.8
Billings in excess of cost	21.3			20.1
Income taxes payable	10.4			39.7
Accrued restructuring	27.1			34.5
Other current liabilities	149.2			156.0
Total other current liabilities	$	328.4		$	401.3
Other non-current liabilities
Income taxes payable	$	46.8		$	61.3
Self-insurance liabilities	47.7			48.3
Deferred compensation plan liabilities	20.9			23.2
Foreign currency contract liabilities	30.6			47.2
Other non-current liabilities	22.2			33.8
Total other non-current liabilities	$	168.2		$	213.8

Pentair plc and Subsidiaries

Notes to consolidated financial statements

7. Accumulated Other Comprehensive Loss

Components of Accumulated Other Comprehensive Loss consist of the following:

	December 31
In millions	2018			2017
Cumulative translation adjustments	$	(211.4	)	$	(221.4	)
Market value of derivative financial instruments, net of tax	(17.2		)	(22.0		)
Accumulated other comprehensive loss	$	(228.6	)	$	(243.4	)

8. Debt

Debt and the average interest rates on debt outstanding were as follows:

In millions	Average interest rate at	Maturity year	December 31
December 31, 2018	2018			2017
Commercial paper	3.248%	2023	$	76.0		$	34.0
Revolving credit facilities	3.703%	2023	26.2			28.4
Senior notes - fixed rate (1)	2.900%	2018	—			255.3
Senior notes - fixed rate (1)	2.650%	2019	250.0			250.0
Senior notes - fixed rate - Euro (1)	2.450%	2019	155.1			594.4
Senior notes - fixed rate (1)	3.625%	2020	74.0			74.0
Senior notes - fixed rate (1)	5.000%	2021	103.8			103.8
Senior notes - fixed rate (1)	3.150%	2022	88.3			88.3
Senior notes - fixed rate (1)	4.650%	2025	19.3			19.3
Unamortized issuance costs and discounts	N/A	N/A	(5.1		)	(6.8		)
Total debt			$	787.6		$	1,440.7
(1) Senior notes guaranteed as to payment by Pentair plc and PISG (“the Notes”)

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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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.

In May 2017, we repurchased an aggregate principal amount of certain series of outstanding senior 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.

We have $405.1 million aggregate principle amount of fixed rate senior notes maturing in 2019. We classified this debt as long-term as of December 31, 2018 as we have the intent and ability to refinance such obligation on a long-term basis under the Credit Facility.

Debt outstanding, excluding unamortized issuance costs and discounts, at December 31, 2018 matures on a calendar year basis as follows:

In millions	2019			2020			2021			2022			2023			Thereafter			Total
Contractual debt obligation maturities	$	405.1		$	74.0		$	103.8		$	88.3		$	102.1		$	19.4		$	792.7

9. Derivatives and Financial Instruments

Derivative financial instruments

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

Foreign currency contracts

We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. We manage our economic and transaction exposure to certain market-based risks through the use of foreign currency derivative financial instruments. Our objective in holding these derivatives is to reduce the volatility of net earnings and cash flows associated with changes in foreign currency exchange rates. The majority of our foreign currency contracts have an original maturity date of less than one year. The derivative contracts contain credit risk to the extent that our bank counterparties may be unable to meet the terms of the agreements. The amount of such credit risk is generally limited to the unrealized gains, if any, in such contracts. Such risk is minimized by limiting those counterparties to major financial institutions of high credit quality.

At December 31, 2018 and 2017, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $331.4 million and $481.4 million, respectively. The impact of these contracts on the Consolidated Statements of Operations and Comprehensive Income was not material for any period presented.

Gains or losses on foreign currency contracts designated as hedges are reclassified out of Accumulated other comprehensive loss and into Selling, general and administrative expense in the Consolidated Statements of Operations and Comprehensive Income when the hedged item affects earnings. Such reclassifications during 2018, 2017 and 2016 were not material.

Net investment hedge

We have net investments in foreign subsidiaries that are subject to changes in the foreign currency exchange rate. In September 2015, we designated the €500 million 2.45% Senior Notes due 2019 (the “2019 Euro Notes”) as a net investment hedge for a portion of our net investment in our Euro denominated subsidiaries. In June 2018, the Company completed a tender offer for €363.4 million of the 2019 Euro Notes. The remaining €136.6 million of the 2019 Euro Notes have been re-designated as a net

Pentair plc and Subsidiaries

Notes to consolidated financial statements

investment hedge in our Euro denominated subsidiaries. The gains/losses on the 2019 Euro Notes have been included as a component of the cumulative translation adjustment account within Accumulated other comprehensive loss. As of December 31, 2018 and 2017, we had deferred foreign currency losses of $0.8 million and $29.6 million, respectively, in Accumulated other comprehensive loss associated with the net investment hedge activity.

Fair value measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:

Level 1:		Valuation is based on observable inputs such as quoted market prices (unadjusted) for identical assets or liabilities in active markets.
Level 2:		Valuation is based on inputs such as quoted market prices for similar assets or liabilities in active markets or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3:		Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

In making fair value measurements, observable market data must be used when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Fair value of financial instruments

The following methods were used to estimate the fair values of each class of financial instrument:

•	short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes payable and variable-rate debt) — recorded amount approximates fair value because of the short maturity period;

•	long-term fixed-rate debt, including current maturities — fair value is based on market quotes available for issuance of debt with similar terms, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance;

•	foreign currency contract agreements — fair values are determined through the use of models that consider various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance; and

•

deferred compensation plan assets (mutual funds, common/collective trusts and cash equivalents for payment of certain non-qualified benefits for retired, terminated and active employees) — fair value of mutual funds and cash equivalents are based on quoted market prices in active markets that are classified as Level 1 in the valuation hierarchy defined by the accounting guidance; fair value of common/collective trusts are valued at net asset value (“NAV”), which is based on the fair value of the underlying securities owned by the fund and divided by the number of shares outstanding.

The recorded amounts and estimated fair values of total debt, excluding unamortized issuance costs and discounts, at December 31 were as follows:

	2018							2017
In millions	Recorded Amount			Fair Value				Recorded Amount			Fair Value
Variable rate debt	$	102.2		$	102.2			$	62.4		$	62.4
Fixed rate debt	690.5			691.8				1,385.1			1,424.0
Total debt	$	792.7		$	794.0			$	1,447.5		$	1,486.4

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Financial assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows:

Recurring fair value measurements	December 31, 2018
In millions	Level 1			Level 2			Level 3			NAV			Total
Foreign currency contract liabilities	$	—		$	(30.6	)	$	—		$	—		$	(30.6	)
Deferred compensation plan assets	17.6			—			—			3.3			20.9
Total recurring fair value measurements	$	17.6		$	(30.6	)	$	—		$	3.3		$	(9.7	)

Recurring fair value measurements	December 31, 2017
In millions	Level 1			Level 2			Level 3			NAV			Total
Foreign currency contract assets	$	—		$	0.6		$	—		$	—		$	0.6
Foreign currency contract liabilities	—			(47.2		)	—			—			(47.2		)
Deferred compensation plan assets	18.7			—			—			4.5			23.2
Total recurring fair value measurements	$	18.7		$	(46.6	)	$	—		$	4.5		$	(23.4	)
Nonrecurring fair value measurements (1)

(1)

During the fourth quarter of 2017, we completed our annual intangible assets impairment review. As a result, we recorded a pre-tax non-cash impairment charge of $8.8 million for trade name intangibles, reducing the carrying value of these intangibles to $10.8 million. The fair value of trade names is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.

10. Income Taxes

Income from continuing operations before income taxes consisted of the following:

	Years ended December 31
In millions	2018			2017			2016
Federal (1)	$	(24.6	)	$	(34.1	)	$	(25.6	)
International (2)	404.4			206.9			246.5
Income from continuing operations before income taxes	$	379.8		$	172.8		$	220.9

(1)	“Federal” reflects United Kingdom (“U.K.”) income from continuing operations before income taxes.

(2)	“International” reflects non-U.K. income from continuing operations before income taxes.

The provision for income taxes consisted of the following:

	Years ended December 31
In millions	2018			2017			2016
Currently payable (receivable)
Federal (1)	$	(0.1	)	$	—		$	—
International (2)	62.3			76.7			41.5
Total current taxes	62.2			76.7			41.5
Deferred
Federal (1)	—			—			—
International (2)	(4.1		)	(18.0		)	1.2
Total deferred taxes	(4.1		)	(18.0		)	1.2
Total provision for income taxes	$	58.1		$	58.7		$	42.7

(1)	“Federal” represents U.K. taxes.

(2)	“International” represents non-U.K. taxes.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Reconciliations of the federal statutory income tax rate to our effective tax rate were as follows:

	Years ended December 31
Percentages	2018		2017		2016
U.K. federal statutory income tax rate	19.0	%	19.3	%	20.0	%
Tax effect of international operations (1)	(12.0	)	(20.8	)	(26.5	)
Change in valuation allowances	7.9		27.6		22.1
Withholding taxes	0.3		0.4		1.8
Interest limitations	1.8		1.7		1.5
Excess tax benefits on stock-based compensation	(1.7	)	(4.5	)	—
Tax effect of U.S. tax reform	(0.9	)	1.3		—
Tax effect of early extinguishment of debt	0.9		9.0		—
Other	—		—		0.4
Effective tax rate	15.3	%	34.0	%	19.3	%

(1)	The tax effect of international operations consists of non-U.K. jurisdictions.

Reconciliations of the beginning and ending gross unrecognized tax benefits were as follows:

	Years ended December 31
In millions	2018			2017			2016
Beginning balance	$	13.8		$	46.3		$	25.0
Gross increases for tax positions in prior periods	44.0			4.7			26.9
Gross decreases for tax positions in prior periods	(4.4		)	(3.4		)	(2.2		)
Gross increases based on tax positions related to the current year	0.9			0.7			0.8
Gross decreases related to settlements with taxing authorities	(1.8		)	(33.6		)	(3.4		)
Reductions due to statute expiration	(1.1		)	(0.9		)	(0.8		)
Ending balance	$	51.4		$	13.8		$	46.3

We record gross unrecognized tax benefits in Other current liabilities and Other non-current liabilities in the Consolidated Balance Sheets. Included in the $51.4 million of total gross unrecognized tax benefits as of December 31, 2018 was $50.3 million of tax benefits that, if recognized, would impact the effective tax rate. It is reasonably possible that the gross unrecognized tax benefits as of December 31, 2018 may decrease by a range of zero to $8.1 million during 2019, primarily as a result of the resolution of non-U.K. examinations, including U.S. state examinations, and the expiration of various statutes of limitations.

Based on the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that certain unrecognized tax benefits for tax positions taken on previously filed tax returns will materially change from those recorded as liabilities in our financial statements. A number of tax periods from 2003 to present are under audit by tax authorities in various jurisdictions, including China, Germany, India and New Zealand. We anticipate that several of these audits may be concluded in the foreseeable future.

We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, in the Consolidated Statements of Operations and Comprehensive Income. As of December 31, 2018 and 2017, we have liabilities of $0.5 million and $0.3 million, respectively, for the possible payment of penalties and $3.6 million and $2.9 million, respectively, for the possible payment of interest expense, which are recorded in Other current liabilities in the Consolidated Balance Sheets.

Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as “temporary differences.” We record the tax effect of these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in future periods) and “deferred tax liabilities” (generally items for which we received a tax deduction but the tax impact has not yet been recorded in the Consolidated Statements of Operations and Comprehensive Income).

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Deferred taxes were recorded in the Consolidated Balance Sheets as follows:

	December 31
In millions	2018			2017
Other non-current assets	$	26.2		$	29.0
Deferred tax liabilities	105.9			108.6
Net deferred tax liabilities	$	79.7		$	79.6

The tax effects of the major items recorded as deferred tax assets and liabilities were as follows:

	December 31
In millions	2018			2017
Deferred tax assets
Accrued liabilities and reserves	$	42.9		$	43.9
Pension and other post-retirement compensation and benefits	25.2			35.7
Employee compensation and benefits	21.8			39.2
Tax loss and credit carryforwards	724.7			670.5
Other assets	4.4			—
Total deferred tax assets	819.0			789.3
Valuation allowance	711.9			656.2
Deferred tax assets, net of valuation allowance	107.1			133.1
Deferred tax liabilities
Property, plant and equipment	7.1			3.7
Goodwill and other intangibles	179.7			190.6
Other liabilities	—			18.4
Total deferred tax liabilities	186.8			212.7
Net deferred tax liabilities	$	79.7		$	79.6

Included in tax loss and credit carryforwards in the table above is a deferred tax asset of $29.6 million as of December 31, 2018 related to foreign tax credit carryover from the tax period ended December 31, 2017 and related to transition taxes. The entire amount is subject to a valuation allowance. The foreign tax credit is eligible for carryforward until the tax period ending December 31, 2027.

As of December 31, 2018, tax loss carryforwards of $2,911.9 million were available to offset future income. A valuation allowance of $692.3 million exists for deferred income tax benefits related to the tax loss carryforwards which may not be realized. The increase in tax loss carryforwards and valuation allowance from 2017 to 2018 were primarily related to internal restructuring transactions. We believe sufficient taxable income will be generated in the respective jurisdictions to allow us to fully recover the remainder of the tax losses. The tax losses primarily relate to non-U.S. carryforwards of $2,818.2 million which are subject to varying expiration periods. Non-U.S. carryforwards of $2,345.7 million are located in jurisdictions with unlimited tax loss carryforward periods, while the remainder will begin to expire in 2019. In addition, there were $93.7 million of state tax loss carryforwards as of December 31, 2018. State tax losses of $56.1 million are in jurisdictions with unlimited tax loss carryforward periods, while the remainder will expire in future years through 2038.

U.S. tax reform

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. For 2018, the Company considered in its annual effective tax rate additional provisions of the Act including changes to the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income provisions (“GILTI”), the base erosion anti-abuse tax, and a deduction for foreign-derived intangible income. The Company has elected to treat tax on GILTI income as a period cost and has therefore included it in its annual effective tax rate.

Given the significance of the Act, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including

Pentair plc and Subsidiaries

Notes to consolidated financial statements

computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. SAB 118 allows registrants to record provisional amounts during a one year “measurement period.” The measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.

The Company calculated its best estimate of the impact of the Act in its December 31, 2017 income tax provision in accordance with its understanding of the Act and guidance available as of the date of the filing of the 2017 Annual Report on Form 10-K and as a result recorded a provisional income tax expense of $2.2 million in the fourth quarter of 2017, the period in which the legislation was enacted. We subsequently recorded a $3.6 million decrease to the provisional income tax expense in the third quarter of 2018, resulting in a $1.4 million net decrease to income tax expense as a result of the Act.

The amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was a decrease to income tax expense of $28.0 million. The amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was an increase to income tax expense of $26.6 million. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.

11. Benefit Plans

Pension and other post-retirement plans

We sponsor U.S. and non-U.S. defined-benefit pension and other post-retirement plans. Pension benefits are based principally on an employee’s years of service and/or compensation levels near retirement. In addition, we provide certain post-retirement health care and life insurance benefits. Generally, the post-retirement health care and life insurance plans require contributions from retirees.

In November 2017, our Board of Directors authorized the termination of the Pentair Salaried Plan (the “Salaried Plan”), a U.S. qualified pension plan, effective December 31, 2017. The Salaried Plan participants will not be adversely affected by the plan termination. Those participants whose plan benefits were not in pay status as of July 1, 2018 were given the opportunity to elect a lump sum (or monthly annuity) payment during a special election window. Payments of $171.9 million were made to participants who elected to receive a lump sum during this window. For all participants whose Salaried Plan benefits were not paid in lump sum, the Company will purchase an annuity for them with an annuity provider within 120 days after all required government approvals for the Salaried Plan termination have been received. The termination is expected to be completed in 2019.

At December 31, 2018, the projected benefit obligation of the Salaried Plan was $175.9 million and the plan assets were $153.7 million. Due to the changing nature of these assumptions, it is at least reasonably possible that changes in these assumptions will occur in the near term and, due to the uncertainties inherent in setting assumptions, that the effect of such changes could be material to the financial statements.

As described in Note 1, during the first quarter of 2018, the Company adopted ASU 2017-07. As a result, service costs are classified as employee compensation costs within Cost of goods sold and Selling, general and administrative expense within the Consolidated Statements of Operations and Comprehensive Income. All other components of net periodic benefit expense are classified within Other (income) expense for the periods presented.

The information herein relates to defined-benefit pension and other post-retirement plans of our continuing operations only.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Obligations and funded status

The following tables present reconciliations of plan benefit obligations, fair value of plan assets and the funded status of pension plans and other post-retirement plans as of and for the years ended December 31, 2018 and 2017:

	Pension plans							Other post-retirement plans
In millions	2018			2017				2018			2017
Change in benefit obligations
Benefit obligation beginning of year	$	473.8		$	423.8			$	17.5		$	18.9
Service cost	4.1			11.7				—			—
Interest cost	11.5			16.4				0.6			0.7
Actuarial loss (gain)	(23.6		)	41.4				(1.4		)	(0.1		)
Foreign currency translation	(0.2		)	0.6				—			—
Benefits paid	(187.7		)	(20.1		)		(1.8		)	(2.0		)
Benefit obligation end of year	$	277.9		$	473.8			$	14.9		$	17.5
Change in plan assets
Fair value of plan assets beginning of year	$	382.8		$	352.3			$	—		$	—
Actual return on plan assets	(21.4		)	42.4				—			—
Company contributions	7.1			6.3				1.8			2.0
Foreign currency translation	(0.1		)	1.9				—			—
Benefits paid	(187.7		)	(20.1		)		(1.8		)	(2.0		)
Fair value of plan assets end of year	$	180.7		$	382.8			$	—		$	—
Funded status
Benefit obligations in excess of the fair value of plan assets	$	(97.2	)	$	(91.0	)		$	(14.9	)	$	(17.5	)

Amounts recorded in the Consolidated Balance Sheets were as follows:

	Pension plans							Other post-retirement plans
In millions	2018			2017				2018			2017
Current liabilities	$	(28.3	)	$	(6.1	)		$	(1.7	)	$	(1.9	)
Non-current liabilities	(68.9		)	(84.9		)		(13.2		)	(15.6		)
Benefit obligations in excess of the fair value of plan assets	$	(97.2	)	$	(91.0	)		$	(14.9	)	$	(17.5	)

The accumulated benefit obligation for all defined benefit plans was $275.0 million and $470.4 million at December 31, 2018 and 2017, respectively.

Information for pension plans with an accumulated benefit obligation or projected benefit obligation in excess of plan assets as of December 31 was as follows:

	Projected benefit obligation exceeds the fair value of plan assets							Accumulated benefit obligation exceeds the fair value of plan assets
In millions	2018			2017				2018			2017
Projected benefit obligation	$	277.9		$	473.8			$	270.6		$	464.9
Fair value of plan assets	180.7			382.8				173.7			374.5
Accumulated benefit obligation	N/A			N/A				268.3			462.3

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Components of net periodic benefit expense for our pension plans for the years ended December 31 were as follows:

In millions	2018			2017			2016
Service cost	$	4.1		$	11.7		$	12.8
Interest cost	11.5			16.4			16.5
Expected return on plan assets	(7.6		)	(11.6		)	(11.5		)
Net actuarial loss (gain)	5.2			8.4			(11.5		)
Net periodic benefit expense	$	13.2		$	24.9		$	6.3

Components of net periodic benefit expense for our other post-retirement plans for the years ended December 31 2018, 2017 and 2016, were not material.

Assumptions

The following table provides the weighted-average assumptions used to determine benefit obligations and net periodic benefit cost as they pertain to our pension and other post-retirement plans.

	Pension plans							Other post-retirement plans
	2018		2017		2016			2018		2017		2016
Benefit obligation assumptions (1)
Discount rate	3.73	%	4.00	%	3.92	%		3.95	%	3.40	%	3.80	%
Rate of compensation increase	3.77	%	3.96	%	3.95	%		NA		NA		NA
Net periodic benefit expense assumptions
Discount rate	4.00	%	3.94	%	4.12	%		3.40	%	3.80	%	3.95	%
Expected long-term return on plan assets	4.17	%	4.05	%	4.19	%		NA		NA		NA
Rate of compensation increase	3.96	%	3.96	%	3.93	%		NA		NA		NA

(1)	The benefit obligation for the Salaried Plan as of December 31, 2018 and 2017 were determined using assumptions reflecting the termination of the plan. As a result, the weighted-average assumptions for the pension plans reflected in the table above do not include the Salaried Plan.

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 rates 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. Pension plan assets yielded returns of (5.60)%, 12.00% and 7.40% in 2018, 2017 and 2016, respectively. As a result of our de-risking strategy to reduce U.S. pension plan liability, we anticipate the expected rate of return on our funded pension plans will continue to be consistent with the discount rate utilized. Any difference in the expected rate and actual returns will be included with the actuarial gain or loss recorded in the fourth quarter when our plans are remeasured.

Healthcare cost trend rates

The assumed healthcare cost trend rates for other post-retirement plans as of December 31 were as follows:

	2018		2017
Healthcare cost trend rate assumed for following year	6.2	%	6.6	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.4	%	4.4	%
Year the cost trend rate reaches the ultimate trend rate	2038		2038

Pentair plc and Subsidiaries

Notes to consolidated financial statements

The assumed healthcare cost trend rates can have a significant effect on the amounts reported for healthcare plans. A one-percentage-point change in the assumed healthcare cost trend rates would have the following effects as of and for the year ended December 31, 2018:

	One Percentage Point
In millions	Increase			Decrease
Increase (decrease) in annual service and interest cost	$	—		$	—
Increase (decrease) in other post-retirement benefit obligations	0.6			(0.5		)

Pension plans assets

Objective

The primary objective of our investment strategy is to meet the pension obligation to our employees at a reasonable cost to us. This is primarily accomplished through growth of capital and safety of the funds invested.

Asset allocation

Our actual overall asset allocation for our pension plans as compared to our investment policy goals as of December 31 was as follows:

	Actual					Target
	2018		2017			2018		2017
Fixed income	87	%	98	%		95	%	97	%
Alternative	5	%	2	%		5	%	3	%
Cash	8	%	—	%		—	%	—	%

Fair value measurement

The fair values of our pension plan assets and their respective levels in the fair value hierarchy as of December 31, 2018 and December 31, 2017 were as follows:

	December 31, 2018
In millions	Level 1			Level 2			Level 3			Total
Cash and cash equivalents	$	—		$	12.0		$	—		$	12.0
Fixed income:
Corporate and non U.S. government	—			102.3			—			102.3
U.S. treasuries	—			18.7			—			18.7
Other	—			16.5			—			16.5
Other investments	—			—			9.3			9.3
Total investments at fair value	$	—		$	149.5		$	9.3		$	158.8
Investments measured at NAV										21.9
Total										$	180.7

	December 31, 2017
In millions	Level 1			Level 2			Level 3			Total
Fixed income:
Corporate and non U.S. government	$	—		$	262.8		$	—		$	262.8
U.S. treasuries	—			43.2			—			43.2
Mortgage-backed securities	—			3.3			—			3.3
Other	—			37.0			—			37.0
Other investments	—			—			9.4			9.4
Total investments at fair value	$	—		$	346.3		$	9.4		$	355.7
Investments measured at NAV										27.1
Total										$	382.8

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Valuation methodologies used for investments measured at fair value were as follows:

•	Cash and cash equivalents: Cash consists of cash held in bank accounts and is considered a Level 1 investment. Cash equivalents consist of investments in commingled funds valued based on observable market data. Such investments were classified as Level 2.

•

Fixed income: Investments in corporate bonds, government securities, mortgages and asset backed securities were valued based upon quoted market prices for similar securities and other observable market data. Investments in commingled funds were generally valued at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service. Such investments were classified as Level 2.

•

Other investments: Other investments include investments in commingled funds with diversified investment strategies. Investments in commingled funds that were valued at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service were classified as Level 2. Investments in commingled funds that were valued based on unobservable inputs due to liquidation restrictions were classified as Level 3.

Activity for our Level 3 pension plan assets held during the years ended December 31, 2018 and 2017 was not material.

Cash flows

Contributions

Pension contributions from continuing operations totaled $7.1 million and $6.3 million in 2018 and 2017, respectively. We anticipate our 2019 pension contributions to be approximately $29.9 million, which includes the planned termination of the Salaried Plan. The changing nature of the termination assumptions used to value the Salaried Plan may cause 2019 pension contributions to be higher or lower than expected. The 2019 expected contributions will equal or exceed our minimum funding requirements.

Estimated future benefit payments

The following benefit payments, which reflect expected future service or payout from termination, as appropriate, are expected to be paid by the plans for the years ended December 31 as follows:

In millions	Pension Plans			Other post- retirement plans
2019	$	183.0		$	1.7
2020	7.2			1.6
2021	7.2			1.6
2022	7.3			1.5
2023	6.8			1.4
Thereafter	36.2			5.4

Savings plan

We have a 401(k) plan (the “401(k) plan”) with an employee share ownership (“ESOP”) bonus component, which covers certain union and all non-union U.S. employees who met certain age requirements. Under the 401(k) plan, eligible U.S. employees could voluntarily contribute a percentage of their eligible compensation. We match contributions made by employees who met certain eligibility and service requirements.

As of January 1, 2018, the 401(k) company match contribution was changed to a dollar-for-dollar (100%) matching contribution on up to 5% of employee eligible earnings, contributed as before-tax contributions. This change replaced the ESOP component discussed below and offers the same 5% total company match.

During 2017 and 2016, the 401(k) matching contribution was 100% of eligible employee contributions for the first 1% of eligible compensation and 50% of the next 5% of eligible compensation.

During 2018, 2017 and 2016, in addition to the matching contribution, all employees who met certain service requirements received a discretionary ESOP contribution equal to 1.5% of annual eligible compensation.

Our combined expense for the 401(k) plan and the ESOP was $23.4 million, $27.9 million and $27.1 million in 2018, 2017 and 2016, respectively.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Other retirement compensation

Total other accrued retirement compensation, primarily related to deferred compensation and supplemental retirement plans, was $28.2 million and $29.6 million as of December 31, 2018 and 2017, respectively, and is included in Pension and other post-retirement compensation and benefits and Other non-current liabilities in the Consolidated Balance Sheets.

12. Shareholders’ Equity

Authorized shares

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

Share repurchases

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 payable

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 pay an annual cash dividend of $0.72 in 2019. 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.

13. Share Plans

Share-based compensation expense

Total share-based compensation expense for 2018, 2017 and 2016 was as follows:

	December 31
In millions	2018			2017			2016
Restricted stock units	$	8.9		$	17.5		$	17.3
Stock options	4.6			10.5			10.4
Performance share units	7.4			11.6			6.5
Total share-based compensation expense	$	20.9		$	39.6		$	34.2

Of the total share-based compensation expense noted above, $3.4 million, $7.6 million and $11.5 million for the years ended December 31, 2018, 2017 and 2016, respectively, was reported as part of Income from discontinued operations, net of tax.

Share incentive plans

In 2012, our Board of Directors, and Tyco International Ltd. (“Tyco”) as our sole shareholder at the time, approved the Pentair plc 2012 Stock and Incentive Plan (the “2012 Plan”). The 2012 Plan became effective on September 28, 2012 and authorizes the issuance of 9.0 million of our ordinary shares. The shares may be issued as new shares or from shares held in treasury. Our practice is to settle equity-based awards by issuing new shares. The 2012 Plan terminates in September 2022. The 2012 Plan allows for the granting to our officers, directors, employees and consultants of non-qualified stock options, incentive stock options, stock appreciation rights, performance shares, performance units, restricted shares, restricted stock units, deferred stock rights, annual incentive awards, dividend equivalent units and other equity-based awards.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

The 2012 Plan is administered by our compensation committee (the “Committee”), which is made up of independent members of our Board of Directors. Employees eligible to receive awards under the 2012 Plan are managerial, administrative or other key employees who are in a position to make a material contribution to the continued profitable growth and long-term success of our company. The Committee has the authority to select the recipients of awards, determine the type and size of awards, establish certain terms and conditions of award grants and take certain other actions as permitted under the 2012 Plan. The 2012 Plan prohibits the Committee from re-pricing awards or canceling and reissuing awards at lower prices.

Non-qualified and incentive stock options

Under the 2012 Plan, we may grant stock options to any eligible employee with an exercise price equal to the market value of the shares on the dates the options were granted. Options generally vest one-third each year over a three-year period commencing on the grant date and expire 10 years after the grant date.

Restricted shares and restricted stock units

Under the 2012 Plan, eligible employees may be awarded restricted shares or restricted stock units of our common stock. Restricted shares and restricted stock units generally vest one-third each year over a three-year period commencing on the grant date, subject to continuous employment and certain other conditions. Restricted shares and restricted stock units are valued at market value on the date of grant and are expensed over the vesting period.

Stock appreciation rights, performance shares and performance units

Under the 2012 Plan, the Committee is permitted to issue these awards which are generally earned over a three-year vesting period and tied to specific financial metrics. In December 2015, the Committee approved the granting of PSUs to certain employees that vest based on the satisfaction of a three-year service period and the achievement of certain performance metrics over that same period. Upon vesting, PSU holders receive dividends that accumulate during the vesting period. The fair value of these PSUs is determined based on the closing market price of the Company’s ordinary shares at the date of grant. Compensation expense is recognized over the period an employee is required to provide service based on the estimated vesting of the PSUs granted. The estimated vesting of the PSUs is based on the probability of achieving certain financial performance metrics during the three year vesting period.

Stock options

The following table summarizes stock option activity under all plans for the year ended December 31, 2018:

Shares and intrinsic value in millions	Number of shares		Weighted- average exercise price			Weighted- average remaining contractual life (years)	Aggregate intrinsic value
Outstanding as of January 1, 2018	5.2		$	28.80
Granted	0.5		45.42
Exercised	(0.8	)	23.52
Forfeited	(0.1	)	43.77
Spin-off adjustment	(0.7	)	—
Outstanding as of December 31, 2018	4.1		$	35.77		5.2	$	20.6
Options exercisable as of December 31, 2018	3.0		$	33.93		4.0	$	19.5
Options expected to vest as of December 31, 2018	1.1		$	40.55		8.2	$	1.2

Fair value of options granted

The weighted average grant date fair value of options granted under Pentair plans in 2018, 2017 and 2016 was estimated to be $10.92, $12.59 and $9.74 per share, respectively. The total intrinsic value of options that were exercised during 2018, 2017 and 2016 was $18.2 million, $34.3 million and $27.1 million, respectively. At December 31, 2018, the total unrecognized compensation cost related to stock options was $7.8 million. This cost is expected to be recognized over a weighted average period of 2.1 years.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

We estimated the fair value of each stock option award on the date of grant using a Black-Scholes option pricing model, modified for dividends and using the following weighted average assumptions:

	December 31
	2018			2017			2016
Risk-free interest rate	2.58	%		1.65	%		1.56	%
Expected dividend yield	1.56	%		2.35	%		2.49	%
Expected share price volatility	24.8	%		26.9	%		27.3	%
Expected term (years)	6.1			6.3			5.9

These estimates require us to make assumptions based on historical results, observance of trends in our share price, changes in option exercise behavior, future expectations and other relevant factors. If other assumptions had been used, share-based compensation expense, as calculated and recorded under the accounting guidance, could have been affected.

We based the expected life assumption on historical experience as well as the terms and vesting periods of the options granted. For purposes of determining expected volatility, we considered a rolling average of historical volatility measured over a period approximately equal to the expected option term. The risk-free rate for periods that coincide with the expected life of the options is based on the U.S. Treasury Department yield curve in effect at the time of grant.

Cash received from option exercises for the years ended December 31, 2018, 2017 and 2016 was $19.5 million, $46.0 million and $31.6 million, respectively. The actual tax benefit realized for the tax deductions from option exercised totaled $5.6 million, $7.8 million and $5.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Restricted stock units

The following table summarizes restricted stock unit activity under all plans for the year ended December 31, 2018:

Shares in millions	Number of shares		Weighted average grant date fair value
Outstanding as of January 1, 2018	0.6		$	39.44
Granted	0.2		45.46
Vested	(0.6	)	43.89
Conversion of PSUs	0.5		—
Spin-off adjustment	(0.2	)	—
Outstanding as of December 31, 2018	0.5		$	41.74

As of December 31, 2018, there was $18.4 million of unrecognized compensation cost related to restricted share compensation arrangements granted under the 2012 Plan and previous plans. That cost is expected to be recognized over a weighted-average period of 1.0 years. The total fair value of shares vested during the years ended December 31, 2018, 2017 and 2016, was $24.4 million, $21.7 million and $27.2 million, respectively. The actual tax benefit realized for the year ended December 31, 2018 was $0.7 million. There were no actual tax benefits realized for the years ended December 31, 2017 and 2016.

Performance share units

The following table summarizes performance share unit activity under all plans for the year ended December 31, 2018:

Shares in millions	Number of shares		Weighted average grant date fair value
Outstanding as of January 1, 2018	0.5		$	29.53
Granted	0.1		45.42
Conversion to RSUs	(0.5	)	—
Outstanding as of December 31, 2018	0.1		$	45.42

Pentair plc and Subsidiaries

Notes to consolidated financial statements

The expense recognized each period is dependent upon our estimate of the number of shares that will ultimately be issued. As of December 31, 2018, there was $4.3 million of unrecognized compensation cost related to performance share compensation arrangements granted under the 2012 Plan and previous plans. That cost is expected to be recognized over a weighted-average period of 2.2 years. The actual tax benefit realized for the year ended December 31, 2018 was $0.2 million. There were no actual tax benefits realized for the years ended December 31, 2017 and 2016.

Electrical separation

In connection with the Separation and Distribution, the Company adjusted its outstanding equity awards on May 1, 2018 in accordance with the Employee Matters Agreement between Pentair and nVent. The outstanding awards will continue to vest over the original vesting period, which is generally three years from the grant date.

The RSUs, PSUs, and stock option awards issued before May 9, 2017 (the date of Pentair’s announcement of its intention to separate its Water and Electrical businesses) were converted into awards of both Pentair and nVent regardless of which company the award holder was employed by immediately after the Separation. These awards were converted as follows:

•	Restricted stock units: For every unvested Pentair RSU award held, the holder received one nVent RSU.

•	Performance share units: Pentair PSUs were converted to Pentair RSUs immediately after the Distribution. The PSUs granted in 2016 were converted at rate of 125% of target, and the PSUs granted in 2017 were converted at a rate of 100% of target. For every converted RSU, the shareholder also received one nVent RSU. The converted RSUs retain the original vesting schedule of the awarded PSUs.

•

Stock options: Every holder of unexercised (vested and unvested) Pentair stock options received both adjusted stock options of Pentair and stock options of nVent, with the number of underlying shares and the exercise price adjusted accordingly to preserve the overall intrinsic value of the awards. The number of Pentair stock options was converted based upon the ratio of Pentair’s pre-Distribution stock price divided by the sum of the Pentair and nVent post-Distribution closing prices. The exercise price for the converted Pentair stock options was adjusted based on the Pentair post-Distribution closing price divided by the Pentair pre-Distribution closing price.

The number of new nVent stock options awarded is the same as the converted number of Pentair stock options calculated as described above. The exercise price for the new nVent stock options was calculated based on nVent’s post-Distribution closing price divided by the Pentair pre-Distribution closing price.

Generally, unvested awards issued after May 9, 2017 were converted to awards of the Company that the shareholder was employed by immediately after the Separation, with adjustments to the number of underlying shares as appropriate to preserve the intrinsic value of such awards immediately prior to the Distribution. The adjustment of the underlying shares was based on the ratio of Pentair’s pre-Distribution stock price divided by the post-Distribution closing price of the respective company’s ordinary shares. The exercise prices of the stock options were converted using the inverse ratio in a manner designed to preserve the intrinsic value of such awards.

14. Segment Information

Effective May 1, 2018, we reorganized our business segments to reflect a new operating structure, resulting in a change to our reporting segments. All prior period amounts related to the segment change have been retrospectively reclassified to conform to the new presentation. As part of this reorganization the legacy Water segment was separated into three reportable business segments:

•

Aquatic Systems — This segment manufactures and sells a complete line of energy-efficient residential and commercial pool equipment and accessories including pumps, filters, heaters, lights, automatic controls, automatic cleaners, maintenance equipment and pool accessories. Applications for our Aquatic Systems products include residential and commercial pool maintenance, pool repair, renovation, service and construction and aquaculture solutions.

•

Filtration Solutions — This segment manufactures and sells water and fluid treatment products and systems, including pressure tanks and vessels, control valves, activated carbon products, conventional filtration products, point-of-entry and point-of-use systems, gas recovery solutions, membrane bioreactors, wastewater reuse systems and advanced membrane filtration and separation systems into the global residential, industrial and commercial markets. These products are used in a range of applications, including use in fluid filtration, ion exchange, desalination, food and beverage, food service and separation technologies for the oil and gas industry.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

•

Flow Technologies — This segment manufactures and sells products ranging from light duty diaphragm pumps to high-flow turbine pumps and solid handling pumps while serving the global residential, commercial and industrial markets. These pumps are used in a range of applications, including residential and municipal wells, water treatment, wastewater solids handling, pressure boosting, fluid delivery, circulation and transfer, fire suppression, flood control, agricultural irrigation and crop spray.

We evaluate performance based on net sales and segment income (loss) and use a variety of ratios to measure performance of our reporting segments. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Segment income (loss) represents equity income of unconsolidated subsidiaries and operating income exclusive of intangible amortization, certain acquisition related expenses, costs of restructuring activities, impairments and other unusual non-operating items.

Financial information by reportable segment is included in the following summary:

	2018			2017			2016				2018			2017			2016
In millions	Net sales										Segment income (loss)
Aquatic Systems	$	1,026.1		$	939.6		$	877.8			$	277.6		$	254.1		$	217.4
Filtration Solutions	1,001.0			990.6			976.3				168.5			154.5			138.4
Flow Technologies	936.7			914.2			923.5				145.6			140.6			141.6
Other	1.3			1.3			3.0				(54.9		)	(52.7		)	(56.0		)
Consolidated (1)	$	2,965.1		$	2,845.7		$	2,780.6			$	536.8		$	496.5		$	441.4

(1)	One customer in the Aquatic Systems segment, Pool Corporation, represented approximately 15% of our consolidated net sales in 2018, 2017 and 2016.

	2018			2017			2016				2018			2017			2016				2018			2017			2016
In millions	Identifiable assets (1)										Capital expenditures										Depreciation
Aquatic Systems	$	1,304.2		$	1,323.0		$	1,238.0			$	10.6		$	9.6		$	12.0			$	8.1		$	10.6		$	9.8
Filtration Solutions	1,232.4			1,333.3			1,362.4				16.6			19.2			17.8				23.2			21.6			23.7
Flow Technologies	1,003.6			1,010.8			865.2				10.3			7.3			11.0				13.1			13.4			13.3
Other	266.3			4,966.6			8,069.2				10.7			3.0			2.5				5.3			5.2			6.2
Consolidated	$	3,806.5		$	8,633.7		$	11,534.8			$	48.2		$	39.1		$	43.3			$	49.7		$	50.8		$	53.0

(1)	All cash and cash equivalents and assets held for sale are included in “Other.”

The following table presents a reconciliation of consolidated segment income to consolidated income from continuing operations before income taxes:

In millions	2018			2017			2016
Segment income	$	536.8		$	496.5		$	441.4
Restructuring and other	(31.8		)	(28.2		)	(7.8		)
Intangible amortization	(34.9		)	(36.4		)	(35.4		)
Pension and other post-retirement mark-to-market (loss) gain	(3.6		)	(8.5		)	12.0
Trade name and other impairment	(12.0		)	(15.6		)	—
Loss on sale of businesses	(7.3		)	(4.2		)	(3.9		)
Loss on early extinguishment of debt	(17.1		)	(101.4		)	—
Interest expense, net	(32.6		)	(87.3		)	(140.1		)
Corporate allocations	(11.0		)	(36.7		)	(39.4		)
Deal related costs and expenses	(2.0		)	—			—
Other expense	(4.7		)	(5.4		)	(5.9		)
Income from continuing operations before income taxes	$	379.8		$	172.8		$	220.9

Pentair plc and Subsidiaries

Notes to consolidated financial statements

15. Commitments and Contingencies

Operating lease commitments

Net rental expense under operating leases was as follows:

	Years ended December 31
In millions	2018			2017			2016
Gross rental expense	$	30.4		$	29.7		$	29.0
Sublease rental income	(0.4		)	(0.2		)	(0.5		)
Net rental expense	$	30.0		$	29.5		$	28.5

Future minimum lease commitments under non-cancelable operating leases, principally related to facilities, machinery, equipment and vehicles as of December 31, 2018 were as follows:

In millions	2019			2020			2021			2022			2023			Thereafter			Total
Minimum lease payments	$	23.2		$	17.6		$	13.3		$	11.1		$	9.5		$	13.8		$	88.5
Minimum sublease rentals	(0.7		)	(0.6		)	(0.6		)	(0.6		)	(0.6		)	(0.6		)	(3.7		)
Net future minimum lease commitments	$	22.5		$	17.0		$	12.7		$	10.5		$	8.9		$	13.2		$	84.8

Other matters

In addition to the matters described above, from time to time, we are subject to disputes, administrative proceedings and other claims relating to the conduct of our business. These matters include, without limitation, claims 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. On the basis of information currently available to it, management does not believe that existing proceedings and claims will have a material impact on our Consolidated Financial Statements. However, litigation is unpredictable, and we could incur judgments or enter into settlements for current or future claims that could adversely affect our financial statements.

Warranties and guarantees

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

Generally, the maximum obligation under such indemnifications is not explicitly stated and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial position, results of operations or cash flows.

We recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. In connection with the disposition of the Valves & Controls business, we agreed to indemnify Emerson Electric Co. for certain pre-closing tax liabilities. In 2017, we recorded a liability representing the fair value of our expected future obligation for this matter.

We provide service and warranty policies on our products. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

The changes in the carrying amount of service and product warranties for the years ended December 31, 2018, 2017 and 2016 were as follows:

	Years ended December 31
In millions	2018			2017			2016
Beginning balance	$	38.1		$	36.3		$	44.6
Service and product warranty provision	50.8			60.8			55.2
Payments	(54.6		)	(59.6		)	(64.2		)
Foreign currency translation	(0.4		)	0.6			0.7
Ending balance	$	33.9		$	38.1		$	36.3

Stand-by letters of credit, bank guarantees and bonds

In certain situations, 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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

16. Selected Quarterly Data (Unaudited)

The following tables present 2018 and 2017 quarterly financial information:

	2018
In millions, except per-share data	First Quarter			Second Quarter				Third Quarter			Fourth Quarter			Full Year
Net sales	$	732.6		$	780.6			$	711.4		$	740.5		$	2,965.1
Gross profit	253.3			282.6				243.8			268.0			1,047.7
Operating income	92.7			122.6				108.4			113.0			436.7
Net income from continuing operations	58.4			77.9			(1)	91.2			94.2			321.7
Income (loss) from discontinued operations, net of tax	44.5			(36.4		)		18.9			(1.3		)	25.7
Net income	102.9			41.5				110.1			92.9			347.4
Earnings (loss) per ordinary share (2)
Basic
Continuing operations	$	0.33		$	0.44			$	0.52		$	0.55		$	1.83
Discontinued operations	0.24			(0.21		)		0.11			(0.01		)	0.15
Basic earnings per ordinary share	$	0.57		$	0.23			$	0.63		$	0.54		$	1.98
Diluted
Continuing operations	$	0.32		$	0.44			$	0.52		$	0.54		$	1.81
Discontinued operations	0.25			(0.21		)		0.11			(0.01		)	0.15
Diluted earnings per ordinary share	$	0.57		$	0.23			$	0.63		$	0.53		$	1.96

(1)	Includes decrease of $17.1 million related to loss on early extinguishment of debt.

(2)	Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average ordinary shares outstanding during that period.

	2017
In millions, except per-share data	First Quarter			Second Quarter				Third Quarter				Fourth Quarter				Full Year
Net sales	$	683.3		$	754.0			$	687.6			$	720.8			$	2,845.7
Gross profit	223.7			273.6				236.5				253.7				987.5
Operating income	61.9			129.2				101.8				85.4				378.3
Net income (loss) from continuing operations	12.7			(3.4		)	(1)	49.0				55.8			(2)	114.1
Income from discontinued operations, net of tax	75.0			66.5				78.2				151.6				371.3
Gain (loss) from sale of discontinued operations, net of tax	—			200.6				(1.7		)		(17.8		)		181.1
Net income	87.7			263.7				125.5				189.6				666.5
Earnings (loss) per ordinary share (3)
Basic
Continuing operations	$	0.07		$	(0.02	)		$	0.27			$	0.32			$	0.63
Discontinued operations	0.41			1.47				0.42				0.73				3.04
Basic earnings per ordinary share	$	0.48		$	1.45			$	0.69			$	1.05			$	3.67
Diluted
Continuing operations	$	0.07		$	(0.02	)		$	0.27			$	0.30			$	0.62
Discontinued operations	0.41			1.45				0.41				0.74				3.01
Diluted earnings per ordinary share	$	0.48		$	1.43			$	0.68			$	1.04			$	3.63

(1)	Includes decrease of $101.4 million related to loss on early extinguishment of debt.

(2)	Includes decrease of $15.6 million due to trade name and other impairment and $8.5 million related to a “mark-to-market” actuarial loss on pension and other post-retirement benefit plans.

(3)	Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average ordinary shares outstanding during that period.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

17. Supplemental Guarantor Information

Pentair plc (the “Parent Company Guarantor”) and Pentair Investments Switzerland GmbH (the “Subsidiary Guarantor”), fully and unconditionally, guarantee the Notes of Pentair Finance S.à r.l. (the “Subsidiary Issuer”). The Subsidiary Guarantor is a Switzerland limited liability company formed in April 2014 and 100 percent-owned subsidiary of the Parent Company Guarantor. The Subsidiary Issuer is a Luxembourg public limited liability company formed in January 2012 and 100 percent-owned subsidiary of the Subsidiary Guarantor. The guarantees provided by the Parent Company Guarantor and Subsidiary Guarantor are joint and several.

The following supplemental financial information sets forth the Company’s Condensed Consolidating Statement of Operations and Comprehensive Income and Condensed Consolidating Statement of Cash Flows for the years ended December 31, 2018, 2017 and 2016 and Condensed Consolidating Balance Sheet as of December 31, 2018 and 2017. Condensed Consolidating financial information for Pentair plc, Pentair Investments Switzerland GmbH and Pentair Finance S.à r.l. on a stand-alone basis is presented using the equity method of accounting for subsidiaries.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Pentair plc and Subsidiaries

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Year Ended December 31, 2018

In millions	Parent Company Guarantor			Subsidiary Guarantor			Subsidiary Issuer			Non-guarantor Subsidiaries			Eliminations			Consolidated Total
Net sales	$	—		$	—		$	—		$	2,965.1		$	—		$	2,965.1
Cost of goods sold	—			—			—			1,917.4			—			1,917.4
Gross profit	—			—			—			1,047.7			—			1,047.7
Selling, general and administrative	11.8			0.9			1.2			520.4			—			534.3
Research and development	—			—			—			76.7			—			76.7
Operating (loss) income	(11.8		)	(0.9		)	(1.2		)	450.6			—			436.7
Loss (earnings) from continuing operations of investment in subsidiaries	(333.5		)	(333.4		)	(376.5		)	—			1,043.4			—
Other (income) expense:
Loss on sale of businesses	—			—			—			7.3			—			7.3
Loss on early extinguishment of debt	—			—			17.1			—			—			17.1
Net interest (income) expense	—			(1.0		)	24.8			8.8			—			32.6
Other income	—			—			—			(0.1		)	—			(0.1		)
Income (loss) from continuing operations before income taxes	321.7			333.5			333.4			434.6			(1,043.4		)	379.8
Provision for income taxes	—			—			—			58.1			—			58.1
Net income (loss) from continuing operations	321.7			333.5			333.4			376.5			(1,043.4		)	321.7
Income from discontinued operations, net of tax	—			—			—			25.7			—			25.7
Earnings (loss) from discontinued operations of investment in subsidiaries	25.7			25.7			25.7			—			(77.1		)	—
Net income (loss)	$	347.4		$	359.2		$	359.1		$	402.2		$	(1,120.5	)	$	347.4
Comprehensive income (loss), net of tax
Net income (loss)	$	347.4		$	359.2		$	359.1		$	402.2		$	(1,120.5	)	$	347.4
Changes in cumulative translation adjustment	10.0			10.0			10.0			10.0			(30.0		)	10.0
Changes in market value of derivative financial instruments, net of tax	4.8			4.8			4.8			4.8			(14.4		)	4.8
Comprehensive income (loss)	$	362.2		$	374.0		$	373.9		$	417.0		$	(1,164.9	)	$	362.2

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Pentair plc and Subsidiaries

Condensed Consolidating Balance Sheet

December 31, 2018

In millions	Parent Company Guarantor			Subsidiary Guarantor			Subsidiary Issuer			Non-guarantor Subsidiaries			Eliminations			Consolidated Total
Assets
Current assets
Cash and cash equivalents	$	0.1		$	—		$	0.1		$	74.1		$	—		$	74.3
Accounts and notes receivable, net	4.6			—			—			483.6			—			488.2
Inventories	—			—			—			387.5			—			387.5
Other current assets	3.4			—			2.2			99.2			(15.4		)	89.4
Total current assets	8.1			—			2.3			1,044.4			(15.4		)	1,039.4
Property, plant and equipment, net	—			—			—			272.6			—			272.6
Other assets
Investments in subsidiaries	1,903.8			2,036.1			2,675.7			—			(6,615.6		)	—
Goodwill	—			—			—			2,072.7			—			2,072.7
Intangibles, net	—			—			—			276.3			—			276.3
Other non-current assets	23.3			—			696.1			729.7			(1,303.6		)	145.5
Total other assets	1,927.1			2,036.1			3,371.8			3,078.7			(7,919.2		)	2,494.5
Total assets	$	1,935.2		$	2,036.1		$	3,374.1		$	4,395.7		$	(7,934.6	)	$	3,806.5
Liabilities and Equity
Current liabilities
Accounts payable	$	0.9		$	—		$	—		$	377.7		$	—		$	378.6
Employee compensation and benefits	0.2			—			—			111.5			—			111.7
Other current liabilities	47.6			1.5			4.4			290.3			(15.4		)	328.4
Total current liabilities	48.7			1.5			4.4			779.5			(15.4		)	818.7
Other liabilities
Long-term debt	29.9			130.8			1,333.9			596.6			(1,303.6		)	787.6
Pension and other post-retirement compensation and benefits	—			—			—			90.0			—			90.0
Deferred tax liabilities	—			—			—			105.9			—			105.9
Other non-current liabilities	20.5			—			—			147.7			—			168.2
Total liabilities	99.1			132.3			1,338.3			1,719.7			(1,319.0		)	1,970.4
Equity	1,836.1			1,903.8			2,035.8			2,676.0			(6,615.6		)	1,836.1
Total liabilities and equity	$	1,935.2		$	2,036.1		$	3,374.1		$	4,395.7		$	(7,934.6	)	$	3,806.5

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Pentair plc and Subsidiaries

Condensed Consolidating Statement of Cash Flows

Year Ended December 31, 2018

In millions	Parent Company Guarantor			Subsidiary Guarantor			Subsidiary Issuer			Non-guarantor Subsidiaries			Eliminations			Consolidated Total
Operating activities
Net cash provided by (used for) operating activities	$	266.3		$	362.1		$	370.6		$	637.7		$	(1,197.6	)	$	439.1
Investing activities
Capital expenditures	—			—			—			(48.2		)	—			(48.2		)
Proceeds from sale of property and equipment	—			—			—			0.2			—			0.2
Payments due to sale of businesses and other	—			—			—			(12.8		)	—			(12.8		)
Acquisitions, net of cash acquired	—			—			—			(0.9		)	—			(0.9		)
Net intercompany loan activity	—			94.1			181.0			1,655.7			(1,930.8		)	—
Net cash provided by (used for) investing activities of continuing operations	—			94.1			181.0			1,594.0			(1,930.8		)	(61.7		)
Net cash provided by (used for) investing activities of discontinued operations	—			—			—			(7.1		)	—			(7.1		)
Net cash provided by (used for) investing activities	—			94.1			181.0			1,586.9			(1,930.8		)	(68.8		)
Financing activities
Net receipts (repayments) of commercial paper and revolving long-term debt	—			—			41.9			(2.2		)	—			39.7
Repayment of long-term debt	—			—			(675.1		)	—			—			(675.1		)
Premium paid on early extinguishment of debt	—			—			(16.0		)	—			—			(16.0		)
Transfer of cash to nVent	—			—			—			(74.2		)	—			(74.2		)
Distribution of cash from nVent	—			—			993.6			—			—			993.6
Net change in advances to subsidiaries	407.7			(456.2		)	(874.6		)	(2,205.3		)	3,128.4			—
Shares issued to employees, net of shares withheld	13.3			—			—			—			—			13.3
Repurchases of ordinary shares	(500.0		)	—			—			—			—			(500.0		)
Dividends paid	(187.2		)	—			—			—			—			(187.2		)
Other	—			—			(2.0		)	—			—			(2.0		)
Net cash provided by (used for) financing activities	(266.2		)	(456.2		)	(532.2		)	(2,281.7		)	3,128.4			(407.9		)
Change in cash held for sale	—			—			—			27.0			—			27.0
Effect of exchange rate changes on cash and cash equivalents	—			—			(19.3		)	17.9			—			(1.4		)
Change in cash and cash equivalents	0.1			—			0.1			(12.2		)	—			(12.0		)
Cash and cash equivalents, beginning of year	—			—			—			86.3			—			86.3
Cash and cash equivalents, end of year	$	0.1		$	—		$	0.1		$	74.1		$	—		$	74.3

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Pentair plc and Subsidiaries

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Year Ended December 31, 2017

In millions	Parent Company Guarantor			Subsidiary Guarantor			Subsidiary Issuer			Non-guarantor Subsidiaries			Eliminations			Consolidated Total
Net sales	$	—		$	—		$	—		$	2,845.7		$	—		$	2,845.7
Cost of goods sold	—			—			—			1,858.2			—			1,858.2
Gross profit	—			—			—			987.5			—			987.5
Selling, general and administrative	9.0			0.6			—			526.4			—			536.0
Research and development	—			—			—			73.2			—			73.2
Operating (loss) income	(9.0		)	(0.6		)	—			387.9			—			378.3
Loss (earnings) from continuing operations of investment in subsidiaries	(122.2		)	(122.2		)	(283.4		)	—			527.8			—
Other (income) expense:
Loss on sale of businesses	—			—			—			4.2			—			4.2
Loss on early extinguishment of debt	—			—			91.0			10.4			—			101.4
Net interest (income) expense	—			(0.6		)	70.7			17.2			—			87.3
Other expense	—			—			—			12.6			—			12.6
Income (loss) from continuing operations before income taxes	113.2			122.2			121.7			343.5			(527.8		)	172.8
Provision (benefit) for income taxes	(0.9		)	—			—			59.6			—			58.7
Net income (loss) from continuing operations	114.1			122.2			121.7			283.9			(527.8		)	114.1
Income from discontinued operations, net of tax	—			—			—			371.3			—			371.3
Gain from sale of discontinued operations, net of tax	—			—			—			181.1			—			181.1
Earnings (loss) from discontinued operations of investment in subsidiaries	552.4			552.4			552.4			—			(1,657.2		)	—
Net income (loss)	$	666.5		$	674.6		$	674.1		$	836.3		$	(2,185.0	)	$	666.5
Comprehensive income (loss), net of tax
Net income (loss)	$	666.5		$	674.6		$	674.1		$	836.3		$	(2,185.0	)	$	666.5
Changes in cumulative translation adjustment	497.5			497.5			497.5			497.5			(1,492.5		)	497.5
Changes in market value of derivative financial instruments, net of tax	(4.6		)	(4.6		)	(4.6		)	(4.6		)	13.8			(4.6		)
Comprehensive income (loss)	$	1,159.4		$	1,167.5		$	1,167.0		$	1,329.2		$	(3,663.7	)	$	1,159.4

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Pentair plc and Subsidiaries

Condensed Consolidating Balance Sheet

December 31, 2017

In millions	Parent Company Guarantor			Subsidiary Guarantor			Subsidiary Issuer			Non-guarantor Subsidiaries			Eliminations			Consolidated Total
Assets
Current assets
Cash and cash equivalents	$	—		$	—		$	—		$	86.3		$	—		$	86.3
Accounts and notes receivable, net	—			—			—			483.1			—			483.1
Inventories	—			—			—			356.9			—			356.9
Other current assets	10.8			1.8			1.5			109.6			(9.2		)	114.5
Current assets held for sale	—			—			—			708.0			—			708.0
Total current assets	10.8			1.8			1.5			1,743.9			(9.2		)	1,748.8
Property, plant and equipment, net	—			—			—			279.8			—			279.8
Other assets
Investments in subsidiaries	5,205.1			5,109.6			7,156.1			—			(17,470.8		)	—
Goodwill	—			—			—			2,112.8			—			2,112.8
Intangibles, net	—			—			—			321.8			—			321.8
Other non-current assets	2.2			94.1			614.0			1,360.0			(1,889.4		)	180.9
Non-current assets held for sale	—			—			—			3,989.6			—			3,989.6
Total other assets	5,207.3			5,203.7			7,770.1			7,784.2			(19,360.2		)	6,605.1
Total assets	$	5,218.1		$	5,205.5		$	7,771.6		$	9,807.9		$	(19,369.4	)	$	8,633.7
Liabilities and Equity
Current liabilities
Accounts payable	$	1.4		$	—		$	—		$	320.1		$	—		$	321.5
Employee compensation and benefits	0.4			—			—			115.4			—			115.8
Other current liabilities	99.6			0.4			9.4			301.1			(9.2		)	401.3
Current liabilities held for sale	—			—			—			360.8			—			360.8
Total current liabilities	101.4			0.4			9.4			1,097.4			(9.2		)	1,199.4
Other liabilities
Long-term debt	48.4			—			2,652.8			628.9			(1,889.4		)	1,440.7
Pension and other post-retirement compensation and benefits	—			—			—			96.4			—			96.4
Deferred tax liabilities	—			—			—			108.6			—			108.6
Other non-current liabilities	30.5			—			—			183.3			—			213.8
Non-current liabilities held for sale	—			—			—			537.0			—			537.0
Total liabilities	180.3			0.4			2,662.2			2,651.6			(1,898.6		)	3,595.9
Equity	5,037.8			5,205.1			5,109.4			7,156.3			(17,470.8		)	5,037.8
Total liabilities and equity	$	5,218.1		$	5,205.5		$	7,771.6		$	9,807.9		$	(19,369.4	)	$	8,633.7

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Pentair plc and Subsidiaries

Condensed Consolidating Statement of Cash Flows

Year Ended December 31, 2017

In millions	Parent Company Guarantor			Subsidiary Guarantor			Subsidiary Issuer			Non-guarantor Subsidiaries			Eliminations			Consolidated Total
Operating activities
Net cash provided by (used for) operating activities	$	678.3		$	676.1		$	656.2		$	794.6		$	(2,185.0	)	$	620.2
Investing activities
Capital expenditures	—			—			—			(39.1		)	—			(39.1		)
Proceeds from sale of property and equipment	—			—			—			3.7			—			3.7
Proceeds from sale of businesses and other	—			—			2,765.6			(6.2		)	—			2,759.4
Acquisitions, net of cash acquired	—			—			—			(45.9		)	—			(45.9		)
Net intercompany loan activity	—			(58.9		)	103.7			172.5			(217.3		)	—
Net cash provided by (used for) investing activities of continuing operations	—			(58.9		)	2,869.3			85.0			(217.3		)	2,678.1
Net cash provided by (used for) investing activities from discontinued operations	—			—			—			(47.7		)	—			(47.7		)
Net cash provided by (used for) investing activities	—			(58.9		)	2,869.3			37.3			(217.3		)	2,630.4
Financing activities
Net receipts (repayments) of commercial paper and revolving long-term debt	—			—			(914.7		)	1.6			—			(913.1		)
Repayment of long-term debt	—			—			(1,917.8		)	(91.5		)	—			(2,009.3		)
Premium paid on early extinguishment of debt	—			—			(86.0		)	(8.9		)	—			(94.9		)
Net change in advances to subsidiaries	(263.8		)	(617.2		)	(680.8		)	(840.5		)	2,402.3			—
Shares issued to employees, net of shares withheld	37.2			—			—			—			—			37.2
Repurchases of ordinary shares	(200.0		)	—			—			—			—			(200.0		)
Dividends paid	(251.7		)	—			—			—			—			(251.7		)
Other	—			—			—			(0.8		)	—			(0.8		)
Net cash provided by (used for) financing activities	(678.3		)	(617.2		)	(3,599.3		)	(940.1		)	2,402.3			(3,432.6		)
Change in cash held for sale	—			—			—			(5.4		)	—			(5.4		)
Effect of exchange rate changes on cash and cash equivalents	—			—			73.8			(17.0		)	—			56.8
Change in cash and cash equivalents	—			—			—			(130.6		)	—			(130.6		)
Cash and cash equivalents, beginning of year	—			—			—			216.9			—			216.9
Cash and cash equivalents, end of year	$	—		$	—		$	—		$	86.3		$	—		$	86.3

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Pentair plc and Subsidiaries

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Year Ended December 31, 2016

In millions	Parent Company Guarantor			Subsidiary Guarantor			Subsidiary Issuer			Non-guarantor Subsidiaries			Eliminations			Consolidated Total
Net sales	$	—		$	—		$	—		$	2,780.6		$	—		$	2,780.6
Cost of goods sold	—			—			—			1,821.5			—			1,821.5
Gross profit	—			—			—			959.1			—			959.1
Selling, general and administrative	12.6			—			1.2			517.6			—			531.4
Research and development	—			—			—			73.3			—			73.3
Operating (loss) income	(12.6		)	—			(1.2		)	368.2			—			354.4
Loss (earnings) from continuing operations of investment in subsidiaries	(189.4		)	(189.4		)	(301.5		)	—			680.3			—
Other (income) expense:
Loss on sale of businesses	—			—			—			3.9			—			3.9
Net interest expense	—			—			110.9			29.2			—			140.1
Other income	—			—			—			(10.5		)	—			(10.5		)
Income (loss) from continuing operations before income taxes	176.8			189.4			189.4			345.6			(680.3		)	220.9
Provision (benefit) for income taxes	(1.4		)	—			—			44.1			—			42.7
Net income (loss) from continuing operations	178.2			189.4			189.4			301.5			(680.3		)	178.2
Income from discontinued operations, net of tax	—			—			—			343.4			—			343.4
Gain from sale of discontinued operations, net of tax	—			—			—			0.6			—			0.6
Earnings (loss) from discontinued operations of investment in subsidiaries	344.0			344.0			344.0			—			(1,032.0		)	—
Net income (loss)	$	522.2		$	533.4		$	533.4		$	645.5		$	(1,712.3	)	$	522.2
Comprehensive income (loss), net of tax
Net income (loss)	$	522.2		$	533.4		$	533.4		$	645.5		$	(1,712.3	)	$	522.2
Changes in cumulative translation adjustment	(83.0		)	(83.0		)	(83.0		)	(83.0		)	249.0			(83.0		)
Changes in market value of derivative financial instruments, net of tax	(8.3		)	(8.3		)	(8.3		)	(8.3		)	24.9			(8.3		)
Comprehensive income (loss)	$	430.9		$	442.1		$	442.1		$	554.2		$	(1,438.4	)	$	430.9

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Pentair plc and Subsidiaries

Condensed Consolidating Statement of Cash Flows

Year Ended December 31, 2016

In millions	Parent Company Guarantor			Subsidiary Guarantor			Subsidiary Issuer			Non-guarantor Subsidiaries			Eliminations			Consolidated Total
Operating activities
Net cash provided by (used for) operating activities	$	595.7		$	541.7		$	532.9		$	903.4		$	(1,712.3	)	$	861.4
Investing activities
Capital expenditures	—			—			—			(43.3		)	—			(43.3		)
Proceeds from sale of property and equipment	—			—			—			18.8			—			18.8
Proceeds from sale of businesses and other	—			—			—			(5.1		)	—			(5.1		)
Acquisitions, net of cash acquired	—			—			—			(25.0		)	—			(25.0		)
Net intercompany loan activity	—			—			667.3			(191.0		)	(476.3		)	—
Net cash provided by (used for) investing activities of continuing operations	—			—			667.3			(245.6		)	(476.3		)	(54.6		)
Net cash provided by (used for) investing activities of discontinued operations	—			—			—			(67.2		)	—			(67.2		)
Net cash provided by (used for) investing activities	—			—			667.3			(312.8		)	(476.3		)	(121.8		)
Financing activities
Net receipts (repayments) of commercial paper and revolving long-term debt	—			—			(385.8		)	0.5			—			(385.3		)
Repayment of long-term debt	—			—			—			(0.7		)	—			(0.7		)
Net change in advances to subsidiaries	(372.8		)	(541.7		)	(842.3		)	(431.8		)	2,188.6			—
Shares issued to employees, net of shares withheld	20.7			—			—			—			—			20.7
Dividends paid	(243.6		)	—			—			—			—			(243.6		)
Other	—			—			—			8.8			—			8.8
Net cash provided by (used for) financing activities	(595.7		)	(541.7		)	(1,228.1		)	(423.2		)	2,188.6			(600.1		)
Change in cash held for sale	—			—			—			1.1			—			1.1
Effect of exchange rate changes on cash and cash equivalents	—			—			27.8			(55.1		)	—			(27.3		)
Change in cash and cash equivalents	—			—			(0.1		)	113.4			—			113.3
Cash and cash equivalents, beginning of year	—			—			0.1			103.5			—			103.6
Cash and cash equivalents, end of year	$	—		$	—		$	—		$	216.9		$	—		$	216.9