Pentair 10-Q 2023-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

OR

Commission file number: 001-11625

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: 44-74-9421-6154

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

On September 30, 2023, 165,298,959 shares of Registrant’s common stock were outstanding.

Pentair plc and Subsidiaries

PART I FINANCIAL INFORMATION

Pentair plc and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

See accompanying notes to condensed consolidated financial statements.

Pentair plc and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

See accompanying notes to condensed consolidated financial statements.

Pentair plc and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

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Forward-looking Statements

This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, are forward-looking statements. Without limitation, any statements preceded or followed by or that include the words “targets,” “plans,” “believes,” “expects,” “intends,” “will,” “likely,” “may,” “anticipates,” “estimates,” “projects,” “should,” “would,” “could,” “positioned,” “strategy,” or “future” or words, phrases, or terms of similar substance or the negative thereof are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the overall global economic and business conditions impacting our business, including the strength of housing and related markets and conditions relating to international hostilities; supply, demand, logistics, competition and pricing pressures related to and in the markets we serve; the ability to achieve the benefits of our restructuring plans, cost reduction initiatives and Transformation Program; the impact of raw material, logistics and labor costs and other inflation; volatility in currency exchange rates and interest rates; failure of markets to accept new product introductions and enhancements; the ability to successfully identify, finance, complete and integrate acquisitions; risks associated with operating foreign businesses; the impact of seasonality of sales and weather conditions; our ability to comply with laws and regulations; the impact of changes in laws, regulations and administrative policy, including those that limit U.S. tax benefits or impact trade agreements and tariffs; the outcome of litigation and governmental proceedings; and the ability to achieve our long-term strategic operating and ESG goals. Additional information concerning these and other factors is contained in our filings with the U.S. Securities and Exchange Commission, including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022. All forward-looking statements speak only as of the date of this report. Pentair assumes no obligation, and disclaims any obligation, to update the information contained in this report.

Overview

The terms “us,” “we,” “our” or “Pentair” refer to Pentair plc and its consolidated subsidiaries. At Pentair, we believe the health of our world depends on reliable access to clean water. We deliver a comprehensive range of smart, sustainable water solutions to homes, businesses and industries around the world. Our industry-leading and proven portfolio of solutions enables our customers to access clean, safe water; reduce water consumption; and recover and reuse water. Whether it’s improving, moving or helping people enjoy water, we help manage the world’s most precious resource. We are comprised of three reporting segments: Industrial & Flow Technologies, Water Solutions and Pool. For the first nine months of 2023, the Industrial & Flow Technologies, Water Solutions and Pool segments represented approximately 39%, 29% and 32% of total revenues, respectively. We classify our operations into reporting segments based primarily on types of products offered and markets served:

• Industrial & Flow Technologies — The focus of this segment is to deliver water where it is needed, when it is needed and more efficiently and transforming waste into value. This segment designs, 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, including 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.

• Water Solutions — The focus of this segment is to provide great tasting, higher-quality water and ice while helping end-users use water more productively. This segment designs, manufactures and sells commercial and residential water treatment products and systems including pressure tanks, control valves, activated carbon products, commercial ice machines, conventional filtration products, and point-of-entry and point-of-use water treatment systems. These 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. In addition, our water solutions business also provides installation and preventative services for water management solutions for commercial operators.

• Pool — The focus of this segment is to provide innovative, energy-efficient pool solutions to help end-users more sustainably enjoy water. This segment designs, manufactures and sells a complete line of energy-efficient residential and commercial pool equipment and accessories including pumps, filters, heaters, lights, automatic controls, automatic cleaners, maintenance equipment and pool accessories. Applications for our pool products include residential and commercial pool maintenance, pool repair, renovation, service and construction and aquaculture solutions.

In July 2022, as part of our Water Solutions reporting segment, we acquired the issued and outstanding equity securities of certain subsidiaries of Welbilt, Inc. (“Welbilt”) and certain other assets, rights, and properties, and assumed certain liabilities, comprising Welbilt’s Manitowoc Ice business (“Manitowoc Ice”), for approximately $1.6 billion in cash.

Key Trends and Uncertainties Regarding Our Existing Business

The following trends and uncertainties affected our financial performance in the first nine months of 2023 and are reasonably likely to impact our results in the future:

• In 2021, we created a transformation office and launched and committed resources to the Transformation Program designed to accelerate growth and drive margin expansion by driving operational excellence, reducing complexity and streamlining our processes. During 2022 and the first nine months of 2023, we made strategic progress on our Transformation Program initiatives with a focus on our four key themes of pricing excellence, strategic sourcing, operations excellence and organizational effectiveness. We expect to continue to execute on our key Transformation Program initiatives to drive margin expansion and to continue to incur transformation costs throughout the remainder of 2023 and beyond.

• During 2022 and the first nine months of 2023, we executed certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. We expect these actions to continue throughout the remainder of 2023 and to drive margin growth.

• During the first nine months of 2023, we continued to experience supply chain challenges and inflationary cost increases of certain raw materials due to availability constraints and high demand. While we have taken pricing actions and implemented transformation initiatives that we expect to improve productivity and offset these cost increases, we expect supply chain pressures and inflationary cost increases to continue for the remainder of 2023, which may continue thereafter and could negatively impact our results of operations.

• During the second half of 2022 and the first nine months of 2023, we have seen inventory correcting within our residential distributor channels. We anticipate channel inventories to approach more normalized levels by the end of 2023.

• The Organization for Economic Co-operation and Development Pillar Two Model Rules (“Pillar Two”) for a global 15.0% minimum tax are in the process of being adopted by a number of jurisdictions in which we operate. In particular, the United Kingdom has completed passage of legislation to comply with the Pillar Two framework which becomes effective beginning in 2024. Pillar Two could negatively impact our effective tax rate beginning in 2024. We are continuing to evaluate the impact of proposed and enacted legislative changes as new guidance becomes available.

*•*We have identified specific product and geographic market opportunities that we find attractive and continue to pursue, both within and outside the U.S. We expect to continue investing in our businesses to drive these opportunities through research and development and additional sales and marketing resources. Unless we successfully penetrate these markets, our core sales growth will likely be limited or may decline.

In 2023, our operating objectives focus on delivering our core and building our future. We expect to execute these objectives by:

• Delivering profitable revenue growth and productivity for customers and shareholders;

• Continuing to focus on capital allocation through:

◦Committing to maintain our investment grade rating;

◦Focusing on reducing our long-term debt;

◦Returning cash to shareholders through dividends and share repurchases; and

◦Accelerating our performance with strategically aligned mergers and acquisitions;

• Focusing growth initiatives that accelerate our investments in digital, technology and services expansion;

• Continuing to implement our Transformation Program initiatives that will drive operational excellence, reduce complexity and improve our organizational structure; and

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

CONSOLIDATED RESULTS OF OPERATIONS

The consolidated results of operations for the three months ended September 30, 2023 and 2022 were as follows:

N.M. Not Meaningful

The consolidated results of operations for the nine months ended September 30, 2023 and September 30, 2022 were as follows:

N.M. Not Meaningful

Net sales

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

The 4.4 percent decrease in net sales in the third quarter of 2023 from 2022 was primarily driven by:

*•*decreased sales volume in our residential flow business within our Industrial & Flow Technologies segment compared to the prior year;

*•*decreased sales volume in our residential business within our Water Solutions segment driven by lower demand compared to the prior year and certain business exits announced in the second half of 2022; and

• sales volume decreases in our Pool segment primarily due to higher channel inventory and lower demand compared to the prior year.

This decrease was partially offset by:

• increases in selling prices to mitigate a rise in inflationary costs and lower rebates and incentives in our Pool segment;

• increased sales within our Water Solutions segment from the acquisition of Manitowoc Ice, which was completed in the third quarter of 2022;

• higher sales volume in our commercial business within our Water Solutions segment driven by higher demand and easing of supply chain pressures, which allowed increased production and delivery to market; and

• increased sales volume in our commercial flow and industrial solutions businesses within our Industrial & Flow Technologies segment compared to the prior year.

Net sales were flat in the first nine months of 2023 from 2022, primarily driven by:

*•*sales volume decreases in our Pool segment primarily due to higher channel inventory and lower demand compared to the prior year;

*•*decreased sales volume in our residential business within our Water Solutions segment driven by lower demand compared to the prior year and certain business exits announced in the second half of 2022;

• increased sales within our Water Solutions segment from the acquisition of Manitowoc Ice, which was completed in the third quarter of 2022;

• higher sales volume in our commercial business within our Water Solutions segment driven by higher demand and easing of supply chain pressures which allowed increased production and delivery to market; and

• increases in selling prices to mitigate a rise in inflationary costs and lower rebates and incentives in our Pool segment.

Gross profit

The 3.9 and 3.7 percentage point increases in gross profit as a percentage of net sales in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• increases in selling prices to mitigate impacts of inflationary costs and lower rebates and incentives in our Pool segment;

*•*increased productivity within our Water Solutions segment as a result of certain transformation and restructuring initiatives; and

• increased productivity in our Industrial & Flow Technologies segment mainly driven by manufacturing leverage and transformation initiatives.

These increases were partially offset by:

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

*•*inventory impairments and write-offs of $1.4 million in the third quarter of 2023 and $5.3 million in the first nine months of 2023.

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

The 0.3 percentage point decrease in SG&A as a percentage of net sales in the third quarter of 2023 from 2022 was primarily driven by:

• identifiable intangible asset amortization expense of $13.8 million in the third quarter of 2023, compared to $18.5 million in the third quarter of 2022;

• restructuring and other costs of $1.6 million in the third quarter of 2023, compared to $12.5 million in the third quarter of 2022; and

*•*no deal-related costs and expenses in the third quarter of 2023, compared to $13.4 million in the third quarter of 2022.

The decrease was partially offset by:

*•*transformation costs of $13.5 million in the third quarter of 2023, compared to $10.1 million in the third quarter of 2022; and

• higher employee compensation costs compared to the same period of the prior year.

The 0.6 percentage point increase in SG&A as a percentage of net sales in the first nine months of 2023 from 2022 was primarily driven by:

*•*increased identifiable intangible asset amortization expense of $12.7 million in the first nine months of 2023 related to the addition of Manitowoc Ice’s definite-lived intangible assets in the third quarter of 2022;

• transformation costs of $28.0 million in the first nine months of 2023, compared to $20.8 million in the first nine months of 2022; and

• higher employee compensation costs compared to the same period of the prior year.

The increase was partially offset by:

*•*no deal-related costs and expenses in the first nine months of 2023, compared to $21.4 million in the first nine months of 2022; and

• restructuring and other costs of $5.1 million in the first nine months of 2023, compared to $15.7 million in the first nine months of 2022.

Net interest expense

The increases in net interest expense in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

*•*increased variable interest rates compared to the same periods of the prior year; and

• increased debt due to the acquisition of Manitowoc Ice in the third quarter of 2022.

These increases were partially offset by:

• the amortization of debt issuance costs of $1.3 million during the third quarter of 2022 and $9.0 million during the first nine months of 2022 related to financing commitments for a bridge loan facility established in connection with the acquisition of Manitowoc Ice that did not recur in the first nine months of 2023.

Provision for income taxes

The 4.0 and 0.6 percentage point increases in the effective tax rate in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• the unfavorable mix of global earnings.

These increases were partially offset by:

*•*the impact of favorable discrete items that occurred during the third quarter and first nine months of 2023 that did not occur in 2022.

SEGMENT RESULTS OF OPERATIONS

The summary that follows provides a discussion of the results of operations of our three reportable segments (Industrial & Flow Technologies, Water Solutions and Pool). Each of these segments is comprised of various product offerings that serve multiple end users.

We evaluate performance based on net sales and segment income and use a variety of ratios to measure performance of our reporting segments. Segment income represents equity income of unconsolidated subsidiaries and operating income exclusive of intangible amortization, certain acquisition related expenses, costs of restructuring and transformation activities, impairments, legal accrual adjustments and settlements and other unusual non-operating items.

Industrial & Flow Technologies

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

Net sales

The components of the change in Industrial & Flow Technologies net sales from the prior period were as follows:

The 2.7 and 7.0 percent increases in net sales for Industrial & Flow Technologies in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• increases in selling prices to mitigate inflationary cost increases;

• increased sales volume in our commercial flow and industrial solutions businesses compared to the prior year; and

• favorable foreign currency effects compared to the third quarter of the prior year.

These increases were partially offset by:

• decreased sales volume in our residential flow business compared to the prior year.

Segment income

The components of the change in Industrial & Flow Technologies segment income as a percentage of net sales from the prior period were as follows:

The 2.5 and 2.4 percentage point increases in segment income for Industrial & Flow Technologies as a percentage of net sales in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• increases in selling prices to mitigate impacts of inflation; and

• increased productivity mainly driven by manufacturing leverage and transformation initiatives.

These increases were partially offset by:

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

• unfavorable foreign currency effects compared to the prior year.

Water Solutions

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

Net sales

The components of the change in Water Solutions net sales from the prior period were as follows:

The 8.8 and 29.0 percent increases in net sales for Water Solutions in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• increased sales as a result of the acquisition of Manitowoc Ice, which was completed in the third quarter of 2022;

• higher sales volume in our commercial business driven by higher demand and easing of supply chain pressures, which allowed increased production and delivery to market; and

• increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

*•*decreased sales volume in our residential business driven by lower demand compared to the prior year and certain business exits announced in the second half of 2022; and

• unfavorable foreign currency effects compared to the first nine months of the prior year.

Segment income

The components of the change in Water Solutions segment income as a percentage of net sales from the prior period were as follows:

The 5.1 and 6.8 percentage point increases in segment income for Water Solutions as a percentage of net sales in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• increased sales as a result of the Manitowoc Ice acquisition;

• increases in selling prices to mitigate impacts of inflation; and

*•*increased productivity in the residential business as a result of certain transformation and restructuring initiatives.

These increases were partially offset by:

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

• unfavorable foreign currency effects compared to the prior year.

Pool

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

Net sales

The components of the change in Pool net sales from the prior period were as follows:

The 20.8 and 21.9 percent decreases in net sales for Pool in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

*•*sales volume decreases primarily due to higher channel inventory and lower demand compared to the prior year.

These decreases were partially offset by:

• increases in selling prices to mitigate inflationary cost increases and lower rebates and incentives.

Segment income

The components of the change in Pool segment income as a percentage of net sales from the prior period were as follows:

The 1.3 and 2.9 percentage point increases in segment income for Pool as a percentage of net sales in the third quarter and first nine months, respectively, of 2023 from 2022 were primarily driven by:

• increases in selling prices to mitigate impacts of inflation and lower rebates and incentives;

• positive impact to margin associated with benefits realized from our transformation initiatives; and

• cost management initiatives associated with decreased sales volume.

These increases were partially offset by:

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

BACKLOG OF ORDERS BY SEGMENT

The majority of our backlog is short cycle in nature with shipments within one year from when a customer places an order and a substantial portion of our revenues has historically resulted from orders received and products delivered in the same month. A portion of our backlog, particularly from orders for major capital projects, can take more than one year from order to delivery depending on the size and type of order. We record, as part of our backlog, all orders from external customers, which represent firm commitments, and are supported by a purchase order or other legitimate contract. Our backlog of orders is dependent upon when customers place orders and is not necessarily an indicator of our expected results for our 2023 net sales.

The decrease in our overall backlog from December 31, 2022 was primarily driven by our backlog trending down to more historical levels as a result of increased manufacturing capacity and improved lead times.

LIQUIDITY AND CAPITAL RESOURCES

We generally fund cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, dividend payments and share repurchases from cash generated from operations, availability under existing committed revolving credit facilities and in certain instances, public and private debt and equity offerings. Our primary revolving credit facility has generally been adequate for these purposes, although we have negotiated additional credit facilities or completed debt and equity offerings as needed to allow us to complete acquisitions.

We experience seasonal cash flows primarily due to seasonal demand in a number of markets. Consistent with historical trends, we experienced seasonal cash usage in the first quarter of 2023 and drew on our revolving credit facility to fund our operations. This cash usage reversed in the second quarter of 2023 as the seasonality of our businesses peaked and generated significant cash to fund our operations.

End-user demand for pool and certain pumping equipment follows warm weather trends and historically is at seasonal highs from April to August. The magnitude of the sales spike typically is partially mitigated by employing some advance sale “early buy” programs (generally including extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by temperature, heavy flooding and droughts.

We expect to continue to have sufficient cash and borrowing capacity to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders quarterly. We believe our existing liquidity position, coupled with our currently anticipated operating cash flows, will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

Summary of cash flows

Operating activities

The $502.3 million in net cash provided by operating activities of continuing operations in the first nine months of 2023 primarily reflects $506.8 million of net income from continuing operations, net of non-cash depreciation, definite-lived intangible amortization and asset impairment.

The $271.5 million in net cash provided by operating activities of continuing operations in the first nine months of 2022 primarily reflects $458.2 million of net income from continuing operations, net of non-cash depreciation and definite-lived intangible amortization. Additionally, we had a cash outflow of $165.2 million as a result of changes in net working capital, primarily due to increased inventory balances compared to December 31, 2021. The inventory balance was higher due to inflationary impacts and continued supply chain inefficiencies.

Investing activities

Net cash used for investing activities in the first nine months of 2023 primarily reflects capital expenditures of $54.8 million, partially offset by proceeds from the sale of property and equipment of $5.4 million.

Net cash used for investing activities in the first nine months of 2022 primarily reflects the net cash paid of $1,591.5 million for the Manitowoc Ice acquisition and capital expenditures of $63.2 million, partially offset by cash received upon the settlement of net investment hedges of $8.8 million.

Financing activities

Net cash used for financing activities in the first nine months of 2023 primarily relates to net repayments of revolving long-term debt of $320.0 million and dividend payments of $108.9 million.

Net cash provided by financing activities in the first nine months of 2022 primarily relates to net borrowings of revolving long-term debt of $256.1 million and net proceeds received from the Term Loan Facility and issuance of the 2032 Senior Notes of $1,391.3 million used to finance the Manitowoc Ice acquisition, partially offset by dividend payments of $104.1 million, repayment of $88.3 million senior fixed notes, share repurchases of $50.0 million and payments of debt issuance costs of $15.7 million.

Free cash flow

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

The following table is a reconciliation of free cash flow:

Debt and capital

Pentair, Pentair Finance S.à r.l (“PFSA“) and Pentair, Inc. are parties to a credit agreement (the “Senior Credit Facility”), with Pentair as guarantor and PFSA and Pentair, Inc. as borrowers, which was amended and restated in December 2021 and further amended in December 2022, providing for a $900.0 million senior unsecured revolving credit facility and a $200.0 million senior unsecured term loan facility. The revolving credit facility has a maturity date of December 16, 2026 and the term loan facility has a maturity date of December 16, 2024. Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate, adjusted term secured overnight financing rate, adjusted euro interbank offered rate, adjusted daily simple secured overnight financing rate or central bank 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.

As of September 30, 2023, total availability under the Senior Credit Facility was $900.0 million. In addition, PFSA has the option to request to increase the revolving credit facility and/or to enter into one or more additional tranches of term loans in an aggregate amount of up to $300.0 million, subject to customary conditions, including the commitment of the participating lenders.

In March 2022, in contemplation of the acquisition of Manitowoc Ice, Pentair and PFSA entered into a Loan Agreement among PFSA, as borrower, Pentair, as guarantor, and the lenders and agents party thereto, providing for a $600.0 million senior unsecured term loan facility (the “Term Loan Facility”). In June 2022, the Term Loan Facility was amended to increase the facility by $400.0 million to an aggregate principal amount of $1.0 billion. The Term Loan Facility has a maturity date of July 28, 2027, with required quarterly installment payments of $6.3 million that began on the last day of the third quarter of 2023 and increase to $12.5 million beginning with the last day of the third quarter of 2024. The Term Loan Facility bears interest at a rate equal to an alternate base rate, adjusted term secured overnight financing rate, or adjusted daily simple secured overnight financing 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 July 2022, in contemplation of the acquisition of Manitowoc Ice, Pentair, as guarantor, and PFSA, as issuer, completed a public offering of $400.0 million aggregate principal amount of 5.900% Senior Notes due 2032 (“2032 Senior Notes”).

We used the net proceeds from the Term Loan Facility and the issuance of the 2032 Senior Notes to finance a portion of the Manitowoc Ice acquisition purchase price and to pay related fees and expenses.

Our debt agreements contain various financial covenants, but the most restrictive covenants are contained in the Senior Credit Facility and the Term Loan Facility. The Senior Credit Facility and the Term Loan Facility contain covenants requiring us not to permit (i) the ratio of our consolidated debt (net of our consolidated unrestricted cash and cash equivalents 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 (each, a “testing period”) to exceed 3.75 to 1.00 (or, at PFSA’s election and subject to certain conditions, 4.25 to 1.00 for four testing periods in connection with certain material acquisitions) (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 and the Term Loan Facility provide 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 and the Term Loan Facility, we have various other credit facilities with an aggregate availability of $20.8 million, of which there were no outstanding borrowings at September 30, 2023. Borrowings under these credit facilities bear interest at variable rates.

We have $31.3 million of Term Loan Facility payments due in the next twelve months. We classified this debt as long-term as of September 30, 2023 as we have the intent and ability to refinance such obligation on a long-term basis under the revolving credit facility under the Senior Credit Facility.

As of September 30, 2023, we had $93.1 million of cash held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.

Share repurchases

In December 2020, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $750.0 million. The authorization expires on December 31, 2025. During the three and nine months ended September 30, 2023, no ordinary shares were repurchased. As of September 30, 2023, we had $600.0 million available for share repurchases under this authorization.

Dividends payable

On September 18, 2023, the Board of Directors declared a quarterly cash dividend of $0.22 per share, payable on November 3, 2023 to shareholders of record at the close of business on October 20, 2023. As a result, the balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $36.4 million at September 30, 2023, compared to $36.2 million at December 31, 2022.

We paid dividends in the first nine months of 2023 of $108.9 million, or $0.66 per ordinary share compared with $104.1 million, or $0.63 per ordinary share, in the prior year period.

Under Irish law, the payment of future cash dividends and repurchases of shares may be paid only out of Pentair plc’s “distributable reserves” on its statutory balance sheet. Pentair plc is not permitted to pay dividends out of share capital, which includes share premiums. Distributable reserves may be created through the earnings of the Irish parent company and through a reduction in share capital approved by the Irish High Court. Distributable reserves are not linked to a U.S. generally accepted accounting principles (“GAAP”) reported amount (e.g., retained earnings). Our distributable reserve balance was $7.1 billion as of December 31, 2022.

Supplemental guarantor information

Pentair plc (the “Parent Company Guarantor”), fully and unconditionally, guarantees the senior notes of PFSA (the “Subsidiary Issuer”). The Subsidiary Issuer is a Luxembourg private limited liability company and 100 percent-owned subsidiary of the Parent Company Guarantor.

The Parent Company Guarantor is a holding company established to own directly and indirectly substantially all of its operating and other subsidiaries. The Subsidiary Issuer is a holding company formed to own directly and indirectly substantially all of its operating and other subsidiaries and to issue debt securities, including the senior notes. The Parent Company Guarantor’s principal source of cash flow, including cash flow to make payments on the senior notes pursuant to the guarantees, is dividends from its subsidiaries. The Subsidiary Issuer’s principal source of cash flow is interest income from its subsidiaries. None of the subsidiaries of the Parent Company Guarantor or the Subsidiary Issuer is under any direct obligation to pay or otherwise fund amounts due on the senior notes or the guarantees, whether in the form of dividends, distributions, loans or other payments. In addition, there may be statutory and regulatory limitations on the payment of dividends from certain subsidiaries of the Parent Company Guarantor or the Subsidiary Issuer. If such subsidiaries are unable to transfer funds to the Parent Company Guarantor or the Subsidiary Issuer and sufficient cash or liquidity is not otherwise available, the Parent Company Guarantor or the Subsidiary Issuer may not be able to make principal and interest payments on their outstanding debt, including the senior notes or the guarantees.

The following table presents summarized financial information as of September 30, 2023 and December 31, 2022 for the Parent Company Guarantor and Subsidiary Issuer on a combined basis after elimination of (i) intercompany transactions and balances among the guarantors and issuer and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor or issuer.

The Parent Company Guarantor and Subsidiary Issuer do not have material results of operations on a combined basis.

CRITICAL ACCOUNTING POLICIES

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with GAAP. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. In our Annual Report on Form 10-K for the year ended December 31, 2022, we identified the critical accounting policies that affect our more significant estimates and assumptions used in preparing our consolidated financial statements. There have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

There have been no material changes in our market risk during the quarter ended September 30, 2023. For additional information refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022.

(a) Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter ended September 30, 2023 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the quarter ended September 30, 2023 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

(b) Changes in Internal Control over Financial Reporting

As part of our ongoing integration activities after the Manitowoc Ice acquisition we are continuing to incorporate our controls and procedures into the Manitowoc Ice business and to augment our company-wide controls. There was no other change in our internal control over financial reporting that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. 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, contractual or regulatory disputes with suppliers, customers, authorities or parties to acquisitions and divestitures; intellectual property matters; environmental, asbestos, safety and health matters; product liability claims; claims relating to the use or installation of our products; consumer and consumer protection matters; and employment and labor matters.

There have been no material changes from the risk factors previously disclosed in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table provides information with respect to purchases we made of our ordinary shares during the third quarter of 2023:

(a)The purchases in this column include 2,332 shares for the period July 1 - July 29, 1,848 shares for the period July 30 - August 26 and 557 shares for the period August 27 - September 30 deemed surrendered to us by participants in our equity incentive plans to satisfy the exercise price or withholding of tax obligations related to the exercise of stock options and vesting of restricted and performance shares.

(b)The average price paid in this column includes shares deemed surrendered to us by participants in our equity incentive plans to satisfy the exercise price for the exercise price of stock options and withholding tax obligations due upon stock option exercises and vesting of restricted and performance shares.

(c)The number of shares in this column represents the number of shares repurchased as part of our publicly announced plans to repurchase our ordinary shares up to the maximum dollar limit authorized by the Board of Directors, discussed below.

(d)In December 2020, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $750.0 million. The authorization expires on December 31, 2025. As of September 30, 2023, we had $600.0 million available for share repurchases under this authorization. From time to time, we may enter into a Rule 10b5-1 trading plan for the purpose of repurchasing shares under this authorization.

(c)During the third quarter of 2023, none of our directors or Section 16 officers adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408(a) of Regulation S-K), except as set forth in the table below.

(1) Each trading arrangement marked as a Rule 10b5-1 trading arrangement is intended to satisfy the affirmative defense of Rule 10b5-1(c).

(2) Each trading arrangement permits transactions through and including the earlier to occur of the completion of all sales under the trading arrangement or the date listed in the table.

The exhibits listed in the following Exhibit Index are filed as part of this Quarterly Report on Form 10-Q.

Exhibit Index to Form 10-Q for the Period Ended September 30, 2023

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on October 24, 2023.