ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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," "positioned," "strategy," "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 ability to successfully complete the sale of the Valves & Controls business on anticipated terms and timetable: overall global economic and business conditions, including worldwide demand for oil and gas; the ability to achieve the benefits of our restructuring plans; the ability to successfully identify, finance, complete and integrate acquisitions; competition and pricing pressures in the markets we serve; the strength of housing and related markets; volatility in currency exchange rates and commodity prices; inability to generate savings from excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices; increased risks associated with operating foreign businesses; the ability to deliver backlog and win future project work; failure of markets to accept new product introductions and enhancements; the impact of changes in laws and regulations, including those that limit U.S. tax benefits; the outcome of litigation and governmental proceedings; and the ability to achieve our long-term strategic operating goals. Additional information concerning these and other factors is contained in our filings with the U.S. Securities and Exchange Commission, including in Item 1A of this Annual Report on Form 10-K. All forward-looking statements speak only as of the date of this report. Pentair plc assumes no obligation, and disclaims any obligation, to update the information contained in this report.
Overview
Pentair plc is a focused diversified industrial manufacturing company comprising three reporting segments: Water Quality Systems, Flow & Filtration Solutions and Technical Solutions. We classify our operations into business segments based primarily on types of products offered and markets served. For the year ended
December 31, 2016
, Water Quality Systems, Flow & Filtration Solutions and Technical Solutions accounted for
29 percent
,
28 percent
and
43 percent
of total revenues, respectively.
In December 2013, the Company's Board of Directors approved changing the Company's jurisdiction of organization from Switzerland to Ireland. At an extraordinary meeting of shareholders on May 20, 2014, Pentair Ltd. shareholders voted in favor of a reorganization proposal pursuant to which Pentair Ltd. would merge into Pentair plc and all Pentair Ltd. common shares would be cancelled and all holders of such shares would receive ordinary shares of Pentair plc on a one-to-one basis. The reorganization transaction was completed on June 3, 2014, at which time Pentair plc replaced Pentair Ltd. as the ultimate parent company (the "Redomicile"). Shares of Pentair plc began trading on the New York Stock Exchange ("NYSE") on June 3, 2014 under the symbol "PNR", the same symbol under which Pentair Ltd. shares were previously traded.
Although our jurisdiction of organization is Ireland, we manage our affairs so that we are centrally managed and controlled in the United Kingdom (the "U.K.") and therefore have our tax residency in the U.K.
Our former parent company, Pentair Ltd., took its form on September 28, 2012 as a result of a reverse acquisition (the "Merger") involving Pentair, Inc. and an indirect, wholly-owned subsidiary of Flow Control (defined below), with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of Pentair Ltd. "Flow Control" refers to Pentair Ltd. prior the Merger. Prior to the Merger, Tyco International Ltd. ("Tyco") engaged in an internal restructuring whereby it transferred to Flow Control certain assets related to the flow control business of Tyco, and Flow Control assumed from Tyco certain liabilities related to the flow control business of Tyco. On September 28, 2012 prior to the Merger, Tyco effected a spin-off of Flow Control through the pro-rata distribution of
100%
of the outstanding ordinary shares of Flow Control to Tyco's shareholders (the "Distribution"), resulting in the distribution of approximately
110.9 million
of our ordinary shares to Tyco's shareholders. The Merger was accounted for as a reverse acquisition under the purchase method of accounting with Pentair, Inc. treated as the acquirer.
On January 30, 2014, we acquired, as part of Water Quality Systems, the remaining 19.9 percent ownership interest in two entities, a U.S. entity and an international entity (collectively, Pentair Residential Filtration or "PRF"), from GE Water & Process Technologies (a unit of General Electric Company) ("GE") for $134.3 million in cash. Prior to the acquisition, we held a 80.1 percent ownership equity interest in PRF, representing our and GE's respective global water softener and residential water filtration businesses.
On July 28, 2014, our Board of Directors approved a decision to exit our Water Transport business in Australia. The results of the Water Transport business have been presented as discontinued operations and the assets and liabilities of the Water Transport business have been reclassified as held for sale for all periods presented. During 2014, we recognized an impairment charge related to allocated amounts of goodwill, intangible assets, property, plant & equipment and other non-current assets totaling
$380.1 million
, net of tax, representing our estimated loss on disposal of the Water Transport business. The sale of the Water Transport business was completed in 2015.
On September 18, 2015, we acquired, as part of Technical Solutions, all of the outstanding shares of capital stock of ERICO Global Company ("ERICO") for approximately
1.8 billion
(the "ERICO Acquisition"). ERICO is a leading global manufacturer and marketer of engineered electrical and fastening products for electrical, mechanical and civil applications. ERICO has employees in 30 countries across the world with recognized brands including CADDY fixing, fastening and support products; ERICO electrical grounding, bonding and connectivity products and LENTON engineered systems.
On August 18, 2016, we entered into a share purchase agreement to sell our Valves & Controls business to Emerson Electric Co. for a purchase price of
$3.15 billion
in cash, subject to customary adjustments. We believe the sale will be completed by the end of the first quarter of 2017, subject to customary regulatory approvals and closing conditions. The results of the Valves and Controls business have been presented as discontinued operations and the related assets and liabilities have been reclassified as held for sale for all periods presented. The Valves & Controls business was previously disclosed as a stand-alone reporting segment.
Key trends and uncertainties regarding our existing business
The following trends and uncertainties affected our financial performance in
2016
and
2015
, and will likely impact our results in the future:
|
|
•
|
Despite the favorable long-term outlook for our end-markets, we experience differing levels of volatility depending on the end-market and may continue to do so over the medium and longer term. During 2015 and 2016, our core sales have been challenged by broad-based industrial capital expenditure and maintenance deferrals. We expect this trend to continue into 2017.
|
|
|
•
|
We experienced declines within our industrial and energy businesses. We expect headwinds in the industrial and energy businesses to continue and oil prices to remain depressed into 2017.
|
|
|
•
|
We initiated restructuring actions to offset the negative earnings impact of core revenue decline and foreign exchange. We expect to continue these actions into 2017 and these actions will contribute to margin growth in 2017.
|
|
|
•
|
In late 2015 and continuing through 2016, our results were negatively impacted due to the strengthening of the U.S. dollar against most key global currencies. We expect this trend to continue into 2017.
|
|
|
•
|
We have identified specific product and geographic market opportunities that we find attractive and continue to pursue, both within and outside the United States. We are reinforcing our businesses to more effectively address 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.
|
|
|
•
|
We have experienced material and other cost inflation. We strive for productivity improvements, and we implement increases in selling prices to help mitigate this inflation. We expect the current economic environment will result in continuing price volatility for many of our raw materials, and we are uncertain as to the timing and impact of these market changes.
|
In
2017
, our operating objectives include the following:
|
|
•
|
Reducing long-term debt and overall leverage through improved cash flow performance and the pending sale of the Valves & Controls business;
|
|
|
•
|
Driving operating excellence through lean enterprise initiatives, with specific focus on sourcing and supply management, cash flow management and lean operations;
|
|
|
•
|
Achieving differentiated revenue growth through new products and global and market expansion;
|
|
|
•
|
Optimizing our technological capabilities to increasingly generate innovative new products; and
|
|
|
•
|
Focusing on developing global talent in light of our global presence.
|
CONSOLIDATED RESULTS OF OPERATIONS
The consolidated results of operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
% / point change
|
In millions
|
2016
|
2015
|
2014
|
|
2016 vs 2015
|
2015 vs 2014
|
Net sales
|
$
|
4,890.0
|
|
$
|
4,616.4
|
|
$
|
4,666.8
|
|
|
5.9
|
%
|
(1.1
|
)%
|
Cost of goods sold
|
3,095.9
|
|
3,017.6
|
|
3,046.3
|
|
|
2.6
|
%
|
(0.9
|
)%
|
Gross profit
|
1,794.1
|
|
1,598.8
|
|
1,620.5
|
|
|
12.2
|
%
|
(1.3
|
)%
|
% of net sales
|
36.7
|
%
|
34.6
|
%
|
34.7
|
%
|
|
2.1 pts
|
|
(0.1) pts
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
979.3
|
|
884.0
|
|
985.6
|
|
|
10.8
|
%
|
(10.3
|
)%
|
% of net sales
|
20.0
|
%
|
19.1
|
%
|
21.1
|
%
|
|
0.9 pts
|
|
(2.0) pts
|
|
Research and development
|
114.1
|
|
98.7
|
|
96.4
|
|
|
15.6
|
%
|
2.4
|
%
|
% of net sales
|
2.3
|
%
|
2.1
|
%
|
2.1
|
%
|
|
0.2 pts
|
|
—
|
|
|
|
|
|
|
|
|
Operating income
|
700.7
|
|
616.1
|
|
538.5
|
|
|
13.7
|
%
|
14.4
|
%
|
% of net sales
|
14.3
|
%
|
13.3
|
%
|
11.5
|
%
|
|
1.0 pts
|
|
1.8 pts
|
|
|
|
|
|
|
|
|
Loss on sale of businesses, net
|
3.9
|
|
3.2
|
|
0.2
|
|
|
21.9
|
%
|
N.M.
|
|
Net interest expense
|
140.1
|
|
101.9
|
|
68.6
|
|
|
37.5
|
%
|
48.5
|
%
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
561.0
|
|
512.5
|
|
470.9
|
|
|
9.5
|
%
|
8.8
|
%
|
Provision for income taxes
|
109.4
|
|
115.4
|
|
114.3
|
|
|
(5.2
|
)%
|
1.0
|
%
|
Effective tax rate
|
19.5
|
%
|
22.5
|
%
|
24.3
|
%
|
|
(3.0) pts
|
|
(1.8) pts
|
|
N.M. Not Meaningful
Net sales
The components of the consolidated net sales change were as follows:
|
|
|
|
|
|
|
|
2016 vs 2015
|
|
2015 vs 2014
|
Volume
|
(1.7
|
)%
|
|
0.5
|
%
|
Price
|
0.3
|
|
|
0.6
|
|
Core growth
|
(1.4
|
)
|
|
1.1
|
|
Acquisition
|
8.1
|
|
|
3.1
|
|
Currency
|
(0.8
|
)
|
|
(5.3
|
)
|
Total
|
5.9
|
%
|
|
(1.1
|
)%
|
The
5.9
percent
increase
in consolidated net sales in
2016
from
2015
was primarily the result of:
|
|
•
|
sales of
$516.1 million
in
2016
as a result of the ERICO Acquisition, compared to sales of
$147.0 million
in
2015
; and
|
|
|
•
|
core sales growth in Water Quality Systems, primarily as the result of increased volume in the United States and Canada.
|
These
increase
s were partially offset by:
|
|
•
|
continued slowdown in capital spending, particularly in our industrial and energy businesses, driving core sales declines in Flow & Filtration Solutions and Technical Solutions;
|
|
|
•
|
slowing economic activity in certain developing regions, including China and Brazil; and
|
|
|
•
|
a strong U.S. dollar causing unfavorable foreign currency effects.
|
The
1.1
percent
decrease
in consolidated net sales in
2015
from
2014
was primarily the result of:
|
|
•
|
a strong U.S. dollar causing unfavorable foreign currency effects;
|
|
|
•
|
a slowdown in industrial capital spending, particularly in our industrial and infrastructure businesses; and
|
|
|
•
|
slowing economic activity in China, Brazil and other developing markets.
|
These
decrease
s were partially offset by:
|
|
•
|
sales of
$147.0 million
as a result of the ERICO Acquisition;
|
|
|
•
|
core sales growth in Water Quality Systems and Technical Solutions, primarily as the result of increased volume in the United States and Canada; and
|
|
|
•
|
core sales growth in our food & beverage and residential & commercial businesses.
|
Gross profit
The
2.1
percentage point
increase
in gross profit as a percentage of sales in
2016
from
2015
was primarily the result of:
|
|
•
|
higher sales volumes, which resulted in increased leverage on fixed expenses included in cost of goods sold;
|
|
|
•
|
higher contribution margin as a result of savings generated from our Pentair Integrated Management System ("PIMS") initiatives including lean and supply management practices; and
|
|
|
•
|
a decrease in cost of goods sold of $35.7 million in 2016 compared to 2015 as a result of inventory fair value step-up recorded as part of the Technical Solutions acquisitions in 2015.
|
These
increase
s were partially offset by:
|
|
•
|
inflationary increases related to raw materials and labor costs.
|
The
0.1
percentage point
decrease
in gross profit as a percentage of sales in
2015
from
2014
was primarily the result of:
|
|
•
|
an increase in cost of goods sold of $35.7 million in 2015 compared to 2014 as a result of inventory fair value step-up recorded as part of the Technical Solutions acquisitions in 2015; and
|
|
|
•
|
inflationary increases related to raw materials and labor costs.
|
These decreases were partially offset by:
|
|
•
|
higher contribution margin as a result of savings generated from our PIMS initiatives including lean and supply management practices.
|
Selling, general and administrative ("SG&A")
The
0.9
percentage point
increase
in SG&A expense as a percentage of sales in
2016
from
2015
and was driven by:
|
|
•
|
"mark-to-market" actuarial losses related to pension and other post-retirement benefit plans of $4.2 million in 2016, compared to "mark-to-market" actuarial gains of
$23.0 million
in 2015;
|
|
|
•
|
an increase in intangible asset amortization as a result of the ERICO Acquisition that occurred at the end of the third quarter in 2015;
|
|
|
•
|
a non-cash impairment charge of $13.3 million related to a trade name intangible asset in Technical Solutions; and
|
|
|
•
|
increased investment in sales and marketing to drive growth.
|
These
increase
s were partially offset by:
|
|
•
|
restructuring costs of
$24.5 million
in
2016
, compared to
$41.3 million
in
2015
;
|
|
|
•
|
deal related costs and expenses of $14.3 million in 2015, which did not occur in 2016; and
|
|
|
•
|
savings generated from back-office consolidation, reduction in personnel and other lean initiatives.
|
The
2.0
percentage point
decrease
in SG&A expense as a percentage of sales in
2015
from
2014
and was driven by the following:
|
|
•
|
"mark-to-market" actuarial gains related to pension and other post-retirement benefit plans of $23.0 million in 2015, compared to "mark-to-market" actuarial losses of $31.5 million in 2014;
|
|
|
•
|
costs of $10.3 million incurred in 2014 as a result of the Redomicile of the Company from Switzerland to Ireland, which did not occur in 2015; and
|
|
|
•
|
cost savings generated from back-office consolidation, reduction in personnel and other lean initiatives.
|
These
decrease
s were partially offset by:
|
|
•
|
deal related costs and expenses of $14.3 million in 2015; and
|
|
|
•
|
lower sales volume and the resultant loss of leverage on fixed operating expenses.
|
Net interest expense
The
37.5
percent
increase
in net interest expense in
2016
from
2015
was primarily the result of:
|
|
•
|
the impact of higher debt levels during 2016, compared to 2015, primarily as the result of the September 2015 issuance of senior notes used to finance the ERICO Acquisition; and
|
|
|
•
|
increased overall interest rates in effect on our outstanding debt.
|
The
48.5
percent
increase
in net interest expense in
2015
from
2014
was primarily the result of:
|
|
•
|
the amortization of $10.8 million of debt issuance costs during 2015 related to financing commitments for a senior unsecured bridge loan facility established (and subsequently terminated upon issuance of the September 2015 issuance of senior notes discussed in Liquidity and Capital Resources below) in connection with the ERICO acquisition; and
|
|
|
•
|
the impact of higher debt levels during 2015, compared to 2014, primarily as the result of the September 2015 issuance of senior notes used to finance the ERICO Acquisition.
|
Provision for income taxes
The
3.0
percentage point
decrease
in the effective tax rate in
2016
from
2015
was primarily due to:
|
|
•
|
the mix of global earnings toward lower tax jurisdictions; and
|
|
|
•
|
the unfavorable tax impact of transaction costs in 2015 related to the ERICO Acquisition.
|
The
1.8
percentage point
decrease
in the effective tax rate in
2015
from
2014
was primarily due to:
|
|
•
|
the mix of global earnings toward lower tax jurisdictions; and
|
|
|
•
|
non-recurring withholding taxes during 2014 which did not recur in 2015.
|
The
decrease
was partially offset by:
|
|
•
|
the unfavorable tax impact of transaction costs in 2015 related to the ERICO Acquisition.
|
SEGMENT RESULTS OF OPERATIONS
This summary that follows provides a discussion of the results of operations of each of our three reportable segments (Water Quality Systems, Flow & Filtration Solutions and Technical Solutions). Each of these segments comprises various product offerings that serve multiple end markets.
We evaluate performance based on sales and segment income and use a variety of ratios to measure performance of our reporting segments. During the third quarter of 2015, we revised our definition of segment income to exclude intangible amortization to better reflect how management assesses performance of the business. Segment income 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.
Water Quality Systems
The net sales and segment income for Water Quality Systems were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
% / point change
|
In millions
|
2016
|
2015
|
2014
|
|
2016 vs 2015
|
2015 vs 2014
|
Net sales
|
$
|
1,428.2
|
|
$
|
1,381.5
|
|
$
|
1,356.4
|
|
|
3.4
|
%
|
1.9
|
%
|
Segment income
|
313.3
|
|
281.8
|
|
253.3
|
|
|
11.2
|
%
|
11.3
|
%
|
% of net sales
|
21.9
|
%
|
20.4
|
%
|
18.7
|
%
|
|
1.5 pts
|
|
1.7 pts
|
|
Net sales
The components of the change in Water Quality Systems net sales were as follows:
|
|
|
|
|
|
|
|
2016 vs 2015
|
|
2015 vs 2014
|
Volume
|
2.8
|
%
|
|
4.2
|
%
|
Price
|
0.9
|
|
|
0.8
|
|
Core growth
|
3.7
|
|
|
5.0
|
|
Currency
|
(0.3
|
)
|
|
(3.1
|
)
|
Total
|
3.4
|
%
|
|
1.9
|
%
|
The
3.4%
percent
increase
in Water Quality Systems sales in
2016
from
2015
was primarily the result of:
|
|
•
|
core sales growth related to higher sales of certain pool products primarily serving North American residential housing in 2016; and
|
|
|
•
|
selective increases in selling prices to mitigate inflationary cost increases.
|
These
increase
s were partially offset by:
|
|
•
|
a strong U.S. dollar causing unfavorable foreign currency effects; and
|
|
|
•
|
core sales declines in Western Europe, Asia and in certain developing regions.
|
The
1.9%
percent
increase
in Water Quality Systems sales in
2015
from
2014
was primarily the result of:
|
|
•
|
core sales growth related to higher sales of certain pool products primarily serving North American residential housing in 2015;
|
|
|
•
|
core sales growth within our residential & commercial and food & beverage businesses; and
|
|
|
•
|
selective increases in selling prices to mitigate inflationary cost increases.
|
These
increase
were partially offset by:
|
|
•
|
a strong U.S. dollar causing unfavorable foreign currency effects; and
|
|
|
•
|
decreased sales in Western Europe and in the developing regions of Brazil and Latin America.
|
Segment income
The components of the change in Water Quality Systems segment income from the prior period were as follows:
|
|
|
|
|
|
|
2016
|
2015
|
Growth
|
0.6
|
pts
|
0.3
|
pts
|
Inflation
|
(0.9
|
)
|
(1.0
|
)
|
Productivity/Price
|
1.8
|
|
2.4
|
|
Total
|
1.5
|
pts
|
1.7
|
pts
|
The
1.5
percentage point
increase
in segment income for Water Quality Systems as a percentage of net sales in
2016
from
2015
was primarily the result of:
|
|
•
|
favorable material savings and product mix offsetting inflation;
|
|
|
•
|
selective increases in selling prices to mitigate inflationary cost increases; and
|
|
|
•
|
cost savings generated from PIMS initiatives including lean and supply management practices.
|
These
increase
s were partially offset by:
|
|
•
|
inflationary increases related to labor costs and certain raw materials; and
|
|
|
•
|
continued growth investments in research & development and sales & marketing.
|
The
1.7
percentage point
increase
in segment income for Water Quality Systems as a percentage of net sales in
2015
from
2014
was primarily the result of:
|
|
•
|
price increases more than offsetting inflationary cost increases; and
|
|
|
•
|
cost savings generated from back-office consolidation, reduction in personnel and other lean initiatives.
|
These
increase
s were partially offset by:
|
|
•
|
inflationary increases related to labor costs and certain raw materials.
|
Flow & Filtration Solutions
The net sales and segment income for Flow & Filtration Solutions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
% / point change
|
In millions
|
2016
|
2015
|
2014
|
|
2016 vs 2015
|
2015 vs 2014
|
Net sales
|
$
|
1,363.1
|
|
$
|
1,441.6
|
|
$
|
1,603.1
|
|
|
(5.4
|
)%
|
(10.1
|
)%
|
Segment income
|
180.7
|
|
187.2
|
|
201.3
|
|
|
(3.5
|
)%
|
(7.0
|
)%
|
% of net sales
|
13.3
|
%
|
13.0
|
%
|
12.6
|
%
|
|
0.3 pts
|
|
0.4 pts
|
|
Net sales
The components of the change in Flow & Filtration Solutions net sales were as follows:
|
|
|
|
|
|
|
|
2016 vs 2015
|
|
2015 vs 2014
|
Volume
|
(5.6
|
)%
|
|
(4.6
|
)%
|
Price
|
0.8
|
|
|
1.0
|
|
Core growth
|
(4.8
|
)
|
|
(3.6
|
)
|
Currency
|
(0.6
|
)
|
|
(6.5
|
)
|
Total
|
(5.4
|
)%
|
|
(10.1
|
)%
|
The
5.4
percent
decrease
in Flow & Filtration Solutions sales in
2016
from
2015
was primarily the result of:
|
|
•
|
continued slowdown in industrial capital spending, driving core sales declines in our industrial business;
|
|
|
•
|
core sales declines in the food & beverage business due mainly to weak irrigation sales and lower project sales;
|
|
|
•
|
continued sales declines in China, Southeast Asia and Brazil as the result of economic uncertainty; and
|
|
|
•
|
a strong U.S. dollar causing unfavorable foreign currency effects.
|
These
decrease
s were partially offset by:
|
|
•
|
core sales growth related to higher sales of pump and filtration solutions serving the infrastructure business;
|
|
|
•
|
core growth in the Middle East; and
|
|
|
•
|
selective increases in selling prices to mitigate inflationary cost increases.
|
The
10.1
percent
decrease
in Flow & Filtration Solutions sales in
2015
from
2014
was primarily the result of:
|
|
•
|
decrease in core sales due to significant declines in the global agricultural industry, broad-based slowing of global capital spending and customer inventory de-stocking;
|
|
|
•
|
decreased sales volume related to the loss of a customer in the residential retail business during the second half of 2014; and
|
|
|
•
|
a strong U.S. dollar causing unfavorable foreign currency effects.
|
These
decrease
s were partially offset by:
|
|
•
|
selective increases in selling prices to mitigate inflationary cost increases;
|
|
|
•
|
core sales growth in our food & beverage business; and
|
|
|
•
|
core growth in developing regions, including Eastern Europe and Southeast Asia.
|
Segment income
The components of the change in Flow & Filtration Solutions segment income from the prior period were as follows:
|
|
|
|
|
|
|
2016
|
2015
|
Growth
|
(1.5
|
) pts
|
(2.6
|
) pts
|
Inflation
|
(1.1
|
)
|
(1.4
|
)
|
Productivity/Price
|
2.9
|
|
4.4
|
|
Total
|
0.3
|
pts
|
0.4
|
pts
|
The
0.3
percentage point
increase
in segment income for Flow & Filtration Solutions as a percentage of net sales in
2016
from
2015
was primarily the result of:
|
|
•
|
selective increases in selling prices to mitigate inflationary cost increases;
|
|
|
•
|
savings driven from cost-out actions; and
|
|
|
•
|
savings generated from our PIMS initiatives, including lean and supply management practices.
|
These
increase
s were partially offset by:
|
|
•
|
lower core sales volumes, which resulted in decreased leverage on operating expenses;
|
|
|
•
|
negative product mix and pricing pressure; and
|
|
|
•
|
inflationary increases related to labor and certain raw materials.
|
The
0.4
percentage point
increase
in segment income for Flow & Filtration Solutions as a percentage of net sales in
2015
from
2014
was primarily the result of:
|
|
•
|
price increases more than offsetting inflationary cost increases;
|
|
|
•
|
savings driven from cost-out actions; and
|
|
|
•
|
savings generated from our PIMS initiatives, including lean and supply management practices.
|
These
increase
s were partially offset by:
|
|
•
|
lower core sales volumes, which resulted in decreased leverage on operating expenses; and
|
|
|
•
|
inflationary increases related to labor and certain raw materials.
|
Technical Solutions
The net sales and segment income for Technical Solutions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
% / point change
|
In millions
|
2016
|
2015
|
2014
|
|
2016 vs 2015
|
2015 vs 2014
|
Net sales
|
$
|
2,116.0
|
|
$
|
1,809.3
|
|
$
|
1,728.1
|
|
|
17.0
|
%
|
4.7
|
%
|
Segment income
|
447.2
|
|
395.0
|
|
378.1
|
|
|
13.2
|
%
|
4.5
|
%
|
% of net sales
|
21.1
|
%
|
21.8
|
%
|
21.9
|
%
|
|
(0.7) pts
|
|
(0.1) pts
|
|
Net sales
The components of the change in Technical Solutions net sales were as follows:
|
|
|
|
|
|
|
|
2016 vs 2015
|
|
2015 vs 2014
|
Volume
|
(2.1
|
)%
|
|
2.2
|
%
|
Price
|
(0.4
|
)
|
|
0.1
|
|
Core growth
|
(2.5
|
)
|
|
2.3
|
|
Acquisition
|
20.6
|
|
|
8.5
|
|
Currency
|
(1.1
|
)
|
|
(6.1
|
)
|
Total
|
17.0
|
%
|
|
4.7
|
%
|
The
17.0
percent
increase
in Technical Solutions sales in
2016
from
2015
was primarily the result of:
|
|
•
|
sales of
$516.1 million
in
2016
as a result of the ERICO Acquisition, compared to sales of
$147.0 million
in
2015
; and
|
|
|
•
|
core growth in our industrial and residential & commercial businesses.
|
These
increase
s were partially offset by:
|
|
•
|
continued slowdown in capital spending, particularly in the energy and infrastructure businesses, driving core sales declines; and
|
|
|
•
|
a strong U.S. dollar causing unfavorable foreign currency effects.
|
The
4.7
percent
increase
in Technical Solutions sales in
2015
from
2014
was primarily the result of:
|
|
•
|
sales of
$147.0 million
as a result of the ERICO Acquisition;
|
|
|
•
|
core growth in our residential & commercial and energy businesses; and
|
|
|
•
|
higher project core sales volume in the U.S. and Canada.
|
These
increase
s were partially offset by:
|
|
•
|
a strong U.S. dollar causing unfavorable foreign currency effects;
|
|
|
•
|
lower core sales volumes in our infrastructure business, primarily due to broad-based slowing of global capital spending; and
|
|
|
•
|
a decrease in demand for products in developing regions.
|
Segment income
The components of the change in Technical Solutions segment income from the prior period were as follows:
|
|
|
|
|
|
|
2015
|
2014
|
Growth/Acquisition
|
(1.0
|
) pts
|
(0.9
|
) pts
|
Inflation
|
(1.1
|
)
|
(1.1
|
)
|
Productivity/Price
|
1.4
|
|
1.9
|
|
Total
|
(0.7
|
) pts
|
(0.1
|
) pts
|
The
0.7
percentage point
decrease
in segment income for Technical Solutions as a percentage of net sales in
2016
from
2015
was primarily the result of:
|
|
•
|
lower margin project sales not offsetting the decline in higher margin product sales; and
|
|
|
•
|
inflationary increases related to labor costs and certain raw materials.
|
These
decrease
s were partially offset by:
|
|
•
|
higher core sales in our industrial and residential & commercial businesses, which resulted in increased leverage on operating expenses; and
|
|
|
•
|
strong contribution and integration synergies as a result of the ERICO Acquisition.
|
The
0.1
percentage point
decrease
in segment income for Technical Solutions as a percentage of sales in
2015
from
2014
was primarily the result of:
|
|
•
|
high margin project sales in 2014 that did not recur in 2015;
|
|
|
•
|
lower core sales volumes in our infrastructure business, which resulted in decreased leverage on operating expenses; and
|
|
|
•
|
inflationary increases related to labor costs and certain raw materials.
|
These
decrease
s were partially offset by:
|
|
•
|
higher core sales volumes in our energy and commercial businesses, which resulted in increased leverage on operating expenses; and
|
|
|
•
|
selective increases in selling prices to mitigate inflationary cost increases.
|
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. We have grown our businesses in significant part in the past through acquisitions financed by credit provided under our revolving credit facilities and from time to time, by private or public debt issuance. Our primary revolving credit facilities have generally been adequate for these purposes, although we have negotiated additional credit facilities as needed to allow us to complete acquisitions. We intend to issue commercial paper to fund our financing needs on a short-term basis and to use our revolving credit facility as back-up liquidity to support commercial paper.
We are focusing on increasing our cash flow and repaying existing debt, while continuing to fund our research and development, marketing and capital investment initiatives. Our intent is to maintain investment grade ratings and a solid liquidity position.
We experience seasonal cash flows primarily due to seasonal demand in a number of markets within Flow & Filtration Solutions and Water Quality Systems. We generally borrow in the first quarter of our fiscal year for operational purposes, which usage reverses in the second quarter as the seasonality of our businesses peaks. End-user demand for pool and certain pumping equipment follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales spike 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 heavy flooding and droughts. Additionally, Technical Solutions generally experiences increased demand for thermal protection products and services during the fall and winter months in the Northern Hemisphere.
Operating activities
Cash provided by operating activities of continuing operations was
$702.4 million
in
2016
, or
$104.7 million
higher
than in
2015
. The
increase
in cash provided by operating activities from continuing operations was due primarily to a $
122.6 million
increase in
Net income from continuing operations
, net of the following non-cash items: depreciation and amortization, loss on sale of businesses, trade name impairment and pension and other post-retirement expense.
Cash provided by operating activities from continuing operations was
$597.7 million
in
2015
, or
$78.3 million
lower
than in
2014
. The
decrease
in cash provided by operating activities from continuing operations was due primarily to changes in non-cash pension and other post-retirement expenses and increases in net working capital during 2015.
Investing activities
Net cash
used for
investing activities of continuing operations was
$123.3 million
in
2016
, compared to
$2,003.6 million
in
2015
and
$93.9 million
in
2014
. The following investing activities impacted our cash flow:
Acquisitions
In November 2016, we paid cash of
$25.0 million
to acquire a business as part of Water Quality Systems.
In 2015, we paid cash of $1,806.3 million, net of cash acquired, to acquire ERICO Global Company during the third quarter and cash of $96.0 million, net of cash acquired, to acquire Nuheat Industries Limited ("Nuheat") during the second quarter, both as part of Technical Solutions. During the fourth quarter, we paid an additional $0.9 million related to the Nuheat acquisition in settlement of a working capital adjustment.
In December 2014, we paid cash of $7.5 million and $4.8 million to acquire businesses as part of Water Quality Systems and Technical Solutions, respectively.
Capital expenditures
Capital expenditures in
2016
,
2015
and
2014
were
$117.8 million
,
$91.3 million
and
$83.7 million
, respectively. We anticipate capital expenditures for fiscal
2017
to be approximately $100 million, primarily for capacity expansions of manufacturing facilities located in our low-cost countries, developing new products and general maintenance.
Financing activities
Net cash
used for
financing activities was
$600.1 million
in
2016
. Cash used for financing activities in 2016 was primarily due to net repayments of commercial paper and revolving long-term debt and payment of dividends.
Net cash
provided by
financing activities was
$1,286.3 million
in
2015
. Cash provided by financing activities in 2015 was primarily due to cash proceeds received from the September 2015 issuance of senior notes (discussed below), partially offset by share repurchases, repayment of $350.0 million of senior notes due 2015 and payment of dividends.
Net cash
used for
financing activities was
$995.1 million
in
2014
. Cash used for financing activities in 2014 included share repurchases, payments of dividends and the purchase of the remaining noncontrolling interest in a business, partially offset by net receipts of commercial paper and revolving long-term debt to fund our operations in the normal course of business.
In September 2015, Pentair plc, Pentair Finance S.A. ("PFSA") and Pentair Investments Switzerland GmbH ("PISG"), a 100-percent owned subsidiary of Pentair plc and the 100-percent owner of PFSA, completed public offerings (the "September 2015 Offerings") of
$500.0 million
aggregate principal amount of PFSA's
2.90%
Senior Notes due
2018
,
$400.0 million
aggregate principal amount of PFSA's
3.625%
Senior Notes due
2020
,
$250.0 million
aggregate principal amount of PFSA's
4.65%
Senior Notes due
2025
and
€500.0 million
aggregate principal amount of PFSA's
2.45%
Senior Notes due
2019
, all of which are guaranteed as to payment by Pentair plc and PISG. Pentair plc used the net proceeds from the September 2015 Offerings to finance the ERICO Acquisition.
The Senior Notes issued in the September 2015 Offerings,
1.875%
Senior Notes due
2017
,
2.65%
Senior Notes due
2019
, $373.0 million of the
5.00%
Senior Notes due
2021
and
3.15%
Senior Notes due
2022
issued by PFSA and $127.0 million of the
5.00%
Senior Notes due
2021
issued by Pentair, Inc. (collectively, the "Notes"), are guaranteed as to payment by Pentair plc and PISG.
In October 2014, Pentair plc, PISG, 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 to
$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 Second Amendment, the "Amendments"), which, among other things, increased the maximum Leverage Ratio to the amounts specified below, and amended the definition of EBITDA to include earnings from discontinued operations subject to a sale agreement until such disposition actually occurs.
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. As of
December 31, 2016
and
2015
, we had
$398.7
and
$179.5
, respectively, of commercial paper outstanding, all of which was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility.
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, 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 (a)
4.50
to
1.00
as of the last day of any period of four consecutive fiscal quarters ending on September 30, 2016; (b)
4.50
to
1.00
as of the last day of the period of four consecutive fiscal quarters ending on December 31, 2016; (c)
4.25
to
1.00
as of the last day of the period of four consecutive fiscal quarters ending on March 31, 2017; (d)
4.00
to
1.00
as of the last day of the period of four consecutive fiscal quarters ending on June 30, 2017; and (e)
3.50
to
1.00
as of the last day of the period of four consecutive fiscal quarters ending thereafter, 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
December 31, 2016
, we were in compliance with all financial covenants in our debt agreements.
Total availability under the Credit Facility was
$1,524.5 million
as of
December 31, 2016
, which was limited to
$803.5 million
by the 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
$49.4 million
, of which there were
no
outstanding borrowings at
December 31, 2016
. Borrowings under these credit facilities bear interest at variable rates.
As of
December 31, 2016
, we had
$122.4 million
of cash held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.
We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders quarterly. We believe we have the ability and sufficient capacity to meet these cash requirements by using available cash and internally generated funds and to borrow under our committed and uncommitted credit facilities.
Further, we plan to utilize a portion of the proceeds from the sale of our Valves & Controls business to retire a significant portion of outstanding debt, and thus reduce our future contractual obligations. We believe the sale of the Valves & Controls business will be completed by the end of the first quarter of 2017, subject to customary regulatory approvals and closing conditions.
Dividends
On December 6, 2016, the Board of Directors declared a quarterly cash dividend of
$0.345
that was paid on February 10, 2017 to shareholders of record at the close of business on January 27, 2017. Additionally, the Board of Director's approved a plan to increase the 2017 annual cash dividend to
$1.38
, which is intended to paid in four quarterly installments. The 2017 increase will mark the 41
st
consecutive year we have increased dividends.
We paid dividends in
2016
of
$243.6 million
, or
$1.34
per ordinary share, compared with
$231.7 million
, or
$1.28
per ordinary share, in
2015
and
$211.4 million
, or
$1.10
per ordinary share, in
2014
.
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). On July 22, 2014, the Irish High Court approved Pentair plc's conversion of approximately $14.4 billion of share premium to distributable reserves. On July 29, 2014, following the approval of the Irish High Court, we made the required filing of Pentair plc's initial accounts with the Irish Companies Registration Office, which completed the process to allow us to pay future cash dividends and redeem and repurchase shares out of Pentair plc's "distributable reserves." Our distributable reserve balance was
$9.4 billion
and
$9.6 billion
as of
December 31, 2016
and
2015
, respectively.
Authorized shares
Our authorized share capital consists of
426.0 million
ordinary shares with a par value of
$0.01
per share.
Ordinary shares held in treasury
In August 2015, we canceled all of our ordinary shares held in treasury. At the time of the cancellation, we held
19.1 million
ordinary shares in treasury at a cost of
$1.2 billion
.
Share repurchases
Prior to the closing of the Merger, our Board of Directors, and Tyco as our sole shareholder, authorized the repurchase of our ordinary shares with a maximum aggregate value of
$400.0 million
following the closing of the Merger. In October 2012, the Board of Directors authorized the repurchase of our ordinary shares with a maximum dollar limit of
$800.0 million
. The authorization expired on December 31, 2015. There is no remaining availability under the 2012 authorizations.
In December 2013, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of
$1.0 billion
. The authorization expired on December 31, 2016. There is no remaining availability under the 2013 authorization.
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 year ended
December 31, 2015
, we repurchased
3.1 million
of our ordinary shares for
$200.0 million
. We have
$800.0 million
remaining availability for repurchases under the 2014 authorization.
Contractual obligations
The following summarizes our significant contractual obligations that impact our liquidity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions
|
2017
|
2018
|
2019
|
2020
|
2021
|
Thereafter
|
Total
|
Debt obligations
|
$
|
0.8
|
|
$
|
500.0
|
|
$
|
2,096.2
|
|
$
|
400.0
|
|
$
|
500.0
|
|
$
|
800.0
|
|
$
|
4,297.0
|
|
Interest obligations on fixed-rate debt
|
107.0
|
|
98.1
|
|
83.5
|
|
64.2
|
|
38.3
|
|
55.3
|
|
446.4
|
|
Operating lease obligations, net of sublease rentals
|
29.8
|
|
23.9
|
|
19.3
|
|
14.4
|
|
10.7
|
|
12.2
|
|
110.3
|
|
Purchase and marketing obligations
|
61.2
|
|
19.0
|
|
5.0
|
|
2.4
|
|
2.4
|
|
9.5
|
|
99.5
|
|
Pension and other post-retirement plan contributions
|
13.5
|
|
13.5
|
|
14.4
|
|
16.1
|
|
13.9
|
|
71.4
|
|
142.8
|
|
Total contractual obligations, net
|
$
|
212.3
|
|
$
|
654.5
|
|
$
|
2,218.4
|
|
$
|
497.1
|
|
$
|
565.3
|
|
$
|
948.4
|
|
$
|
5,096.0
|
|
The majority of the purchase obligations represent commitments for raw materials to be utilized in the normal course of business. For purposes of the above table, arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction.
In addition to the summary of significant contractual obligations, we will incur annual interest expense on outstanding variable rate debt. As of
December 31, 2016
, variable interest rate debt was
$976.3 million
at a weighted average interest rate of
2.01%
.
The total gross liability for uncertain tax positions at
December 31, 2016
was estimated to be
$71.1 million
. We record penalties and interest related to unrecognized tax benefits in
Provision for income taxes
and
Interest expense
, respectively, which is consistent with our past practices. As of
December 31, 2016
, we had recorded
$2.4 million
for the possible payment of penalties and
$11.0 million
related to the possible payment of interest.
Other financial measures
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 equals or exceeds 100 percent conversion of net income. Free cash flow is a non-GAAP financial measure that we use to assess our cash flow performance. We believe free cash flow is an important measure of operating performance because it provides us and our investors a measurement of cash generated from operations that is available to pay dividends, make acquisitions, repay debt and repurchase shares. 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:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions
|
2016
|
2015
|
2014
|
Net cash provided by (used for) operating activities of continuing operations
|
$
|
702.4
|
|
$
|
597.7
|
|
$
|
676.0
|
|
Capital expenditures
|
(117.8
|
)
|
(91.3
|
)
|
(83.7
|
)
|
Proceeds from sale of property and equipment
|
24.7
|
|
4.6
|
|
1.9
|
|
Free cash flow from continuing operations
|
$
|
609.3
|
|
$
|
511.0
|
|
$
|
594.2
|
|
Net cash provided by (used for) operating activities of discontinued operations
|
159.0
|
|
141.6
|
|
332.4
|
|
Capital expenditures of discontinued operations
|
(20.4
|
)
|
(43.0
|
)
|
(45.9
|
)
|
Proceeds from sale of property and equipment of discontinued operations
|
21.9
|
|
22.7
|
|
11.2
|
|
Free cash flow
|
$
|
769.8
|
|
$
|
632.3
|
|
$
|
891.9
|
|
Off-balance sheet arrangements
At
December 31, 2016
, we had no off-balance sheet financing arrangements.
COMMITMENTS AND CONTINGENCIES
We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, asbestos, environmental, safety and health, patent infringement and employment matters.
While we believe that a material impact on our consolidated financial position, results of operations or cash flows from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations and cash flows for the proceedings and claims described in ITEM 8, Note 17 of the Notes to Consolidated Financial Statements could change in the future.
Asbestos matters
Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. Each case typically names between dozens to hundreds of corporate defendants. While we have observed an increase in the number of these lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims, a large percentage of these suits have not presented viable legal claims and, as a result, have been dismissed by the courts. Our historical strategy has been to mount a vigorous defense aimed at having unsubstantiated suits dismissed, and, where appropriate, settling suits before trial. Although a large percentage of litigated suits have been dismissed, we cannot predict the extent to which we will be successful in resolving lawsuits in the future.
As of
December 31, 2016
, there were approximately
3,800
claims outstanding against our subsidiaries, of which approximately
3,300
relate to the Valves & Controls business classified as held for sale. These amounts include adjustments for claims that are not actively being prosecuted. The amounts are not adjusted for claims that identify incorrect defendants or duplicate other
actions. In addition, the amount does not include certain claims pending against third parties for which we have been provided an indemnification.
Our estimated liability for asbestos-related claims was
$228.3 million
and
$237.9 million
as of
December 31, 2016
and
2015
, respectively, and was recorded in
Non-current liabilities held for sale
in the Consolidated Balance Sheets for pending and future claims and related defense costs. Our estimated receivable for insurance recoveries was
$108.5 million
and
$111.0 million
at
December 31, 2016
and
2015
, respectively, and was recorded in
Non-current assets held for sale
in the Consolidated Balance Sheets.
Environmental matters
We are involved in or have retained responsibility and potential liability for environmental obligations and legal proceedings related to our current business and, including pursuant to certain indemnification obligations, related to certain formerly owned businesses. Our accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. Based upon our experience, current information regarding known contingencies and applicable laws, we have recorded reserves for these environmental matters of
$18.3 million
and
$22.8 million
as of
December 31, 2016
and
2015
, respectively, which relate primarily to the Valves & Controls business classified as held for sale. We do not anticipate these environmental conditions will have a material adverse effect on our financial position, results of operations or cash flows.
Product liability claims
We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, our captive insurance subsidiary. See discussion in ITEM 1 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements — Insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.
Stand-by letters of credit, bank guarantees and bonds
In certain situations, Tyco guaranteed Flow Control's performance to third parties or provided financial guarantees for financial commitments of Flow Control. In situations where Flow Control and Tyco were unable to obtain a release from these guarantees in connection with the spin-off, we will indemnify Tyco for any losses it suffers as a result of such guarantees.
In disposing of assets or businesses, we often provide representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to reasonably estimate the potential liability due to the inchoate and unknown nature of these potential liabilities. However, we have no reason to believe that these uncertainties would have a material adverse effect on our financial position, results of operations or cash flows.
In the ordinary course of business, we are required to commit to bonds, letters of credit and bank guarantees that require payments to our customers for any non-performance. The outstanding face value of these instruments fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit primarily to secure our performance to third parties under self-insurance programs.
As of
December 31, 2016
and
2015
, the outstanding value of bonds, letters of credit and bank guarantees totaled
$331.0 million
and
$402.2 million
, respectively, of which
$156.6 million
and
$202.3 million
, respectively, relate to the Valves & Controls business classified as held for sale.
NEW ACCOUNTING STANDARDS
See ITEM 8, Note 1 of the Notes to Consolidated Financial Statements, included in this Form 10-K, for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.
CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with GAAP. Our significant accounting policies are more fully described in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:
|
|
•
|
it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and
|
|
|
•
|
changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.
|
Our critical accounting estimates include the following:
Impairment of goodwill and indefinite-lived intangibles
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased and liabilities assumed.
Goodwill is tested at least annually for impairment and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is performed using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the estimated fair value is less than the carrying amount of the reporting unit there is an indication that goodwill impairment exists and a second step must be completed in order to determine the amount of the goodwill impairment, if any that should be recorded. In the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.
The fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations.
In developing our discounted cash flow analysis, assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on our annual operating plan and long-term business plan for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and growth expectations for the industries and end markets we participate in. These assumptions are determined over a six year long-term planning period. The six year growth rates for revenues and operating profits vary for each reporting unit being evaluated. Revenues and operating profit beyond
2022
are projected to grow at a perpetual growth rate of
3.0%
.
Discount rate assumptions for each reporting unit take into consideration our assessment of risks inherent in the future cash flows of the respective reporting unit and our weighted-average cost of capital. We utilized a discount rate of
9.0%
in determining the discounted cash flows in our fair value analysis.
In estimating fair value using the market approach, we identify a group of comparable publicly-traded companies for each reporting unit that are similar in terms of size and product offering. These groups of comparable companies are used to develop multiples based on total market-based invested capital as a multiple of earnings before interest, taxes, depreciation and amortization ("EBITDA"). We determine our estimated values by applying these comparable EBITDA multiples to the operating results of our reporting units. The ultimate fair value of each reporting unit is determined considering the results of both valuation methods.
We completed step one of our annual goodwill impairment evaluation as of the first day of the fourth quarter of
2016
,
2015
and
2014
with each of our reporting units' fair value in excess of its carrying value.
During the latter part of the fourth quarter of 2015, the oil and gas industry continued to deteriorate, leading management to reconsider its estimates for future profitability of the reporting unit and thereby increasing the likelihood that the associated goodwill could be impaired. As such, we concluded that a triggering event occurred during the fourth quarter of 2015 requiring that we test Valves & Controls goodwill for impairment. As a result, we reperformed our step one analysis as of December 31, 2015. Consistent with our annual test, the fair value was estimated using both a discounted cash flow analysis and market approach.
The results of our step one goodwill impairment testing as of December 31, 2015 indicated that the fair value of Valves & Controls was below its carrying value. Accordingly, we performed the step two test and concluded the goodwill of the Valves & Controls business classified as held for sale was impaired. As a result, we recorded a non-cash goodwill impairment charge of
$515.2 million
for the year ended December 31, 2015. The impairment charge was recorded in
Income (loss) from discontinued operations, net of tax
in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Identifiable intangible assets
Our primary identifiable intangible assets include: customer relationships, trade names and trademarks, proprietary technology, backlog and patents. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. We complete our annual impairment test during the fourth quarter each year for those identifiable assets not subject to amortization.
The impairment test consists of a comparison of the fair value of the trade name with its carrying value. Fair value is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.
An impairment charge of
$13.3 million
was recorded in 2016 related to a trade name in Technical Solutions as the result of a rebranding strategy implemented in the fourth quarter of 2016. The trade name impairment charges were recorded in
Selling, general and administrative
in our Consolidated Statements of Operations and Comprehensive Income (Loss).
As noted above, during the latter part of the fourth quarter of 2015, the oil and gas industry continued to deteriorate, leading management to reconsider its estimates for future profitability of the Valves & Controls and thereby increasing the likelihood that the associated intangible assets could be impaired. As such, we concluded that a triggering event occurred during the fourth quarter of 2015 requiring that we test Valves & Controls trade names for impairment. As a result of this test, an impairment charge of
$39.5 million
was recorded in 2015 related to trade names in the Valves & Controls business classified as held for sale. The impairment charge was recorded in
Income (loss) from discontinued operations, net of tax
in our Consolidated Statements of Operations and Comprehensive Income (Loss).
There were
no
impairment charges recorded in 2014 for identifiable intangible assets.
Pension and other post-retirement plans
We sponsor U.S. and Non-U.S. defined-benefit pension and other post-retirement plans. The amounts recognized in our consolidated financial statements related to our defined-benefit pension and other post-retirement plans are determined from actuarial valuations. Inherent in these valuations are assumptions, including: expected return on plan assets, discount rates, rate of increase in future compensation levels and health care cost trend rates. These assumptions are updated annually and are disclosed in ITEM 8, Note 13 to the Notes to Consolidated Financial Statements. Differences in actual experience or changes in assumptions may affect our pension and other post-retirement obligations and future expense.
We recognize changes in the fair value of plan assets and net actuarial gains or losses for pension and other post-retirement benefits annually in the fourth quarter each year ("mark-to-market adjustment") and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension and other post-retirement plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate used to value pension and other post-retirement benefit obligations as of the measurement date and (2) differences between the expected and the actual return on plan assets. This accounting method also results in the potential for volatile and difficult to forecast mark-to-market adjustments. Mark-to-market adjustments resulted in a pre-tax charge of
$4.2 million
in
2016
, pre-tax income of
$23.0 million
in
2015
and a pre-tax charge of
$31.5 million
in
2014
. The remaining components of pension expense, including service and interest costs and the expected return on plan assets, are recorded on a quarterly basis as ongoing pension expense.
Discount rate
The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of bonds available in the marketplace rated AA or higher, adjusted to eliminate the effects of call provisions. This produced a weighted-average discount rate for our U.S. plans of
4.02%
in
2016
,
4.21%
in
2015
and
3.63%
in
2014
. The discount rates on our Non-U.S. plans ranged from
0.50%
to
4.00%
in
2016
,
0.50%
to
4.25%
in
2015
and
0.50%
to
4.25%
in
2014
. There are no known or anticipated changes in our discount rate assumption that will impact our pension expense in
2017
.
Expected rate of return
Our expected rate of return on plan assets for our U.S. plans was
4.28%
for
2016
,
3.65%
in
2015
and
4.56%
in
2014
. The expected rate of return on our Non-U.S. plans ranged from
1.00%
to
5.50%
in
2016
,
1.00%
to
6.00%
in
2015
and
1.00%
to
6.00%
in
2014
. The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices.
During 2012, we adopted an investment strategy for our U.S. pension plans with a primary objective of preserving the funded status of the U.S. plans. This was achieved through investments in fixed interest instruments with interest rate sensitivity characteristics closely reflecting the interest rate sensitivity of our benefit obligations. The shifting of allocations away from equities to liability hedging fixed income investments, by reinvesting in fixed income instruments as equity investments were redeemed, was completed during 2013. As of
December 31, 2016
, the U.S. pension plans have an approximately
99 percent
allocation to fixed income investments. As a result of the adoption of this investment strategy, we anticipate the expected rate of return on our U.S. funded pension plans will continue to be consistent with the discount rate.
See ITEM 8, Note 13 of the Notes to Consolidated Financial Statements for further information regarding pension and other post-retirement plans.
Loss contingencies
Accruals are recorded for various contingencies including legal proceedings, self-insurance and other claims that arise in the normal course of business. The accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.
We recognize asbestos-related liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Certain of these liabilities are subject to insurance coverage. Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. The process of estimating asbestos-related liabilities and the corresponding insurance recoveries receivable is complex and dependent primarily on our historical claim experience, estimates of potential future claims, our legal strategy for resolving these claims, the availability of insurance coverage, and the solvency and creditworthiness of insurers.
See ITEM 8, Note 17 of the Notes to Consolidated Financial Statements for further information regarding loss contingencies.
Income taxes
In determining taxable income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
We currently have recorded valuation allowances that we will maintain until when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our income tax expense recorded in the future may be reduced to the extent of decreases in our valuation allowances. The realization of our remaining deferred tax assets is primarily dependent on future taxable income in the appropriate jurisdiction. Any reduction in future taxable income including but not limited to any future restructuring activities may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance could result in additional income tax expense in such period and could have a significant impact on our future earnings.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management records the effect of a tax rate or law change on the Company's deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on the Company's financial condition, results of operations or cash flows.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We perform reviews of our income tax positions on a quarterly basis
and accrue for uncertain tax positions. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the tax jurisdictions in which we operate based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. As events change or resolution occurs, these liabilities are adjusted, such as in the case of audit settlements with taxing authorities. The ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Pentair plc and its subsidiaries (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of
December 31, 2016
. In making this assessment, management used the criteria for effective internal control over financial reporting described in
Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of
December 31, 2016
, the Company's internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on the Company's internal control over financial reporting as of
December 31, 2016
. That attestation report is set forth immediately following this management report.
|
|
|
|
Randall J. Hogan
|
|
John L. Stauch
|
Chairman and Chief Executive Officer
|
|
Executive Vice President and Chief Financial Officer
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Pentair plc
London, United Kingdom
We have audited the internal control over financial reporting of Pentair plc and subsidiaries (the "Company") as of
December 31, 2016
, based on criteria established in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016
, based on the criteria established in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Index at Item 15 as of and for the year ended
December 31, 2016
of the Company and our report dated
February 21, 2017
expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 21, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Pentair plc
London, United Kingdom
We have audited the accompanying consolidated balance sheets of Pentair plc and subsidiaries (the "Company") as of
December 31, 2016
and
2015
, and the related consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended
December 31, 2016
. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pentair plc and subsidiaries as of
December 31, 2016
and
2015
, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2016
, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2016
, based on the criteria established in
Internal Control—Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 21, 2017
expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 21, 2017
Pentair plc and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions, except per-share data
|
2016
|
2015
|
2014
|
Net sales
|
$
|
4,890.0
|
|
$
|
4,616.4
|
|
$
|
4,666.8
|
|
Cost of goods sold
|
3,095.9
|
|
3,017.6
|
|
3,046.3
|
|
Gross profit
|
1,794.1
|
|
1,598.8
|
|
1,620.5
|
|
Selling, general and administrative
|
979.3
|
|
884.0
|
|
985.6
|
|
Research and development
|
114.1
|
|
98.7
|
|
96.4
|
|
Operating income
|
700.7
|
|
616.1
|
|
538.5
|
|
Other (income) expense
|
|
|
|
Loss on sale of businesses, net
|
3.9
|
|
3.2
|
|
0.2
|
|
Equity income of unconsolidated subsidiaries
|
(4.3
|
)
|
(1.5
|
)
|
(1.2
|
)
|
Interest income
|
(8.3
|
)
|
(4.7
|
)
|
(2.3
|
)
|
Interest expense
|
148.4
|
|
106.6
|
|
70.9
|
|
Income from continuing operations before income taxes
|
561.0
|
|
512.5
|
|
470.9
|
|
Provision for income taxes
|
109.4
|
|
115.4
|
|
114.3
|
|
Net income from continuing operations
|
451.6
|
|
397.1
|
|
356.6
|
|
Income (loss) from discontinued operations, net of tax
|
70.0
|
|
(466.8
|
)
|
244.0
|
|
Gain (loss) from sale / impairment of discontinued operations, net of tax
|
0.6
|
|
(6.7
|
)
|
(385.7
|
)
|
Net income (loss)
|
$
|
522.2
|
|
$
|
(76.4
|
)
|
$
|
214.9
|
|
Comprehensive income (loss), net of tax
|
|
|
|
Net income (loss)
|
$
|
522.2
|
|
$
|
(76.4
|
)
|
$
|
214.9
|
|
Changes in cumulative translation adjustment
|
(83.0
|
)
|
(264.9
|
)
|
(336.3
|
)
|
Changes in market value of derivative financial instruments, net of $1.9, $0.5 and $1.1 tax, respectively
|
(8.3
|
)
|
0.2
|
|
(0.4
|
)
|
Comprehensive income (loss)
|
$
|
430.9
|
|
$
|
(341.1
|
)
|
$
|
(121.8
|
)
|
Earnings (loss) per ordinary share
|
|
|
|
Basic
|
|
|
|
Continuing operations
|
$
|
2.49
|
|
$
|
2.20
|
|
$
|
1.87
|
|
Discontinued operations
|
0.39
|
|
(2.62
|
)
|
(0.74
|
)
|
Basic earnings (loss) per ordinary share
|
$
|
2.88
|
|
$
|
(0.42
|
)
|
$
|
1.13
|
|
Diluted
|
|
|
|
Continuing operations
|
$
|
2.47
|
|
$
|
2.17
|
|
$
|
1.84
|
|
Discontinued operations
|
0.38
|
|
(2.59
|
)
|
(0.73
|
)
|
Diluted earnings (loss) per ordinary share
|
$
|
2.85
|
|
$
|
(0.42
|
)
|
$
|
1.11
|
|
Weighted average ordinary shares outstanding
|
|
|
|
Basic
|
181.3
|
|
180.3
|
|
190.6
|
|
Diluted
|
183.1
|
|
182.6
|
|
193.7
|
|
See accompanying notes to consolidated financial statements.
Pentair plc and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
December 31
|
In millions, except per-share data
|
2016
|
2015
|
Assets
|
Current assets
|
|
|
Cash and cash equivalents
|
$
|
238.5
|
|
$
|
126.3
|
|
Accounts and notes receivable, net of allowances of $25.6 and $46.1, respectively
|
764.0
|
|
773.2
|
|
Inventories
|
524.2
|
|
564.7
|
|
Other current assets
|
253.4
|
|
220.0
|
|
Current assets held for sale
|
891.9
|
|
1,093.4
|
|
Total current assets
|
2,672.0
|
|
2,777.6
|
|
Property, plant and equipment, net
|
538.6
|
|
539.8
|
|
Other assets
|
|
|
Goodwill
|
4,217.4
|
|
4,259.0
|
|
Intangibles, net
|
1,631.8
|
|
1,747.4
|
|
Other non-current assets
|
182.1
|
|
161.1
|
|
Non-current assets held for sale
|
2,292.9
|
|
2,348.6
|
|
Total other assets
|
8,324.2
|
|
8,516.1
|
|
Total assets
|
$
|
11,534.8
|
|
$
|
11,833.5
|
|
Liabilities and Equity
|
Current liabilities
|
|
|
Current maturities of long-term debt and short-term borrowings
|
$
|
0.8
|
|
$
|
—
|
|
Accounts payable
|
436.6
|
|
403.8
|
|
Employee compensation and benefits
|
166.1
|
|
162.6
|
|
Other current liabilities
|
511.5
|
|
487.1
|
|
Current liabilities held for sale
|
356.2
|
|
433.0
|
|
Total current liabilities
|
1,471.2
|
|
1,486.5
|
|
Other liabilities
|
|
|
Long-term debt
|
4,278.4
|
|
4,685.8
|
|
Pension and other post-retirement compensation and benefits
|
253.4
|
|
244.6
|
|
Deferred tax liabilities
|
609.5
|
|
670.2
|
|
Other non-current liabilities
|
162.0
|
|
192.4
|
|
Non-current liabilities held for sale
|
505.9
|
|
545.2
|
|
Total liabilities
|
7,280.4
|
|
7,824.7
|
|
Equity
|
|
|
Ordinary shares $0.01 par value, 426.0 authorized, 181.8 and 180.5 issued at December 31, 2016 and December 31, 2015, respectively
|
1.8
|
|
1.8
|
|
Additional paid-in capital
|
2,920.8
|
|
2,860.3
|
|
Retained earnings
|
2,068.1
|
|
1,791.7
|
|
Accumulated other comprehensive loss
|
(736.3
|
)
|
(645.0
|
)
|
Total equity
|
4,254.4
|
|
4,008.8
|
|
Total liabilities and equity
|
$
|
11,534.8
|
|
$
|
11,833.5
|
|
See accompanying notes to consolidated financial statements.
Pentair plc and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions
|
2016
|
2015
|
2014
|
Operating activities
|
|
|
|
Net income (loss)
|
$
|
522.2
|
|
$
|
(76.4
|
)
|
$
|
214.9
|
|
(Income) loss from discontinued operations, net of tax
|
(70.0
|
)
|
466.8
|
|
(244.0
|
)
|
(Gain) loss from sale / impairment of discontinued operations, net of tax
|
(0.6
|
)
|
6.7
|
|
385.7
|
|
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used for) operating activities of continuing operations
|
|
|
|
Equity income of unconsolidated subsidiaries
|
(4.3
|
)
|
(1.5
|
)
|
(1.2
|
)
|
Depreciation
|
84.6
|
|
81.2
|
|
79.7
|
|
Amortization
|
96.4
|
|
68.1
|
|
60.6
|
|
Loss on sale of businesses, net
|
3.9
|
|
3.2
|
|
0.2
|
|
Deferred income taxes
|
(16.1
|
)
|
(2.3
|
)
|
(23.0
|
)
|
Share-based compensation
|
34.2
|
|
33.0
|
|
33.6
|
|
Impairment of trade names
|
13.3
|
|
—
|
|
—
|
|
Excess tax benefits from share-based compensation
|
(8.0
|
)
|
(6.0
|
)
|
(12.6
|
)
|
Amortization of bridge financing debt issuance costs
|
—
|
|
10.8
|
|
—
|
|
Pension and other post-retirement expense
|
31.8
|
|
9.4
|
|
57.5
|
|
Pension and other post-retirement contributions
|
(13.5
|
)
|
(12.7
|
)
|
(12.6
|
)
|
Changes in assets and liabilities, net of effects of business acquisitions
|
|
|
|
Accounts and notes receivable
|
21.3
|
|
(6.2
|
)
|
15.3
|
|
Inventories
|
34.3
|
|
54.7
|
|
30.8
|
|
Other current assets
|
(15.8
|
)
|
(27.3
|
)
|
(25.8
|
)
|
Accounts payable
|
38.0
|
|
10.6
|
|
5.3
|
|
Employee compensation and benefits
|
7.0
|
|
(15.6
|
)
|
(1.7
|
)
|
Other current liabilities
|
51.6
|
|
(16.6
|
)
|
60.4
|
|
Other non-current assets and liabilities
|
(107.9
|
)
|
17.8
|
|
52.9
|
|
Net cash provided by (used for) operating activities of continuing operations
|
702.4
|
|
597.7
|
|
676.0
|
|
Net cash provided by (used for) operating activities of discontinued operations
|
159.0
|
|
141.6
|
|
332.4
|
|
Net cash provided by (used for) operating activities
|
861.4
|
|
739.3
|
|
1,008.4
|
|
Investing activities
|
|
|
|
Capital expenditures
|
(117.8
|
)
|
(91.3
|
)
|
(83.7
|
)
|
Proceeds from sale of property and equipment
|
24.7
|
|
4.6
|
|
1.9
|
|
Acquisitions, net of cash acquired
|
(25.0
|
)
|
(1,913.9
|
)
|
(12.3
|
)
|
Other
|
(5.2
|
)
|
(3.0
|
)
|
0.2
|
|
Net cash provided by (used for) investing activities of continuing operations
|
(123.3
|
)
|
(2,003.6
|
)
|
(93.9
|
)
|
Net cash provided by (used for) investing activities of discontinued operations
|
1.5
|
|
38.1
|
|
(34.4
|
)
|
Net cash provided by (used for) investing activities
|
(121.8
|
)
|
(1,965.5
|
)
|
(128.3
|
)
|
Financing activities
|
|
|
|
Net receipts (repayments) of short-term borrowings
|
0.8
|
|
(2.3
|
)
|
0.5
|
|
Net receipts (repayments) of commercial paper and revolving long-term debt
|
(385.3
|
)
|
363.5
|
|
468.6
|
|
Proceeds from long-term debt
|
—
|
|
1,714.8
|
|
2.2
|
|
Repayment of long-term debt
|
(0.7
|
)
|
(356.6
|
)
|
(16.8
|
)
|
Debt issuance costs
|
—
|
|
(26.8
|
)
|
(3.1
|
)
|
Excess tax benefits from share-based compensation
|
8.0
|
|
6.0
|
|
12.6
|
|
Shares issued to employees, net of shares withheld
|
20.7
|
|
19.4
|
|
37.0
|
|
Repurchases of ordinary shares
|
—
|
|
(200.0
|
)
|
(1,150.0
|
)
|
Dividends paid
|
(243.6
|
)
|
(231.7
|
)
|
(211.4
|
)
|
Purchase of noncontrolling interest
|
—
|
|
—
|
|
(134.7
|
)
|
Net cash provided by (used for) financing activities
|
(600.1
|
)
|
1,286.3
|
|
(995.1
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
(27.3
|
)
|
(44.2
|
)
|
(30.6
|
)
|
Change in cash and cash equivalents
|
112.2
|
|
15.9
|
|
(145.6
|
)
|
Cash and cash equivalents, beginning of year
|
126.3
|
|
110.4
|
|
256.0
|
|
Cash and cash equivalents, end of year
|
$
|
238.5
|
|
$
|
126.3
|
|
$
|
110.4
|
|
See accompanying notes to consolidated financial statements.
Pentair plc and Subsidiaries
Consolidated Statements of Changes in Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Ordinary shares
|
|
Treasury shares
|
Additional paid-in capital
|
Retained earnings
|
Accumulated other comprehensive loss
|
Total Pentair plc
|
Non-controlling interest
|
Total
|
Number
|
Amount
|
|
Number
|
Amount
|
Balance - December 31, 2013
|
213.0
|
|
$
|
113.5
|
|
|
(15.6
|
)
|
$
|
(875.1
|
)
|
$
|
5,071.4
|
|
$
|
1,829.1
|
|
$
|
(43.6
|
)
|
$
|
6,095.3
|
|
$
|
122.4
|
|
$
|
6,217.7
|
|
Net income
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
214.9
|
|
—
|
|
214.9
|
|
—
|
|
214.9
|
|
Other comprehensive loss, net of tax
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(336.7
|
)
|
(336.7
|
)
|
—
|
|
(336.7
|
)
|
Tax benefit of share-based compensation
|
—
|
|
—
|
|
|
—
|
|
—
|
|
11.4
|
|
—
|
|
—
|
|
11.4
|
|
—
|
|
11.4
|
|
Conversion of Pentair Ltd. common shares to Pentair plc ordinary shares
|
—
|
|
(111.4
|
)
|
|
—
|
|
—
|
|
111.4
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Dividends declared
|
—
|
|
—
|
|
|
—
|
|
—
|
|
(229.5
|
)
|
—
|
|
—
|
|
(229.5
|
)
|
—
|
|
(229.5
|
)
|
Purchase of noncontrolling interest
|
—
|
|
—
|
|
|
—
|
|
—
|
|
(12.3
|
)
|
—
|
|
—
|
|
(12.3
|
)
|
(122.4
|
)
|
(134.7
|
)
|
Share repurchase
|
(10.6
|
)
|
(0.1
|
)
|
|
(5.8
|
)
|
(450.7
|
)
|
(699.2
|
)
|
—
|
|
—
|
|
(1,150.0
|
)
|
—
|
|
(1,150.0
|
)
|
Exercise of options, net of shares tendered for payment
|
—
|
|
—
|
|
|
1.3
|
|
60.9
|
|
(14.4
|
)
|
—
|
|
—
|
|
46.5
|
|
—
|
|
46.5
|
|
Issuance of restricted shares, net of cancellations
|
—
|
|
—
|
|
|
0.3
|
|
19.3
|
|
(19.3
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Shares surrendered by employees to pay taxes
|
—
|
|
—
|
|
|
(0.1
|
)
|
(6.3
|
)
|
(3.1
|
)
|
—
|
|
—
|
|
(9.4
|
)
|
—
|
|
(9.4
|
)
|
Share-based compensation
|
—
|
|
—
|
|
|
—
|
|
—
|
|
33.6
|
|
—
|
|
—
|
|
33.6
|
|
—
|
|
33.6
|
|
Balance - December 31, 2014
|
202.4
|
|
$
|
2.0
|
|
|
(19.9
|
)
|
$
|
(1,251.9
|
)
|
$
|
4,250.0
|
|
$
|
2,044.0
|
|
$
|
(380.3
|
)
|
$
|
4,663.8
|
|
$
|
—
|
|
$
|
4,663.8
|
|
Net loss
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
(76.4
|
)
|
—
|
|
(76.4
|
)
|
—
|
|
(76.4
|
)
|
Other comprehensive loss, net of tax
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(264.7
|
)
|
(264.7
|
)
|
—
|
|
(264.7
|
)
|
Tax benefit of share-based compensation
|
—
|
|
—
|
|
|
—
|
|
—
|
|
5.7
|
|
—
|
|
—
|
|
5.7
|
|
—
|
|
5.7
|
|
Dividends declared
|
—
|
|
—
|
|
|
—
|
|
—
|
|
1.5
|
|
(175.9
|
)
|
—
|
|
(174.4
|
)
|
—
|
|
(174.4
|
)
|
Share repurchase
|
(3.1
|
)
|
—
|
|
|
—
|
|
—
|
|
(200.0
|
)
|
—
|
|
—
|
|
(200.0
|
)
|
—
|
|
(200.0
|
)
|
Cancellation of treasury shares
|
(19.1
|
)
|
(0.2
|
)
|
|
19.1
|
|
1,210.9
|
|
(1,210.7
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Exercise of options, net of shares tendered for payment
|
0.1
|
|
—
|
|
|
0.7
|
|
34.6
|
|
(3.5
|
)
|
—
|
|
—
|
|
31.1
|
|
—
|
|
31.1
|
|
Issuance of restricted shares, net of cancellations
|
0.3
|
|
—
|
|
|
0.2
|
|
9.4
|
|
(9.4
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Shares surrendered by employees to pay taxes
|
(0.1
|
)
|
—
|
|
|
(0.1
|
)
|
(3.0
|
)
|
(6.3
|
)
|
—
|
|
—
|
|
(9.3
|
)
|
—
|
|
(9.3
|
)
|
Share-based compensation
|
—
|
|
—
|
|
|
—
|
|
—
|
|
33.0
|
|
—
|
|
—
|
|
33.0
|
|
—
|
|
33.0
|
|
Balance - December 31, 2015
|
180.5
|
|
$
|
1.8
|
|
|
—
|
|
$
|
—
|
|
$
|
2,860.3
|
|
$
|
1,791.7
|
|
$
|
(645.0
|
)
|
$
|
4,008.8
|
|
$
|
—
|
|
$
|
4,008.8
|
|
Net income
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
522.2
|
|
—
|
|
522.2
|
|
—
|
|
522.2
|
|
Other comprehensive loss, net of tax
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(91.3
|
)
|
(91.3
|
)
|
—
|
|
(91.3
|
)
|
Tax benefit of share-based compensation
|
—
|
|
—
|
|
|
—
|
|
—
|
|
5.5
|
|
—
|
|
—
|
|
5.5
|
|
—
|
|
5.5
|
|
Dividends declared
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
(245.8
|
)
|
—
|
|
(245.8
|
)
|
—
|
|
(245.8
|
)
|
Exercise of options, net of shares tendered for payment
|
1.0
|
|
—
|
|
|
—
|
|
—
|
|
31.6
|
|
—
|
|
—
|
|
31.6
|
|
—
|
|
31.6
|
|
Issuance of restricted shares, net of cancellations
|
0.5
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Shares surrendered by employees to pay taxes
|
(0.2
|
)
|
—
|
|
|
—
|
|
—
|
|
(10.8
|
)
|
—
|
|
—
|
|
(10.8
|
)
|
—
|
|
(10.8
|
)
|
Share-based compensation
|
—
|
|
—
|
|
|
—
|
|
—
|
|
34.2
|
|
—
|
|
—
|
|
34.2
|
|
—
|
|
34.2
|
|
Balance - December 31, 2016
|
181.8
|
|
$
|
1.8
|
|
|
—
|
|
$
|
—
|
|
$
|
2,920.8
|
|
$
|
2,068.1
|
|
$
|
(736.3
|
)
|
$
|
4,254.4
|
|
$
|
—
|
|
$
|
4,254.4
|
|
See accompanying notes to consolidated financial statements.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
|
|
1.
|
Basis of Presentation and Summary of Significant Accounting Policies
|
Business
Pentair plc and its consolidated subsidiaries (the "Company" or "Pentair") is a focused diversified industrial manufacturing company comprising three reporting segments: Water Quality Systems, Flow & Filtration Solutions and Technical Solutions.
In December 2013, the Company's Board of Directors approved changing the Company's jurisdiction of organization from Switzerland to Ireland. At an extraordinary meeting of shareholders on May 20, 2014, Pentair Ltd. shareholders voted in favor of a reorganization proposal pursuant to which Pentair Ltd. would merge into Pentair plc, an Irish company, and all Pentair Ltd. CHF 0.50 par value common shares would be canceled and all holders of such shares would receive $0.01 par value ordinary shares of Pentair plc on a one-for-one basis. The reorganization transaction was completed on June 3, 2014, at which time Pentair plc replaced Pentair Ltd. as our ultimate parent company (the "Redomicile"). Shares of Pentair plc began trading on the New York Stock Exchange on June 3, 2014 under the symbol "PNR," the same symbol under which Pentair Ltd. shares were previously traded. Although our jurisdiction of organization is Ireland, we manage our affairs so that we are centrally managed and controlled in the United Kingdom (the "U.K.") and therefore have our tax residency in the U.K.
Our former parent company, Pentair Ltd., took its form on September 28, 2012 as a result of a reverse acquisition (the "Merger") involving Pentair, Inc. and an indirect, wholly-owned subsidiary of Flow Control (defined below), with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of ours. "Flow Control" refers to Pentair Ltd. prior to the Merger. Prior to the Merger, Tyco International Ltd. ("Tyco") engaged in an internal restructuring whereby it transferred to Flow Control certain assets related to the flow control business of Tyco, and Flow Control assumed from Tyco certain liabilities related to the flow control business of Tyco. On September 28, 2012 prior to the Merger, Tyco effected a spin-off of Flow Control through the pro-rata distribution of
100%
of the outstanding ordinary shares of Flow Control to Tyco's shareholders (the "Distribution"), resulting in the distribution of approximately
110.9 million
of our ordinary shares to Tyco's shareholders.
Basis of presentation
The accompanying consolidated financial statements include the accounts of Pentair and all subsidiaries, both the United States ("U.S.") and non-U.S., which we control. Intercompany accounts and transactions have been eliminated. Investments in companies of which we own
20%
to
50%
of the voting stock or have the ability to exercise significant influence over operating and financial policies of the investee are accounted for using the equity method of accounting and as a result, our share of the earnings or losses of such equity affiliates is included in the Consolidated Statements of Operations and Comprehensive Income (Loss).
The consolidated financial statements have been prepared in U.S. dollars ("USD") and in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Fiscal year
Our fiscal year ends on December 31. Beginning in the first quarter of 2016, we report our interim quarterly periods on a calendar quarter basis. Prior to the first quarter of 2016, we reported our interim quarterly periods on a 13-week basis ending on a Saturday.
Use of estimates
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include our accounting for valuation of goodwill and indefinite lived intangible assets, estimated losses on accounts receivable, estimated realizable value on excess and obsolete inventory, percentage of completion revenue recognition, assets acquired and liabilities assumed in acquisitions, estimated selling proceeds from assets held for sale, contingent liabilities, income taxes and pension and other post-retirement benefits. Actual results could differ from our estimates.
Revenue recognition
We recognize revenue when it is realized or realizable and has been earned. Revenue is recognized when persuasive evidence of an arrangement exists, shipment or delivery has occurred (depending on the terms of the sale), our price to the buyer is fixed or determinable, and collectability is reasonably assured.
Generally, there is no post-shipment obligation on product sold other than warranty obligations in the normal and ordinary course of business. In the event significant post-shipment obligations were to exist, revenue recognition would be deferred until substantially all obligations were satisfied.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Percentage of completion
Revenue from certain long-term contracts is recognized over the contractual period under the percentage of completion method of accounting. Under this method, sales and gross profit are recognized as work is performed either based on the relationship between the actual costs incurred and the total estimated costs at completion ("the cost-to-cost method") or based on efforts for measuring progress towards completion in situations in which this approach is more representative of the progress on the contract than the cost-to-cost method. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed on a regular basis. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs. These reviews have not resulted in adjustments that were significant to our results of operations. Estimated losses are recorded when identified. Claims against customers are recognized as revenue upon settlement.
We record costs and earnings in excess of billings on uncompleted contracts within
Other current assets
and billings in excess of costs and earnings on uncompleted contracts within
Other current liabilities
in the Consolidated Balance Sheets.
Sales returns
The right of return may exist explicitly or implicitly with our customers. Generally, our return policy allows for customer returns only upon our authorization. Goods returned must be product we continue to market and must be in salable condition. Returns of custom or modified goods are normally not allowed. At the time of sale, we reduce revenue for the estimated effect of returns. Estimated sales returns include consideration of historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer and a projection of this experience into the future.
Pricing and sales incentives
We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives at the later of the date revenue is recognized or the incentive is offered. Sales incentives given to our customers are recorded as a reduction of revenue unless we (1) receive an identifiable benefit for the goods or services in exchange for the consideration and (2) we can reasonably estimate the fair value of the benefit received.
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price. However, one of our businesses allows customers to apply for a refund of a percentage of the original purchase price if they can demonstrate sales to a qualifying end customer. At the time of sale, we estimate the anticipated refund to be paid based on historical experience and reduce sales for the probable cost of the discount. The cost of these refunds is recorded as a reduction in gross sales.
Volume-based incentives involve rebates that are negotiated at or prior to the time of sale with the customer and are redeemable only if the customer achieves a specified cumulative level of sales or sales increase. Under these incentive programs, at the time of sale, we reforecast the anticipated rebate to be paid based on forecasted sales levels. These forecasts are updated at least quarterly for each customer and sales are reduced for the anticipated cost of the rebate. If the forecasted sales for a customer changes, the accrual for rebates is adjusted to reflect the new amount of rebates expected to be earned by the customer.
Shipping and handling costs
Amounts billed to customers for shipping and handling are recorded in
Net sales
in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss). Shipping and handling costs incurred by Pentair for the delivery of goods to customers are included in
Cost of goods sold
in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss).
Research and development
We conduct research and development ("R&D") activities in our own facilities, which consist primarily of the development of new products, product applications and manufacturing processes. We expense R&D costs as incurred. R&D expenditures during
2016
,
2015
and
2014
were
$114.1 million
,
$98.7 million
and
$96.4 million
, respectively.
Cash equivalents
We consider highly liquid investments with original maturities of three months or less at the date of acquisition to be cash equivalents.
Trade receivables and concentration of credit risk
We record an allowance for doubtful accounts, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for doubtful accounts are based on current trends, aging of accounts receivable, periodic credit evaluations of our customers' financial condition, and historical collection experience. We generally do not require collateral.
No
customer receivable balances exceeded
10%
of total net receivable balances as of
December 31, 2016
or
December 31, 2015
.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Inventories
Inventories are stated at the lower of cost or market with substantially all inventories recorded using the first-in, first-out ("FIFO") cost method and with an insignificant amount of inventories located outside the U.S. recorded using a moving average cost method which approximates FIFO.
Property, plant and equipment, net
Property, plant and equipment is stated at historical cost. We compute depreciation by the straight-line method based on the following estimated useful lives:
|
|
|
|
Years
|
Land improvements
|
5 to 20
|
Buildings and leasehold improvements
|
5 to 50
|
Machinery and equipment
|
3 to 15
|
Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the recorded cost of the assets and their related accumulated depreciation are removed from the Consolidated Balance Sheets and any related gains or losses are included in income.
We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets. We recorded
no
impairment charges in
2016
in conjunction with restructuring activities. During
2015
and
2014
, we recorded
$5.1 million
and
$13.0 million
, respectively, in conjunction with restructuring activities.
Goodwill and identifiable intangible assets
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased and liabilities assumed.
Goodwill is tested annually for impairment and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is performed using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the estimated fair value is less than the carrying amount of the reporting unit there is an indication that goodwill impairment exists and a second step must be completed in order to determine the amount of the goodwill impairment, if any, that should be recorded. In the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.
The fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations. This non-recurring fair value measurement is a "Level 3" measurement under the fair value hierarchy described below.
In developing our discounted cash flow analysis, assumptions about future revenues and expenses, capital expenditures and changes in working capital, are based on our annual operating plan and long-term business plan for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and growth expectations for the industries and end markets we participate in. These assumptions are determined over a
six
year long-term planning period. The
six
year growth rates for revenues and operating profits vary for each reporting unit being evaluated. Revenues and operating profit beyond
2022
are projected to grow at a perpetual growth rate of
3.0%
.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Discount rate assumptions for each reporting unit take into consideration our assessment of risks inherent in the future cash flows of the respective reporting unit and our weighted-average cost of capital. We utilized a discount rate of
9.0%
in determining the discounted cash flows in our fair value analysis.
In estimating fair value using the market approach, we identify a group of comparable publicly-traded companies for each reporting unit that are similar in terms of size and product offering. These groups of comparable companies are used to develop multiples based on total market-based invested capital as a multiple of earnings before interest, taxes, depreciation and amortization ("EBITDA"). We determine our estimated values by applying these comparable EBITDA multiples to the operating results of our reporting units. The ultimate fair value of each reporting unit is determined considering the results of both valuation methods.
We completed step one of our annual goodwill impairment evaluation as of the first day of the fourth quarter of
2016
,
2015
and
2014
with each reporting unit's fair value in excess of its carrying value.
During the latter part of the fourth quarter of 2015, the oil and gas industry continued to deteriorate, leading management to reconsider its estimates for future profitability of the Valves & Controls reporting unit and thereby increasing the likelihood that the associated goodwill could be impaired. As such, we concluded that a triggering event occurred during the fourth quarter of 2015 requiring that we test Valves & Controls goodwill for impairment. As a result, we reperformed our step one analysis as of December 31, 2015. Consistent with our annual test, the fair value was estimated using both a discounted cash flow analysis and market approach.
The results of our step one goodwill impairment testing as of December 31, 2015 indicated that the fair value of Valves & Controls was below its carrying value. Accordingly, we performed the step two test and concluded the goodwill of Valves & Controls was impaired. As a result, we recorded a non-cash goodwill impairment charge of
$515.2 million
for the year ended December 31, 2015. The impairment is included in
Income (loss) from discontinued operations, net of tax
in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Identifiable intangible assets
Our primary identifiable intangible assets include: customer relationships, trade names, proprietary technology and patents. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. We complete our annual impairment test during the fourth quarter each year for those identifiable assets not subject to amortization.
The impairment test for trade names consists of a comparison of the fair value of the trade name with its carrying value. Fair value is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. The non-recurring fair value measurement is a "Level 3" measurement under the fair value hierarchy described below.
An impairment charge of
$13.3 million
was recorded in 2016 related to a trade name in Technical Solutions as a result of a rebranding strategy implemented in the fourth quarter of 2016. The trade name impairment charges were recorded in
Selling, general and administrative
in our Consolidated Statements of Operations and Comprehensive Income (Loss).
As noted above, during the latter part of the fourth quarter of 2015, the oil and gas industry continued to deteriorate, leading management to reconsider its estimates for future profitability of the Valves & Controls and thereby increasing the likelihood that the associated intangible assets could be impaired. As such, we concluded that a triggering event occurred during the fourth quarter of 2015 requiring that we test Valves & Controls trade names for impairment. As a result of this test, an impairment charge of
$39.5 million
was recorded in 2015 related to trade names in the Valves & Controls business classified as held for sale. The impairment is included in
Income (loss) from discontinued operations, net of tax
in our Consolidated Statements of Operations and Comprehensive Income (Loss).
There were
no
impairment charges recorded in 2014 for identifiable intangible assets.
Income taxes
We use the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is
Pentair plc and Subsidiaries
Notes to consolidated financial statements
enacted. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than
50%
likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Pension and other post-retirement plans
We sponsor U.S. and Non-U.S. defined-benefit pension and other post-retirement plans. The pension and other post-retirement benefit costs for company-sponsored benefit plans are determined from actuarial assumptions and methodologies, including discount rates, expected returns on plan assets and health care cost trend rates. These assumptions are updated annually and are disclosed in Note 13.
We recognize changes in the fair value of plan assets and net actuarial gains or losses for pension and other post-retirement benefits annually in the fourth quarter each year ("mark-to-market adjustment") and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension and other post-retirement plans or when assumptions change, as they may each year. The remaining components of pension expense, including service and interest costs and estimated return on plan assets, are recorded on a quarterly basis.
Environmental
We recognize environmental clean-up liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Such liabilities generally are not subject to insurance coverage. The cost of each environmental clean-up is estimated by engineering, financial and legal specialists based on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that, where applicable, other potentially responsible parties ("PRPs") will be able to fulfill their commitments at the sites where Pentair may be jointly and severally liable. The process of estimating environmental clean-up liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remedy and technology will be required and the outcome of discussions with regulatory agencies and other PRPs at multi-party sites. In future periods, new laws or regulations, advances in clean-up technologies and additional information about the ultimate clean-up remedy that is used could significantly change our estimates. Accruals for environmental liabilities are primarily included in
Other current liabilities held for sale
and
Other non-current liabilities held for sale
in the Consolidated Balance Sheets.
Asbestos matters
We recognize asbestos-related liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Certain of these liabilities are subject to insurance coverage and we recognize receivables for asbestos-related insurance recoveries only when realization of the claim is deemed probable. Our subsidiaries and numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. The process of estimating asbestos-related liabilities and the corresponding insurance recoveries receivable is complex and dependent primarily on our historical claim experience, estimates of potential future claims, our legal strategy for resolving these claims, the availability of insurance coverage, and the solvency and creditworthiness of insurers. On an annual basis, we review, and update as appropriate, such estimated asbestos liabilities and assets and the underlying assumptions. Accruals for asbestos-related liabilities are included in
Other non-current liabilities held for sale
and the estimated receivable for insurance recoveries are recorded in
Other non-current assets held for sale
in the Consolidated Balance Sheets.
Insurance subsidiary
We insure certain general and product liability, property, workers' compensation and automobile liability risks through our regulated wholly-owned captive insurance subsidiary, Penwald Insurance Company ("Penwald"). Reserves for policy claims are established based on actuarial projections of ultimate losses. As of
December 31, 2016
and
2015
, reserves for policy claims were
$63.0 million
(
$13.2 million
included in
Other current liabilities
and
$49.8 million
included in
Other non-current liabilities
) and
$62.2 million
(
$13.2 million
included in
Other current liabilities
and
$49.0 million
included in
Other non-current liabilities
), respectively.
Share-based compensation
We account for share-based compensation awards on a fair value basis. The estimated grant date fair value of each option award is recognized in income on an accelerated basis over the requisite service period (generally the vesting period). The estimated fair value of each option award is calculated using the Black-Scholes option-pricing model. From time to time, we have elected to modify the terms of the original grant. These modified grants are accounted for as a new award and measured
Pentair plc and Subsidiaries
Notes to consolidated financial statements
using the fair value method, resulting in the inclusion of additional compensation expense in our Consolidated Statements of Operations and Comprehensive Income (Loss). Restricted share awards and units are recorded as compensation cost on an accelerated basis over the requisite service periods based on the market value on the date of grant.
Performance share units ("PSU") are stock awards where the ultimate number of shares issued will be contingent on the Company's performance against certain financial performance targets. The fair value of each PSU is based on the market value on the date of grant. We recognize expense related to the estimated vesting of our PSUs granted. The estimated vesting of the performance share units is based on the probability of achieving certain financial performance thresholds over the specified performance period.
Earnings (loss) per ordinary share
Basic earnings (loss) per share are computed by dividing net income (loss) attributable to Pentair plc by the weighted-average number of ordinary shares outstanding. Diluted earnings (loss) per share are computed by dividing net income (loss) attributable to Pentair plc by the weighted-average number of ordinary shares outstanding including the dilutive effects of ordinary share equivalents.
Derivative financial instruments
We recognize all derivatives, including those embedded in other contracts, as either assets or liabilities at fair value in our Consolidated Balance Sheets. If the derivative is designated and is effective as a cash-flow hedge, changes in the fair value of the derivative are recorded in
Accumulated other comprehensive income (loss)
("AOCI") as a separate component of equity in the Consolidated Balance Sheets and is recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) when the hedged item affects earnings. If the underlying hedged transaction ceases to exist or if the hedge becomes ineffective, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings. For a derivative that is not designated as or does not qualify as a hedge, changes in fair value are reported in earnings immediately.
Gains and losses on net investment hedges are included in AOCI as a separate component of equity in the Consolidated Balance Sheets.
We use derivative instruments for the purpose of hedging interest rate and currency exposures, which exist as part of ongoing business operations. We do not hold or issue derivative financial instruments for trading or speculative purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of and have been designated as, normal purchases or sales. Our policy is not to enter into contracts with terms that cannot be designated as normal purchases or sales. From time to time, we may enter into short duration foreign currency contracts to hedge foreign currency risks.
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.
Foreign currency translation
The financial statements of subsidiaries located outside of the U.S. are generally measured using the local currency as the functional currency, except for certain corporate entities outside of the U.S. which are measured using USD. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. The resultant translation adjustments are included in AOCI, a separate component of equity.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
New accounting standards
In March 2016, the Financial Accounting Standards Board ("FASB") issued a new accounting standard that will change certain aspects of accounting for share-based payments to employees, including the accounting for income taxes, forfeitures and statutory withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. We will adopt this standard during the first quarter of 2017. We do not expect the adoption of the standard to have a significant impact on our financial condition or results of operations.
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 new standard is effective for fiscal years 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 November 2015, the FASB issued a new accounting standard which clarifies and simplifies the balance sheet classification of deferred tax assets and liabilities. Under the new standard, all deferred tax assets and liabilities are required to be classified as non-current in a classified balance sheet. The Company adopted the new standard on a prospective basis in the fourth quarter of 2016 and the prior period was not retrospectively adjusted. The adoption of the standard did not impact the Company's consolidated financial position, results of operations, equity or cash flows.
In April 2015, the FASB issued a new accounting standard which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new standard was effective for annual and interim periods beginning after December 15, 2015. We adopted the new standard during the first quarter of 2016 and, as a result, reclassified unamortized debt issuance costs of
$23.5 million
from
Other current assets
and
Other non-current assets
to
Long-term debt
on the Consolidated Balance Sheet as of December 31, 2015.
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 is currently evaluating the overall impact this standard will have on our consolidated financial statements and related disclosures, as well as the expected method of adoption.
Material acquisitions
On September 18, 2015, we acquired, as part of Technical Solutions, all of the outstanding shares of capital stock of ERICO Global Company ("ERICO") for approximately
$1.8 billion
(the "ERICO Acquisition"). ERICO is a leading global manufacturer and marketer of engineered electrical and fastening products for electrical, mechanical and civil applications. ERICO has employees in 30 countries across the world with recognized brands including CADDY fixing, fastening and support products; ERICO electrical grounding, bonding and connectivity products and LENTON engineered systems.
The purchase price has been allocated based on the fair value of assets acquired and liabilities assumed at the date of the ERICO Acquisition. The purchase price allocation was completed in the third quarter of 2016.
The following table summarizes our preliminary estimates of the fair values of the assets acquired and liabilities assumed in the ERICO Acquisition as previously reported at December 31, 2015 and as revised for adjustments made during 2016:
Pentair plc and Subsidiaries
Notes to consolidated financial statements
|
|
|
|
|
|
|
|
In millions
|
As Originally Reported
|
As Revised
|
Cash
|
$
|
11.8
|
|
$
|
11.8
|
|
Accounts receivable
|
75.9
|
|
75.9
|
|
Inventories
|
102.4
|
|
101.8
|
|
Other current assets
|
2.9
|
|
2.8
|
|
Property, plant and equipment
|
53.4
|
|
53.1
|
|
Identifiable intangible assets
|
1,033.8
|
|
1,033.8
|
|
Goodwill
|
1,061.9
|
|
1,031.0
|
|
Current liabilities
|
(97.2
|
)
|
(94.7
|
)
|
Deferred income taxes, including current
|
(418.8
|
)
|
(382.3
|
)
|
Other liabilities
|
(8.0
|
)
|
(15.1
|
)
|
Purchase price
|
$
|
1,818.1
|
|
$
|
1,818.1
|
|
The excess of purchase price over tangible net assets and identified intangible assets acquired has been allocated to goodwill in the amount of
$1,031.0 million
, none of which is expected to be deductible for income tax purposes. Identifiable intangible assets acquired as part of the ERICO Acquisition include
$228.4 million
of indefinite-lived trade name intangible assets and
$805.4 million
of definite-lived customer relationships with an estimated useful life of
21
years.
The following unaudited pro forma consolidated condensed financial results of operations are presented as if the ERICO Acquisition was consummated on January 1, 2014, the beginning of the comparable prior annual reporting period:
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions, except share and per-share data
|
2015
|
2014
|
Pro forma net sales
|
$
|
5,002.6
|
|
$
|
5,223.8
|
|
Pro forma net income from continuing operations
|
460.4
|
|
358.8
|
|
Pro forma earnings per ordinary share - continuing operations
|
|
|
Basic
|
$
|
2.55
|
|
$
|
1.88
|
|
Diluted
|
2.52
|
|
1.85
|
|
The unaudited pro forma net income from continuing operations for the year ended
December 31, 2014
was adjusted to include the impact of
$32.8 million
in non-recurring items related to acquisition date fair value adjustments to inventory. The unaudited pro forma net income for the year ended
December 31, 2015
excludes the impact of
$24.6 million
of non-recurring transaction related and bridge financing costs.
The pro forma condensed consolidated financial information has been prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates based on currently available information and actual amounts may differ materially from these estimates. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of the ERICO Acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the ERICO Acquisition occurred on January 1, 2014.
Other acquisitions
In November 2016, we completed an acquisition as part of Water Quality Systems with a purchase price of
$25.0 million
in cash, net of cash acquired. The pro forma impact of the acquisition was not material.
In April 2015, we acquired, as part of Technical Solutions, all of the outstanding shares of capital stock of Nuheat Industries Limited ("Nuheat") for
$96.0 million
in cash (
120.5 million
Canadian dollars translated at the April 2, 2015 exchange rate), net of cash acquired. In November 2015, cash of
$0.9 million
(
1.2 million
Canadian dollars translated at the average monthly exchange rate) was paid to Nuheat in settlement of a working capital adjustment. Based in Canada, Nuheat is a leading manufacturer of electric floor heating systems that are distributed across North America. Total goodwill recorded as part of the purchase allocation was
$43.2 million
, none of which is tax deductible. Identified intangible assets acquired consisted of customer relationships of
$53.3 million
, with an estimated useful life of 17 years. The pro forma impact of this acquisition was not material.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
On January 30, 2014, we acquired, as part of Water Quality Systems, the remaining
19.9 percent
ownership interest in two entities, a U.S. entity and an international entity (collectively, Pentair Residential Filtration or "PRF"), from GE Water & Process Technologies (a unit of General Electric Company) ("GE") for
$134.3 million
in cash. Prior to the acquisition, we held a
80.1 percent
ownership equity interest in PRF, representing our and GE's respective global water softener and residential water filtration businesses. There was no material pro forma impact from this acquisition as the results of PRF were consolidated into our financial statements prior to acquiring the remaining interest.
|
|
3.
|
Discontinued Operations
|
On August 18, 2016, we entered into a Share Purchase Agreement (the "Purchase Agreement") to sell our Valves & Controls business to Emerson Electric Co. for a purchase price of
$3.15 billion
in cash, subject to certain customary adjustments. We believe the sale will be completed by the end of the first quarter of 2017, subject to customary regulatory approvals and closing conditions.
We have concluded, as a result of the signing of the Purchase Agreement, that the Valves & Controls business has met the criteria to be classified as held for sale. The results of the Valves & Controls business have been presented as discontinued operations and the related assets and liabilities have been reclassified as held for sale for all periods presented. The Valves & Controls business was previously disclosed as a stand-alone reporting segment. Transaction costs of
$24.2 million
related to the sale of Valves & Controls were incurred during the
year ended
December 31, 2016
and were recorded within
Selling, general and administrative
expenses in the operating results of discontinued operations presented below.
On July 28, 2014, our Board of Directors approved a decision to exit our Water Transport business in Australia. During the third quarter of 2014, we recognized an impairment charge related to allocated amounts of goodwill, intangible assets, property, plant & equipment and other non-current assets totaling
$380.1 million
, net of a
$12.3 million
tax benefit, representing our estimated loss on disposal of the Water Transport business. The impairment charge was determined using significant unobservable inputs ("Level 3" fair value measurements). In addition, during the first quarter of 2014 and fourth quarter of 2013, we sold portions of our Water Transport business in Australia and New Zealand, respectively, resulting in losses of
$5.6 million
, net of a
$2.4 million
tax benefit, and
$0.8 million
, net of a
$0.3 million
tax benefit, respectively.
During 2015, we sold the remainder of our Water Transport business and received cash proceeds of
$59.0 million
. The results of the Water Transport business have been presented as discontinued operations.
Operating results of discontinued operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions
|
2016
|
2015
|
2014
|
Net sales
|
$
|
1,639.4
|
|
$
|
1,858.6
|
|
$
|
2,673.3
|
|
Cost of goods sold
|
1,177.1
|
|
1,271.2
|
|
1,785.1
|
|
Gross profit
|
462.3
|
|
587.4
|
|
888.2
|
|
Selling, general and administrative
|
367.6
|
|
457.8
|
|
551.5
|
|
Research and development
|
18.2
|
|
21.2
|
|
23.4
|
|
Impairment of goodwill and trade names
|
—
|
|
554.7
|
|
—
|
|
Operating income (loss)
|
$
|
76.5
|
|
$
|
(446.3
|
)
|
$
|
313.3
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes
|
$
|
77.2
|
|
$
|
(445.5
|
)
|
$
|
314.9
|
|
Provision for income taxes
|
7.2
|
|
21.3
|
|
70.9
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
70.0
|
|
$
|
(466.8
|
)
|
$
|
244.0
|
|
|
|
|
|
Gain (loss) from sale / impairment of discontinued operations before income taxes
|
$
|
0.6
|
|
$
|
(6.7
|
)
|
$
|
(400.4
|
)
|
Income tax benefit
|
—
|
|
—
|
|
14.7
|
|
Gain (loss) from sale / impairment of discontinued operations, net of tax
|
$
|
0.6
|
|
$
|
(6.7
|
)
|
$
|
(385.7
|
)
|
Pentair plc and Subsidiaries
Notes to consolidated financial statements
The carrying amounts of major classes of assets and liabilities that were classified as held for sale on the Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
December 31
|
In millions
|
2016
|
2015
|
Accounts and notes receivable, net
|
$
|
365.4
|
|
$
|
394.5
|
|
Inventories
|
491.5
|
|
609.6
|
|
Other current assets
|
35.0
|
|
89.3
|
|
Current assets held for sale
|
$
|
891.9
|
|
$
|
1,093.4
|
|
Property, plant and equipment, net
|
$
|
361.5
|
|
$
|
403.1
|
|
Goodwill
|
996.4
|
|
996.4
|
|
Intangibles, net
|
703.5
|
|
742.7
|
|
Asbestos-related insurance receivable
|
108.5
|
|
111.0
|
|
Other non-current assets
|
123.0
|
|
95.4
|
|
Non-current assets held for sale
|
$
|
2,292.9
|
|
$
|
2,348.6
|
|
Accounts payable
|
$
|
151.4
|
|
$
|
175.0
|
|
Employee compensation and benefits
|
61.5
|
|
100.3
|
|
Other current liabilities
|
143.3
|
|
157.7
|
|
Current liabilities held for sale
|
$
|
356.2
|
|
$
|
433.0
|
|
Pension and other post-retirement compensation and benefits
|
$
|
32.2
|
|
$
|
42.6
|
|
Deferred tax liabilities
|
162.8
|
|
173.9
|
|
Asbestos-related liabilities
|
228.3
|
|
237.9
|
|
Other non-current liabilities
|
82.6
|
|
90.8
|
|
Non-current liabilities held for sale
|
$
|
505.9
|
|
$
|
545.2
|
|
|
|
4.
|
Earnings (Loss) Per Share
|
Basic and diluted earnings (loss) per share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions, except per share data
|
2016
|
2015
|
2014
|
Net income (loss)
|
$
|
522.2
|
|
$
|
(76.4
|
)
|
$
|
214.9
|
|
Net income from continuing operations
|
$
|
451.6
|
|
$
|
397.1
|
|
$
|
356.6
|
|
Weighted average ordinary shares outstanding
|
|
|
|
Basic
|
181.3
|
|
180.3
|
|
190.6
|
|
Dilutive impact of stock options and restricted stock awards
|
1.8
|
|
2.3
|
|
3.1
|
|
Diluted
|
183.1
|
|
182.6
|
|
193.7
|
|
Earnings (loss) per ordinary share
|
|
|
|
Basic
|
|
|
|
Continuing operations
|
$
|
2.49
|
|
$
|
2.20
|
|
$
|
1.87
|
|
Discontinued operations
|
0.39
|
|
(2.62
|
)
|
(0.74
|
)
|
Basic earnings (loss) per ordinary share
|
$
|
2.88
|
|
$
|
(0.42
|
)
|
$
|
1.13
|
|
Diluted
|
|
|
|
Continuing operations
|
$
|
2.47
|
|
$
|
2.17
|
|
$
|
1.84
|
|
Discontinued operations
|
0.38
|
|
(2.59
|
)
|
(0.73
|
)
|
Diluted earnings (loss) per ordinary share
|
$
|
2.85
|
|
$
|
(0.42
|
)
|
$
|
1.11
|
|
Anti-dilutive stock options excluded from the calculation of diluted earnings per share
|
1.2
|
|
1.3
|
|
0.5
|
|
Pentair plc and Subsidiaries
Notes to consolidated financial statements
During
2016
,
2015
and
2014
, we initiated and continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. The
2016
initiatives included a reduction in hourly and salaried headcount of approximately
650
employees, which included
100
in Water Quality Systems,
200
in Flow & Filtration Solutions and
350
in Technical Solutions. The
2015
initiatives included the reduction in hourly and salaried headcount of approximately
500
employees, which included
100
in Water Quality Systems,
200
in Flow & Filtration Solutions and
200
in Technical Solutions. The
2014
initiatives included the reduction in hourly and salaried headcount of approximately
550
employees, which included
50
in Water Quality Systems,
350
in Flow & Filtration Solutions and
150
in Technical Solutions.
Restructuring related costs included in
Selling, general and administrative
expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss) included costs for severance and other restructuring costs as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions
|
2016
|
2015
|
2014
|
Severance and related costs
|
$
|
24.5
|
|
$
|
34.5
|
|
$
|
23.3
|
|
Other
|
—
|
|
6.8
|
|
16.2
|
|
Total restructuring costs
|
$
|
24.5
|
|
$
|
41.3
|
|
$
|
39.5
|
|
Other restructuring costs primarily consist of asset impairment and various contract termination costs.
Restructuring costs by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions
|
2016
|
2015
|
2014
|
Water Quality Systems
|
$
|
6.0
|
|
$
|
6.2
|
|
$
|
15.2
|
|
Flow & Filtration Solutions
|
4.5
|
|
11.2
|
|
14.0
|
|
Technical Solutions
|
12.3
|
|
15.7
|
|
4.3
|
|
Other
|
1.7
|
|
8.2
|
|
6.0
|
|
Consolidated
|
$
|
24.5
|
|
$
|
41.3
|
|
$
|
39.5
|
|
Activity related to accrued severance and related costs recorded in
Other current liabilities
in the Consolidated Balance Sheets is summarized as follows:
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions
|
2016
|
2015
|
Beginning balance
|
$
|
37.1
|
|
$
|
34.7
|
|
Costs incurred
|
24.5
|
|
34.5
|
|
Cash payments and other
|
(36.2
|
)
|
(32.1
|
)
|
Ending balance
|
$
|
25.4
|
|
$
|
37.1
|
|
|
|
6.
|
Goodwill and Other Identifiable Intangible Assets
|
The changes in the carrying amount of goodwill for the years ended
December 31, 2016
and
2015
by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
December 31, 2015
|
Acquisitions/
divestitures
|
Purchase accounting adjustments
|
Foreign currency
translation/other
|
December 31, 2016
|
Water Quality Systems
|
$
|
1,121.1
|
|
$
|
20.8
|
|
$
|
—
|
|
$
|
(4.8
|
)
|
$
|
1,137.1
|
|
Flow & Filtration Solutions
|
882.7
|
|
—
|
|
—
|
|
(25.2
|
)
|
857.5
|
|
Technical Solutions
|
2,255.2
|
|
—
|
|
(30.9
|
)
|
(1.5
|
)
|
2,222.8
|
|
Total goodwill
|
$
|
4,259.0
|
|
$
|
20.8
|
|
$
|
(30.9
|
)
|
$
|
(31.5
|
)
|
$
|
4,217.4
|
|
Pentair plc and Subsidiaries
Notes to consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
December 31, 2014
|
Acquisitions/
divestitures
|
Foreign currency
translation/other
|
December 31, 2015
|
Water Quality Systems
|
$
|
1,137.6
|
|
$
|
—
|
|
$
|
(16.5
|
)
|
$
|
1,121.1
|
|
Flow & Filtration Solutions
|
942.4
|
|
—
|
|
(59.7
|
)
|
882.7
|
|
Technical Solutions
|
1,150.3
|
|
1,116.4
|
|
(11.5
|
)
|
2,255.2
|
|
Total goodwill
|
$
|
3,230.3
|
|
$
|
1,116.4
|
|
$
|
(87.7
|
)
|
$
|
4,259.0
|
|
Accumulated goodwill impairment losses were
$200.5 million
as of
December 31, 2016
and
2015
.
Identifiable intangible assets consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
In millions
|
Cost
|
Accumulated
amortization
|
Net
|
|
Cost
|
Accumulated
amortization
|
Net
|
Finite-life intangibles
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
1,478.0
|
|
$
|
(346.7
|
)
|
$
|
1,131.3
|
|
|
$
|
1,482.9
|
|
$
|
(266.9
|
)
|
$
|
1,216.0
|
|
Trade names
|
1.8
|
|
(1.4
|
)
|
0.4
|
|
|
1.8
|
|
(1.2
|
)
|
0.6
|
|
Proprietary technology and patents
|
141.3
|
|
(100.3
|
)
|
41.0
|
|
|
144.1
|
|
(89.8
|
)
|
54.3
|
|
Total finite-life intangibles
|
1,621.1
|
|
(448.4
|
)
|
1,172.7
|
|
|
1,628.8
|
|
(357.9
|
)
|
1,270.9
|
|
Indefinite-life intangibles
|
|
|
|
|
|
|
|
Trade names
|
459.1
|
|
—
|
|
459.1
|
|
|
476.5
|
|
—
|
|
476.5
|
|
Total intangibles
|
$
|
2,080.2
|
|
$
|
(448.4
|
)
|
$
|
1,631.8
|
|
|
$
|
2,105.3
|
|
$
|
(357.9
|
)
|
$
|
1,747.4
|
|
Identifiable intangible asset amortization expense in
2016
,
2015
and
2014
was
$96.4 million
,
$68.1 million
and
$60.6 million
, respectively.
In
2016
, we recorded an impairment charge for trade name intangible assets of
$13.3 million
in Technical Solutions. There were
no
impairment charges recorded in
2015
and
2014
.
Estimated future amortization expense for identifiable intangible assets during the next five years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2017
|
2018
|
2019
|
2020
|
2021
|
Estimated amortization expense
|
$
|
95.5
|
|
$
|
94.0
|
|
$
|
91.6
|
|
$
|
85.0
|
|
$
|
80.0
|
|
Pentair plc and Subsidiaries
Notes to consolidated financial statements
|
|
7.
|
Supplemental Balance Sheet Information
|
|
|
|
|
|
|
|
|
|
December 31
|
In millions
|
2016
|
2015
|
Inventories
|
|
|
Raw materials and supplies
|
$
|
223.5
|
|
$
|
243.9
|
|
Work-in-process
|
67.3
|
|
74.4
|
|
Finished goods
|
233.4
|
|
246.4
|
|
Total inventories
|
$
|
524.2
|
|
$
|
564.7
|
|
Other current assets
|
|
|
Cost in excess of billings
|
$
|
107.7
|
|
$
|
114.4
|
|
Prepaid expenses
|
68.7
|
|
59.1
|
|
Prepaid income taxes
|
67.2
|
|
0.8
|
|
Other current assets
|
9.8
|
|
45.7
|
|
Total other current assets
|
$
|
253.4
|
|
$
|
220.0
|
|
Property, plant and equipment, net
|
|
|
Land and land improvements
|
$
|
66.2
|
|
$
|
86.6
|
|
Buildings and leasehold improvements
|
335.0
|
|
338.9
|
|
Machinery and equipment
|
932.5
|
|
960.2
|
|
Construction in progress
|
68.6
|
|
68.3
|
|
Total property, plant and equipment
|
1,402.3
|
|
1,454.0
|
|
Accumulated depreciation and amortization
|
863.7
|
|
914.2
|
|
Total property, plant and equipment, net
|
$
|
538.6
|
|
$
|
539.8
|
|
Other non-current assets
|
|
|
Deferred income taxes
|
$
|
39.0
|
|
$
|
2.2
|
|
Deferred compensation plan assets
|
47.9
|
|
50.8
|
|
Other non-current assets
|
95.2
|
|
108.1
|
|
Total other non-current assets
|
$
|
182.1
|
|
$
|
161.1
|
|
Other current liabilities
|
|
|
Dividends payable
|
$
|
61.8
|
|
$
|
59.6
|
|
Accrued warranty
|
38.9
|
|
47.0
|
|
Accrued rebates
|
78.2
|
|
50.7
|
|
Billings in excess of cost
|
22.5
|
|
32.0
|
|
Income taxes payable
|
87.3
|
|
58.9
|
|
Other current liabilities
|
222.8
|
|
238.9
|
|
Total other current liabilities
|
$
|
511.5
|
|
$
|
487.1
|
|
Other non-current liabilities
|
|
|
Income taxes payable
|
$
|
36.1
|
|
$
|
46.8
|
|
Self-insurance liabilities
|
49.8
|
|
49.0
|
|
Deferred compensation plan liabilities
|
47.9
|
|
50.8
|
|
Other non-current liabilities
|
28.2
|
|
45.8
|
|
Total other non-current liabilities
|
$
|
162.0
|
|
$
|
192.4
|
|
Pentair plc and Subsidiaries
Notes to consolidated financial statements
|
|
8.
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions
|
2016
|
2015
|
2014
|
Cash paid for interest, net
|
$
|
143.4
|
|
$
|
76.9
|
|
$
|
67.5
|
|
Cash paid for income taxes, net
|
145.1
|
|
182.8
|
|
134.2
|
|
|
|
9.
|
Accumulated Other Comprehensive Income (Loss)
|
Components of AOCI consist of the following:
|
|
|
|
|
|
|
|
|
December 31
|
In millions
|
2016
|
2015
|
Cumulative translation adjustments
|
$
|
(718.9
|
)
|
$
|
(635.9
|
)
|
Change in market value of derivative financial instruments, net of tax
|
(17.4
|
)
|
(9.1
|
)
|
Accumulated other comprehensive loss
|
$
|
(736.3
|
)
|
$
|
(645.0
|
)
|
Debt and the average interest rates on debt outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
In millions
|
Average
interest rate at
|
Maturity
year
|
December 31
|
December 31, 2016
|
2016
|
2015
|
Commercial paper
|
1.754%
|
2019
|
$
|
398.7
|
|
$
|
179.5
|
|
Revolving credit facilities
|
2.192%
|
2019
|
576.8
|
|
1,181.4
|
|
Senior notes - fixed rate
|
1.875%
|
2017
|
350.0
|
|
350.0
|
|
Senior notes - fixed rate
|
2.900%
|
2018
|
500.0
|
|
500.0
|
|
Senior notes - fixed rate
|
2.650%
|
2019
|
250.0
|
|
250.0
|
|
Senior notes - fixed rate - Euro
|
2.450%
|
2019
|
520.7
|
|
548.4
|
|
Senior notes - fixed rate
|
3.625%
|
2020
|
400.0
|
|
400.0
|
|
Senior notes - fixed rate
|
5.000%
|
2021
|
500.0
|
|
500.0
|
|
Senior notes - fixed rate
|
3.150%
|
2022
|
550.0
|
|
550.0
|
|
Senior notes - fixed rate
|
4.650%
|
2025
|
250.0
|
|
250.0
|
|
Other
|
N/A
|
N/A
|
0.8
|
|
—
|
|
Unamortized debt issuance costs and discounts
|
N/A
|
N/A
|
(17.8
|
)
|
(23.5
|
)
|
Total debt
|
|
|
4,279.2
|
|
4,685.8
|
|
Less: Current maturities and short-term borrowings
|
|
|
(0.8
|
)
|
—
|
|
Long-term debt
|
|
|
$
|
4,278.4
|
|
$
|
4,685.8
|
|
In September 2015, Pentair plc, Pentair Finance S.A. ("PFSA") and Pentair Investments Switzerland GmbH ("PISG"), a 100-percent owned subsidiary of Pentair plc and the 100-percent owner of PFSA, completed public offerings (the "September 2015 Offerings") of
$500.0 million
aggregate principal amount of PFSA's
2.90%
Senior Notes due
2018
,
$400.0 million
aggregate principal amount of PFSA's
3.625%
Senior Notes due
2020
,
$250.0 million
aggregate principal amount of PFSA's
4.65%
Senior Notes due
2025
and
€500.0 million
aggregate principal amount of PFSA's
2.45%
Senior Notes due
2019
, all of which are guaranteed as to payment by Pentair plc and PISG. Pentair plc used the net proceeds from the September 2015 Offerings to finance the ERICO Acquisition.
The Senior Notes issued in the September 2015 Offerings,
1.875%
Senior Notes due
2017
,
2.65%
Senior Notes due
2019
,
$373.0 million
of the
5.00%
Senior Notes due
2021
and
3.15%
Senior Notes due
2022
issued by PFSA and
$127.0 million
of the
5.00%
Senior Notes due
2021
issued by Pentair, Inc. (collectively, the "Notes"), are guaranteed as to payment by Pentair plc and PISG.
In October 2014, Pentair plc, PISG, 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
Pentair plc and Subsidiaries
Notes to consolidated financial statements
maximum aggregate availability to
$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 Second Amendment, the "Amendments"), which, among other things, increased the maximum Leverage Ratio to the amounts specified below, and amended the definition of EBITDA to include earnings from discontinued operations subject to a sale agreement until such disposition actually occurs.
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. As of
December 31, 2016
and
2015
, we had
$398.7 million
and
$179.5 million
, respectively, of commercial paper outstanding, all of which was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility.
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, 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 (a)
4.50
to
1.00
as of the last day of any period of four consecutive fiscal quarters ending on September 30, 2016; (b)
4.50
to
1.00
as of the last day of the period of four consecutive fiscal quarters ending on December 31, 2016; (c)
4.25
to
1.00
as of the last day of the period of four consecutive fiscal quarters ending on March 31, 2017; (d)
4.00
to
1.00
as of the last day of the period of four consecutive fiscal quarters ending on June 30, 2017; and (e)
3.50
to
1.00
as of the last day of the period of four consecutive fiscal quarters ending thereafter, 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
December 31, 2016
,
we were in compliance with all financial covenants in our debt agreements.
Total availability under the Credit Facility was
$1,524.5 million
as of
December 31, 2016
, which was limited to
$803.5 million
by the 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
$49.4 million
, of which there were
no
outstanding borrowings at
December 31, 2016
. Borrowings under these credit facilities bear interest at variable rates.
We have
$350.0 million
of fixed rate senior notes maturing in September
2017
. We classified this debt as long-term as of
December 31, 2016
as we have the intent and ability to refinance such obligation on a long-term basis under the Credit Facility.
Debt outstanding, excluding unamortized issuance costs and discounts
,
at
December 31, 2016
matures on a calendar year basis as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2017
|
2018
|
2019
|
2020
|
2021
|
Thereafter
|
Total
|
Contractual debt obligation maturities
|
$
|
0.8
|
|
$
|
500.0
|
|
$
|
2,096.2
|
|
$
|
400.0
|
|
$
|
500.0
|
|
$
|
800.0
|
|
$
|
4,297.0
|
|
Pentair plc and Subsidiaries
Notes to consolidated financial statements
|
|
11.
|
Derivatives and Financial Instruments
|
Derivative financial instruments
We are exposed to market risk related to changes in foreign currency exchange rates. To manage the volatility related to this exposure, we periodically enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates. The derivative contracts contain credit risk to the extent that our bank counterparties may be unable to meet the terms of the agreements. The amount of such credit risk is generally limited to the unrealized gains, if any, in such contracts. Such risk is minimized by limiting those counterparties to major financial institutions of high credit quality.
Foreign currency contracts
We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. We manage our economic and transaction exposure to certain market-based risks through the use of foreign currency derivative financial instruments. Our objective in holding these derivatives is to reduce the volatility of net earnings and cash flows associated with changes in foreign currency exchange rates. The majority of our foreign currency contracts have an original maturity date of less than one year.
At
December 31, 2016
and
2015
, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of
$475.6 million
and
$331.5 million
, respectively. The impact of these contracts on the 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 AOCI and into
Selling, general and administrative expense
in the Consolidated Statements of Operations and Comprehensive Income (Loss) upon settlement. Such reclassifications during
2016
,
2015
and
2014
were not material.
Net investment hedge
We have net investments in foreign subsidiaries that are subject to changes in the foreign currency exchange rate. In September 2015,
we designated the €500 million 2.45% Senior Notes due 2019 (the "2019 Euro Notes") as a net investment hedge for a portion of our net investment in our Euro denominated subsidiaries
. The gains/losses on the 2019 Euro Notes have been included as a component of the cumulative translation adjustment account within AOCI. As of
December 31, 2016
and
2015
, we had deferred foreign currency gains of
$44.2 million
and
$16.4 million
, respectively, in AOCI associated with the net investment hedge activity.
Fair value of financial instruments
The following methods were used to estimate the fair values of each class of financial instrument:
|
|
•
|
short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes payable and variable-rate debt) — recorded amount approximates fair value because of the short maturity period;
|
|
|
•
|
long-term fixed-rate debt, including current maturities — fair value is based on market quotes available for issuance of debt with similar terms, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance; and
|
|
|
•
|
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.
|
The recorded amounts and estimated fair values of total debt, excluding unamortized issuance costs and discounts
,
at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
In millions
|
Recorded
Amount
|
Fair Value
|
|
Recorded
Amount
|
Fair Value
|
Variable rate debt
|
$
|
976.3
|
|
$
|
976.3
|
|
|
$
|
1,360.9
|
|
$
|
1,360.9
|
|
Fixed rate debt
|
3,320.7
|
|
3,427.1
|
|
|
3,348.4
|
|
3,395.4
|
|
Total debt
|
$
|
4,297.0
|
|
$
|
4,403.4
|
|
|
$
|
4,709.3
|
|
$
|
4,756.3
|
|
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Financial assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring fair value measurements
|
December 31, 2016
|
In millions
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Foreign currency contract assets
|
$
|
—
|
|
$
|
5.5
|
|
$
|
—
|
|
$
|
5.5
|
|
Foreign currency contract liabilities
|
—
|
|
(5.4
|
)
|
—
|
|
(5.4
|
)
|
Deferred compensation plans assets
(2)
|
41.6
|
|
6.3
|
|
—
|
|
47.9
|
|
Total recurring fair value measurements
|
$
|
41.6
|
|
$
|
6.4
|
|
$
|
—
|
|
$
|
48.0
|
|
Nonrecurring fair value measurements
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring fair value measurements
|
December 31, 2015
|
In millions
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Foreign currency contract assets
|
$
|
—
|
|
$
|
0.1
|
|
$
|
—
|
|
$
|
0.1
|
|
Foreign currency contract liabilities
|
—
|
|
(7.6
|
)
|
—
|
|
(7.6
|
)
|
Deferred compensation plan assets
(2)
|
43.8
|
|
7.0
|
|
—
|
|
50.8
|
|
Total recurring fair value measurements
|
$
|
43.8
|
|
$
|
(0.5
|
)
|
$
|
—
|
|
$
|
43.3
|
|
Nonrecurring fair value measurements
(3) (4)
|
|
|
|
|
|
|
(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.
|
|
|
(2)
|
Deferred compensation plan assets include mutual funds, common/collective trusts and cash equivalents for payment of certain non-qualified benefits for retired, terminated and active employees. The fair value of mutual funds and cash equivalents were based on quoted market prices in active markets. The underlying investments in the common/collective trusts primarily include intermediate and long-term debt securities, corporate debt securities, equity securities and fixed income securities. The overall fair value of the common/collective trusts are based on observable inputs.
|
|
|
(3)
|
During the fourth quarter of 2015, we performed a goodwill impairment test for the Valves & Controls reporting unit using the required two-step process as of December 31, 2015. As a result, we recorded a non-cash goodwill impairment charge of
$515.2 million
. The first step of this process includes comparing the fair value to the carrying value of the reporting unit to which the goodwill is allocated to identify potential impairment. If the fair value of the reporting unit exceeds its carrying value, goodwill allocated to that reporting unit is not considered impaired. If the inverse result is observed, the reporting unit is considered to be impaired and step two of the test to measure the amount of impairment must be completed.
|
The fair value of the reporting unit was determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations.
Step two compares the implied fair value of the goodwill with the carrying value of that goodwill. If the carrying value of the goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
|
|
(4)
|
During the fourth quarter of 2015, we performed an impairment test for our Valves & Controls trade names. As a result, we recorded a pre-tax, non-cash trade name impairment charge of
$39.5 million
. The fair value of trade names is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.
|
The Valves & Controls business referred to above has met the criteria to be classified as held for sale and is presented as discontinued operations for all periods presented. See Note 3 of the Notes to the Consolidated Financial Statements for additional information.
Income from continuing operations before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions
|
2016
|
2015
|
2014
|
Federal
(1)
|
$
|
(25.6
|
)
|
$
|
(21.8
|
)
|
$
|
(15.8
|
)
|
International
(2)
|
586.6
|
|
534.3
|
|
486.7
|
|
Income from continuing operations before income taxes
|
$
|
561.0
|
|
$
|
512.5
|
|
$
|
470.9
|
|
|
|
(1)
|
"Federal" reflects U.K. income from continuing operations before income taxes.
|
|
|
(2)
|
"International" reflects non-U.K. income from continuing operations before income taxes.
|
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions
|
2016
|
2015
|
2014
|
Currently payable
|
|
|
|
Federal
(1)
|
$
|
(0.1
|
)
|
$
|
—
|
|
$
|
0.5
|
|
International
(2)
|
125.6
|
|
117.7
|
|
136.8
|
|
Total current taxes
|
125.5
|
|
117.7
|
|
137.3
|
|
Deferred
|
|
|
|
Federal
(1)
|
(0.4
|
)
|
1.2
|
|
(0.7
|
)
|
International
(2)
|
(15.7
|
)
|
(3.5
|
)
|
(22.3
|
)
|
Total deferred taxes
|
(16.1
|
)
|
(2.3
|
)
|
(23.0
|
)
|
Total provision for income taxes
|
$
|
109.4
|
|
$
|
115.4
|
|
$
|
114.3
|
|
|
|
(1)
|
"Federal" represents U.K. taxes.
|
|
|
(2)
|
"International" represents non-U.K. taxes.
|
Reconciliations of the federal statutory income tax rate to our effective tax rate were as follows:
|
|
|
|
|
|
|
|
|
Years ended December 31
|
Percentages
|
2016
|
2015
|
2014
|
Federal statutory income tax rate
(1)
|
20.0
|
|
20.3
|
|
21.0
|
|
Tax effect of international operations
(2)
|
(11.8
|
)
|
(6.5
|
)
|
(4.9
|
)
|
Change in valuation allowances
|
9.7
|
|
6.9
|
|
4.4
|
|
Withholding taxes
|
0.9
|
|
0.6
|
|
2.8
|
|
Interest limitations
|
0.6
|
|
0.7
|
|
1.0
|
|
Non-deductible transaction costs
|
0.1
|
|
0.5
|
|
—
|
|
Effective tax rate
|
19.5
|
|
22.5
|
|
24.3
|
|
|
|
(1)
|
The statutory rate for
2016
,
2015
and
2014
reflects the U.K. statutory rate of
20.0 percent
,
20.3 percent
and
21.0 percent
, respectively.
|
|
|
(2)
|
The tax effect of international operations consists of non-U.K. jurisdictions.
|
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Reconciliations of the beginning and ending gross unrecognized tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
In millions
|
2016
|
2015
|
2014
|
Beginning balance
|
$
|
45.6
|
|
$
|
40.3
|
|
$
|
39.5
|
|
Gross increases for tax positions in prior periods
|
27.4
|
|
4.7
|
|
0.8
|
|
Gross decreases for tax positions in prior periods
|
(4.8
|
)
|
(1.5
|
)
|
(0.2
|
)
|
Gross increases based on tax positions related to the current year
|
2.0
|
|
1.3
|
|
1.1
|
|
Gross decreases related to settlements with taxing authorities
|
(3.4
|
)
|
(1.9
|
)
|
(0.1
|
)
|
Reductions due to statute expiration
|
(0.8
|
)
|
(1.4
|
)
|
(1.1
|
)
|
Gross (decreases) increases due to currency fluctuations
|
(0.2
|
)
|
(2.5
|
)
|
0.3
|
|
Gross increases due to acquisitions
|
5.3
|
|
6.6
|
|
—
|
|
Ending balance
|
$
|
71.1
|
|
$
|
45.6
|
|
$
|
40.3
|
|
Included in the
$71.1 million
of total gross unrecognized tax benefits as of
December 31, 2016
was
$68.3 million
of tax benefits that, if recognized, would impact the effective tax rate. It is reasonably possible that the gross unrecognized tax benefits as of
December 31, 2016
may decrease by a range of
zero
to
$42.2 million
during
2017
, primarily as a result of the resolution of non-U.K. examinations, including U.S. federal and state examinations, and the expiration of various statutes of limitations. The
$27.4 million
gross increase for tax positions in prior periods consists primarily of a tentative settlement with the Internal Revenue Service ("IRS") related to the value of certain intellectual property sold from the U.S. to a non-U.S. affiliate. The increase for tax positions in prior periods had no impact on our effective tax rate.
Based on the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that certain unrecognized tax benefits for tax positions taken on previously filed tax returns will materially change from those recorded as liabilities in our financial statements. The IRS is currently examining the Panthro Acquisition Co. U.S. federal income tax returns for tax years ending December 31, 2012 and December 31, 2013. A number of tax periods from 2002 to present are under audit by tax authorities in various jurisdictions, including Canada, France, Germany, India, Italy, New Zealand and Singapore. We anticipate that several of these audits may be concluded in the foreseeable future. We are also subject to the 2012 Tax Sharing Agreement, discussed below, which generally applies to pre-Distribution Tyco tax periods which remain subject to audit by the IRS.
We record penalties and interest related to unrecognized tax benefits in
Provision for income taxes
and
Interest expense
, respectively, in the Consolidated Statements of Operations and Comprehensive Income (Loss). As of
December 31, 2016
and
2015
, we have liabilities of
$2.4 million
and
$2.3 million
, respectively, for the possible payment of penalties and
$11.0 million
and
$7.9 million
, respectively, for the possible payment of interest expense, which are recorded in
Other current liabilities
in the Consolidated Balance Sheets.
Taxes have not been provided on undistributed earnings of subsidiaries where it is our intention to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. It is not practicable to estimate the amount of tax that might be payable if such earnings were to be remitted.
Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as "temporary differences." We record the tax effect of these temporary differences as "deferred tax assets" (generally items that can be used as a tax deduction or credit in future periods) and "deferred tax liabilities" (generally items for which we received a tax deduction but the tax impact has not yet been recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss)).
Deferred taxes were recorded in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
December 31
|
In millions
|
2016
|
2015
|
Other current assets
|
$
|
—
|
|
$
|
34.4
|
|
Other non-current assets
|
39.0
|
|
2.2
|
|
Deferred tax liabilities
|
609.5
|
|
670.2
|
|
Net deferred tax liabilities
|
$
|
570.5
|
|
$
|
633.6
|
|
Pentair plc and Subsidiaries
Notes to consolidated financial statements
The tax effects of the major items recorded as deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
December 31
|
In millions
|
2016
|
2015
|
Deferred tax assets
|
|
|
Accrued liabilities and reserves
|
$
|
83.2
|
|
$
|
70.2
|
|
Pension and other post-retirement benefits
|
48.9
|
|
44.5
|
|
Employee compensation and benefits
|
76.6
|
|
78.3
|
|
Tax loss and credit carryforwards
|
391.0
|
|
293.8
|
|
Total deferred tax assets
|
599.7
|
|
486.8
|
|
Valuation allowance
|
380.8
|
|
286.5
|
|
Deferred tax assets, net of valuation allowance
|
218.9
|
|
200.3
|
|
Deferred tax liabilities
|
|
|
Property, plant and equipment
|
23.6
|
|
23.9
|
|
Goodwill and other intangibles
|
733.7
|
|
774.2
|
|
Other liabilities
|
32.1
|
|
35.8
|
|
Total deferred tax liabilities
|
789.4
|
|
833.9
|
|
Net deferred tax liabilities
|
$
|
570.5
|
|
$
|
633.6
|
|
As of
December 31, 2016
, tax loss carryforwards of
$1,462.4 million
were available to offset future income. A valuation allowance of
$378.9 million
exists for deferred income tax benefits related to the tax loss carryforwards which may not be realized. The increase in tax loss carryforwards and valuation allowance from
2015
to
2016
were primarily related to restructuring and interest expense. We believe sufficient taxable income will be generated in the respective jurisdictions to allow us to fully recover the remainder of the tax losses. The tax losses relate to Non-U.S. carryforwards of
$1,388.0 million
which are subject to varying expiration periods. Non-U.S. carryforwards of
$1,130.6 million
are located in jurisdictions with unlimited tax loss carryforward periods, while the remainder will begin to expire in
2017
. In addition, there were
no
U.S. federal tax loss carryforwards and
$74.4 million
of state tax loss carryforwards as of
December 31, 2016
, which will expire in future years through
2036
.
Tax sharing agreement
In connection with the Distribution, we entered into a tax sharing agreement (the "2012 Tax Sharing Agreement") with Tyco (now known as Johnson Controls International plc, "Johnson Controls") and The ADT Corporation ("ADT"), which governs the rights and obligations of ADT, Johnson Controls and us for certain pre-Distribution tax liabilities, including Johnson Controls' obligations under a separate tax sharing agreement (the "2007 Tax Sharing Agreement") entered into by Johnson Controls, Covidien Ltd. (now known as Medtronic plc, "Medtronic") and TE Connectivity Ltd. ("TE Connectivity") in connection with the 2007 distributions of Medtronic and TE Connectivity by Johnson Controls.
The 2012 Tax Sharing Agreement provides that we, Johnson Controls and ADT will share (i) certain pre-Distribution income tax liabilities that arise from adjustments made by tax authorities to our, Johnson Controls' and ADT's U.S. income tax returns, including withholding tax, income tax or other tax liabilities that could arise if the Merger, Distribution or certain internal transactions undertaken in anticipation of the Distribution are determined to be taxable for U.S. federal or Swiss tax purposes, and (ii) payments required to be made by Johnson Controls with respect to the 2007 Tax Sharing Agreement (the liabilities in clauses (i) and (ii) collectively, "Shared Tax Liabilities"). Johnson Controls is responsible for the first
$500 million
of Shared Tax Liabilities. As of December 31, 2016, Johnson Controls has paid
$210.0 million
of Shared Tax Liabilities. We and ADT will share
42%
and
58%
, respectively, of the next
$225 million
of Shared Tax Liabilities. We, ADT and Johnson Controls will share
20%
,
27.5%
and
52.5%
, respectively, of Shared Tax Liabilities above
$725 million
. Costs and expenses associated with the management of Shared Tax Liabilities will generally be shared
20%
by us,
27.5%
by ADT and
52.5%
by Johnson Controls. As of
December 31, 2016
, we have a liability of
$13.3 million
recorded for this matter in
Other non-current liabilities
in the Consolidated Balance Sheets.
In addition, under the terms of the 2012 Tax Sharing Agreement, in the event the Distribution, the ADT distribution, the internal transactions or the Merger were determined to be taxable as a result of actions taken after the Distribution by us, ADT or Johnson Controls, the party responsible for such failure would be responsible for all taxes imposed as a result thereof. If such failure is not the result of actions taken after the Distribution by us, ADT or Johnson Controls, then we, ADT and Johnson Controls would be responsible for any taxes imposed as a result of such determination in the same manner and in the same proportions as we, ADT and Johnson Controls are responsible for Shared Tax Liabilities.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Pension and other post-retirement plans
We sponsor U.S. and Non-U.S. defined-benefit pension and other post-retirement plans. Pension benefits are based principally on an employee's years of service and/or compensation levels near retirement. In addition, we provide certain post-retirement health care and life insurance benefits. Generally, the post-retirement health care and life insurance plans require contributions from retirees. In December 2007, we announced that we will be freezing certain U.S. pension plans as of December 31, 2017.
The information herein relates to defined-benefit pension and other post-retirement plans of our continuing operations only.
Obligations and funded status
The following tables present reconciliations of plan benefit obligations, fair value of plan assets and the funded status of pension plans and other post-retirement plans as of and for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pension plans
|
|
Non-U.S. pension plans
|
|
Other post-retirement
plans
|
In millions
|
2016
|
2015
|
|
2016
|
2015
|
|
2016
|
2015
|
Change in benefit obligations
|
|
|
|
|
|
|
|
|
Benefit obligation beginning of year
|
$
|
396.9
|
|
$
|
416.2
|
|
|
$
|
173.4
|
|
$
|
189.6
|
|
|
$
|
38.8
|
|
$
|
41.5
|
|
Service cost
|
11.2
|
|
14.0
|
|
|
6.6
|
|
7.8
|
|
|
0.2
|
|
0.2
|
|
Interest cost
|
16.4
|
|
14.9
|
|
|
4.1
|
|
3.9
|
|
|
1.5
|
|
1.5
|
|
Actuarial loss (gain)
|
0.9
|
|
(39.1
|
)
|
|
16.8
|
|
(6.5
|
)
|
|
(0.5
|
)
|
(0.9
|
)
|
Foreign currency translation
|
—
|
|
—
|
|
|
(9.2
|
)
|
(17.0
|
)
|
|
—
|
|
—
|
|
Benefits paid
|
(12.1
|
)
|
(9.1
|
)
|
|
(4.9
|
)
|
(4.4
|
)
|
|
(3.1
|
)
|
(3.5
|
)
|
Benefit obligation end of year
|
$
|
413.3
|
|
$
|
396.9
|
|
|
$
|
186.8
|
|
$
|
173.4
|
|
|
$
|
36.9
|
|
$
|
38.8
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets beginning of year
|
$
|
327.7
|
|
$
|
343.9
|
|
|
$
|
46.6
|
|
$
|
49.9
|
|
|
$
|
—
|
|
$
|
—
|
|
Actual return on plan assets
|
24.6
|
|
(11.1
|
)
|
|
3.0
|
|
1.3
|
|
|
—
|
|
—
|
|
Company contributions
|
4.2
|
|
4.0
|
|
|
5.8
|
|
5.2
|
|
|
3.1
|
|
3.5
|
|
Foreign currency translation
|
—
|
|
—
|
|
|
(4.8
|
)
|
(5.4
|
)
|
|
—
|
|
—
|
|
Benefits paid
|
(12.1
|
)
|
(9.1
|
)
|
|
(4.9
|
)
|
(4.4
|
)
|
|
(3.1
|
)
|
(3.5
|
)
|
Fair value of plan assets end of year
|
$
|
344.4
|
|
$
|
327.7
|
|
|
$
|
45.7
|
|
$
|
46.6
|
|
|
$
|
—
|
|
$
|
—
|
|
Funded status
|
|
|
|
|
|
|
|
|
Benefit obligations in excess of the fair value of plan assets
|
$
|
(68.9
|
)
|
$
|
(69.2
|
)
|
|
$
|
(141.1
|
)
|
$
|
(126.8
|
)
|
|
$
|
(36.9
|
)
|
$
|
(38.8
|
)
|
Amounts recorded in the Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pension plans
|
|
Non-U.S. pension plans
|
|
Other post-retirement
plans
|
In millions
|
2016
|
2015
|
|
2016
|
2015
|
|
2016
|
2015
|
Other non-current assets
|
$
|
0.8
|
|
$
|
0.5
|
|
|
$
|
3.2
|
|
$
|
4.5
|
|
|
$
|
—
|
|
$
|
—
|
|
Current liabilities
|
(4.4
|
)
|
(4.1
|
)
|
|
(2.9
|
)
|
(3.0
|
)
|
|
(3.2
|
)
|
(3.3
|
)
|
Non-current liabilities
|
(65.3
|
)
|
(65.6
|
)
|
|
(141.4
|
)
|
(128.3
|
)
|
|
(33.7
|
)
|
(35.5
|
)
|
Benefit obligations in excess of the fair value of plan assets
|
$
|
(68.9
|
)
|
$
|
(69.2
|
)
|
|
$
|
(141.1
|
)
|
$
|
(126.8
|
)
|
|
$
|
(36.9
|
)
|
$
|
(38.8
|
)
|
The accumulated benefit obligation for all defined benefit plans was
$585.9 million
and
$547.9 million
at
December 31, 2016
and
2015
, respectively.
Pentair plc and Subsidiaries
Notes to consolidated financial statements
Information for pension plans with an accumulated benefit obligation or projected benefit obligation in excess of plan assets as of December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
exceeds the fair value
of plan assets
|
|
Accumulated benefit obligation
exceeds the fair value of
plan assets
|
In millions
|
2016
|
2015
|
|
2016
|
2015
|
U.S. pension plans
|
|
|
|
|
|
Projected benefit obligation
|
$
|
87.2
|
|
$
|
86.4
|
|
|
$
|
87.2
|
|
$
|
86.4
|
|
Fair value of plan assets
|
17.5
|
|
16.6
|
|
|
17.5
|
|
16.6
|
|
Accumulated benefit obligation
|
N/A
|
|
N/A
|
|
|
86.3
|
|
82.4
|
|
Non-U.S. pension plans
|
|
|
|
|
|
Projected benefit obligation
|
$
|
165.2
|
|
$
|
152.7
|
|
|
$
|
165.2
|
|
$
|
145.0
|
|
Fair value of plan assets
|
20.9
|
|
21.4
|
|
|
20.9
|
|
14.2
|
|
Accumulated benefit obligation
|
NA
|
|
NA
|
|
|
155.7
|
|
136.8
|
|
Components of net periodic benefit expense for our pension plans for the years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. pension plans
|
|
Non-U.S. pension plans
|
In millions
|
2016
|
2015
|
2014
|
|
2016
|
2015
|
2014
|
Service cost
|
$
|
11.2
|
|
$
|
14.0
|
|
$
|
13.1
|
|
|
$
|
6.6
|
|
$
|
7.8
|
|
$
|
5.3
|
|
Interest cost
|
16.4
|
|
14.9
|
|
15.4
|
|
|
4.1
|
|
3.9
|
|
5.3
|
|
Expected return on plan assets
|
(11.4
|
)
|
(10.0
|
)
|
(10.5
|
)
|
|
(1.5
|
)
|
(1.6
|
)
|
(1.7
|
)
|
Net actuarial (gain) loss
|
(12.4
|
)
|
(18.0
|
)
|
(3.1
|
)
|
|
17.2
|
|
(2.4
|
)
|
31.5
|
|
Net periodic benefit expense
|
$
|
3.8
|
|
$
|
0.9
|
|
$
|
14.9
|
|
|
$
|
26.4
|
|
$
|
7.7
|
|
$
|
40.4
|
|
Components of net periodic benefit expense for our other post-retirement plans for the years ended December 31
2016
,
2015
and
2014
, were not material.
Assumptions
Weighted-average assumptions used to determine benefit obligations as of December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pension plans
|
|
Non-U.S. pension plans
|
|
Other post-retirement
plans
|
Percentages
|
2016
|
2015
|
2014
|
|
2016
|
2015
|
2014
|
|
2016
|
2015
|
2014
|
Discount rate
|
4.02
|
%
|
4.21
|
%
|
3.63
|
%
|
|
2.00
|
%
|
2.52
|
%
|
2.30
|
%
|
|
3.80
|
%
|
3.95
|
%
|
3.60
|
%
|
Rate of compensation increase
|
4.00
|
%
|
4.00
|
%
|
4.00
|
%
|
|
2.91
|
%
|
2.90
|
%
|
2.89
|
%
|
|
—
|
—
|
—
|
Weighted-average assumptions used to determine net periodic benefit expense (income) for years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pension plans
|
|
Non-U.S. pension plans
|
|
Other post-retirement
plans
|
Percentages
|
2016
|
2015
|
2014
|
|
2016
|
2015
|
2014
|
|
2016
|
2015
|
2014
|
Discount rate
|
4.21
|
%
|
3.63
|
%
|
4.51
|
%
|
|
2.52
|
%
|
2.30
|
%
|
3.73
|
%
|
|
3.95
|
%
|
3.60
|
%
|
4.35
|
%
|
Expected long-term return on plan assets
|
4.28
|
%
|
3.65
|
%
|
4.56
|
%
|
|
3.29
|
%
|
3.57
|
%
|
4.19
|
%
|
|
—
|
—
|
—
|
Rate of compensation increase
|
4.00
|
%
|
4.00
|
%
|
4.00
|
%
|
|
2.90
|
%
|
2.89
|
%
|
2.94
|
%
|
|
—
|
—
|
—
|
Uncertainty in the securities markets and U.S. economy could result in investment returns less than those assumed. Should the securities markets decline or medical and prescription drug costs increase at a rate greater than assumed, we would expect increasing annual combined net pension and other post-retirement costs for the next several years. Should actual experience
Pentair plc and Subsidiaries
Notes to consolidated financial statements
differ from actuarial assumptions, the projected pension benefit obligation and net pension cost and accumulated other post-retirement benefit obligation and other post-retirement benefit cost would be affected in future years.
Discount rates
The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of bonds rated AA or higher available in the marketplace, adjusted to eliminate the effects of call provisions. This produced a weighted-average discount rate for our U.S. pension plans of
4.02%
,
4.21%
and
3.63%
in
2016
,
2015
and
2014
, respectively. The discount rates on our non-U.S. pension plans ranged from
0.50%
to
4.00%
,
0.50%
to
4.25%
and
0.50%
to
4.25%
in
2016
,
2015
and
2014
, respectively. There are no known or anticipated changes in our discount rate assumptions that will impact our pension expense in
2017
.
Expected rates of return
Our expected rates of return on U.S. pension plan assets were
4.28%
,
3.65%
and
4.56%
for
2016
,
2015
and
2014
, respectively. The expected rates of return on non-U.S. pension plan assets ranged from
1.00%
to
5.50%
,
1.00%
to
6.00%
and
1.00%
to
6.00%
in
2016
,
2015
and
2014
, respectively. The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices. U.S. pension plan assets yielded returns of
7.50%
,
(3.20)%
and
22.30%
in
2016
,
2015
and
2014
, respectively. As a result of our de-risking strategy to reduce U.S. pension plan liability, we anticipate the expected rate of return on our U.S. funded pension plans will continue to be consistent with the discount rate utilized. Any difference in the expected rate and actual returns will be included with the actuarial gain or loss recorded in the fourth quarter when our plans are remeasured.
Healthcare cost trend rates
The assumed healthcare cost trend rates for other post-retirement plans as of December 31 were as follows:
|
|
|
|
|
|
|
2016
|
2015
|
Healthcare cost trend rate assumed for following year
|
7.0
|
%
|
7.4
|
%
|
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
|
4.4
|
%
|
4.4
|
%
|
Year the cost trend rate reaches the ultimate trend rate
|
2038
|
|
2038
|
|
The assumed healthcare cost trend rates can have a significant effect on the amounts reported for healthcare plans. A one-percentage-point change in the assumed healthcare cost trend rates would have the following effects as of and for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
One Percentage Point
|
In millions
|
Increase
|
Decrease
|
Increase (decrease) in annual service and interest cost
|
$
|
0.1
|
|
$
|
(0.1
|
)
|
Increase (decrease) in other post-retirement benefit obligations
|
0.8
|
|
(0.7
|
)
|
Pension plans assets
Objective
The primary objective of our investment strategy is to meet the pension obligation to our employees at a reasonable cost to us. This is primarily accomplished through growth of capital and safety of the funds invested.
During 2012, we adopted an investment strategy for our U.S. pension plans with a primary objective of preserving the funded status of the U.S. plans. This was achieved through investments in fixed interest instruments with interest rate sensitivity characteristics closely reflecting the interest rate sensitivity of our benefit obligations. Shifting of allocations away from equities to liability hedging fixed income investments, by reinvesting in fixed income instruments as equity investments were redeemed, was completed during 2013. As of
December 31, 2016
, the U.S. pension plans have an approximately
99 percent
allocation to fixed income investments.
Asset allocation
Our actual overall asset allocation for our U.S. and non-U.S. pension plans as compared to our investment policy goals as of December 31 was as follows:
Pentair plc and Subsidiaries
Notes to consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pension plans
|
|
Actual
|
|
Target
|
Percentages
|
2016
|
2015
|
|
2016
|
2015
|
Fixed income
|
99
|
%
|
98
|
%
|
|
100
|
%
|
100
|
%
|
Alternative
|
1
|
%
|
2
|
%
|
|
—
|
%
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. pension plans
|
|
Actual
|
|
Target
|
Percentages
|
2016
|
2015
|
|
2016
|
2015
|
Equity securities
|
23
|
%
|
23
|
%
|
|
23
|
%
|
22
|
%
|
Fixed income
|
46
|
%
|
46
|
%
|
|
48
|
%
|
48
|
%
|
Alternative
|
26
|
%
|
27
|
%
|
|
27
|
%
|
28
|
%
|
Cash
|
5
|
%
|
4
|
%
|
|
2
|
%
|
2
|
%
|
Fair value measurement
The fair values of our pension plan assets and their respective levels in the fair value hierarchy as of
December 31, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
In millions
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
3.4
|
|
$
|
—
|
|
$
|
3.4
|
|
Fixed income:
|
|
|
|
|
Corporate and non U.S. government
|
—
|
|
290.5
|
|
—
|
|
290.5
|
|
U.S. treasuries
|
—
|
|
30.5
|
|
—
|
|
30.5
|
|
Mortgage-backed securities
|
—
|
|
4.5
|
|
—
|
|
4.5
|
|
Other
|
—
|
|
37.0
|
|
—
|
|
37.0
|
|
Global equity securities:
|
|
|
|
|
Large cap equity
|
—
|
|
2.2
|
|
—
|
|
2.2
|
|
International equity
|
—
|
|
8.3
|
|
—
|
|
8.3
|
|
Other investments
|
—
|
|
11.7
|
|
2.0
|
|
13.7
|
|
Total fair value of plan assets
|
$
|
—
|
|
$
|
388.1
|
|
$
|
2.0
|
|
$
|
390.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
In millions
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
3.1
|
|
$
|
—
|
|
$
|
3.1
|
|
Fixed income:
|
|
|
|
|
Corporate and non U.S. government
|
—
|
|
248.6
|
|
—
|
|
248.6
|
|
U.S. treasuries
|
—
|
|
52.0
|
|
—
|
|
52.0
|
|
Mortgage-backed securities
|
—
|
|
5.8
|
|
—
|
|
5.8
|
|
Other
|
—
|
|
37.2
|
|
—
|
|
37.2
|
|
Global equity securities:
|
|
|
|
|
Large cap equity
|
—
|
|
2.4
|
|
—
|
|
2.4
|
|
International equity
|
—
|
|
7.8
|
|
—
|
|
7.8
|
|
Other investments
|
—
|
|
13.3
|
|
4.1
|
|
17.4
|
|
Total fair value of plan assets
|
$
|
—
|
|
$
|
370.2
|
|
$
|
4.1
|
|
$
|
374.3
|
|