Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. 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, 2019, 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, 2019. That attestation report is set forth immediately following this management report.

John L. StauchMark C. Borin
President and Chief Executive OfficerExecutive Vice President, Chief Financial Officer and Chief Accounting Officer

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Pentair plc

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, 2019, 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, 2019, 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 as of and for the year ended December 31, 2019, of the Company and our report dated February 25, 2020 expressed an unqualified opinion on those financial statements.

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 25, 2020

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Pentair plc

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Pentair plc and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income, cash flows, and changes in equity, for each of the three years in the period ended December 31, 2019, and the related notes (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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 25, 2020 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 Company’s 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Indefinite-lived Trade Names — Valuation — Refer to Notes 1 and 5 to the financial statements

Critical Audit Matter Description

The Company’s evaluation of indefinite-lived trade names for impairment involves the comparison of the estimated fair value of each indefinite-lived trade name to its carrying value. The Company determines the estimated fair value of its trade names using the income approach, more specifically, the relief-from-royalty method. The determination of the estimated fair value using the relief-from-royalty method requires management to make significant estimates and assumptions including selecting appropriate royalty and discount rates and forecast future revenues. Changes in these assumptions could have a significant impact on the estimated fair value of indefinite-lived trade names. For certain of the Company’s indefinite-lived trade names, a significant change in estimated fair value could cause a significant impairment.

The indefinite-lived trade names balance was $173.4 million as of December 31, 2019, of which certain trade names are higher risk for impairment. When identifying the higher risk indefinite-lived trade names, we considered the relationship of their fair value to carrying value. The estimated fair values of these trade names exceeded their carrying values as of the measurement date and, therefore, no impairment was recognized.

Given the level of judgment involved, management uses a third-party fair value specialist to assist in establishing the discount

rate and royalty rate assumptions. As the trade name revenues are sensitive to changes in demand, auditing these assumptions involved a high degree of auditor judgment, and an increased extent of audit effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the significant estimates and assumptions for the trade names included the following, among others:

•We tested the effectiveness of controls over indefinite-lived trade names, including those over management’s review of the revenue forecasts and the selection of the royalty and discount rates to be used in the valuation.
•We assessed management’s ability to prepare accurate revenue forecasts by performing a retrospective review to compare actual results to management’s historical forecasts.
•We evaluated the reasonableness of management’s revenue forecasts by inquiring of management regarding the forecasts and comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in Company press releases, analyst and industry reports of the Company and companies in its peer group.
•We considered the impact of changes in the regulatory environment and the industry on management’s forecasts.

With the assistance of our fair value specialists, we evaluated the royalty and discount rates used by management in the valuation, including testing the underlying source information and the mathematical calculations, developing a range of independent estimates and comparing those to the royalty and discount rates selected by management.

Income Taxes — Completeness of Uncertain Tax Positions — Refer to Notes 1 and 12 in the financial statements

Critical Audit Matter Description

The Company assesses uncertain tax positions (“UTP”) based upon an evaluation of available information and records a liability when a position taken or expected to be taken in a tax return does not meet certain measurement or recognition criteria. A tax benefit is recognized only if management believes it is more likely than not that the tax position will be sustained upon examination by the relevant tax authority. Determining the completeness of UTPs is complex and significant judgment is involved in identifying which positions may not meet the required measurement or recognition criteria. As of December 31, 2019, the Company’s recorded UTP balance was $47.4 million.

The UTP analysis is complex as it includes numerous tax jurisdictions and varying applications of tax laws. Given the multiple jurisdictions in which the Company operates and the complexity of tax law, auditing the completeness of UTPs involved a high degree of auditor judgment, and an increased extent of audit effort, including the need to involve our tax specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures to evaluate management’s estimates, in material jurisdictions, related to the determination of UTPs included the following, among others:

•We tested the effectiveness of controls over management’s determination of the existence of UTPs.
•With the assistance of our income tax specialists, we assessed the Company’s determination of the existence of UTPs. In particular, our procedures included:
◦Evaluating the Company’s significant judgments related to completeness of UTPs in material jurisdictions (U.S. and Switzerland):
▪We performed inquiries of management to assess whether they are aware of any new items or significant changes to the business that would impact the UTP assessment or give rise to new UTPs.
▪We evaluated the following: technical merits of existing UTPs, technical merits of potential UTPs, and significant transactions and their tax implications, including the completeness and accuracy of the underlying data supporting the transactions.
▪We assessed the appropriateness and consistency of management’s methods and assumptions used in identifying uncertain tax positions
▪We evaluated former and ongoing tax audits by tax authorities.
▪We assessed the interpretation of applicable tax law.
▪We considered changes in applicable tax law.
▪We inspected the Company’s filed tax returns in material jurisdictions and the tax provision to obtain an understanding of significant differences. We assessed whether the appropriate UTP was recorded as well as whether any additional UTPs needed to be considered.
▪We evaluated the appropriateness and consistency of the financial statement disclosures, including judgments associated with unrecognized tax benefits that could increase or decrease within 12 months of the reporting date.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

February 25, 2020

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 data201920182017
Net sales$2,957.2$2,965.1$2,845.7
Cost of goods sold1,905.71,917.41,858.2
Gross profit1,051.51,047.7987.5
Selling, general and administrative540.1534.3536.0
Research and development78.976.773.2
Operating income432.5436.7378.3
Other (income) expense
(Gain) loss on sale of businesses(2.2)7.34.2
Loss on early extinguishment of debt—17.1101.4
Net interest expense30.132.687.3
Other (income) expense(2.9)(0.1)12.6
Income from continuing operations before income taxes407.5379.8172.8
Provision for income taxes45.858.158.7
Net income from continuing operations361.7321.7114.1
(Loss) income from discontinued operations, net of tax(6.0)25.7371.3
Gain from sale of discontinued operations, net of tax——181.1
Net income$355.7$347.4$666.5
Comprehensive income, net of tax
Net income$355.7$347.4$666.5
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)(15.3)10.0497.5
Changes in market value of derivative financial instruments, net of tax17.44.8(4.6)
Comprehensive income$357.8$362.2$1,159.4
Earnings per ordinary share
Basic
Continuing operations$2.14$1.83$0.63
Discontinued operations(0.04)0.153.04
Basic earnings per ordinary share$2.10$1.98$3.67
Diluted
Continuing operations$2.12$1.81$0.62
Discontinued operations(0.03)0.153.01
Diluted earnings per ordinary share$2.09$1.96$3.63
Weighted average ordinary shares outstanding
Basic169.4175.8181.7
Diluted170.4177.3183.7

See accompanying notes to consolidated financial statements.

Pentair plc and Subsidiaries

Consolidated Balance Sheets

December 31
In millions, except per-share data20192018
Assets
Current assets
Cash and cash equivalents$82.5$74.3
Accounts receivable, net of allowances of $10.3 and $14.0, respectively502.9488.2
Inventories377.4387.5
Other current assets99.189.4
Total current assets1,061.91,039.4
Property, plant and equipment, net283.2272.6
Other assets
Goodwill2,258.32,072.7
Intangibles, net339.2276.3
Other non-current assets196.9145.5
Total other assets2,794.42,494.5
Total assets$4,139.5$3,806.5
Liabilities and Equity
Current liabilities
Accounts payable$325.1$378.6
Employee compensation and benefits71.0111.7
Other current liabilities352.9328.4
Total current liabilities749.0818.7
Other liabilities
Long-term debt1,029.1787.6
Pension and other post-retirement compensation and benefits96.490.0
Deferred tax liabilities104.4105.9
Other non-current liabilities206.7168.2
Total liabilities2,185.61,970.4
Equity
Ordinary shares $0.01 par value, 426.0 authorized, 168.3 and 171.4 issued at December 31, 2019 and December 31, 2018, respectively1.71.7
Additional paid-in capital1,777.71,893.8
Retained earnings401.0169.2
Accumulated other comprehensive loss(226.5)(228.6)
Total equity1,953.91,836.1
Total liabilities and equity$4,139.5$3,806.5

See accompanying notes to consolidated financial statements.

Pentair plc and Subsidiaries

Consolidated Statements of Cash Flows

Years ended December 31
In millions201920182017
Operating activities
Net income$355.7$347.4$666.5
Loss (income) from discontinued operations, net of tax6.0(25.7)(371.3)
Gain from sale of discontinued operations, net of tax——(181.1)
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities of continuing operations
Equity income of unconsolidated subsidiaries(3.5)(8.4)(1.3)
Depreciation48.349.750.8
Amortization31.734.936.4
(Gain) loss on sale of businesses(2.2)7.34.2
Deferred income taxes(18.4)(4.1)(18.0)
Share-based compensation21.420.939.6
Trade name and other impairment21.212.015.6
Loss on early extinguishment of debt—17.1101.4
Pension and other post-retirement expense1.913.224.9
Pension and other post-retirement contributions(20.9)(8.9)(8.3)
Changes in assets and liabilities, net of effects of business acquisitions
Accounts receivable(17.5)(15.3)(13.4)
Inventories13.6(40.1)(20.5)
Other current assets(18.4)31.2(13.0)
Accounts payable(63.6)58.315.6
Employee compensation and benefits(19.1)(0.6)(1.4)
Other current liabilities(0.4)(3.3)(54.6)
Other non-current assets and liabilities9.4(27.5)6.5
Net cash provided by operating activities of continuing operations345.2458.1278.6
Net cash provided by (used for) operating activities of discontinued operations7.8(19.0)341.6
Net cash provided by operating activities353.0439.1620.2
Investing activities
Capital expenditures(58.5)(48.2)(39.1)
Proceeds from sale of property and equipment0.60.23.7
Proceeds from (payments due to) sale of businesses15.3(12.8)2,759.4
Acquisitions, net of cash acquired(287.8)(0.9)(45.9)
Other(1.5)——
Net cash (used for) provided by investing activities of continuing operations(331.9)(61.7)2,678.1
Net cash used for investing activities of discontinued operations—(7.1)(47.7)
Net cash (used for) provided by investing activities(331.9)(68.8)2,630.4
Financing activities
Net receipts (repayments) of commercial paper and revolving long-term debt51.539.7(913.1)
Proceeds from long-term debt600.0——
Repayment of long-term debt(401.5)(675.1)(2,009.3)
Premium paid on early extinguishment of debt—(16.0)(94.9)
Distribution of cash from nVent, net of cash transferred—919.4—
Shares issued to employees, net of shares withheld12.513.337.2
Repurchases of ordinary shares(150.0)(500.0)(200.0)
Dividends paid(122.7)(187.2)(251.7)
Other(6.9)(2.0)(0.8)
Net cash used for financing activities(17.1)(407.9)(3,432.6)
Change in cash held for sale—27.0(5.4)
Effect of exchange rate changes on cash and cash equivalents4.2(1.4)56.8
Change in cash and cash equivalents8.2(12.0)(130.6)
Cash and cash equivalents, beginning of year74.386.3216.9
Cash and cash equivalents, end of year$82.5$74.3$86.3
Supplemental disclosure of cash flow information:
Cash paid for interest, net$33.7$43.7$107.2
Cash paid for income taxes, net59.092.9362.1

See accompanying notes to consolidated financial statements.

Pentair plc and Subsidiaries

Consolidated Statements of Changes in Equity

In millionsOrdinary sharesAdditional paid-in capitalRetained earningsAccumulated other comprehensive income (loss)Total
NumberAmount
Balance - December 31, 2016181.8$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————492.9492.9
Dividends declared———(252.9)—(252.9)
Share repurchases(3.0)—(200.0)——(200.0)
Exercise of options, net of shares tendered for payment1.2—45.6——45.6
Issuance of restricted shares, net of cancellations0.4—————
Shares surrendered by employees to pay taxes(0.1)—(8.3)——(8.3)
Share-based compensation——39.6——39.6
Balance - December 31, 2017180.3$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————62.662.6
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 payment0.9—24.3——24.3
Issuance of restricted shares, net of cancellations0.5—————
Shares surrendered by employees to pay taxes(0.1)—(11.0)——(11.0)
Share-based compensation——20.9——20.9
Balance - December 31, 2018171.4$1.7$1,893.8$169.2$(228.6)$1,836.1
Net income———355.7—355.7
Other comprehensive income, net of tax————2.12.1
Dividends declared———(123.9)—(123.9)
Share repurchases(4.0)—(150.0)——(150.0)
Exercise of options, net of shares tendered for payment0.7—17.1——17.1
Issuance of restricted shares, net of cancellations0.3—————
Shares surrendered by employees to pay taxes(0.1)—(4.6)——(4.6)
Share-based compensation——21.4——21.4
Balance - December 31, 2019168.3$1.7$1,777.7$401.0$(226.5)$1,953.9

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.

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 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.

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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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 92.0%, 92.5% and 92.4% of our revenue for the years ended December 31, 2019, 2018 and 2017, 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 8.0%, 7.5% and 7.6% of our revenue for the years ended December 31, 2019, 2018 and 2017, 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, 2019, we had $56.4 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 products 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.

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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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 millions20192018$ Change% Change
Contract assets$41.0$36.5$4.512.3%
Contract liabilities32.632.8(0.2)(0.6)%
Net contract assets$8.4$3.7$4.7127.0%

The $4.7 million increase in net contract assets from December 31, 2018 to December 31, 2019 was primarily the result of timing of milestone payments. Approximately 80% of our contract liabilities at December 31, 2018 were recognized in revenue during the twelve months ended December 31, 2019. There were no impairment losses recognized on our contract assets for the twelve months ended December 31, 2019 and 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 millions201920182017
U.S.$1,866.7$1,858.1$1,752.7
Western Europe401.6402.7381.9
Developing (1)480.6476.5478.2
Other Developed (2)208.3227.8232.9
Consolidated net sales (3)$2,957.2$2,965.1$2,845.7
(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 millions201920182017
Residential$1,668.2$1,665.9$1,579.0
Commercial627.3630.7604.4
Industrial661.7668.5662.3
Consolidated net sales$2,957.2$2,965.1$2,845.7

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 2019, 2018 and 2017 were $78.9 million, $76.7 million and $73.2 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.

The following table summarizes the activity in the allowance for doubtful accounts:

Years ended December 31
In millions201920182017
Beginning balance$14.0$14.2$12.8
Bad debt expense1.41.12.3
Write-offs, net of recoveries(4.1)(0.9)(2.2)
Other (1)(1.0)(0.4)1.3
Ending balance$10.3$14.0$14.2
(1) Other amounts are primarily the effects of changes in currency translations and the impact of allowance for credits.

Inventories

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

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Property, plant and equipment, net

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

Years
Land improvements5 to 20
Buildings and leasehold improvements5 to 50
Machinery and equipment3 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.

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

In millions20192018
U.S.$172.3$156.9
Western Europe69.776.6
Developing (1)31.128.8
Other Developed (2)10.110.3
Consolidated (3)$283.2$272.6
(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 material long-lived asset impairment charges in 2019, 2018, or 2017.

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. A qualitative assessment is first performed, as of the first day of the fourth quarter, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, an evaluation, based upon discounted cash flows, is performed and requires management to estimate future cash flows, growth rates and economic and market conditions.

As a result of the qualitative assessment performed as of October 1, 2019 and 2018, it was determined that it was more likely than not that the fair value of the reporting units exceeded their respective carrying values. Factors considered in the analysis included the last discounted cash flow fair value assessment of reporting units performed in 2017 and the calculated excess fair value over carrying amount, financial performance, forecasts and trends, market capitalization, regulatory and environmental issues, macro-economic conditions, industry and market considerations, raw material costs and management stability. We also 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

Pentair plc and Subsidiaries

Notes to consolidated financial statements

amount. 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 first day of 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 2019 and 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.

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.

Insurance subsidiary

A portion of our property and casualty insurance program is insured 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, 2019 and 2018, reserves for policy claims were $54.7 million, of which $13.1 million was included in Other current liabilities and $41.6 million was included in Other non-current liabilities, and $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, 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

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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. 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.

New accounting standards

On January 1, 2019, we adopted ASU No. 2016-02, “Leases” (“the new lease standard” or “ASC 842”) using the transition method of adoption. Under the transition method of adoption, comparative information has not been restated and continues to be reported under the standards in effect for those periods. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected the practical expedient to not separate non-lease components from the lease components to which they relate, and instead account for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes. Accordingly, all costs associated with a lease contract are accounted for as one lease cost.

The impact of adopting the new standard primarily relates to the recognition of a lease right-of-use (“ROU”) asset and current and non-current lease liability on the consolidated balance sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As we cannot readily determine the rate implicit in the lease, we use our incremental borrowing rate determined by country of lease origin based on the anticipated lease term as determined at commencement date in determining the present value of lease payments. The ROU asset also excludes any accrued lease payments and unamortized lease incentives.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

As of December 31, 2019, $77.2 million was included in Other non-current assets, $19.0 million in Other current liabilities and $61.1 million in Other non-current liabilities, on the Consolidated Balance Sheets as a result of the new lease standard. There was no impact on our Consolidated Statements of Operations and Comprehensive Income or Consolidated Statements of Cash Flows.

On January 1, 2019, we adopted ASU No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - Changes to the Disclosure Requirements for Defined Benefit Plans.” This ASU changes the disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans.

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 is eligible for capitalization in assets. 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 for the year ended December 31, 2017, 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. The impact of the adoption of the new standard did not have a material impact to our net income.

2.Acquisitions and Discontinued Operations

Acquisitions

In February 2019, as part of Filtration Solutions, we completed the acquisitions of Aquion, Inc. (“Aquion”) and Pelican Water Systems (“Pelican”) for $163.4 million and $121.1 million, respectively, in cash, net of cash acquired.

For Aquion, the excess of purchase price over tangible net assets and identified intangible assets acquired has been preliminarily allocated to goodwill in the amount of $87.5 million, $4.6 million of which is expected to be deductible for income tax purposes. Identifiable intangible assets acquired as part of the Aquion acquisition include $15.7 million of indefinite-lived trade name intangible assets and $78.8 million of definite-lived customer relationships with an estimated useful life of 15 years.

For Pelican, the excess purchase price over tangible net assets acquired has been preliminarily allocated to goodwill in the amount of $118.0 million, $7.6 million of which is expected to be deductible for income tax purposes.

The preliminary purchase price allocation for these acquisitions is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These changes will primarily relate to impacts associated with other accruals.

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.

The pro forma impact of these acquisitions was not material.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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 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 (Loss) income from discontinued operations, net of tax presented below.

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 of discontinued operations before income taxes presented below.

Operating results of discontinued operations are summarized below:

Years ended December 31
In millions201920182017
Net sales$—$693.9$2,548.2
Cost of goods sold—424.01,596.2
Gross profit—269.9952.0
Selling, general and administrative7.4237.8589.2
Research and development—14.648.3
Operating (loss) income$(7.4)$17.5$314.5
(Loss) income from discontinued operations before income taxes$(7.6)$31.8$317.1
Income tax (benefit) provision(1.6)6.1(54.2)
(Loss) income from discontinued operations, net of tax$(6.0)$25.7$371.3
Gain from sale of discontinued operations before income taxes$—$—$183.5
Provision for income taxes——2.4
Gain from sale of discontinued operations, net of tax$—$—$181.1

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 data201920182017
Net income$355.7$347.4$666.5
Net income from continuing operations$361.7$321.7$114.1
Weighted average ordinary shares outstanding
Basic169.4175.8181.7
Dilutive impact of stock options and restricted stock awards1.01.52.0
Diluted170.4177.3183.7
Earnings per ordinary share
Basic
Continuing operations$2.14$1.83$0.63
Discontinued operations(0.04)0.153.04
Basic earnings per ordinary share$2.10$1.98$3.67
Diluted
Continuing operations$2.12$1.81$0.62
Discontinued operations(0.03)0.153.01
Diluted earnings per ordinary share$2.09$1.96$3.63
Anti-dilutive stock options excluded from the calculation of diluted earnings per share2.11.21.8

4. Restructuring

During 2019, 2018 and 2017, 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, 2019, 2018 and 2017 included a reduction in hourly and salaried headcount of approximately 375 employees, 300 employees and 250 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 millions201920182017
Severance and related costs$11.7$13.2$27.3
Other2.327.40.9
Total restructuring costs$14.0$40.6$28.2

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 millions201920182017
Aquatic Systems$4.2$15.3$3.6
Filtration Solutions4.714.613.0
Flow Technologies2.79.37.0
Other2.41.44.6
Consolidated$14.0$40.6$28.2

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 millions20192018
Beginning balance$27.1$34.5
Costs incurred11.713.2
Cash payments and other(22.6)(20.6)
Ending balance$16.2$27.1
5.Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 by reportable segment were as follows:

In millionsDecember 31, 2018Acquisitions/ divestituresForeign currency translation/otherDecember 31, 2019
Aquatic Systems$965.9$(3.7)$(0.8)$961.4
Filtration Solutions643.5205.5(11.8)837.2
Flow Technologies463.3—(3.6)459.7
Total goodwill$2,072.7$201.8$(16.2)$2,258.3
In millionsDecember 31, 2017Foreign currency translation/otherDecember 31, 2018
Aquatic Systems$973.1$(7.2)$965.9
Filtration Solutions667.6(24.1)643.5
Flow Technologies472.1(8.8)463.3
Total goodwill$2,112.8$(40.1)$2,072.7

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

Identifiable intangible assets consisted of the following at December 31:

20192018
In millionsCostAccumulated amortizationNetCostAccumulated amortizationNet
Definite-life intangibles
Customer relationships$418.1$(269.1)$149.0$347.1$(247.9)$99.2
Trade names———0.4(0.4)—
Proprietary technology and patents42.3(25.5)16.886.2(68.4)17.8
Total finite-life intangibles460.4(294.6)165.8433.7(316.7)117.0
Indefinite-life intangibles
Trade names173.4—173.4159.3—159.3
Total intangibles$633.8$(294.6)$339.2$593.0$(316.7)$276.3

Identifiable intangible asset amortization expense in 2019, 2018 and 2017 was $31.7 million, $34.9 million and $36.4 million, respectively.

There was no impairment charge for trade name intangible assets in 2019 and 2018. In 2017, we recorded an impairment charge for trade name intangible assets of $8.8 million in Filtration Solutions and Flow Technologies.

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

In millions20202021202220232024
Estimated amortization expense$28.3$23.3$16.3$13.9$12.6

Pentair plc and Subsidiaries

Notes to consolidated financial statements

6. Supplemental Balance Sheet Information

December 31
In millions20192018
Inventories
Raw materials and supplies$196.2$191.3
Work-in-process65.264.0
Finished goods116.0132.2
Total inventories$377.4$387.5
Other current assets
Cost in excess of billings$41.0$36.5
Prepaid expenses48.336.7
Prepaid income taxes5.28.5
Other current assets4.67.7
Total other current assets$99.1$89.4
Property, plant and equipment, net
Land and land improvements$33.7$33.5
Buildings and leasehold improvements188.1178.9
Machinery and equipment610.7593.8
Construction in progress48.135.7
Total property, plant and equipment880.6841.9
Accumulated depreciation and amortization597.4569.3
Total property, plant and equipment, net$283.2$272.6
Other non-current assets
Right-of-use lease assets$77.2$—
Deferred income taxes29.626.2
Deferred compensation plan assets21.320.9
Other non-current assets68.898.4
Total other non-current assets$196.9$145.5
Other current liabilities
Dividends payable$32.0$30.8
Accrued warranty32.133.9
Accrued rebates and incentives83.576.9
Billings in excess of cost22.521.3
Current lease liability19.0—
Income taxes payable11.110.4
Accrued restructuring16.227.1
Other current liabilities136.5128.0
Total other current liabilities$352.9$328.4
Other non-current liabilities
Long-term lease liability$61.1$—
Income taxes payable45.446.8
Self-insurance liabilities41.647.7
Deferred compensation plan liabilities21.320.9
Foreign currency contract liabilities11.630.6
Other non-current liabilities25.722.2
Total other non-current liabilities$206.7$168.2

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 millions20192018
Cumulative translation adjustments$(226.1)$(210.8)
Market value of derivative financial instruments, net of tax(0.4)(17.8)
Accumulated other comprehensive loss$(226.5)$(228.6)

8. Debt

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

In millionsAverage interest rate atMaturity yearDecember 31
December 31, 201920192018
Commercial paper2.327%2023$117.8$76.0
Revolving credit facilities2.863%202335.826.2
Term loans (1)2.914%2023200.0—
Senior notes - fixed rate (1)2.650%2019—250.0
Senior notes - fixed rate - Euro (1)2.450%2019—155.1
Senior notes - fixed rate (1)3.625%202074.074.0
Senior notes - fixed rate (1)5.000%2021103.8103.8
Senior notes - fixed rate (1)3.150%202288.388.3
Senior notes - fixed rate (1)4.650%202519.319.3
Senior notes - fixed rate (1)4.500%2029400.0—
Unamortized issuance costs and discountsN/AN/A(9.9)(5.1)
Total debt$1,029.1$787.6
(1) Senior notes (“the Notes”) and the term loans are guaranteed as to payment by Pentair plc and PISG

In June 2019, Pentair, Pentair Finance S.à r.l. (“PFSA”) and Pentair Investments Switzerland GmbH (“PISG”) completed a public offering of $400.0 million aggregate principal amount of PFSA’s 4.500% Senior Notes due 2029 (the “2029 Notes”). The 2029 Notes are fully and unconditionally guaranteed as to payment of principal and interest by Pentair and PISG. We used the net proceeds of the 2029 Notes to partially repay outstanding commercial paper.

In April 2018, Pentair, PISG, PFSA and Pentair, Inc. entered into a credit agreement, providing for an $800.0 million senior unsecured revolving credit facility with a term of five years (the “Senior Credit Facility”), with Pentair and PISG as guarantors and PFSA and Pentair, Inc. as borrowers. 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. In May 2019, PFSA executed an increase of the Senior Credit Facility by $100.0 million for a total commitment up to $900.0 million in the aggregate.

In December 2019, the Senior Credit Facility was amended to provide for the extension of term loans in an aggregate amount of $200.0 million (the “Term Loans”). The Term Loans are in addition to the Senior Credit Facility commitment. In addition, PFSA has the option to further increase the Senior Credit Facility in an aggregate amount of up to $300.0 million, through a combination of increases to the total commitment amount of the Senior Credit Facility and/or one or more tranches of term loans in addition to the Term Loans, subject to customary conditions, including the commitment of the participating lenders.

As of December 31, 2019, total availability under the Senior Credit Facility was $746.4 million.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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 $117.8 million of commercial paper outstanding as of December 31, 2019 and $76.0 million as of December 31, 2018, 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.

In addition to the Senior Credit Facility, we have various other credit facilities with an aggregate availability of $21.0 million, of which there were no outstanding borrowings at December 31, 2019. Borrowings under these credit facilities bear interest at variable rates.

In 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.

We have $74.0 million aggregate principal amount of fixed rate senior notes maturing in 2020. We classified this debt as long-term as of December 31, 2019 as we have the intent and ability to refinance such obligation on a long-term basis under the Senior Credit Facility.

Debt outstanding, excluding unamortized issuance costs and discounts, at December 31, 2019 matures on a calendar year basis as follows:

In millions20202021202220232024ThereafterTotal
Contractual debt obligation maturities$74.0$103.8$88.3$353.6$—$419.3$1,039.0

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.

At December 31, 2019 and 2018, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $17.0 million and $47.6 million, respectively. The impact of these contracts on the Consolidated Statements of Operations and Comprehensive Income was not material for any period presented.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Cross Currency Swaps

At December 31, 2019 and 2018, we had outstanding cross currency swap agreements with a combined notional amount of $777.0 million and $283.8 million, respectively. The agreements are accounted for as either cash flow hedges, to hedge foreign currency fluctuations on certain intercompany debt, or as net investment hedges to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. As of December 31, 2019 and 2018, we had deferred foreign currency losses of $1.8 million and $14.5 million, respectively, recorded in Accumulated other comprehensive loss associated with our cross currency swap activity.

Foreign Currency Denominated Debt

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. At that time, the remaining €136.6 million of the 2019 Euro Notes were re-designated as a net investment hedge in our Euro denominated subsidiaries. In September 2019, the 2019 Euro Notes matured and were paid in full, terminating the net investment hedge. The historical 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, 2019 we had deferred foreign currency gains of $2.8 million and as of December 31, 2018 we had deferred foreign currency losses of $0.8 million, 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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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

20192018
In millionsRecorded AmountFair ValueRecorded AmountFair Value
Variable rate debt$353.6$353.6$102.2$102.2
Fixed rate debt685.4732.2690.5691.8
Total debt$1,039.0$1,085.8$792.7$794.0

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

Recurring fair value measurementsDecember 31, 2019
In millionsLevel 1Level 2Level 3NAVTotal
Foreign currency contract assets$—$0.1$—$—$0.1
Foreign currency contract liabilities—(11.6)——(11.6)
Deferred compensation plan assets12.5——8.821.3
Total recurring fair value measurements$12.5$(11.5)$—$8.8$9.8
Nonrecurring fair value measurements (1)
Recurring fair value measurementsDecember 31, 2018
In millionsLevel 1Level 2Level 3NAVTotal
Foreign currency contract liabilities$—$(30.6)$—$—$(30.6)
Deferred compensation plan assets17.6——3.320.9
Total recurring fair value measurements$17.6$(30.6)$—$3.3$(9.7)
Nonrecurring fair value measurements (1)
(1)During the years ended December 31, 2019 and 2018, we recorded impairment charges for cost method investments in the amount of $21.2 million and $12.0 million, respectively. In 2018, a valuation method using prices in active markets was utilized to determine the fair value. In 2019, we determined the value using unobservable inputs and wrote the balance of the cost method investments to zero.

10. Income Taxes

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

Years ended December 31
In millions201920182017
Federal (1)$(1.6)$(24.6)$(34.1)
International (2)409.1404.4206.9
Income from continuing operations before income taxes$407.5$379.8$172.8
(1)“Federal” reflects United Kingdom (“U.K.”) loss from continuing operations before income taxes.
(2)“International” reflects non-U.K. income from continuing operations before income taxes.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

The provision for income taxes consisted of the following:

Years ended December 31
In millions201920182017
Currently payable (receivable)
Federal (1)$—$(0.1)$—
International (2)64.262.376.7
Total current taxes64.262.276.7
Deferred
International (2)(18.4)(4.1)(18.0)
Total deferred taxes(18.4)(4.1)(18.0)
Total provision for income taxes$45.8$58.1$58.7
(1)“Federal” represents U.K. taxes.
(2)“International” represents non-U.K. taxes.

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

Years ended December 31
Percentages201920182017
U.K. federal statutory income tax rate19.0%19.0%19.3%
Tax effect of international operations (1)(8.2)(9.9)(18.7)
Change in valuation allowances1.17.927.6
Excess tax benefits on stock-based compensation(0.7)(1.7)(4.5)
Tax effect of U.S. tax reform—(0.9)1.3
Tax effect of early extinguishment of debt—0.99.0
Effective tax rate11.2%15.3%34.0%
(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 millions201920182017
Beginning balance$51.4$13.8$46.3
Gross increases for tax positions in prior periods0.444.04.7
Gross decreases for tax positions in prior periods(0.8)(4.4)(3.4)
Gross increases based on tax positions related to the current year0.40.90.7
Gross decreases related to settlements with taxing authorities(2.9)(1.8)(33.6)
Reductions due to statute expiration(1.1)(1.1)(0.9)
Ending balance$47.4$51.4$13.8

We record gross unrecognized tax benefits in Other current liabilities and Other non-current liabilities in the Consolidated Balance Sheets. Included in the $47.4 million of total gross unrecognized tax benefits as of December 31, 2019 was $47.0 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, 2019 may decrease by a range of zero to $4.3 million during 2020, 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 2008 to present are under audit by tax authorities in various jurisdictions, including China, Germany, India, Italy and New Zealand. We anticipate that several of these audits may be concluded in the foreseeable future.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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, 2019 and 2018, we have liabilities of $0.4 million and $0.5 million, respectively, for the possible payment of penalties and $3.7 million and $3.6 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).

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

December 31
In millions20192018
Other non-current assets$29.6$26.2
Deferred tax liabilities104.4105.9
Net deferred tax liabilities$74.8$79.7

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

December 31
In millions20192018
Deferred tax assets
Accrued liabilities and reserves$41.9$42.9
Pension and other post-retirement compensation and benefits25.225.2
Employee compensation and benefits19.621.8
Tax loss and credit carryforwards712.0724.7
Interest limitations45.020.6
Total deferred tax assets843.7835.2
Valuation allowance693.8711.9
Deferred tax assets, net of valuation allowance149.9123.3
Deferred tax liabilities
Property, plant and equipment8.57.1
Goodwill and other intangibles200.4179.7
Other liabilities15.816.2
Total deferred tax liabilities224.7203.0
Net deferred tax liabilities$74.8$79.7

Included in tax loss and credit carryforwards in the table above is a deferred tax asset of $29.6 million as of December 31, 2019 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, 2019, tax loss carryforwards of $2,957.4 million were available to offset future income. A valuation allowance of $663.1 million exists for deferred income tax benefits related to the tax loss carryforwards which may not be realized. We believe sufficient taxable income will be generated in the respective jurisdictions to allow us to fully recover the remainder of the tax losses. The tax losses primarily relate to non-U.S. carryforwards of $2,843.1 million which are subject to varying expiration periods. Non-U.S. carryforwards of $1,763.9 million are located in jurisdictions with unlimited tax loss carryforward periods, while the remainder will begin to expire in 2020. In addition, there were $14.6 million U.S. federal loss carryforwards with unlimited tax loss carryforward periods and $99.7 million of state tax loss carryforwards as of December 31, 2019. State tax losses of $64.0 million are in jurisdictions with unlimited tax loss carryforward periods, while the remainder will expire in future years through 2039.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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.

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 2017, our Board of Directors approved amendments to terminate the Pentair Salaried Plan (the “Salaried Plan”), a U.S. qualified pension plan. The Salaried Plan discontinued accruing benefits on December 31, 2017 and the termination was effective December 31, 2017. The Salaried Plan participants were not adversely affected by the plan termination.

In 2018, 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.

In 2019, the Company received all required government approvals to complete the termination of the Salaried Plan. In June 2019, we entered into an agreement with an insurance company to purchase from us, through an annuity contract, our remaining obligations under the Salaried Plan. For the year ended December 31, 2019, we contributed $11.1 million to the Salaried Plan as part of the process to settle our obligations. As a result of these actions, a non-cash pre-tax settlement gain of $11.8 million was recorded for the year ended December 31, 2019 and is reflected within Net actuarial loss (gain) in the Net periodic benefit expense table below.

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, 2019 and 2018:

Pension plansOther post-retirement plans
In millions2019201820192018
Change in benefit obligations
Benefit obligation beginning of year$277.9$473.8$14.9$17.5
Service cost2.64.1——
Interest cost7.311.50.60.6
Settlements(1.5)———
Actuarial loss (gain)8.0(23.6)2.0(1.4)
Foreign currency translation0.1(0.2)——
Benefits paid(182.3)(187.7)(2.9)(1.8)
Benefit obligation end of year$112.1$277.9$14.6$14.9
Change in plan assets
Fair value of plan assets beginning of year$180.7$382.8$—$—
Actual return on plan assets16.0(21.4)——
Company contributions18.07.12.91.8
Settlements(1.5)———
Foreign currency translation0.1(0.1)——
Benefits paid(182.3)(187.7)(2.9)(1.8)
Fair value of plan assets end of year$31.0$180.7$—$—
Funded status
Benefit obligations in excess of the fair value of plan assets$(81.1)$(97.2)$(14.6)$(14.9)

Amounts recorded in the Consolidated Balance Sheets were as follows:

Pension plansOther post-retirement plans
In millions2019201820192018
Current liabilities$(5.3)$(28.3)$(1.7)$(1.7)
Non-current liabilities(75.8)(68.9)(12.9)(13.2)
Benefit obligations in excess of the fair value of plan assets$(81.1)$(97.2)$(14.6)$(14.9)

The accumulated benefit obligation for all defined benefit plans was $107.1 million and $275.0 million at December 31, 2019 and 2018, 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 assetsAccumulated benefit obligation exceeds the fair value of plan assets
In millions2019201820192018
Projected benefit obligation$111.7$277.9$111.7$270.6
Fair value of plan assets30.4180.730.4173.7
Accumulated benefit obligationN/AN/A107.1268.3

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 millions201920182017
Service cost$2.6$4.1$11.7
Interest cost7.311.516.4
Expected return on plan assets(3.9)(7.6)(11.6)
Net actuarial (gain) loss(4.1)5.28.4
Net periodic benefit expense$1.9$13.2$24.9

Components of net periodic benefit expense for our other post-retirement plans for the years ended December 31, 2019, 2018 and 2017, 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 plansOther post-retirement plans
201920182017201920182017
Benefit obligation assumptions (1)
Discount rate2.68%3.73%4.00%2.81%3.95%3.40%
Rate of compensation increase3.68%3.77%3.96%NANANA
Net periodic benefit expense assumptions
Discount rate3.70%4.00%3.94%3.95%3.40%3.80%
Expected long-term return on plan assets4.37%4.17%4.05%NANANA
Rate of compensation increase3.72%3.96%3.96%NANANA
(1)The benefit obligation for the Salaried Plan as of December 31, 2018 was determined using assumptions reflecting the termination of the plan. As a result, the 2018 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 2020.

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 8.85%, (5.60)% and 12.00% in 2019, 2018 and 2017, respectively.

Healthcare cost trend rates

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

20192018
Healthcare cost trend rate assumed for following year5.8%6.2%
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 rate20382038

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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:

ActualTarget
2019201820192018
Fixed income70%87%72%95%
Alternative29%5%28%5%
Cash1%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, 2019 and December 31, 2018 were as follows:

December 31, 2019
In millionsLevel 1Level 2Level 3Total
Cash and cash equivalents$0.4$—$—$0.4
Other investments——8.98.9
Total investments at fair value$0.4$—$8.9$9.3
Investments measured at NAV21.7
Total$31.0
December 31, 2018
In millionsLevel 1Level 2Level 3Total
Cash and cash equivalents$—$12.0$—$12.0
Fixed income—137.5—137.5
Other investments——9.39.3
Total investments at fair value$—$149.5$9.3$158.8
Investments measured at NAV21.9
Total$180.7

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, 2019 and 2018 was not material.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Cash flows

Contributions

Pension contributions from continuing operations totaled $18.0 million and $7.1 million in 2019 and 2018, respectively. We anticipate our 2020 pension contributions to be approximately $6.6 million. The 2020 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 in each of the next five fiscal years and in the aggregate for the five fiscal years thereafter are as follows:

In millionsPension plansOther post- retirement plans
2020$6.8$1.7
20216.81.6
20226.81.5
20237.21.4
20247.21.3
2025 - 202936.94.9

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, 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 and 2017, 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 $14.4 million, $23.4 million and $27.9 million in 2019, 2018 and 2017, respectively.

Other retirement compensation

Total other accrued retirement compensation, primarily related to deferred compensation and supplemental retirement plans, was $29.0 million and $28.2 million as of December 31, 2019 and 2018, respectively, and is included in Pension and other post-retirement compensation and benefits and Other non-current liabilities in the Consolidated Balance Sheets.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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, 2018, we repurchased 10.2 million of our ordinary 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.

During the year ended December 31, 2019, we repurchased 4.0 million of our ordinary shares for $150.0 million pursuant to the 2018 Authorization.

As of December 31, 2019, we had $250.0 million available for share repurchases under the 2018 Authorization.

Dividends payable

On December 9, 2019, the Board of Directors approved a 6 percent increase in the company’s regular quarterly dividend rate (from $0.18 per share to $0.19 per share) that was paid on February 7, 2020 to shareholders of record at the close of business on January 24, 2020. The balance of dividends payable included in Other current liabilities on our Consolidated Balance Sheets was $32.0 million at December 31, 2019. Dividends paid per ordinary share were $0.72, $1.05 and $1.38 for the years ended December 31, 2019, 2018 and 2017, respectively.

13. Share Plans

Share-based compensation expense

Total share-based compensation expense for 2019, 2018 and 2017 was as follows:

December 31
In millions201920182017
Restricted stock units$11.2$8.9$17.5
Stock options4.54.610.5
Performance share units5.77.411.6
Total share-based compensation expense$21.4$20.9$39.6

Of the total share-based compensation expense noted above, $3.4 million and $7.6 million for the years ended December 31, 2018 and 2017, respectively, was reported as part of (Loss) 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.

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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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 period of three years 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 period of three years 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 vesting period of three years and tied to specific financial metrics. PSUs are granted to certain employees that vest based on the satisfaction of a service period of three years 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 vesting period.

Stock options

The following table summarizes stock option activity under all plans for the year ended December 31, 2019:

Shares and intrinsic value in millionsNumber of sharesWeighted- average exercise priceWeighted- average remaining contractual life (years)Aggregate intrinsic value
Outstanding as of January 1, 20194.1$35.77
Granted0.439.05
Exercised(0.6)26.92
Forfeited(0.1)44.56
Outstanding as of December 31, 20193.8$37.295.2$34.1
Options exercisable as of December 31, 20192.9$36.084.2$30.2
Options expected to vest as of December 31, 20190.8$41.358.3$3.8

Fair value of options granted

The weighted average grant date fair value of options granted under Pentair plans in 2019, 2018 and 2017 was estimated to be $8.86, $10.92 and $12.59 per share, respectively. The total intrinsic value of options that were exercised during 2019, 2018 and 2017 was $9.5 million, $18.2 million and $34.3 million, respectively. At December 31, 2019, the total unrecognized compensation cost related to stock options was $4.0 million. This cost is expected to be recognized over a weighted average period of 1.7 years.

We estimated the fair value of each stock option award issued in the annual share-based compensation grant using a Black-Scholes option pricing model, modified for dividends and using the following assumptions:

December 31
201920182017
Risk-free interest rate2.89%2.58%1.65%
Expected dividend yield1.78%1.56%2.35%
Expected share price volatility23.3%24.8%26.9%
Expected term (years)6.16.16.3

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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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, 2019, 2018 and 2017 was $15.5 million, $19.5 million and $46.0 million, respectively. The actual tax benefit realized for the tax deductions from option exercised totaled $2.8 million, $5.6 million and $7.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Restricted stock units

The following table summarizes restricted stock unit activity under all plans for the year ended December 31, 2019:

Shares in millionsNumber of sharesWeighted average grant date fair value
Outstanding as of January 1, 20190.5$41.74
Granted0.341.08
Vested(0.2)37.61
Outstanding as of December 31, 20190.6$42.16

As of December 31, 2019, there was $20.5 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 1.1 years. The total fair value of shares vested during the years ended December 31, 2019, 2018 and 2017, was $9.3 million, $24.4 million and $21.7 million, respectively. The actual tax benefit realized for the year ended December 31, 2019 and 2018 was $0.1 million and $0.7 million, respectively. There were no actual tax benefits realized for the year ended December 31, 2017.

Performance share units

The following table summarizes performance share unit activity under all plans for the year ended December 31, 2019:

Shares in millionsNumber of sharesWeighted average grant date fair value
Outstanding as of January 1, 20190.1$45.42
Granted0.238.60
Outstanding as of December 31, 20190.3$41.62

The expense recognized each period is dependent upon our estimate of the number of shares that will ultimately be issued. As of December 31, 2019, there was $8.7 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 1.7 years. There were $0.2 million of actual tax benefits realized for both of the years ended December 31, 2019 and 2018. There were no actual tax benefits realized for the year ended December 31, 2017.

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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

•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

We classify our operations into the following 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.
•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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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

201920182017201920182017
In millionsNet salesSegment income (loss)
Aquatic Systems$985.3$1,026.1$939.6$268.9$277.6$254.1
Filtration Solutions1,066.91,001.0990.6171.3168.5154.5
Flow Technologies903.6936.7914.2138.4145.6140.6
Other1.41.31.3(62.3)(54.9)(52.7)
Consolidated (1)$2,957.2$2,965.1$2,845.7$516.3$536.8$496.5
(1)One customer in the Aquatic Systems segment, Pool Corporation, represented approximately 15% of our consolidated net sales in 2019, 2018 and 2017.
201920182017201920182017201920182017
In millionsIdentifiable assets (1)Capital expendituresDepreciation
Aquatic Systems$1,340.1$1,304.2$1,323.0$11.1$10.6$9.6$8.3$8.1$10.6
Filtration Solutions1,552.61,232.41,333.326.316.619.222.523.221.6
Flow Technologies1,000.01,003.61,010.814.110.37.312.013.113.4
Other246.8266.34,966.67.010.73.05.55.35.2
Consolidated$4,139.5$3,806.5$8,633.7$58.5$48.2$39.1$48.3$49.7$50.8
(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 millions201920182017
Segment income$516.3$536.8$496.5
Restructuring and other(21.0)(31.8)(28.2)
Inventory step-up(2.2)——
Intangible amortization(31.7)(34.9)(36.4)
Pension and other post-retirement mark-to-market gain (loss)3.4(3.6)(8.5)
Trade name and other impairment(21.2)(12.0)(15.6)
Gain (loss) on sale of businesses2.2(7.3)(4.2)
Loss on early extinguishment of debt—(17.1)(101.4)
Interest expense, net(30.1)(32.6)(87.3)
Corporate allocations—(11.0)(36.7)
Deal related costs and expenses(4.2)(2.0)—
Other expense(4.0)(4.7)(5.4)
Income from continuing operations before income taxes$407.5$379.8$172.8

15. Commitments and Contingencies

Leases

We determine if an arrangement is a lease at inception. Our lease portfolio principally consists of operating leases related to facilities, machinery, equipment and vehicles. Our lease terms do not include options to extend or terminate the lease until we are reasonably certain that we will exercise that option. Operating lease cost for lease payments is recognized on a straight-line basis over the lease term and principally consists of fixed payments for base rent.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

The components of lease cost was as follows:

In millionsDecember 31, 2019
Operating lease cost$32.5
Sublease income(1.0)
Total lease cost$31.5

Supplemental cash flow information related to leases was as follows:

In millionsDecember 31, 2019
Operating cash flows from operating leases$26.8
Right-of-use assets obtained in exchange for lease obligations$91.1

Other information related to leases was as follows:

December 31, 2019
Weighted-average remaining lease term of operating leases5.2
Weighted-average discount rate of operating leases6.3%

Future minimum lease commitments under non-cancelable operating leases as of December 31, 2019 were as follows:

In millionsOperating Leases
2020$23.3
202118.8
202216.3
202313.9
202411.0
Thereafter11.0
Total lease payments94.3
Less: imputed interest(14.2)
Total$80.1

Future minimum lease commitments under non-cancelable operating leases based on accounting standards applicable as of December 31, 2018 were as follows:

In millionsOperating Leases
2019$23.2
202017.6
202113.3
202211.1
20239.5
Thereafter13.8
Total$88.5

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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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. We have 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.

The changes in the carrying amount of service and product warranties for the years ended December 31, 2019, 2018 and 2017 were as follows:

Years ended December 31
In millions201920182017
Beginning balance$33.9$38.1$36.3
Service and product warranty provision53.850.860.8
Payments(55.5)(54.6)(59.6)
Foreign currency translation(0.1)(0.4)0.6
Ending balance$32.1$33.9$38.1

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 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, 2019 and 2018, the outstanding value of bonds, letters of credit and bank guarantees totaled $91.3 million and $123.6 million, respectively.

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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

16. Selected Quarterly Data (Unaudited)

The following tables present 2019 and 2018 quarterly financial information:

2019
In millions, except per-share dataFirst QuarterSecond QuarterThird QuarterFourth QuarterFull Year
Net sales$688.9$799.5$713.6$755.2$2,957.2
Gross profit235.6286.7255.0274.21,051.5
Operating income67.6133.8108.8122.3432.5
Net income from continuing operations52.4115.191.3102.9361.7
(Loss) income from discontinued operations, net of tax(1.1)(0.8)1.0(5.1)(6.0)
Net income51.3114.392.397.8355.7
Earnings (loss) per ordinary share (1)
Basic
Continuing operations$0.31$0.68$0.54$0.61$2.14
Discontinued operations(0.01)(0.01)0.01(0.03)(0.04)
Basic earnings per ordinary share$0.30$0.67$0.55$0.58$2.10
Diluted
Continuing operations$0.30$0.68$0.54$0.61$2.12
Discontinued operations—(0.01)0.01(0.03)(0.03)
Diluted earnings per ordinary share$0.30$0.67$0.55$0.58$2.09
(1)Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average ordinary shares outstanding during that period.
2018
In millions, except per-share dataFirst QuarterSecond QuarterThird QuarterFourth QuarterFull Year
Net sales$732.6$780.6$711.4$740.5$2,965.1
Gross profit253.3282.6243.8268.01,047.7
Operating income92.7122.6108.4113.0436.7
Net income from continuing operations58.477.9(1)91.294.2321.7
Income (loss) from discontinued operations, net of tax44.5(36.4)18.9(1.3)25.7
Net income102.941.5110.192.9347.4
Earnings (loss) per ordinary share (2)
Basic
Continuing operations$0.33$0.44$0.52$0.55$1.83
Discontinued operations0.24(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 operations0.25(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.

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, 2019, 2018 and 2017 and Condensed Consolidating Balance Sheet as of December 31, 2019 and 2018. 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, 2019

In millionsParent Company GuarantorSubsidiary GuarantorSubsidiary IssuerNon-guarantor SubsidiariesEliminationsConsolidated Total
Net sales$—$—$—$2,957.2$—$2,957.2
Cost of goods sold———1,905.7—1,905.7
Gross profit———1,051.5—1,051.5
Selling, general and administrative12.50.11.3526.2—540.1
Research and development———78.9—78.9
Operating (loss) income(12.5)(0.1)(1.3)446.4—432.5
(Earnings) loss from continuing operations of investment in subsidiaries(374.2)(376.3)(382.2)—1,132.7—
Other (income) expense:
Gain on sale of businesses———(2.2)—(2.2)
Net interest expense—2.04.623.5—30.1
Other income———(2.9)—(2.9)
Income (loss) from continuing operations before income taxes361.7374.2376.3428.0(1,132.7)407.5
Provision for income taxes———45.8—45.8
Net income (loss) from continuing operations361.7374.2376.3382.2(1,132.7)361.7
Loss from discontinued operations, net of tax———(6.0)—(6.0)
(Loss) earnings from discontinued operations of investment in subsidiaries(6.0)(6.0)(6.0)—18.0—
Net income (loss)$355.7$368.2$370.3$376.2$(1,114.7)$355.7
Comprehensive income (loss), net of tax
Net income (loss)$355.7$368.2$370.3$376.2$(1,114.7)$355.7
Changes in cumulative translation adjustment(15.3)(15.3)(15.3)(15.3)45.9(15.3)
Changes in market value of derivative financial instruments, net of tax17.417.417.417.4(52.2)17.4
Comprehensive income (loss)$357.8$370.3$372.4$378.3$(1,121.0)$357.8

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Pentair plc and Subsidiaries

Condensed Consolidating Balance Sheet

December 31, 2019

In millionsParent Company GuarantorSubsidiary GuarantorSubsidiary IssuerNon-guarantor SubsidiariesEliminationsConsolidated Total
Assets
Current assets
Cash and cash equivalents$—$—$0.1$82.4$—$82.5
Accounts and notes receivable, net0.2—2.4501.1(0.8)502.9
Inventories———377.4—377.4
Other current assets1.2—0.297.7—99.1
Total current assets1.4—2.71,058.6(0.8)1,061.9
Property, plant and equipment, net———283.2—283.2
Other assets
Investments in subsidiaries1,904.51,904.02,789.6—(6,598.1)—
Goodwill———2,258.3—2,258.3
Intangibles, net———339.2—339.2
Other non-current assets110.60.91,278.7184.1(1,377.4)196.9
Total other assets2,015.11,904.94,068.32,781.6(7,975.5)2,794.4
Total assets$2,016.5$1,904.9$4,071.0$4,123.4$(7,976.3)$4,139.5
Liabilities and Equity
Current liabilities
Accounts payable$2.4$0.1$0.1$323.3$(0.8)$325.1
Employee compensation and benefits0.1——70.9—71.0
Other current liabilities39.70.313.1299.8—352.9
Total current liabilities42.20.413.2694.0(0.8)749.0
Other liabilities
Long-term debt——2,154.0252.5(1,377.4)1,029.1
Pension and other post-retirement compensation and benefits———96.4—96.4
Deferred tax liabilities———104.4—104.4
Other non-current liabilities20.4——186.3—206.7
Total liabilities62.60.42,167.21,333.6(1,378.2)2,185.6
Equity1,953.91,904.51,903.82,789.8(6,598.1)1,953.9
Total liabilities and equity$2,016.5$1,904.9$4,071.0$4,123.4$(7,976.3)$4,139.5

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Pentair plc and Subsidiaries

Condensed Consolidating Statement of Cash Flows

Year Ended December 31, 2019

In millionsParent Company GuarantorSubsidiary GuarantorSubsidiary IssuerNon-guarantor SubsidiariesEliminationsConsolidated Total
Operating activities
Net cash provided by (used for) operating activities$361.6$367.1$381.0$340.0$(1,096.7)$353.0
Investing activities
Capital expenditures———(58.5)—(58.5)
Proceeds from sale of property and equipment———0.6—0.6
Proceeds from sale of businesses———15.3—15.3
Acquisitions, net of cash acquired———(287.8)—(287.8)
Net intercompany loan activity(127.8)(131.7)(309.9)203.6365.8—
Other———(1.5)—(1.5)
Net cash (used for) provided by investing activities(127.8)(131.7)(309.9)(128.3)365.8(331.9)
Financing activities
Net receipts of commercial paper and revolving long-term debt——41.99.6—51.5
Proceeds from long-term debt——600.0——600.0
Repayment of long-term debt——(401.5)——(401.5)
Net change in advances to subsidiaries26.3(235.4)(301.0)(220.8)730.9—
Shares issued to employees, net of shares withheld12.5————12.5
Repurchases of ordinary shares(150.0)————(150.0)
Dividends paid(122.7)————(122.7)
Other——(6.9)——(6.9)
Net cash (used for) provided by financing activities(233.9)(235.4)(67.5)(211.2)730.9(17.1)
Effect of exchange rate changes on cash and cash equivalents——(3.6)7.8—4.2
Change in cash and cash equivalents(0.1)——8.3—8.2
Cash and cash equivalents, beginning of year0.1—0.174.1—74.3
Cash and cash equivalents, end of year$—$—$0.1$82.4$—$82.5

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 millionsParent Company GuarantorSubsidiary GuarantorSubsidiary IssuerNon-guarantor SubsidiariesEliminationsConsolidated 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 administrative11.80.91.2520.4—534.3
Research and development———76.7—76.7
Operating (loss) income(11.8)(0.9)(1.2)450.6—436.7
(Earnings) loss 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)24.88.8—32.6
Other income———(0.1)—(0.1)
Income (loss) from continuing operations before income taxes321.7333.5333.4434.6(1,043.4)379.8
Provision for income taxes———58.1—58.1
Net income (loss) from continuing operations321.7333.5333.4376.5(1,043.4)321.7
Income from discontinued operations, net of tax———25.7—25.7
Earnings (loss) from discontinued operations of investment in subsidiaries25.725.725.7—(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 adjustment10.010.010.010.0(30.0)10.0
Changes in market value of derivative financial instruments, net of tax4.84.84.84.8(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 millionsParent Company GuarantorSubsidiary GuarantorSubsidiary IssuerNon-guarantor SubsidiariesEliminationsConsolidated Total
Assets
Current assets
Cash and cash equivalents$0.1$—$0.1$74.1$—$74.3
Accounts and notes receivable, net4.6——483.6—488.2
Inventories———387.5—387.5
Other current assets3.4—2.299.2(15.4)89.4
Total current assets8.1—2.31,044.4(15.4)1,039.4
Property, plant and equipment, net———272.6—272.6
Other assets
Investments in subsidiaries1,903.82,036.12,675.7—(6,615.6)—
Goodwill———2,072.7—2,072.7
Intangibles, net———276.3—276.3
Other non-current assets23.3—696.1729.7(1,303.6)145.5
Total other assets1,927.12,036.13,371.83,078.7(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 benefits0.2——111.5—111.7
Other current liabilities47.61.54.4290.3(15.4)328.4
Total current liabilities48.71.54.4779.5(15.4)818.7
Other liabilities
Long-term debt29.9130.81,333.9596.6(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 liabilities20.5——147.7—168.2
Total liabilities99.1132.31,338.31,719.7(1,319.0)1,970.4
Equity1,836.11,903.82,035.82,676.0(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 millionsParent Company GuarantorSubsidiary GuarantorSubsidiary IssuerNon-guarantor SubsidiariesEliminationsConsolidated 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———(12.8)—(12.8)
Acquisitions, net of cash acquired———(0.9)—(0.9)
Net intercompany loan activity—94.1181.01,655.7(1,930.8)—
Net cash provided by (used for) investing activities of continuing operations—94.1181.01,594.0(1,930.8)(61.7)
Net cash used for investing activities from discontinued operations———(7.1)—(7.1)
Net cash provided by (used for) investing activities—94.1181.01,586.9(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)
Distribution of cash from nVent, net of cash transferred——993.6(74.2)—919.4
Net change in advances to subsidiaries407.7(456.2)(874.6)(2,205.3)3,128.4—
Shares issued to employees, net of shares withheld13.3————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 equivalents0.1—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 millionsParent Company GuarantorSubsidiary GuarantorSubsidiary IssuerNon-guarantor SubsidiariesEliminationsConsolidated 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 administrative9.00.6—526.4—536.0
Research and development———73.2—73.2
Operating (loss) income(9.0)(0.6)—387.9—378.3
(Earnings) loss 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——91.010.4—101.4
Net interest (income) expense—(0.6)70.717.2—87.3
Other expense———12.6—12.6
Income (loss) from continuing operations before income taxes113.2122.2121.7343.5(527.8)172.8
(Benefit) provision for income taxes(0.9)——59.6—58.7
Net income (loss) from continuing operations114.1122.2121.7283.9(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 subsidiaries552.4552.4552.4—(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 adjustment497.5497.5497.5497.5(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 Statement of Cash Flows

Year Ended December 31, 2017

In millionsParent Company GuarantorSubsidiary GuarantorSubsidiary IssuerNon-guarantor SubsidiariesEliminationsConsolidated Total
Operating activities
Net cash provided by (used for) operating activities$678.3$676.1$656.2$794.6$(2,185.0)$620.2
Investing activities
Capital expenditures———(39.1)—(39.1)
Proceeds from sale of property and equipment———3.7—3.7
Proceeds from sale of businesses and other——2,765.6(6.2)—2,759.4
Acquisitions, net of cash acquired———(45.9)—(45.9)
Net intercompany loan activity—(58.9)103.7172.5(217.3)—
Net cash provided by (used for) investing activities of continuing operations—(58.9)2,869.385.0(217.3)2,678.1
Net cash used for investing activities of discontinued operations———(47.7)—(47.7)
Net cash (used for) provided by investing activities—(58.9)2,869.337.3(217.3)2,630.4
Financing activities
Net (repayments) receipts of commercial paper and revolving long-term debt——(914.7)1.6—(913.1)
Repayment of long-term debt——(1,917.8)(91.5)—(2,009.3)
Premium paid on early extinguishment of debt——(86.0)(8.9)—(94.9)
Net change in advances to subsidiaries(263.8)(617.2)(680.8)(840.5)2,402.3—
Shares issued to employees, net of shares withheld37.2————37.2
Repurchases of ordinary shares(200.0)————(200.0)
Dividends paid(251.7)————(251.7)
Other———(0.8)—(0.8)
Net cash (used for) provided by financing activities(678.3)(617.2)(3,599.3)(940.1)2,402.3(3,432.6)
Change in cash held for sale———(5.4)—(5.4)
Effect of exchange rate changes on cash and cash equivalents——73.8(17.0)—56.8
Change in cash and cash equivalents———(130.6)—(130.6)
Cash and cash equivalents, beginning of year———216.9—216.9
Cash and cash equivalents, end of year$—$—$—$86.3$—$86.3

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