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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the Quarterly Period Ended September 30, 2017
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-11625
Pentair plc
 
(Exact name of Registrant as specified in its charter)
Ireland
  
98-1141328
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification number)
 
 
43 London Wall, London, EC2M 5TF, United Kingdom
(Address of principal executive offices)
Registrant's telephone number, including area code: 44-20-7347-8925
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§223.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
 
Large accelerated filer þ
  
Accelerated filer o
  
Non-accelerated filer o
  
Smaller reporting 
company o
 
Emerging growth
company 
o
 
  
 
  
(Do not check if a smaller reporting company)
  
 
 
 
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 þ
On September 30, 2017, 181,597,391 shares of Registrant's common stock were outstanding.



Table of Contents

Pentair plc and Subsidiaries
 
 
Page
 
 
PART I FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II OTHER INFORMATION
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 6.
 
 
 
 



2

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
Pentair plc and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
 
Three months ended
 
Nine months ended
In millions, except per-share data
September 30,
2017
September 30,
2016
 
September 30,
2017
September 30,
2016
Net sales
$
1,226.8

$
1,210.7

 
$
3,675.6

$
3,701.9

Cost of goods sold
771.5

769.8

 
2,314.8

2,347.9

Gross profit
455.3

440.9

 
1,360.8

1,354.0

Selling, general and administrative
234.7

228.4

 
730.3

728.2

Research and development
28.4

29.7

 
87.1

86.9

Operating income
192.2

182.8

 
543.4

538.9

Other (income) expense:
 
 
 
 
 
Equity income of unconsolidated subsidiaries
(0.3
)
(1.2
)
 
(0.9
)
(2.7
)
Loss on sale of business
3.8


 
3.8


Loss on early extinguishment of debt


 
101.4


Net interest expense
13.9

34.3

 
74.2

105.9

Income from continuing operations before income taxes
174.8

149.7

 
364.9

435.7

Provision for income taxes
47.7

32.2

 
88.8

93.7

Net income from continuing operations
127.1

117.5

 
276.1

342.0

Income from discontinued operations, net of tax

22.9

 
1.9

48.6

(Loss) gain from sale of discontinued operations, net of tax
(1.7
)
0.6

 
198.9

0.6

Net income
$
125.4

$
141.0

 
$
476.9

$
391.2

Comprehensive income, net of tax
 
 
 
 
 
Net income
$
125.4

$
141.0

 
$
476.9

$
391.2

Changes in cumulative translation adjustment (inclusive of divestiture of business reclassified to gain from sale of $0.0 and $374.2 for the three and nine months ended September 30, 2017, respectively)
34.5

34.9

 
502.8

37.1

Changes in market value of derivative financial instruments, net of tax
(3.0
)
(4.8
)
 
(2.3
)
(8.6
)
Comprehensive income
$
156.9

$
171.1

 
$
977.4

$
419.7

Earnings (loss) per ordinary share
 
 
 
 
 
Basic
 
 
 
 
 
Continuing operations
$
0.70

$
0.65

 
$
1.52

$
1.89

Discontinued operations
(0.01
)
0.13

 
1.10

0.27

Basic earnings per ordinary share
$
0.69

$
0.78

 
$
2.62

$
2.16

Diluted
 
 
 
 
 
Continuing operations
$
0.69

$
0.64

 
1.50

1.87

Discontinued operations
(0.01
)
0.13

 
1.10

0.27

Diluted earnings per ordinary share
$
0.68

$
0.77

 
$
2.60

$
2.14

Weighted average ordinary shares outstanding
 
 
 
 
 
Basic
181.5

181.4

 
181.7

181.1

Diluted
183.5

183.6

 
183.7

183.0

Cash dividends paid per ordinary share
$
0.345

$
0.34

 
$
1.035

$
1.00

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

Pentair plc and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
 
September 30,
2017
December 31,
2016
In millions, except per-share data
Assets
Current assets
 
 
Cash and cash equivalents
$
108.5

$
238.5

Accounts and notes receivable, net of allowances of $27.3 and $25.6, respectively
768.2

764.0

Inventories
579.2

524.2

Other current assets
249.9

253.4

Current assets held for sale

891.9

Total current assets
1,705.8

2,672.0

Property, plant and equipment, net
547.1

538.6

Other assets
 
 
Goodwill
4,343.6

4,217.4

Intangibles, net
1,607.3

1,631.8

Other non-current assets
425.0

182.1

Non-current assets held for sale

2,292.9

Total other assets
6,375.9

8,324.2

Total assets
$
8,628.8

$
11,534.8

Liabilities and Equity
Current liabilities
 
 
Current maturities of long-term debt and short-term borrowings
$

$
0.8

Accounts payable
383.4

436.6

Employee compensation and benefits
160.5

166.1

Other current liabilities
528.7

511.5

Current liabilities held for sale

356.2

Total current liabilities
1,072.6

1,471.2

Other liabilities
 
 
Long-term debt
1,503.4

4,278.4

Pension and other post-retirement compensation and benefits
275.1

253.4

Deferred tax liabilities
549.5

609.5

Other non-current liabilities
219.6

162.0

Non-current liabilities held for sale

505.9

Total liabilities
3,620.2

7,280.4

Equity
 
 
Ordinary shares $0.01 par value, 426.0 authorized, 181.6 and 181.8 issued at September 30, 2017 and December 31, 2016, respectively
1.8

1.8

Additional paid-in capital
2,887.3

2,920.8

Retained earnings
2,355.3

2,068.1

Accumulated other comprehensive loss
(235.8
)
(736.3
)
Total equity
5,008.6

4,254.4

Total liabilities and equity
$
8,628.8

$
11,534.8

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

Pentair plc and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine months ended
In millions
September 30,
2017
September 30,
2016
Operating activities
 
 
Net income
$
476.9

$
391.2

Income from discontinued operations, net of tax
(1.9
)
(48.6
)
Gain from sale of discontinued operations, net of tax
(198.9
)
(0.6
)
Adjustments to reconcile net income from continuing operations to net cash provided by (used for) operating activities of continuing operations
 
 
Equity income of unconsolidated subsidiaries
(0.9
)
(2.7
)
Depreciation
63.9

64.3

Amortization
73.2

72.6

Deferred income taxes
(11.8
)
(3.8
)
Loss on sale of business
3.8


Share-based compensation
32.2

28.7

Loss on early extinguishment of debt
101.4


Excess tax benefits from share-based compensation

(8.8
)
Changes in assets and liabilities, net of effects of business acquisitions
 
 
Accounts and notes receivable
32.1

91.8

Inventories
(29.4
)
14.0

Other current assets
(19.7
)
(62.5
)
Accounts payable
(77.5
)
(56.9
)
Employee compensation and benefits
(15.9
)
(5.2
)
Other current liabilities
(12.2
)
13.6

Other non-current assets and liabilities
3.2

(27.4
)
Net cash provided by (used for) operating activities of continuing operations
418.5

459.7

Net cash provided by (used for) operating activities of discontinued operations
(56.7
)
97.1

Net cash provided by (used for) operating activities
361.8

556.8

Investing activities
 
 
Capital expenditures
(50.5
)
(94.5
)
Proceeds from sale of property and equipment
7.1

24.1

Proceeds from sale of businesses
2,764.0


Acquisitions, net of cash acquired
(59.5
)

Other

(3.8
)
Net cash provided by (used for) investing activities of continuing operations
2,661.1

(74.2
)
Net cash provided by (used for) investing activities of discontinued operations
(6.5
)
(4.3
)
Net cash provided by (used for) investing activities
2,654.6

(78.5
)
Financing activities
 
 
Net repayments of short-term borrowings
(0.8
)

Net repayments of commercial paper and revolving long-term debt
(842.3
)
(291.1
)
Repayments of long-term debt
(2,009.3
)
(0.7
)
Premium paid on early extinguishment of debt
(94.9
)

Excess tax benefits from share-based compensation

8.8

Shares issued to employees, net of shares withheld
34.3

20.1

Repurchases of ordinary shares
(100.0
)

Dividends paid
(188.9
)
(181.6
)
Net cash provided by (used for) financing activities
(3,201.9
)
(444.5
)
Effect of exchange rate changes on cash and cash equivalents
55.5

10.8

Change in cash and cash equivalents
(130.0
)
44.6

Cash and cash equivalents, beginning of period
238.5

126.3

Cash and cash equivalents, end of period
$
108.5

$
170.9

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

Pentair plc and Subsidiaries
Condensed Consolidated Statements of Changes in Equity (Unaudited)

In millions
Ordinary shares
 
Additional paid-in capital
Retained earnings
Accumulated
other
comprehensive loss
 Total
Number
Amount
 
Balance - December 31, 2016
181.8

$
1.8

 
$
2,920.8

$
2,068.1

$
(736.3
)
$
4,254.4

Net income


 

476.9


476.9

Other comprehensive income, net of tax


 


500.5

500.5

Dividends declared


 

(189.7
)

(189.7
)
Share repurchase
(1.5
)

 
(100.0
)


(100.0
)
Exercise of options, net of shares tendered for payment
1.1


 
41.6



41.6

Issuance of restricted shares, net of cancellations
0.3


 




Shares surrendered by employees to pay taxes
(0.1
)

 
(7.3
)


(7.3
)
Share-based compensation


 
32.2



32.2

Balance - September 30, 2017
181.6

$
1.8

 
$
2,887.3

$
2,355.3

$
(235.8
)
$
5,008.6

 
In millions
Ordinary shares
 
Additional paid-in capital
Retained earnings
Accumulated
other
comprehensive loss
 Total
Number
Amount
Balance - December 31, 2015
180.5

$
1.8

 
$
2,860.3

$
1,791.7

$
(645.0
)
$
4,008.8

Net income


 

391.2


391.2

Other comprehensive income, net of tax


 


28.5

28.5

Dividends declared


 

(122.0
)

(122.0
)
Exercise of options, net of shares tendered for payment
0.9


 
30.7



30.7

Issuance of restricted shares, net of cancellations
0.5


 




Shares surrendered by employees to pay taxes
(0.2
)

 
(10.6
)


(10.6
)
Share-based compensation


 
28.7



28.7

Balance - September 30, 2016
181.7

$
1.8

 
$
2,909.1

$
2,060.9

$
(616.5
)
$
4,355.3

See accompanying notes to condensed consolidated financial statements.


6

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)


1.Basis of Presentation and Responsibility for Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of Pentair plc (formerly Pentair Ltd.) and its subsidiaries ("we," "us," "our," "Pentair," or "the Company") have been prepared following the requirements of the U.S. Securities and Exchange Commission ("SEC") for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America can be condensed or omitted.
We are responsible for the unaudited condensed consolidated financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of those for a full year.
Our fiscal year ends on December 31. We report our interim quarterly periods on a calendar quarter basis.
Proposed Separation
On May 9, 2017, we announced that our Board of Directors approved a plan to separate our Water business and Electrical business into two independent, publicly-traded companies (the "Proposed Separation"). The Proposed Separation is expected to occur through a tax-free spin-off of the Electrical business to Pentair shareholders.

Completion of the Proposed Separation is subject to certain customary conditions, including, among other things, final approval of the transaction by Pentair's Board of Directors, receipt of tax opinions and rulings and effectiveness of appropriate filings with the SEC. Upon completion of the Proposed Separation, it is anticipated that Electrical's jurisdiction of organization will be Ireland, but that it will manage its affairs so that it will be centrally managed and controlled in the United Kingdom (the "U.K.") and therefore will have its tax residency in the U.K.
The disclosures and financial statements within these condensed consolidated financial statements include the results of operations, financial condition and cash flows of the Electrical business as continuing operations.
We expect to complete the Proposed Separation in the second quarter of 2018; however, there can be no assurance regarding the ultimate timing of the Proposed Separation or that the Proposed Separation will be completed.
New accounting standards
In March 2016, the Financial Accounting Standards Board ("FASB") issued a new accounting standard for share-based payments. The guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of excess tax benefits in the Condensed Consolidated Statements of Cash Flows. We adopted the new standard in the first quarter of 2017. The impact of the adoption resulted in the following:
All excess tax benefits and deficiencies arising from employee share-based payment awards, and dividends on those awards, will be recognized within income taxes in the period in which they occur rather than within additional paid-in-capital. Our adoption of this requirement under the new standard had no material impact for the three and nine months ended September 30, 2017.
The Company no longer presents excess tax benefits within cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows; instead these are now reflected within cash flows from operating activities. The Company elected to apply this change prospectively.
The Company elected not to change its policy on accounting for forfeitures and continues to estimate the total number of awards for which the requisite service period will not be rendered.
The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three and nine months ended September 30, 2017. This increased diluted weighted average common shares outstanding by less than 300,000 shares for the three and nine months ended September 30, 2017.

7

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

In February 2016, the FASB issued new accounting requirements regarding accounting for leases, which require an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The requirements are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and early adoption is permitted. We have not yet determined the potential effects on our financial condition or results of operations.
In May 2014, the FASB issued new accounting requirements for the recognition of revenue from contracts with customers. The new requirements also include additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The requirements are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company intends to adopt the new revenue guidance as of January 1, 2018 and expects to utilize the modified retrospective transition method of adoption, with adjustment to beginning retained earnings for the cumulative effect of the change. In preparation for adoption of the new guidance, the Company has reviewed representative samples of contracts and other forms of agreements with customers globally and is in the process of quantifying the impact of adopting the new revenue standard. Based on its procedures to date, the Company does not believe the adoption of the new standard will have a material impact on its results of operations, financial condition or cash flows. The new standard will result in enhanced disclosures in the footnotes to our consolidated financial statements to provide additional quantitative and qualitative information related to disaggregation of revenue, changes in contract assets and liabilities and remaining performance obligations. Adoption of this standard will require changes to our business processes, systems and controls to support the additional required disclosures. We are in the process of implementing such changes.
2.Discontinued Operations
On April 28, 2017, we completed the sale of the Valves & Controls business to Emerson Electric Co. for $3.15 billion, subject to final working capital adjustments. The sale resulted in a gain, net of tax, of $198.9 million.

The results of the Valves & Controls business have been presented as discontinued operations and the related assets and liabilities have been classified as held for sale for all periods presented. The Valves & Controls business was previously disclosed as a stand-alone reporting segment. Transaction costs of $1.7 million and $55.4 million related to the sale of Valves & Controls were incurred during the three and nine months ended September 30, 2017, respectively, and were recorded within (Loss) gain from sale of discontinued operations before income taxes presented below.


8

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Results of discontinued operations are summarized below:
 
Three months ended
 
Nine months ended
In millions
September 30,
2017
September 30,
2016
 
September 30,
2017
September 30,
2016
Net sales
$

$
410.9

 
$
450.3

$
1,231.6

Cost of goods sold

287.6

 
339.7

886.7

Gross profit

123.3

 
110.6

344.9

Selling, general and administrative

87.4

 
103.3

267.6

Research and development

4.3

 
5.7

14.2

Operating income
$

$
31.6

 
$
1.6

$
63.1

 
 
 
 
 
 
Income from discontinued operations before income taxes
$

$
32.0

 
$
2.5

$
63.6

Provision for income taxes

9.1

 
0.6

15.0

Income from discontinued operations, net of tax
$

$
22.9

 
$
1.9

$
48.6

 
 
 
 
 
 
(Loss) gain from sale of discontinued operations before income taxes
$
(1.7
)
$
0.6

 
$
201.3

$
0.6

Provision for income taxes


 
2.4


(Loss) gain from sale of discontinued operations, net of tax
$
(1.7
)
$
0.6

 
$
198.9

$
0.6

The carrying amounts of major classes of assets and liabilities that were classified as held for sale on the Condensed Consolidated Balance Sheets were as follows:
In millions
September 30,
2017
December 31,
2016
Accounts and notes receivable, net
$

$
365.4

Inventories

491.5

Other current assets

35.0

Current assets held for sale
$

$
891.9

Property, plant and equipment, net
$

$
361.5

Goodwill

996.4

Intangibles, net

703.5

Asbestos-related insurance receivable

108.5

Other non-current assets

123.0

Non-current assets held for sale
$

$
2,292.9

Accounts payable
$

$
151.4

Employee compensation and benefits

61.5

Other current liabilities

143.3

Current liabilities held for sale
$

$
356.2

Pension and other post-retirement compensation and benefits
$

$
32.2

Deferred tax liabilities

162.8

Asbestos-related liabilities

228.3

Other non-current liabilities

82.6

Non-current liabilities held for sale
$

$
505.9


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Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

3.
Share Plans
Total share-based compensation expense for the three and nine months ended September 30, 2017 and 2016 was as follows:
 
Three months ended    
 
Nine months ended
In millions
September 30,
2017
September 30,
2016
 
September 30,
2017
September 30,
2016
Restricted stock units
$
2.9

$
3.6

 
$
14.4

$
14.2

Stock options
1.9

1.8

 
8.3

9.0

Performance share units
1.4

1.0

 
9.5

5.5

Total share-based compensation expense
$
6.2

$
6.4

 
$
32.2

$
28.7


In the first quarter of 2017, we issued our annual share-based compensation grants under the Pentair plc 2012 Stock and Incentive Plan to eligible employees. The total number of awards issued was approximately 1.4 million, of which 0.3 million were restricted stock units, 0.9 million were stock options and 0.2 million were performance share units. The weighted-average grant date fair value of the restricted stock units, stock options and performance share units issued was $58.93, $12.57 and $58.41, respectively.
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:
 
2017
Annual Grant
Risk-free interest rate
1.61
%
Expected dividend yield
2.38
%
Expected share price volatility
26.9
%
Expected term (years)
6.3

These estimates require us to make assumptions based on historical results, observance of trends in our share price, changes in option exercise behavior, future expectations and other relevant factors. If other assumptions had been used, share-based compensation expense, as calculated and recorded under the accounting guidance, could have been affected.
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 share price volatility, we considered a rolling average of historical volatility measured over a period approximately equal to the expected option term. The risk-free interest 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.
4.
Restructuring
During the nine months ended September 30, 2017 and the year ended December 31, 2016, we continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. Initiatives during the nine months ended September 30, 2017 included the reduction in hourly and salaried headcount of approximately 400 employees, consisting of approximately 200 in Water and 200 in Electrical. Initiatives during the year ended December 31, 2016 included the reduction in hourly and salaried headcount of approximately 650 employees, consisting of approximately 300 in Water and 350 in Electrical.
Restructuring related costs included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) included costs for severance and other restructuring costs as follows: 
 
Three months ended    
 
Nine months ended
In millions
September 30,
2017
September 30,
2016
 
September 30,
2017
September 30,
2016
Severance and related costs
$
4.7

$
7.3

 
$
38.1

$
19.2

Other
0.2


 
0.5

0.7

Total restructuring costs
$
4.9

$
7.3

 
$
38.6

$
19.9


10

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Other restructuring costs primarily consist of asset impairment and various contract termination costs.
Restructuring costs by reportable segment were as follows:
 
Three months ended
 
Nine months ended
In millions
September 30,
2017
September 30,
2016
 
September 30,
2017
September 30,
2016
Water
$
1.4

$
0.2

 
$
14.3

$
7.1

Electrical
1.7

7.1

 
14.7

11.0

Other
1.8


 
9.6

1.8

Consolidated
$
4.9

$
7.3

 
$
38.6

$
19.9

Activity related to accrued severance and related costs recorded in Other current liabilities in the Condensed Consolidated Balance Sheets is summarized as follows for the nine months ended September 30, 2017: 
In millions
September 30,
2017
Beginning balance
$
25.4

Costs incurred
38.1

Cash payments and other
(32.4
)
Ending balance
$
31.1

5.
Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
 
Three months ended    
 
Nine months ended
In millions, except per-share data
September 30,
2017
September 30,
2016
 
September 30,
2017
September 30,
2016
Net income
$
125.4

$
141.0

 
$
476.9

$
391.2

Net income from continuing operations
$
127.1

$
117.5

 
$
276.1

$
342.0

Weighted average ordinary shares outstanding
 
 
 
 
 
Basic
181.5

181.4

 
181.7

181.1

Dilutive impact of stock options, restricted stock units and performance share units
2.0

2.2

 
2.0

1.9

Diluted
183.5

183.6

 
183.7

183.0

Earnings (loss) per ordinary share
 
 
 
 
 
Basic
 
 
 
 
 
Continuing operations
$
0.70

$
0.65

 
$
1.52

$
1.89

Discontinued operations
(0.01
)
0.13

 
1.10

0.27

Basic earnings per ordinary share
$
0.69

$
0.78

 
$
2.62

$
2.16

Diluted
 
 
 
 
 
Continuing operations
$
0.69

$
0.64

 
$
1.50

$
1.87

Discontinued operations
(0.01
)
0.13

 
1.10

0.27

Diluted earnings per ordinary share
$
0.68

$
0.77

 
$
2.60

$
2.14

Anti-dilutive stock options excluded from the calculation of diluted earnings per share
1.6

1.2

 
1.8

1.8


11

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

6.
Supplemental Balance Sheet Information
In millions
September 30,
2017
December 31,
2016
Inventories
 
 
Raw materials and supplies
$
252.4

$
223.5

Work-in-process
80.7

67.3

Finished goods
246.1

233.4

Total inventories
$
579.2

$
524.2

Other current assets
 
 
Cost in excess of billings
$
128.5

$
107.7

Prepaid expenses
86.1

68.7

Prepaid income taxes
28.1

67.2

Other current assets
7.2

9.8

Total other current assets
$
249.9

$
253.4

Property, plant and equipment, net
 
 
Land and land improvements
$
70.6

$
66.2

Buildings and leasehold improvements
352.5

335.0

Machinery and equipment
1,002.0

932.5

Construction in progress
36.6

68.6

Total property, plant and equipment
1,461.7

1,402.3

Accumulated depreciation and amortization
914.6

863.7

Total property, plant and equipment, net
$
547.1

$
538.6

Other non-current assets
 
 
Deferred income taxes
$
37.5

$
39.0

Prepaid income taxes
252.2


Deferred compensation plan assets
48.1

47.9

Other non-current assets
87.2

95.2

Total other non-current assets
$
425.0

$
182.1

Other current liabilities
 
 
Dividends payable
$
62.7

$
61.8

Accrued warranty
38.1

38.9

Accrued rebates
97.1

78.2

Billings in excess of cost
30.4

22.5

Income taxes payable
41.8

87.3

Accrued restructuring
31.1

25.4

Other current liabilities
227.5

197.4

Total other current liabilities
$
528.7

$
511.5

Other non-current liabilities
 
 
Income taxes payable
$
33.9

$
36.1

Self-insurance liabilities
51.7

49.8

Deferred compensation plan liabilities
48.1

47.9

Foreign currency contract liabilities
41.4

5.4

Other non-current liabilities
44.5

22.8

Total other non-current liabilities
$
219.6

$
162.0


12

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

7.
Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill by segment were as follows:
In millions
December 31,
2016
Acquisitions/divestitures
Foreign currency 
translation/other 
September 30,
2017
Water
$
1,994.6

$
27.3

$
83.4

$
2,105.3

Electrical
2,222.8

5.3

10.2

2,238.3

Total goodwill
$
4,217.4

$
32.6

$
93.6

$
4,343.6

Identifiable intangible assets consisted of the following:
 
September 30,
2017
 
December 31,
2016
In millions
Cost
Accumulated
amortization
Net
 
Cost
Accumulated
amortization
Net
Finite-life intangibles
 
 
 
 
 
 
 
Customer relationships
$
1,513.2

$
(415.1
)
$
1,098.1

 
$
1,478.0

$
(346.7
)
$
1,131.3

Trade names
1.5

(1.4
)
0.1

 
1.8

(1.4
)
0.4

Proprietary technology and patents
131.3

(90.8
)
40.5

 
141.3

(100.3
)
41.0

Total finite-life intangibles
1,646.0

(507.3
)
1,138.7

 
1,621.1

(448.4
)
1,172.7

Indefinite-life intangibles
 
 
 
 
 
 
 
Trade names
468.6


468.6

 
459.1


459.1

Total intangibles, net
$
2,114.6

$
(507.3
)
$
1,607.3

 
$
2,080.2

$
(448.4
)
$
1,631.8

Intangible asset amortization expense was $24.6 million and $24.1 million for the three months ended September 30, 2017 and 2016, respectively, and $73.2 million and $72.6 million for the nine months ended September 30, 2017 and 2016, respectively.
Estimated future amortization expense for identifiable intangible assets during the remainder of 2017 and the next five years is as follows:
 
Q4
 
 
 
 
 
In millions
2017
2018
2019
2020
2021
2022
Estimated amortization expense
$
24.5

$
96.1

$
89.1

$
83.9

$
77.4

$
70.1

During the first nine months of 2017, we completed acquisitions with purchase prices totaling $59.5 million in cash, net of cash acquired. Identifiable intangible assets acquired included $19.1 million of definite-lived customer relationships with an estimated useful life of 11 years.

13

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

8.
Debt
Debt and the average interest rates on debt outstanding were as follows: 
In millions
Average interest rate as of September 30, 2017
Maturity
Year
September 30,
2017
December 31,
2016
Commercial paper
2.100%
2019
$
116.0

$
398.7

Revolving credit facilities
2.732%
2019
17.2

576.8

Senior notes - fixed rate (1)
1.875%
2017

350.0

Senior notes - fixed rate (1)
2.900%
2018
255.3

500.0

Senior notes - fixed rate (1)
2.650%
2019
250.0

250.0

Senior notes - fixed rate - Euro (1)
2.450%
2019
587.3

520.7

Senior notes - fixed rate (1)
3.625%
2020
74.0

400.0

Senior notes - fixed rate (1)
5.000%
2021
103.8

500.0

Senior notes - fixed rate (1)
3.150%
2022
88.3

550.0

Senior notes - fixed rate (1)
4.650%
2025
19.3

250.0

Other
N/A
N/A

0.8

Unamortized debt issuance costs and discounts
N/A
N/A
(7.8
)
(17.8
)
Total debt


1,503.4

4,279.2

Less: Current maturities and short-term borrowings



(0.8
)
Long-term debt


$
1,503.4

$
4,278.4

 
 
 
 
 
(1) Senior notes are guaranteed as to payment by Pentair plc and PISG
In October 2014, Pentair plc, Pentair Investments Switzerland GmbH ("PISG"), Pentair Finance S.à r.l. ("PFSA") and Pentair, Inc. entered into an amended and restated credit agreement (the "Credit Facility"), with Pentair plc and PISG as guarantors and PFSA and Pentair, Inc. as borrowers. The Credit Facility had a maximum aggregate availability of $2,100.0 million and a maturity date of October 3, 2019. Borrowings under the Credit Facility generally bear interest at a variable rate equal to the London Interbank Offered Rate ("LIBOR") plus a specified margin based upon PFSA's credit ratings. PFSA must pay a facility fee ranging from 9.0 to 25.0 basis points per annum (based upon PFSA's credit ratings) on the amount of each lender's commitment and letter of credit fee for each letter of credit issued and outstanding under the Credit Facility.
In August 2015, Pentair plc, PISG and PFSA entered into a First Amendment to the Credit Facility (the "First Amendment"), which, among other things, increased the Leverage Ratio (as defined below). In September 2015, Pentair plc, PISG and PFSA entered into a Second Amendment to the Credit Facility (the "Second Amendment"), which, among other things, increased the maximum aggregate availability to $2,500.0 million. Additionally, in September 2016, Pentair plc, PISG and PFSA entered into a Third Amendment to the Credit Facility (the "Third Amendment," and collectively with the First Amendment and the Second Amendment, the "Amendments"), which, among other things, increased the Leverage Ratio to the amounts specified below, and amended the definition of EBITDA (as defined below) to include earnings from discontinued operations for operations subject to a sale agreement until such disposition actually occurs.
In May 2017, we repurchased aggregate principal of certain series of outstanding notes totaling $1,659.3 million. All costs associated with the repurchases were recorded as Loss on early extinguishment of debt, including $6.5 million of unamortized deferred financing costs.
PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. PFSA uses the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. PFSA had $116.0 million of commercial paper outstanding as of September 30, 2017 and $398.7 million as of December 31, 2016, 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 Credit Facility.

14

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Our debt agreements contain certain financial covenants, the most restrictive of which are in the Credit Facility (as updated for the Amendments), including that we may not permit (i) the ratio of our consolidated debt plus synthetic lease obligations to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization, non-cash share-based compensation expense, and up to a lifetime maximum $25.0 million of costs, fees and expenses incurred in connection with certain acquisitions, investments, dispositions and the issuance, repayment or refinancing of debt, ("EBITDA") for the four consecutive fiscal quarters then ended (the "Leverage Ratio") to exceed 3.50 to 1.00 as of the last day of any period of four consecutive fiscal quarters and (ii) the ratio of our EBITDA for the four consecutive fiscal quarters then ended to our consolidated interest expense, including consolidated yield or discount accrued as to outstanding securitization obligations (if any), 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 Credit Facility provides for the calculation of EBITDA giving pro forma effect to certain acquisitions, divestitures and liquidations during the period to which such calculation relates. As of September 30, 2017, we were in compliance with all financial covenants in our debt agreements.
Total availability under the Credit Facility was $2,366.8 million as of September 30, 2017, which was limited to $1,828.4 million by the maximum Leverage Ratio in the Credit Facility's credit agreement.
In addition to the Credit Facility, we have various other credit facilities with an aggregate availability of $29.9 million, of which there were no outstanding borrowings at September 30, 2017. Borrowings under these credit facilities bear interest at variable rates.
We have $255.3 million of fixed rate senior notes maturing in September 2018. We classified this debt as long-term as of September 30, 2017 as we have the intent and ability to refinance such obligation on a long-term basis under the Credit Facility.
Debt outstanding, excluding unamortized issuance costs and discounts, at September 30, 2017 matures on a calendar year basis as follows:
 
Q4
 
 
 
 
 
 
 
In millions
2017
2018
2019
2020
2021
2022
Thereafter
Total
Contractual debt obligation maturities
$

$

$
1,225.8

$
74.0

$
103.8

$
88.3

$
19.3

$
1,511.2

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 September 30, 2017 and December 31, 2016, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $410.4 million and $475.6 million, respectively. The impact of these contracts on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) was not material for any period presented.
Gains or losses on foreign currency contracts designated as hedges are reclassified out of Accumulated Other Comprehensive Loss ("AOCI") and into Selling, general and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) upon settlement. Such reclassifications during the three and nine months ended September 30, 2017 and 2016 were not material.

15

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Net investment hedge
We have net investments in foreign subsidiaries that are subject to changes in the foreign currency exchange rate. In September 2015, we designated the €500 million 2.45% Senior Notes due 2019 (the "2019 Euro Notes") as a net investment hedge for a portion of our net investment in our Euro denominated subsidiaries. The gains/losses on the 2019 Euro Notes have been included as a component of the cumulative translation adjustment account within AOCI. As of September 30, 2017 and December 31, 2016, we had a deferred foreign currency loss of $22.5 million and a gain of $44.2 million, respectively, in AOCI 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 instruments: 
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 based on observable inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance.
The recorded amounts and estimated fair values of total debt, excluding unamortized issuance costs and discounts, were as follows:
 
September 30,
2017
 
December 31,
2016
In millions
Recorded
Amount
Fair
Value
 
Recorded
Amount
Fair
Value
Variable rate debt
$
133.2

$
133.2

 
$
976.3

$
976.3

Fixed rate debt
1,378.0

1,424.3

 
3,320.7

3,427.1

Total debt
$
1,511.2

$
1,557.5

 
$
4,297.0

$
4,403.4


16

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Financial assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows:
 
September 30, 2017
In millions
Level 1
Level 2
Level 3
Total
Recurring fair value measurements
 
 
 
 
Foreign currency contract assets
$

$
1.4

$

$
1.4

Foreign currency contract liabilities

(41.4
)

(41.4
)
Deferred compensation plan assets
42.0

6.1


48.1

Total recurring fair value measurements
$
42.0

$
(33.9
)
$

$
8.1

 
December 31, 2016
In millions
Level 1
Level 2
Level 3
Total
Recurring fair value measurements
 
 
 
 
Foreign currency contract assets
$

$
5.5

$

$
5.5

Foreign currency contract liabilities

(5.4
)

(5.4
)
Deferred compensation plan assets
41.6

6.3


47.9

Total recurring fair value measurements
$
41.6

$
6.4

$

$
48.0

Nonrecurring fair value measurements (1)
 
 
 
 
(1)
During the fourth quarter of 2016, we completed our annual intangible assets impairment review. As a result, we recorded a pre-tax non-cash impairment charge of $13.3 million for a trade name intangible in 2016. The impairment charge reduced the carrying value of the impacted trade name intangible to $0. The fair value of trade names is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.
10.
Income Taxes
We manage our affairs so that we are centrally managed and controlled in the U.K. and therefore have our tax residency in the U.K. The provision for income taxes consists of provisions for U.K. and international income taxes. We operate in an international environment with operations in various locations outside the U.K. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.
The effective income tax rate for the nine months ended September 30, 2017 was 24.3%, compared to 21.5% for 2016. We continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.
The liability for uncertain tax positions was $36.8 million and $71.1 million at September 30, 2017 and December 31, 2016, respectively. The $34.3 million reduction in uncertain tax positions between December 31, 2016 and September 30, 2017 is primarily due to the settlement of tax controversies with the Internal Revenue Service and the payment of resulting tax liabilities. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), which is consistent with our past practices.

17

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

11.
Benefit Plans
Components of net periodic benefit cost for our pension plans for the three and nine months ended September 30, 2017 and 2016 were as follows:
 
U.S. pension plans
 
Three months ended
 
Nine months ended
In millions
September 30,
2017
September 30,
2016
 
September 30,
2017
September 30,
2016
Service cost
$
2.6

$
2.8

 
$
7.8

$
8.4

Interest cost
4.1

4.1

 
12.3

12.3

Expected return on plan assets
(2.9
)
(2.9
)
 
(8.7
)
(8.6
)
Net periodic benefit cost
$
3.8

$
4.0

 
$
11.4

$
12.1

 
Non-U.S. pension plans
 
Three months ended
 
Nine months ended
In millions
September 30,
2017
September 30,
2016
 
September 30,
2017
September 30,
2016
Service cost
$
1.8

$
2.1

 
$
5.4

$
6.2

Interest cost
0.9

1.1

 
2.7

3.3

Expected return on plan assets
(0.3
)
(0.4
)
 
(0.9
)
(1.2
)
Net periodic benefit cost
$
2.4

$
2.8

 
$
7.2

$
8.3

Components of net periodic benefit cost for our other post-retirement plans for the three and nine months ended September 30, 2017 and 2016 were not material.
12.
Shareholders' Equity
Share repurchases
In December 2014, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $1.0 billion. The authorization expires on December 31, 2019. During the nine months ended September 30, 2017, we repurchased 1.5 million of our shares for $100.0 million pursuant to this authorization. As of September 30, 2017, we had $700.0 million available for share repurchases under this authorization.
Dividends payable
On December 6, 2016, the Board of Directors approved a plan to increase the 2017 annual cash dividend to $1.38, which is intended to be paid in four equal quarterly installments. Additionally, on September 19, 2017 the Board of Directors declared a quarterly cash dividend of $0.345 payable on November 3, 2017 to shareholders of record at the close of business on October 20, 2017. As a result, the balance of dividends payable included in Other current liabilities on our Consolidated Balance Sheets was $62.7 million and $61.8 million at September 30, 2017 and December 31, 2016, respectively.
13.
Segment Information
During the first quarter of 2017, we reorganized our business segments to reflect a new operating structure, resulting in a change to our reporting segments in 2017. The prior period information was recast to be comparable to the current year presentation.
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, "mark-to-market" gain/loss for pension and other post-retirement plans, impairments and other unusual non-operating items.

18

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Financial information by reportable segment is as follows:
 
Three months ended
 
Nine months ended
In millions
September 30,
2017
September 30,
2016
 
September 30,
2017
September 30,
2016
Net sales
 
 
 
 
 
Water
$
687.3

$
668.3

 
$
2,123.9

$
2,095.7

Electrical
540.6

543.1

 
1,556.0

1,608.3

Other
(1.1
)
(0.7
)
 
(4.3
)
(2.1
)
Consolidated
$
1,226.8

$
1,210.7

 
$
3,675.6

$
3,701.9

Segment income (loss)
 
 
 
 
 
Water
$
130.5

$
119.1

 
$
407.5

$
373.9

Electrical
121.5

119.6

 
337.8

344.0

Other
(20.1
)
(22.5
)
 
(74.7
)
(82.8
)
Consolidated
$
231.9

$
216.2

 
$
670.6

$
635.1

The following table presents a reconciliation of consolidated segment income to consolidated income from continuing operations before income taxes:
 
Three months ended
 
Nine months ended
In millions
September 30,
2017
September 30,
2016
 
September 30,
2017
September 30,
2016
Segment income
$
231.9

$
216.2

 
$
670.6

$
635.1

Restructuring and other
(4.9
)
(8.1
)
 
(43.2
)
(20.9
)
Intangible amortization
(24.6
)
(24.1
)
 
(73.2
)
(72.6
)
Loss on sale of business
(3.8
)

 
(3.8
)

Loss of early extinguishment of debt


 
(101.4
)

Separation costs
(9.9
)

 
(9.9
)

Net interest expense
(13.9
)
(34.3
)
 
(74.2
)
(105.9
)
Income from continuing operations before income taxes
$
174.8

$
149.7

 
$
364.9

$
435.7

14.
Commitments and Contingencies
Warranties and guarantees
In connection with the disposition of our businesses or product lines, we may agree to indemnify purchasers for various potential liabilities relating to the sold business, such as pre-closing tax, product liability, warranty, environmental, or other obligations. The subject matter, amounts and duration of any such indemnification obligations vary for each type of liability indemnified and may vary widely from transaction to transaction. Generally, the maximum obligation under such indemnifications is not explicitly stated and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.
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. During the second quarter of 2017, we recorded a liability representing the fair value of our expected future obligation for this matter.
We provide service and warranty policies on our products. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant.

19

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

The changes in the carrying amount of service and product warranties of continuing operations for the nine months ended September 30, 2017 were as follows:  
In millions
September 30,
2017
Beginning balance
$
38.9

Service and product warranty provision
44.1

Payments
(46.7
)
Acquisitions
1.1

Foreign currency translation
0.7

Ending balance
$
38.1

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 Pentair Ltd. In situations where Flow Control and Tyco were unable to obtain a release from these guarantees in connection with the spin-off of Pentair Ltd., we will indemnify Tyco for any losses it suffers as a result of such guarantees.
In disposing of assets or businesses, we often provide representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to reasonably estimate the potential liability due to the inchoate and unknown nature of these potential liabilities. However, we have no reason to believe that these uncertainties would have a material adverse effect on our financial position, results of operations or cash flows.
In the ordinary course of business, we are required to commit to bonds, letters of credit and bank guarantees that require payments to our customers for any non-performance. The outstanding face value of these instruments fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit primarily to secure our performance to third parties under self-insurance programs.
As of September 30, 2017 and December 31, 2016, the outstanding value of bonds, letters of credit and bank guarantees totaled $193.3 million and $331.0 million, respectively.
15.
Supplemental Guarantor Information
Pentair plc (the "Parent Company Guarantor") and PISG (the "Subsidiary Guarantor"), fully and unconditionally, guarantee the Notes of PFSA (the "Subsidiary Issuer"). The Subsidiary Guarantor is a Switzerland limited liability company and 100 percent-owned subsidiary of the Parent Company Guarantor. The Subsidiary Issuer is a Luxembourg private limited liability company and 100 percent-owned subsidiary of the Subsidiary Guarantor. The guarantees provided by the Parent Company Guarantor and Subsidiary Guarantor are joint and several.
The following supplemental financial information sets forth the Company's Condensed Consolidating Statement of Operations and Comprehensive Income (Loss), Condensed Consolidating Balance Sheets and Condensed Consolidating Statement of Cash Flows by relevant group within the Company: Pentair plc and PISG as the guarantors, PFSA as issuer of the debt and all other non-guarantor subsidiaries. Condensed consolidating financial information for Pentair plc, PISG and PFSA on a stand-alone basis is presented using the equity method of accounting for subsidiaries.

20

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2017
In millions
Parent
Company
Guarantor
Subsidiary
Guarantor
Subsidiary
Issuer
Non-guarantor
Subsidiaries
Eliminations
Consolidated
Total
Net sales
$

$

$

$
1,226.8

$

$
1,226.8

Cost of goods sold



771.5


771.5

Gross profit



455.3


455.3

Selling, general and administrative
4.2



230.5


234.7

Research and development



28.4


28.4

Operating income (loss)
(4.2
)


196.4


192.2

Loss (earnings) from continuing operations of investment in subsidiaries
(130.9
)
(130.7
)
(115.3
)

376.9


Other (income) expense:
 
 
 
 
 
 
Equity income of unconsolidated subsidiaries



(0.3
)

(0.3
)
Loss on sale of business



3.8


3.8

Net interest (income) expense

(0.2
)
10.3

3.8


13.9

Income (loss) from continuing operations before income taxes
126.7

130.9

105.0

189.1

(376.9
)
174.8

Provision (benefit) for income taxes
(0.4
)


48.1


47.7

Net income (loss) from continuing operations
127.1

130.9

105.0

141.0

(376.9
)
127.1

Loss from sale of discontinued operations, net of tax



(1.7
)

(1.7
)
Earnings (loss) from discontinued operations of investment in subsidiaries
(1.7
)
(1.7
)
(1.7
)

5.1


Net income (loss)
$
125.4

$
129.2

$
103.3

$
139.3

$
(371.8
)
$
125.4

Comprehensive income (loss), net of tax
 
 
 
 
 
 
Net income (loss)
$
125.4

$
129.2

$
103.3

$
139.3

$
(371.8
)
$
125.4

Changes in cumulative translation adjustment
34.5

34.5

34.5

34.5

(103.5
)
34.5

Changes in market value of derivative financial instruments, net of tax
(3.0
)
(3.0
)
(3.0
)
(3.0
)
9.0

(3.0
)
Comprehensive income (loss)
$
156.9

$
160.7

$
134.8

$
170.8

$
(466.3
)
$
156.9




21

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Nine months ended September 30, 2017
In millions
Parent
Company
Guarantor
Subsidiary
Guarantor
Subsidiary
Issuer
Non-guarantor
Subsidiaries
Eliminations
Consolidated
Total
Net sales
$

$

$

$
3,675.6

$

$
3,675.6

Cost of goods sold



2,314.8


2,314.8

Gross profit



1,360.8


1,360.8

Selling, general and administrative
0.5

0.2

0.3

729.3


730.3

Research and development



87.1


87.1

Operating income (loss)
(0.5
)
(0.2
)
(0.3
)
544.4


543.4

Loss (earnings) from continuing operations of investment in subsidiaries
(276.2
)
(276.1
)
(427.5
)

979.8


Other (income) expense:
 
 
 
 
 
 
Equity income of unconsolidated subsidiaries



(0.9
)

(0.9
)
Loss on sale of business



3.8


3.8

Loss on early extinguishment of debt


91.0

10.4


101.4

Net interest (income) expense

(0.3
)
60.6

13.9


74.2

Income (loss) from continuing operations before income taxes
275.7

276.2

275.6

517.2

(979.8
)
364.9

Provision (benefit) for income taxes
(0.4
)


89.2


88.8

Net income (loss) from continuing operations
276.1

276.2

275.6

428.0

(979.8
)
276.1

Income from discontinued operations, net of tax



1.9


1.9

Gain from sale of discontinued operations, net of tax



198.9


198.9

Earnings (loss) from discontinued operations of investment in subsidiaries
200.8

200.8

200.8


(602.4
)

Net income (loss)
$
476.9

$
477.0

$
476.4

$
628.8

$
(1,582.2
)
$
476.9

Comprehensive income (loss), net of tax
 
 
 
 
 
 
Net income (loss)
$
476.9

$
477.0

$
476.4

$
628.8

$
(1,582.2
)
$
476.9

Changes in cumulative translation adjustment
502.8

502.8

502.8

502.8

(1,508.4
)
502.8

Changes in market value of derivative financial instruments, net of tax
(2.3
)
(2.3
)
(2.3
)
(2.3
)
6.9

(2.3
)
Comprehensive income (loss)
$
977.4

$
977.5

$
976.9

$
1,129.3

$
(3,083.7
)
$
977.4


22

Table of Contents
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)

Condensed Consolidating Balance Sheet
September 30, 2017
In millions
Parent
Company
Guarantor
Subsidiary
Guarantor
Subsidiary
Issuer
Non-guarantor
Subsidiaries
Eliminations
Consolidated
Total
Assets
Current assets
 
 
 
 
 
 
Cash and cash equivalents
$
0.1

$

$
0.3

$
108.1

$

$
108.5

Accounts and notes receivable, net
2.5



765.7


768.2

Inventories



579.2


579.2

Other current assets
2.3

2.0

7.3

250.2

(11.9
)
249.9

Total current assets
4.9

2.0

7.6

1,703.2

(11.9
)
1,705.8

Property, plant and equipment, net



547.1


547.1

Other assets
 
 
 
 
 
 
Investments in subsidiaries
4,993.2

4,880.7

6,989.7


(16,863.6
)

Goodwill



4,343.6


4,343.6

Intangibles, net



1,607.3


1,607.3

Other non-current assets
121.4

110.9

592.2

1,391.3

(1,790.8
)
425.0

Total other assets
5,114.6

4,991.6

7,581.9

7,342.2

(18,654.4
)
6,375.9

Total assets
$
5,119.5

$
4,993.6

$
7,589.5

$
9,592.5

$
(18,666.3
)
$
8,628.8

Liabilities and Equity
Current liabilities
 
 
 
 
 
 
Accounts payable
$
1.3

$

$

$
382.1

$

$
383.4

Employee compensation and benefits
0.3



160.2


160.5

Other current liabilities
74.4

0.4

4.7

461.1

(11.9
)
528.7

Total current liabilities
76.0

0.4

4.7

1,003.4

(11.9
)
1,072.6

Other liabilities
 
 
 
 
 
 
Long-term debt


2,704.3

589.9

(1,790.8
)
1,503.4

Pension and other post-retirement compensation and benefits



275.1


275.1

Deferred tax liabilities



549.5


549.5

Other non-current liabilities
34.9



184.7