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, 2020. 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, 2020, 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, 2020. That attestation report is set forth immediately following this management report.

John L. Stauch						Robert P. Fishman
President and Chief Executive Officer						Executive 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, 2020, 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, 2020, based on 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, 2020, of the Company and our report dated February 16, 2021 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 16, 2021

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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 16, 2021, 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 weighted average cost of capital (“WACC”) rates and forecasting future revenues for the related brands. 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 $180.6 million as of December 31, 2020, 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 royalty and WACC rate assumptions. The future trade name revenues are sensitive to changes in demand, and the short-term growth rates have increased uncertainty as a result of the COVID-19 pandemic. 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 forecasts of future trade name revenues and selection of the royalty and WACC rates included the following, among others:

• We tested the effectiveness of controls over indefinite-lived trade names impairment evaluation, including those over management’s review of the trade name revenue forecasts and the selection of the royalty and WACC rates to be used in the valuation.

• We assessed management’s ability to prepare accurate trade name revenue forecasts by performing a retrospective review to compare actual results to management’s historical forecasts.

• We evaluated the reasonableness of management’s trade name 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, (3) forecasted information included in Company press releases, (4) underlying analysis detailing business strategies and growth plans, and (5) current industry, market and economic trends.

• We also performed sensitivity analyses to evaluate the impact that changes in the significant assumptions would have on the fair value of the trade names.

• With the assistance of our fair value specialists, we evaluated the royalty and WACC rates used by management in the valuation, including (1) testing the underlying source information and the mathematical calculations, (2) developing a range of independent estimates and comparing those to the WACC rate selected by management, and (3) comparing the selected royalty rate to market data for comparable licensing agreement rates.

Income Taxes — Completeness of Uncertain Tax Positions — Refer to Notes 1 and 10 to the financial statements

Critical Audit Matter Description

The Company assesses uncertain tax positions (“UTPs”) 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, 2020, the Company’s recorded UTP balance was $46.3 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 the completeness of UTPs in material jurisdictions 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:

▪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 UTPs.

▪We evaluated former and ongoing tax audits by tax authorities.

▪We considered changes in and assessed the Company’s interpretation of applicable tax laws.

▪We inspected the Company’s filed tax returns and the tax provision to obtain an understanding of significant differences. We assessed whether the appropriate UTPs were 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 16, 2021

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

Pentair plc and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

			Years ended December 31
In millions, except per-share data			2020			2019			2018
Net sales			$	3,017.8		$	2,957.2		$	2,965.1
Cost of goods sold			1,960.2			1,905.7			1,917.4
Gross profit			1,057.6			1,051.5			1,047.7
Selling, general and administrative			520.5			540.1			534.3
Research and development			75.7			78.9			76.7
Operating income			461.4			432.5			436.7
Other (income) expense
Loss (gain) on sale of businesses			0.1			(2.2)			7.3
Loss on early extinguishment of debt			—			—			17.1
Net interest expense			23.9			30.1			32.6
Other expense (income)			5.3			(2.9)			(0.1)
Income from continuing operations before income taxes			432.1			407.5			379.8
Provision for income taxes			75.0			45.8			58.1
Net income from continuing operations			357.1			361.7			321.7
Income (loss) from discontinued operations, net of tax			1.5			(6.0)			25.7
Net income			$	358.6		$	355.7		$	347.4
Comprehensive income, net of tax
Net income			$	358.6		$	355.7		$	347.4
Changes in cumulative translation adjustment			49.0			(15.3)			10.0
Changes in market value of derivative financial instruments, net of tax			(29.8)			17.4			4.8
Comprehensive income			$	377.8		$	357.8		$	362.2
Earnings (loss) per ordinary share
Basic
Continuing operations			$	2.14		$	2.14		$	1.83
Discontinued operations			0.01			(0.04)			0.15
Basic earnings per ordinary share			$	2.15		$	2.10		$	1.98
Diluted
Continuing operations			$	2.13		$	2.12		$	1.81
Discontinued operations			0.01			(0.03)			0.15
Diluted earnings per ordinary share			$	2.14		$	2.09		$	1.96
Weighted average ordinary shares outstanding
Basic			166.5			169.4			175.8
Diluted			167.4			170.4			177.3

See accompanying notes to consolidated financial statements.

Pentair plc and Subsidiaries

Consolidated Balance Sheets

			December 31
In millions, except per-share data			2020			2019
Assets
Current assets
Cash and cash equivalents			$	82.1		$	82.5
Accounts receivable, net of allowances of $8.4 and $10.3, respectively			367.5			502.9
Inventories			420.0			377.4
Other current assets			105.5			99.1
Total current assets			975.1			1,061.9
Property, plant and equipment, net			301.2			283.2
Other assets
Goodwill			2,392.2			2,258.3
Intangibles, net			325.9			339.2
Other non-current assets			202.8			196.9
Total other assets			2,920.9			2,794.4
Total assets			$	4,197.2		$	4,139.5
Liabilities and Equity
Current liabilities
Accounts payable			$	245.1		$	325.1
Employee compensation and benefits			117.0			71.0
Other current liabilities			410.4			352.9
Total current liabilities			772.5			749.0
Other liabilities
Long-term debt			839.6			1,029.1
Pension and other post-retirement compensation and benefits			102.0			96.4
Deferred tax liabilities			107.4			104.4
Other non-current liabilities			269.4			206.7
Total liabilities			2,090.9			2,185.6
Commitments and contingencies (Note 15)
Equity
Ordinary shares $0.01 par value, 426.0 authorized, 166.1 and 168.3 issued at December 31, 2020 and 2019, respectively			1.7			1.7
Additional paid-in capital			1,680.7			1,777.7
Retained earnings			631.2			401.0
Accumulated other comprehensive loss			(207.3)			(226.5)
Total equity			2,106.3			1,953.9
Total liabilities and equity			$	4,197.2		$	4,139.5

See accompanying notes to consolidated financial statements.

Pentair plc and Subsidiaries

Consolidated Statements of Cash Flows

			Years ended December 31
In millions			2020			2019			2018
Operating activities
Net income			$	358.6		$	355.7		$	347.4
(Income) loss from discontinued operations, net of tax			(1.5)			6.0			(25.7)
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities of continuing operations
Equity income of unconsolidated subsidiaries			(1.4)			(3.5)			(8.4)
Depreciation			46.7			48.3			49.7
Amortization			28.4			31.7			34.9
Loss (gain) on sale of businesses			0.1			(2.2)			7.3
Deferred income taxes			4.6			(18.4)			(4.1)
Share-based compensation			20.3			21.4			20.9
Asset impairment			—			21.2			12.0
Loss on early extinguishment of debt			—			—			17.1
Pension and other post-retirement expense			12.2			1.9			13.2
Pension and other post-retirement contributions			(8.4)			(20.9)			(8.9)
Changes in assets and liabilities, net of effects of business acquisitions
Accounts receivable			148.3			(17.5)			(15.3)
Inventories			(29.1)			13.6			(40.1)
Other current assets			(2.3)			(18.4)			31.2
Accounts payable			(81.9)			(63.6)			58.3
Employee compensation and benefits			42.5			(19.1)			(0.6)
Other current liabilities			32.0			(0.4)			(3.3)
Other non-current assets and liabilities			5.1			9.4			(27.5)
Net cash provided by operating activities of continuing operations			574.2			345.2			458.1
Net cash (used for) provided by operating activities of discontinued operations			(0.6)			7.8			(19.0)
Net cash provided by operating activities			573.6			353.0			439.1
Investing activities
Capital expenditures			(62.2)			(58.5)			(48.2)
Proceeds from sale of property and equipment			0.1			0.6			0.2
Proceeds from (payments due to) sale of businesses			—			15.3			(12.8)
Acquisitions, net of cash acquired			(58.0)			(287.8)			(0.9)
Other			2.2			(1.5)			—
Net cash used for investing activities of continuing operations			(117.9)			(331.9)			(61.7)
Net cash used for investing activities of discontinued operations			—			—			(7.1)
Net cash used for investing activities			(117.9)			(331.9)			(68.8)
Financing activities
Net (repayments) receipts of commercial paper and revolving long-term debt			(117.5)			51.5			39.7
Proceeds from long-term debt			—			600.0			—
Repayment of long-term debt			(74.0)			(401.5)			(675.1)
Premium paid on early extinguishment of debt			—			—			(16.0)
Distribution of cash from nVent, net of cash transferred			—			—			919.4
Shares issued to employees, net of shares withheld			32.9			12.5			13.3
Repurchases of ordinary shares			(150.2)			(150.0)			(500.0)
Dividends paid			(127.1)			(122.7)			(187.2)
Other			—			(6.9)			(2.0)
Net cash used for financing activities			(435.9)			(17.1)			(407.9)
Change in cash held for sale			—			—			27.0
Effect of exchange rate changes on cash and cash equivalents			(20.2)			4.2			(1.4)
Change in cash and cash equivalents			(0.4)			8.2			(12.0)
Cash and cash equivalents, beginning of year			82.5			74.3			86.3
Cash and cash equivalents, end of year			$	82.1		$	82.5		$	74.3
Supplemental disclosure of cash flow information:
Cash paid for interest, net			$	41.0		$	33.7		$	43.7
Cash paid for income taxes, net			67.7			59.0			92.9

See accompanying notes to consolidated financial statements.

Pentair plc and Subsidiaries

Consolidated Statements of Changes in Equity

In millions			Ordinary shares						Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total
Number			Amount
Balance - December 31, 2017			180.3			$	1.8		$	2,797.7		$	2,481.7		$	(243.4)		$	5,037.8
Net income			—			—			—			347.4			—			347.4
Cumulative effect of accounting changes			—			—			—			(214.0)			—			(214.0)
Other comprehensive income, net of tax			—			—			—			—			62.6			62.6
Distribution to nVent			—			—			(438.2)			(2,291.0)			(47.8)			(2,777.0)
Dividends declared			—			—			—			(154.9)			—			(154.9)
Share repurchases			(10.2)			(0.1)			(499.9)			—			—			(500.0)
Exercise of options, net of shares tendered for payment			0.9			—			24.3			—			—			24.3
Issuance of restricted shares, net of cancellations			0.5			—			—			—			—			—
Shares surrendered by employees to pay taxes			(0.1)						(11.0)			—			—			(11.0)
Share-based compensation			—						20.9			—			—			20.9
Balance - December 31, 2018			171.4			$	1.7		$	1,893.8		$	169.2		$	(228.6)		$	1,836.1
Net income			—			—			—			355.7			—			355.7
Other comprehensive income, net of tax			—			—			—			—			2.1			2.1
Dividends declared			—			—			—			(123.9)			—			(123.9)
Share repurchases			(4.0)			—			(150.0)			—			—			(150.0)
Exercise of options, net of shares tendered for payment			0.7			—			17.1			—			—			17.1
Issuance of restricted shares, net of cancellations			0.3			—			—			—			—			—
Shares surrendered by employees to pay taxes			(0.1)			—			(4.6)			—			—			(4.6)
Share-based compensation			—			—			21.4			—			—			21.4
Balance - December 31, 2019			168.3			$	1.7		$	1,777.7		$	401.0		$	(226.5)		$	1,953.9
Net income			—			—			—			358.6			—			358.6
Other comprehensive income, net of tax			—			—			—			—			19.2			19.2
Dividends declared			—			—			—			(128.4)			—			(128.4)
Share repurchases			(3.7)			—			(150.2)			—			—			(150.2)
Exercise of options, net of shares tendered for payment			1.3			—			37.6			—			—			37.6
Issuance of restricted shares, net of cancellations			0.3			—			—			—			—			—
Shares surrendered by employees to pay taxes			(0.1)			—			(4.7)			—			—			(4.7)
Share-based compensation			—			—			20.3			—			—			20.3
Balance - December 31, 2020			166.1			$	1.7		$	1,680.7		$	631.2		$	(207.3)		$	2,106.3

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 industrial manufacturing company comprised of two reporting segments: Consumer Solutions and Industrial & 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.

COVID-19

In March 2020, the World Health Organization declared the novel coronavirus 2019 (“COVID-19”) a global pandemic. The COVID-19 pandemic has had and may continue to have an unfavorable impact on certain parts of our business. The broader implications of the COVID-19 pandemic on our business, financial condition and results of operations remain uncertain and will depend on certain developments, including the duration and severity of the COVID-19 pandemic and the availability and distribution of vaccines to address the COVID-19 virus, its impact on our customers and suppliers and the range of governmental and community reactions to the pandemic. We may continue to experience reduced customer demand or constrained supply that could materially adversely impact our business, financial condition, results of operations, liquidity and cash flows in future periods.

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 and pension and other post-retirement benefits. Actual results could differ from our estimates.

Revenue recognition

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

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

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Performance obligations

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

Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from goods and services transferred to customers at a point in time accounted for 92.2%, 92.0% and 92.5% of our revenue for the years ended December 31, 2020, 2019 and 2018, respectively. Revenue on these contracts is recognized when obligations under the terms of the contract with our customer are satisfied; generally this occurs with the transfer of control upon shipment.

Revenue from products and services transferred to customers over time accounted for 7.8%, 8.0% and 7.5% of our revenue for the years ended December 31, 2020, 2019 and 2018, 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, 2020, we had $76.7 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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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

Shipping and handling costs

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

Contract assets and liabilities

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

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

Contract assets and liabilities consisted of the following:

			December 31
In millions			2020			2019						$ Change			% Change
Contract assets			$	50.1		$	41.0					$	9.1		22.2		%
Contract liabilities			27.5			32.6						(5.1)			(15.6)		%
Net contract assets			$	22.6		$	8.4					$	14.2		169.0		%

The $14.2 million increase in net contract assets from December 31, 2019 to December 31, 2020 was primarily the result of timing of milestone payments. Approximately 85% of our contract liabilities at December 31, 2019 were recognized in revenue during the twelve months ended December 31, 2020. There were no impairment losses recognized on our contract assets for the twelve months ended December 31, 2020 and December 31, 2019.

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, based on geographic destination of the sale, was as follows:

			Years ended December 31
In millions			2020			2019			2018
U.S.			$	2,011.7		$	1,866.7		$	1,858.1
Western Europe			375.3			401.6			402.7
Developing (1)			427.5			480.6			476.5
Other Developed (2)			203.3			208.3			227.8
Consolidated net sales (3)			$	3,017.8		$	2,957.2		$	2,965.1
(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 in Ireland, for each of the years presented, were not material.

Vertical net sales information was as follows:

			Years ended December 31
In millions			2020			2019			2018
Residential			$	1,883.4		$	1,668.2		$	1,665.9
Commercial			528.6			627.3			630.7
Industrial			605.8			661.7			668.5
Consolidated net sales			$	3,017.8		$	2,957.2		$	2,965.1

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 during 2020, 2019 and 2018 were $75.7 million, $78.9 million and $76.7 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 credit losses, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for credit losses are based on current trends, aging of accounts receivable, periodic credit evaluations of our customers’ financial condition, and historical collection experience as well as reasonable and supportable forecasts of future economic conditions. We generally do not require collateral.

The following table summarizes the activity in the allowance for credit losses:

			Years ended December 31
In millions			2020			2019			2018
Beginning balance			$	10.3		$	14.0		$	14.2
Bad debt (benefit) expense (1)			(0.4)			1.4			1.1
Write-offs, net of recoveries			(1.6)			(4.1)			(0.9)
Other (2)			0.1			(1.0)			(0.4)
Ending balance			$	8.4		$	10.3		$	14.0
(1) The bad debt benefit for the year-ended December 31, 2020 includes the positive impact related to the adoption of Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments-Credit Losses.”
(2) 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 improvements			5 to 20
Buildings and leasehold improvements			5 to 50
Machinery and equipment			3 to 15

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

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

In millions			2020			2019
U.S.			$	183.6		$	172.3
Western Europe			76.7			69.7
Developing (1)			30.4			31.1
Other Developed (2)			10.5			10.1
Consolidated (3)			$	301.2		$	283.2
(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 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 2020, 2019, or 2018.

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.

We test our goodwill for impairment at least annually during the fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. We perform our annual or interim goodwill impairment test by comparing the fair value of the relevant reporting unit with its carrying amount. We would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit.

We have the option to perform a qualitative assessment to determine whether it is necessary to perform the quantitative goodwill impairment test. However, we may elect to perform the quantitative goodwill impairment test even if no indications of a potential impairment exist.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

During 2020, a quantitative assessment was performed. The fair value of each reporting unit was determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. The non-recurring fair value measurement is a “Level 3” measurement under the fair value hierarchy. For the 2020 annual impairment test, the estimated fair value exceeded the carrying value in each of our reporting units, therefore, no impairment charge was required.

During 2019, a qualitative assessment was performed. We 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 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 amount. The 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 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 any of the years presented for identifiable intangible assets.

Income taxes

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

Pension and other post-retirement plans

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

We recognize changes in the fair value of plan assets and net actuarial gains or losses for pension and other post-retirement benefits annually in the fourth quarter each year (“mark-to-market adjustment”) and, if applicable, in any quarter in which an interim re-measurement 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. The service costs are recorded within Operating income and the interest costs, expected return on plan assets and net actuarial gain/loss components of net periodic pension and other post-retirement benefit costs are recorded within Other expense (income).

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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, 2020 and 2019, reserves for policy claims were $55.0 million, of which $13.0 million was included in Other current liabilities and $42.0 million was included in Other non-current liabilities, and $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, respectively.

Share-based compensation

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

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

Performance share units (“PSUs”) are stock awards where the ultimate number of shares issued will be contingent on the Company’s performance against certain performance goals. The Compensation Committee has the ability to adjust performance goals or modify the manner of measuring or evaluating a performance goal using its discretion. 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 performance metrics 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 the Company’s non-U.S. dollar functional currency international subsidiaries are measured using the local currency as the functional currency. 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 March 2, 2020, we early adopted the SEC’s rule titled “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities,” which simplifies the disclosure requirements related to our guaranteed registered securities under Rule 3-10 of Regulation S-X.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

On January 1, 2020, we adopted ASU No. 2016-13 “Financial Instruments-Credit Losses” and the related amendments (the “new standard”). The new standard changes the methodology used to measure credit losses for certain financial instruments and financial assets, including trade receivables. The approach utilizes an expected credit loss model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of an asset, which may result in earlier recognition of credit losses than under the previous accounting standards.

Under the new standard, we record an allowance for credit losses, reducing our trade receivables balance to an amount we estimate is collectible from our customers. The estimates used in determining the allowance for credit losses are based on historical collection experience, including write-offs and recoveries, periodic credit evaluations of our customers’ financial situation, and current circumstances as well as reasonable and supportable forecasts of future economic conditions. The adoption of this new standard did not have a material impact on our consolidated financial statements.

2. Acquisitions and Discontinued Operations

Acquisitions

In February 2019, as part of Consumer 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 and final working capital true-ups.

For Aquion, the excess of purchase price over tangible net assets and identified intangible assets acquired has been allocated to goodwill in the amount of $101.9 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 allocated to goodwill in the amount of $118.0 million, $7.6 million of which is expected to be deductible for income tax purposes.

In 2020, our Consumer Solutions reporting segment completed acquisitions with purchase prices totaling $58.0 million in cash, net of cash acquired.

The pro forma impact of the acquisitions in 2019 and 2020 were not material.

Discontinued Operations

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 for the twelve months ended December 31, 2018. These costs are reported in discontinued operations as they represent a cost directly related to the Separation and Distribution and were included within Income (loss) from discontinued operations, net of tax presented below.

Operating results of discontinued operations are summarized below:

			Years ended December 31
In millions			2020			2019			2018
Net sales			$	—		$	—		$	693.9
Cost of goods sold			—			—			424.0
Gross profit			—			—			269.9
Selling, general and administrative			(1.2)			7.4			237.8
Research and development			—			—			14.6
Operating income (loss)			$	1.2		$	(7.4)		$	17.5
Income (loss) from discontinued operations before income taxes			$	1.6		$	(7.6)		$	31.8
Income tax provision (benefit)			0.1			(1.6)			6.1
Income (loss) from discontinued operations, net of tax			$	1.5		$	(6.0)		$	25.7

Pentair plc and Subsidiaries

Notes to consolidated financial statements

3. Earnings Per Share

Basic and diluted earnings per share were calculated as follows:

			Years ended December 31
In millions, except per share data			2020			2019			2018
Net income			$	358.6		$	355.7		$	347.4
Net income from continuing operations			$	357.1		$	361.7		$	321.7
Weighted average ordinary shares outstanding
Basic			166.5			169.4			175.8
Dilutive impact of stock options and restricted stock awards			0.9			1.0			1.5
Diluted			167.4			170.4			177.3
Earnings (loss) per ordinary share
Basic
Continuing operations			$	2.14		$	2.14		$	1.83
Discontinued operations			0.01			(0.04)			0.15
Basic earnings per ordinary share			$	2.15		$	2.10		$	1.98
Diluted
Continuing operations			$	2.13		$	2.12		$	1.81
Discontinued operations			0.01			(0.03)			0.15
Diluted earnings per ordinary share			$	2.14		$	2.09		$	1.96
Anti-dilutive stock options excluded from the calculation of diluted earnings per share			1.7			2.1			1.2

4. Restructuring

During 2020, 2019 and 2018, 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, 2020, 2019 and 2018 included a reduction in hourly and salaried headcount of approximately 175 employees, 375 employees and 300 employees, respectively.

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

			Years ended December 31
In millions			2020			2019			2018
Severance and related costs			$	9.7		$	11.7		$	13.2
Other			4.4			2.3			27.4
Total restructuring costs			$	14.1		$	14.0		$	40.6

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

Restructuring costs by reportable segment were as follows:

			Years ended December 31
In millions			2020			2019			2018
Consumer Solutions			$	3.6		$	6.7		$	14.7
Industrial & Flow Technologies			4.7			4.9			24.5
Other			5.8			2.4			1.4
Consolidated			$	14.1		$	14.0		$	40.6

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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

			Years ended December 31
In millions			2020			2019
Beginning balance			$	16.2		$	27.1
Costs incurred			9.7			11.7
Cash payments and other			(10.7)			(22.6)
Ending balance			$	15.2		$	16.2

5. Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019 by reportable segment were as follows:

In millions			December 31, 2019			Acquisitions/ divestitures			Purchase accounting adjustments						Foreign currency translation			December 31, 2020
Consumer Solutions			$	1,501.4		$	51.9		$	14.4					$	12.8		$	1,580.5
Industrial & Flow Technologies			756.9			—			—						54.8			811.7
Total goodwill			$	2,258.3		$	51.9		$	14.4					$	67.6		$	2,392.2

In millions			December 31, 2018			Acquisitions/ divestitures						Foreign currency translation			December 31, 2019
Consumer Solutions			$	1,302.8		$	201.8					$	(3.2)		$	1,501.4
Industrial & Flow Technologies			769.9			—						(13.0)			756.9
Total goodwill			$	2,072.7		$	201.8					$	(16.2)		$	2,258.3

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

Identifiable intangible assets consisted of the following at December 31:

			2020												2019
In millions			Cost			Accumulated amortization			Net						Cost			Accumulated amortization			Net
Definite-life intangibles
Customer relationships			$	435.9		$	(308.1)		$	127.8					$	418.1		$	(269.1)		$	149.0
Proprietary technology and patents			46.9			(29.4)			17.5						42.3			(25.5)			16.8
Total finite-life intangibles			482.8			(337.5)			145.3						460.4			(294.6)			165.8
Indefinite-life intangibles
Trade names			180.6			—			180.6						173.4			—			173.4
Total intangibles			$	663.4		$	(337.5)		$	325.9					$	633.8		$	(294.6)		$	339.2

Identifiable intangible asset amortization expense in 2020, 2019 and 2018 was $28.4 million, $31.7 million and $34.9 million, respectively.

There was no impairment charge for intangible assets in any of the years presented.

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

In millions			2021			2022			2023			2024			2025
Estimated amortization expense			$	23.9		$	16.6		$	13.9		$	13.3		$	13.3

Pentair plc and Subsidiaries

Notes to consolidated financial statements

6. Supplemental Balance Sheet Information

			December 31
In millions			2020			2019
Inventories
Raw materials and supplies			$	218.7		$	196.2
Work-in-process			67.2			65.2
Finished goods			134.1			116.0
Total inventories			$	420.0		$	377.4
Other current assets
Cost in excess of billings			$	50.1		$	41.0
Prepaid expenses			48.5			48.3
Prepaid income taxes			3.8			5.2
Other current assets			3.1			4.6
Total other current assets			$	105.5		$	99.1
Property, plant and equipment, net
Land and land improvements			$	35.9		$	33.7
Buildings and leasehold improvements			195.4			188.1
Machinery and equipment			589.7			537.2
Capitalized software			79.9			73.5
Construction in progress			47.8			48.1
Total property, plant and equipment			948.7			880.6
Accumulated depreciation and amortization			647.5			597.4
Total property, plant and equipment, net			$	301.2		$	283.2
Other non-current assets
Right-of-use lease assets			$	83.6		$	77.2
Deferred income taxes			27.4			29.6
Deferred compensation plan assets			22.6			21.3
Other non-current assets			69.2			68.8
Total other non-current assets			$	202.8		$	196.9
Other current liabilities
Dividends payable			$	33.2		$	32.0
Accrued warranty			37.0			32.1
Accrued rebates and incentives			122.0			83.5
Billings in excess of cost			22.5			22.5
Current lease liability			22.1			19.0
Income taxes payable			14.6			11.1
Accrued restructuring			15.2			16.2
Other current liabilities			143.8			136.5
Total other current liabilities			$	410.4		$	352.9
Other non-current liabilities
Long-term lease liability			$	65.1		$	61.1
Income taxes payable			44.8			45.4
Self-insurance liabilities			42.0			41.6
Deferred compensation plan liabilities			22.6			21.3
Foreign currency contract liabilities			69.6			11.6
Other non-current liabilities			25.3			25.7
Total other non-current liabilities			$	269.4		$	206.7

Pentair plc and Subsidiaries

Notes to consolidated financial statements

7. Accumulated Other Comprehensive Loss

Components of Accumulated Other Comprehensive Loss consist of the following:

			December 31
In millions			2020			2019
Cumulative translation adjustments			$	(177.1)		$	(226.1)
Market value of derivative financial instruments, net of tax			(30.2)			(0.4)
Accumulated other comprehensive loss			$	(207.3)		$	(226.5)

8. Debt

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

In millions			Average interest rate at			Maturity year			December 31
December 31, 2020			2020			2019
Commercial paper			N/A			2023			$	—		$	117.8
Revolving credit facilities			1.244%			2023			36.1			35.8
Term loans			1.224%			2023			200.0			200.0
Senior notes - fixed rate (1)			3.625%			2020			—			74.0
Senior notes - fixed rate (1)			5.000%			2021			103.8			103.8
Senior notes - fixed rate (1)			3.150%			2022			88.3			88.3
Senior notes - fixed rate (1)			4.650%			2025			19.3			19.3
Senior notes - fixed rate (1)			4.500%			2029			400.0			400.0
Unamortized issuance costs and discounts			N/A			N/A			(7.9)			(9.9)
Total debt									$	839.6		$	1,029.1
(1) Senior notes are guaranteed as to payment by Pentair plc.

In April 2018, Pentair, Pentair Investments Switzerland GmbH (“PISG”), Pentair Finance S.à r.l (“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. In June 2020, Pentair assumed the PISG guarantee. 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.

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 no commercial paper outstanding as of December 31, 2020 and $117.8 million as of December 31, 2019, 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.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

In March 2020, the commercial paper market began to experience high levels of volatility due to uncertainty related to the COVID-19 pandemic. The volatility impacted both market access to and pricing of commercial paper. As a cost mitigation action, we withdrew our credit ratings to access the commercial paper market in the second quarter of 2020 and continued to use the revolving credit facility, along with cash generated from operations, to fund our general operations. As of December 31, 2020, total availability under the Senior Credit Facility was $863.9 million.

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 our 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 $21.4 million, of which there were no outstanding borrowings at December 31, 2020. Borrowings under these credit facilities bear interest at variable rates.

We have $103.8 million aggregate principal amount of fixed rate senior notes maturing in the next twelve months. We classified this debt as long-term as of December 31, 2020 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, 2020 matures on a calendar year basis as follows:

In millions			2021			2022			2023			2024			2025			Thereafter			Total
Contractual debt obligation maturities			$	103.8		$	88.3		$	236.1		$	—		$	19.3		$	400.0		$	847.5

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, 2020 and 2019, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $12.4 million and $17.0 million, respectively. The impact of these contracts on the Consolidated Statements of Operations and Comprehensive Income was not material for any period presented.

Cross Currency Swaps

At December 31, 2020 and 2019, we had outstanding cross currency swap agreements with a combined notional amount of $855.1 million and $777.0 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, 2020 and 2019, we had deferred foreign currency losses of $32.8 million and $1.8 million, respectively, recorded in Accumulated other comprehensive loss associated with our cross currency swap activity.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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, 2020 and December 31, 2019, we had deferred foreign currency gains of $2.8 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.

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

			2020									2019
In millions			Recorded Amount			Fair Value						Recorded Amount			Fair Value
Variable rate debt			$	236.1		$	236.1					$	353.6		$	353.6
Fixed rate debt			611.4			695.4						685.4			732.2
Total debt			$	847.5		$	931.5					$	1,039.0		$	1,085.8

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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

Recurring fair value measurements			December 31, 2020
In millions			Level 1			Level 2			Level 3			NAV			Total
Foreign currency contract liabilities			$	—		$	(69.6)		$	—		$	—		$	(69.6)
Deferred compensation plan assets			12.2			—			—			10.4			22.6
Total recurring fair value measurements			$	12.2		$	(69.6)		$	—		$	10.4		$	(47.0)

Recurring fair value measurements			December 31, 2019
In millions			Level 1			Level 2			Level 3			NAV			Total
Foreign currency contract assets			$	—		$	0.1		$	—		$	—		$	0.1
Foreign currency contract liabilities			$	—		$	(11.6)		$	—		$	—		$	(11.6)
Deferred compensation plan assets			12.5			—			—			8.8			21.3
Total recurring fair value measurements			$	12.5		$	(11.5)		$	—		$	8.8		$	9.8

Nonrecurring fair value measurements

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 millions			2020			2019			2018
Federal (1)			$	7.2		$	(1.6)		$	(24.6)
International (2)			424.9			409.1			404.4
Income from continuing operations before income taxes			$	432.1		$	407.5		$	379.8

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

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

The provision for income taxes consisted of the following:

			Years ended December 31
In millions			2020			2019			2018
Currently payable (receivable)
Federal (1)			$	0.1		$	—		$	(0.1)
International (2)			70.3			64.2			62.3
Total current taxes			70.4			64.2			62.2
Deferred
International (2)			4.6			(18.4)			(4.1)
Total deferred taxes			4.6			(18.4)			(4.1)
Total provision for income taxes			$	75.0		$	45.8		$	58.1

(1) “Federal” represents U.K. taxes.

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

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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

			Years ended December 31
Percentages			2020			2019			2018
U.K. federal statutory income tax rate			19.0		%	19.0		%	19.0		%
Tax effect of international operations (1)			(3.9)			(8.2)			(9.9)
Change in valuation allowances			1.3			1.1			7.9
Excess tax benefits on stock-based compensation			(0.7)			(0.7)			(1.7)
Base erosion and anti-abuse tax			1.7			—			—
Tax effect of U.S. tax reform			—			—			(0.9)
Tax effect of early extinguishment of debt			—			—			0.9
Effective tax rate			17.4		%	11.2		%	15.3		%

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

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

			Years ended December 31
In millions			2020			2019			2018
Beginning balance			$	47.4		$	51.4		$	13.8
Gross increases for tax positions in prior periods			0.6			0.4			44.0
Gross decreases for tax positions in prior periods			—			(0.8)			(4.4)
Gross increases based on tax positions related to the current year			0.2			0.4			0.9
Gross decreases related to settlements with taxing authorities			(1.1)			(2.9)			(1.8)
Reductions due to statute expiration			(0.8)			(1.1)			(1.1)
Ending balance			$	46.3		$	47.4		$	51.4

We record gross unrecognized tax benefits in Other current liabilities and Other non-current liabilities in the Consolidated Balance Sheets. Included in the $46.3 million of total gross unrecognized tax benefits as of December 31, 2020 was $45.9 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, 2020 may decrease by a range of zero to $10.6 million during 2021, 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, New Zealand, and the U.S. We anticipate that several of these audits may be concluded in the foreseeable future.

We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, in the Consolidated Statements of Operations and Comprehensive Income. As of December 31, 2020 and 2019, we have liabilities of $0.2 million and $0.4 million, respectively, for the possible payment of penalties and $4.6 million and $3.7 million, respectively, for the possible payment of interest expense, which are recorded in Other current liabilities in the Consolidated Balance Sheets.

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

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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

			December 31
In millions			2020			2019
Other non-current assets			$	27.4		$	29.6
Deferred tax liabilities			107.4			104.4
Net deferred tax liabilities			$	80.0		$	74.8

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

			December 31
In millions			2020			2019
Deferred tax assets
Accrued liabilities and reserves			$	59.4		$	41.9
Pension and other post-retirement compensation and benefits			26.2			25.2
Employee compensation and benefits			18.5			19.6
Tax loss and credit carryforwards			744.5			712.0
Interest limitations			49.9			45.0
Total deferred tax assets			898.5			843.7
Valuation allowance			747.3			693.8
Deferred tax assets, net of valuation allowance			151.2			149.9
Deferred tax liabilities
Property, plant and equipment			5.3			8.5
Goodwill and other intangibles			209.0			200.4
Other liabilities			16.9			15.8
Total deferred tax liabilities			231.2			224.7
Net deferred tax liabilities			$	80.0		$	74.8

Included in tax loss and credit carryforwards in the table above is a deferred tax asset of $29.6 million as of December 31, 2020 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, 2020, tax loss carryforwards of $2,923.5 million were available to offset future income. A valuation allowance of $716.7 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 $2,824.9 million which are subject to varying expiration periods. Non-U.S. carryforwards of $1,785.0 million are located in jurisdictions with unlimited tax loss carryforward periods, while the remainder will begin to expire in 2021. In addition, there were $98.6 million of U.S. state tax loss carryforwards as of December 31, 2020. U.S. state tax losses of $61.1 million are in jurisdictions with unlimited tax loss carryforward periods, while the remainder will expire in future years through 2040.

Taxes have not been provided on undistributed earnings of subsidiaries where it is our intention to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. It is not practicable to estimate the amount of tax that might be payable if such earnings were to be remitted.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Impacts of U.S. tax legislation

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 and subsequent years, 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.

In April 2020, the IRS released final regulations as part of the Act that place limitations on the deductibility of certain interest expense for U.S. tax purposes. These regulations resulted in discrete tax expense of approximately $14.1 million in 2020, as well as an increase to our 2020 annual effective tax rate of approximately 0.3%.

On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the ability to carryback net operating losses arising in taxable years from 2018 through 2020. The CARES Act provides positive cash benefits of approximately $26.9 million, offset by an increase to our 2020 annual effective tax rate of approximately 1.0% and $5.1 million in discrete tax items recorded in 2020, mainly attributable to base erosion and anti-abuse tax related to 2019.

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.

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, 2020 and 2019:

			Pension plans															Other post-retirement plans
In millions			2020			2019															2020			2019
Change in benefit obligations
Benefit obligation beginning of year			$	112.1		$	277.9														$	14.6		$	14.9
Service cost			3.3			2.6															—			—
Interest cost			2.9			7.3															0.4			0.6
Settlements			—			(1.5)															—			—
Actuarial loss			9.3			8.0															0.1			2.0
Foreign currency translation			1.4			0.1															—			—
Benefits paid			(8.2)			(182.3)															(1.3)			(2.9)
Benefit obligation end of year			$	120.8		$	112.1														$	13.8		$	14.6
Change in plan assets
Fair value of plan assets beginning of year			$	31.0		$	180.7														$	—		$	—
Actual return on plan assets			3.0			16.0															—			—
Company contributions			7.1			18.0															1.3			2.9
Settlements			—			(1.5)															—			—
Foreign currency translation			0.8			0.1															—			—
Benefits paid			(8.2)			(182.3)															(1.3)			(2.9)
Fair value of plan assets end of year			$	33.7		$	31.0														$	—		$	—
Funded status
Benefit obligations in excess of the fair value of plan assets			$	(87.1)		$	(81.1)														$	(13.8)		$	(14.6)

The actuarial loss in 2020 was primarily due to declines in the discount rates to reflect economic conditions at December 31, 2020.

Amounts recorded in the Consolidated Balance Sheets were as follows:

			Pension plans															Other post-retirement plans
In millions			2020			2019															2020			2019
Current liabilities			$	(5.6)		$	(5.3)														$	(1.5)		$	(1.7)
Non-current liabilities			(81.5)			(75.8)															(12.3)			(12.9)
Benefit obligations in excess of the fair value of plan assets			$	(87.1)		$	(81.1)														$	(13.8)		$	(14.6)

The accumulated benefit obligation for all defined benefit plans was $119.3 million and $107.1 million at December 31, 2020 and 2019, respectively.

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

			Projected benefit obligation exceeds the fair value of plan assets									Accumulated benefit obligation exceeds the fair value of plan assets
In millions			2020			2019						2020			2019
Projected benefit obligation			$	120.8		$	111.7					$	120.8		$	111.7
Fair value of plan assets			33.7			30.4						33.7			30.4
Accumulated benefit obligation			N/A			N/A						119.3			107.1

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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

In millions			2020			2019			2018
Service cost			$	3.3		$	2.6		$	4.1
Interest cost			2.9			7.3			11.5
Expected return on plan assets			(0.8)			(3.9)			(7.6)
Net actuarial loss (gain)			6.8			(4.1)			5.2
Net periodic benefit expense			$	12.2		$	1.9		$	13.2

Components of net periodic benefit expense for our other post-retirement plans for the years ended December 31, 2020, 2019 and 2018, were not material.

Assumptions

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

			Pension plans																		Other post-retirement plans
			2020			2019			2018																		2020			2019			2018
Benefit obligation assumptions (1)
Discount rate			1.74		%	2.68		%	3.73		%																1.77		%	2.81		%	3.95		%
Rate of compensation increase			3.62		%	3.68		%	3.77		%																N/A			N/A			N/A
Net periodic benefit expense assumptions
Discount rate			2.68		%	3.70		%	4.00		%																2.81		%	3.95		%	3.40		%
Expected long-term return on plan assets			3.32		%	4.37		%	4.17		%																N/A			N/A			N/A
Rate of compensation increase			3.68		%	3.72		%	3.96		%																N/A			N/A			N/A

(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. There are no known or anticipated changes in our discount rate assumptions that will impact our pension expense in 2021.

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 9.68%, 8.85% and (5.60)% in 2020, 2019 and 2018, respectively.

Healthcare cost trend rates

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

			2020			2019
Healthcare cost trend rate assumed for following year			5.4		%	5.8		%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)			4.4		%	4.4		%
Year the cost trend rate reaches the ultimate trend rate			2038			2038

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Pension plans assets

Objective

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

Asset allocation

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

			Actual									Target
			2020			2019						2020			2019
Fixed income			70		%	70		%				71		%	72		%
Alternative			30		%	29		%				29		%	28		%
Cash			—		%	1		%				—		%	—		%

Fair value measurement

The fair values of our pension plan assets and their respective levels in the fair value hierarchy as of December 31, 2020 and December 31, 2019 were as follows:

			December 31, 2020
In millions			Level 1			Level 2			Level 3			Total
Cash and cash equivalents			$	0.1		$	—		$	—		$	0.1
Other investments			—			—			10.0			10.0
Total investments at fair value			$	0.1		$	—		$	10.0		$	10.1
Investments measured at NAV												23.6
Total												$	33.7

			December 31, 2019
In millions			Level 1			Level 2			Level 3			Total
Cash and cash equivalents			$	0.4		$	—		$	—		$	0.4
Other investments			—			—			8.9			8.9
Total investments at fair value			$	0.4		$	—		$	8.9		$	9.3
Investments measured at NAV												21.7
Total												$	31.0

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 are considered a Level 2 investment.

• Other investments:** Other investments include investments in commingled funds with diversified investment strategies. 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, 2020 and 2019 was not material.

Cash flows

Contributions

Pension contributions totaled $7.1 million and $18.0 million in 2020 and 2019, respectively. We anticipate our 2021 pension contributions to be approximately $6.5 million. The 2021 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:

Pentair plc and Subsidiaries

Notes to consolidated financial statements

In millions			Pension plans						Other post- retirement plans
2021			$	7.0					$	1.5
2022			7.2						1.4
2023			7.4						1.3
2024			7.6						1.2
2025			7.5						1.1
2026 - 2030			36.0						4.3

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 may voluntarily contribute a percentage of their eligible compensation. We match contributions made by employees who met certain eligibility and service requirements. The 401(k) company match contribution is a dollar-for-dollar (100%) matching contribution on up to 5% of employee eligible earnings, contributed as before-tax contributions.

During 2018, 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 $15.3 million, $14.4 million and $23.4 million in 2020, 2019 and 2018, respectively.

Other retirement compensation

Total other accrued retirement compensation, primarily related to deferred compensation and supplemental retirement plans, was $30.7 million and $29.0 million as of December 31, 2020 and 2019, respectively, and is included in Pension and other post-retirement compensation and benefits and Other non-current liabilities in the Consolidated Balance Sheets.

12. Shareholders’ Equity

Authorized shares

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

Share repurchases

In May 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”). The 2018 Authorization expires on May 31, 2021. On December 8, 2020, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $750.0 million (the “2020 Authorization”). The 2020 Authorization expires on December 31, 2025. The 2020 Authorization supplements the 2018 Authorization.

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

During the year ended December 31, 2020, we repurchased 3.7 million of our ordinary shares for $150.2 million under the 2018 Authorization. As of December 31, 2020, we had $99.7 million and $750.0 million available for share repurchases under the 2018 Authorization and 2020 Authorization, respectively.

Dividends payable

On December 8, 2020, the Board of Directors approved a 5 percent increase in the Company’s regular quarterly dividend rate (from $0.19 per share to $0.20 per share) that was paid on February 5, 2021 to shareholders of record at the close of business on January 22, 2021. The balance of dividends payable included in Other current liabilities on our Consolidated Balance Sheets was $33.2 million at December 31, 2020. Dividends paid per ordinary share were $0.76, $0.72 and $1.05 for the years ended December 31, 2020, 2019 and 2018, respectively.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

13. Share Plans

Share-based compensation expense

Total share-based compensation expense for 2020, 2019 and 2018 was as follows:

			December 31
In millions			2020			2019			2018
Restricted stock units			$	12.5		$	11.2		$	8.9
Stock options			3.0			4.5			4.6
Performance share units			4.8			5.7			7.4
Total share-based compensation expense			$	20.3		$	21.4		$	20.9

Of the total share-based compensation expense noted above, $3.4 million for the year ended December 31, 2018 was reported as part of Income (loss) from discontinued operations, net of tax.

Share incentive plans

In May 2020, the Pentair plc 2020 Share and Incentive Plan (“2020 Share Plan”) was approved during the Annual General Meeting of Shareholders. The Pentair plc 2012 Stock and Incentive Plan (“2012 Stock Plan”) terminated upon the approval of the 2020 Share Plan, although awards outstanding under the 2012 Stock Plan continue in effect. Beginning May 5, 2020, all share-based compensation grants were made under the 2020 Share Plan.

The 2020 Share Plan authorizes the issuance of 3.3 million of our ordinary shares, plus the number of shares reserved under the 2012 Stock Plan that were not the subject of outstanding awards as of the date the 2020 Share Plan became effective, which was 2.5 million shares, plus certain shares that would become available under the 2012 Stock Plan if it had remained in effect. 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 2020 Share Plan terminates on the date all shares reserved for issuance have been issued. The 2020 Share Plan allows for the granting to our employees, consultants and directors of stock options, stock appreciation rights, performance share units, restricted shares, restricted stock units, deferred stock rights, incentive awards, dividend equivalent units and other equity-based awards.

The 2020 Share 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 2020 Share Plan are managerial, administrative or professional employees. 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 2020 Share Plan. The 2020 Share Plan prohibits the Committee from re-pricing awards or canceling and reissuing awards at lower prices.

Non-qualified and incentive stock options

Under the 2020 Share 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 2020 Share 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 2020 Share Plan, the Committee is permitted to issue these awards which are generally contingent on the achievement of predetermined performance goals over a vesting period of three years. The Committee has the ability to adjust performance goals or modify the manner of measuring or evaluating a performance goal using its discretion. 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 performance metrics during the vesting period.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

Stock options

The following table summarizes stock option activity under all plans for the year ended December 31, 2020:

Shares and intrinsic value in millions			Number of shares			Weighted- average exercise price			Weighted- average remaining contractual life (years)			Aggregate intrinsic value
Outstanding as of January 1, 2020			3.8			$	37.29
Granted			0.4			44.58
Exercised			(1.1)			30.05
Forfeited			(0.3)			45.61
Outstanding as of December 31, 2020			2.8			$	40.47		5.6			$	35.5
Options exercisable as of December 31, 2020			2.1			$	39.72		4.7			$	28.6
Options expected to vest as of December 31, 2020			0.7			$	42.85		8.4			$	6.8

Fair value of options granted

The weighted average grant date fair value of options granted under Pentair plans in 2020, 2019 and 2018 was estimated to be $9.55, $8.86 and $10.92 per share, respectively. The total intrinsic value of options that were exercised during 2020, 2019 and 2018 was $18.0 million, $9.5 million and $18.2 million, respectively. At December 31, 2020, the total unrecognized compensation cost related to stock options was $3.0 million. This cost is expected to be recognized over a weighted average period of 1.8 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
			2020						2019									2018
Risk-free interest rate			1.61		%				2.89		%							2.58		%
Expected dividend yield			1.80		%				1.78		%							1.56		%
Expected share price volatility			24.10		%				23.30		%							24.80		%
Expected term (years)			6.8						6.1									6.1

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

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

Cash received from option exercises for the years ended December 31, 2020, 2019 and 2018 was $30.8 million, $15.5 million and $19.5 million, respectively. The actual tax benefit realized for the tax deductions from options exercised totaled $2.9 million, $2.8 million and $5.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Restricted stock units

The following table summarizes restricted stock unit activity under all plans for the year ended December 31, 2020:

Shares in millions			Number of shares			Weighted average grant date fair value
Outstanding as of January 1, 2020			0.6			$	42.16
Granted			0.4			42.37
Vested			(0.2)			40.85
Forfeited			(0.1)			42.79
Outstanding as of December 31, 2020			0.7			$	42.52

Pentair plc and Subsidiaries

Notes to consolidated financial statements

As of December 31, 2020, there was $25.6 million of unrecognized compensation cost related to restricted share compensation arrangements granted under the 2020 Plan and previous plans. That cost is expected to be recognized over a weighted-average period of 1.2 years. The total fair value of shares vested during the years ended December 31, 2020, 2019 and 2018, was $11.2 million, $9.3 million and $24.4 million, respectively. For the year ended December 31, 2020, there was no tax benefit realized. The actual tax benefit realized for the years ended December 31, 2019 and 2018, was $0.1 million, and $0.7 million respectively.

Performance share units

The following table summarizes performance share unit activity under all plans for the year ended December 31, 2020:

Shares in millions			Number of shares			Weighted average grant date fair value
Outstanding as of January 1, 2020			0.3			$	41.62
Granted			0.2			45.31
Forfeited			(0.1)			43.30
Outstanding as of December 31, 2020			0.4			$	42.78

The expense recognized each period is dependent upon our estimate of the number of shares that will ultimately be issued. As of December 31, 2020, there was $7.5 million of unrecognized compensation cost related to performance share compensation arrangements granted under the 2020 Plan and previous plans. That cost is expected to be recognized over a weighted-average period of 1.2 years. There were $0.1 million, $0.2 million, and $0.2 million of actual tax benefits realized for the years ended December 31, 2020, 2019, and 2018, respectively.

Electrical separation

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

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

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

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

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

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

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

Pentair plc and Subsidiaries

Notes to consolidated financial statements

14. Segment Information

Effective January 1, 2020, we reorganized our business segments to better support our organization with our strategies and to better align with our customer base, resulting in a change to our reporting segments. All prior period amounts related to the segment change have been retrospectively reclassified to conform to the new presentation. As part of this reorganization, the legacy Aquatic Systems, Flow Technologies, and Filtration Solutions segments were realigned into two reportable business segments:

• Consumer Solutions** - This segment designs, manufactures and sells energy-efficient residential and commercial pool equipment and accessories, and commercial and residential water treatment products and systems. Residential and commercial pool equipment and accessories include pumps, filters, heaters, lights, automatic controls, automatic cleaners, maintenance equipment and pool accessories. Water treatment products and systems include pressure tanks, control valves, activated carbon products, conventional filtration products, and point-of-entry and point-of-use systems. Applications for our pool business’s products include residential and commercial pool maintenance, repair, renovation, service and construction. Our water treatment products and systems are used in residential whole home water filtration, drinking water filtration and water softening solutions in addition to commercial total water management and filtration in foodservice operations. The primary focus of this segment is business-to-consumer.

• Industrial & Flow Technologies** - This segment manufactures and sells a variety of fluid treatment and pump products and systems, including pressure vessels, gas recovery solutions, membrane bioreactors, wastewater reuse systems and advanced membrane filtration, separation systems, water disposal pumps, water supply pumps, fluid transfer pumps, turbine pumps, solid handling pumps, and agricultural spray nozzles, while serving the global residential, commercial and industrial markets. These products and systems are used in a range of applications, fluid delivery, ion exchange, desalination, food and beverage, separation technologies for the oil and gas industry, residential and municipal wells, water treatment, wastewater solids handling, pressure boosting, circulation and transfer, fire suppression, flood control, agricultural irrigation and crop spray. The primary focus of this segment is business-to-business.

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

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

			2020			2019			2018						2020			2019			2018
In millions			Net sales												Segment income (loss)
Consumer Solutions			$	1,742.9		$	1,611.7		$	1,578.4					$	419.1		$	379.6		$	392.9
Industrial & Flow Technologies			1,273.6			1,344.1			1,385.4						164.6			199.0			198.8
Other			1.3			1.4			1.3						(66.1)			(62.3)			(54.9)
Consolidated (1)			$	3,017.8		$	2,957.2		$	2,965.1					$	517.6		$	516.3		$	536.8

(1) One customer in the Consumer Solutions segment, Pool Corporation, represented approximately 15% of our consolidated net sales in 2020, 2019 and 2018.

			2020			2019			2018						2020			2019			2018						2020			2019			2018
In millions			Identifiable assets (1)												Capital expenditures												Depreciation
Consumer Solutions			$	2,327.9		$	2,329.9		$	1,952.2					$	27.4		$	31.2		$	22.7					$	21.4		$	21.8		$	20.9
Industrial & Flow Technologies			1,661.7			1,562.8			1,588.0						26.6			20.3			14.8						19.8			21.0			23.5
Other			207.6			246.8			266.3						8.2			7.0			10.7						5.5			5.5			5.3
Consolidated			$	4,197.2		$	4,139.5		$	3,806.5					$	62.2		$	58.5		$	48.2					$	46.7		$	48.3		$	49.7

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

Pentair plc and Subsidiaries

Notes to consolidated financial statements

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

In millions			2020			2019			2018
Segment income			$	517.6		$	516.3		$	536.8
Restructuring and other			(15.4)			(21.0)			(31.8)
Inventory step-up			—			(2.2)			—
Intangible amortization			(28.4)			(31.7)			(34.9)
Pension and other post-retirement mark-to-market (loss) gain			(6.7)			3.4			(3.6)
Asset impairment			—			(21.2)			(12.0)
(Loss) gain on sale of businesses			(0.1)			2.2			(7.3)
Loss on early extinguishment of debt			—			—			(17.1)
Interest expense, net			(23.9)			(30.1)			(32.6)
Corporate allocations			—			—			(11.0)
Deal related costs and expenses			(0.6)			(4.2)			(2.0)
COVID-19 related costs and expenses			(10.4)			—			—
Other expense			—			(4.0)			(4.7)
Income from continuing operations before income taxes			$	432.1		$	407.5		$	379.8

15. Commitments and Contingencies

Legal proceedings

We have been, and in the future may be, made parties to a number of actions filed or have been, and in the future may be, given notice of potential claims relating to the conduct of our business, including those relating to commercial regulatory or contractual disputes with suppliers, authorities, customers or parties to acquisitions and divestitures, intellectual property matters, environmental, asbestos, safety and health matters, product liability, the use or installation of our products, consumer matters, and employment and labor matters.

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

Environmental matters

We have been named as defendant, target or a potentially responsible party in a number of environmental clean-ups relating to our current or former business units. Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. It can be difficult to estimate reliably the final costs of investigation and remediation due to various factors. In our opinion, the amounts accrued are appropriate based on facts and circumstances as currently known. As of December 31, 2020, our recorded reserves for environmental matters were not material.

Leases

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

These operating lease right-of-use (“ROU”) assets are included in Other non-current assets on Consolidated Balance Sheets, and represent our right to use the underlying asset for the lease term. Our obligation to make lease payments arising from the lease are included in Other current liabilities and Other non-current liabilities on the Consolidated Balance Sheets. 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 at the commencement date in determining the present value of lease payments. The ROU asset also excludes any accrued lease payments and unamortized lease incentives.

For measurement and classification of lease agreements, we group lease and non-lease components into 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 components of lease cost was as follows:

In millions			December 31, 2020			December 31, 2019
Operating lease cost			$	32.5		$	32.5
Sublease income			(1.0)			(1.0)
Total lease cost			$	31.5		$	31.5

Supplemental cash flow information related to leases was as follows:

In millions			December 31, 2020			December 31, 2019
Operating cash flows from operating leases			$	28.5		$	26.8
Right-of-use assets obtained in exchange for lease obligations			$	13.6		$	91.1

Other information related to leases was as follows:

			December 31, 2020			December 31, 2019
Weighted-average remaining lease term of operating leases (years)			4.7			5.2
Weighted-average discount rate of operating leases			5.5		%	6.3		%

Future minimum lease commitments under non-cancelable operating leases as of December 31, 2020 were as follows:

In millions
2021			$	26.2
2022			22.9
2023			19.5
2024			14.8
2025			6.0
Thereafter			9.5
Total lease payments			98.9
Less: imputed interest			(11.7)
Total			$	87.2

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, 2020, 2019 and 2018 were as follows:

			Years ended December 31
In millions			2020			2019			2018
Beginning balance			$	32.1		$	33.9		$	38.1
Service and product warranty provision			55.5			53.8			50.8
Payments			(51.1)			(55.5)			(54.6)
Foreign currency translation			0.5			(0.1)			(0.4)
Ending balance			$	37.0		$	32.1		$	33.9

Stand-by letters of credit, bank guarantees and bonds

In certain situations, Tyco International Ltd., Pentair Ltd.’s former parent company (“Tyco”), guaranteed performance by the flow control business of Pentair Ltd. (“Flow Control”) to third parties or provided financial guarantees for financial commitments of Flow Control. In situations where Flow Control and Tyco were unable to obtain a release from these guarantees in connection with the spin-off of Flow Control from Tyco, we will indemnify Tyco for any losses it suffers as a result of such guarantees.

In 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, 2020 and 2019, the outstanding value of bonds, letters of credit and bank guarantees totaled $99.1 million and $91.3 million, respectively.

Pentair plc and Subsidiaries

Notes to consolidated financial statements

16. Selected Quarterly Data (Unaudited)

The following tables present 2020 and 2019 quarterly financial information:

			2020
In millions, except per-share data			First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Full Year
Net sales			$	710.0		$	713.3		$	798.5		$	796.0		$	3,017.8
Gross profit			251.6			245.1			277.4			283.5			1,057.6
Operating income			100.7			111.1			128.1			121.5			461.4
Net income from continuing operations			72.7			73.8			110.8			99.8			357.1
(Loss) income from discontinued operations, net of tax			—			(1.7)			—			3.2			1.5
Net income			72.7			72.1			110.8			103.0			358.6
Earnings (loss) per ordinary share (1)
Basic
Continuing operations			$	0.43		$	0.44		$	0.67		$	0.60		$	2.14
Discontinued operations			—			(0.01)			—			0.02			0.01
Basic earnings per ordinary share			$	0.43		$	0.43		$	0.67		$	0.62		$	2.15
Diluted
Continuing operations			$	0.43		$	0.44		$	0.66		$	0.60		$	2.13
Discontinued operations			—			(0.01)			—			0.01			0.01
Diluted earnings per ordinary share			$	0.43		$	0.43		$	0.66		$	0.61		$	2.14

(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.

			2019
In millions, except per-share data			First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Full Year
Net sales			$	688.9		$	799.5		$	713.6		$	755.2		$	2,957.2
Gross profit			235.6			286.7			255.0			274.2			1,051.5
Operating income			67.6			133.8			108.8			122.3			432.5
Net income from continuing operations			52.4			115.1			91.3			102.9			361.7
(Loss) income from discontinued operations, net of tax			(1.1)			(0.8)			1.0			(5.1)			(6.0)
Net income			51.3			114.3			92.3			97.8			355.7
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.