PENTAIR plc (PNR) FY 2021 MD&A

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,” “could,” “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 overall impact of the COVID-19 pandemic on our business; the duration and severity of the COVID-19 pandemic, the impact of virus variants and the effectiveness of vaccinations; actions that may be taken by us, other businesses and governments to address or otherwise mitigate the impact of the COVID-19 pandemic, including those that may impact our ability to operate our facilities, meet production demands, and deliver products to our customers; the impacts of the COVID-19 pandemic on the global economy, our workforce, customers and suppliers, and customer demand; overall global economic and business conditions impacting our business, including the strength of housing and related markets; supply, demand, logistics, competition and pricing pressures related to and in the markets we serve; volatility in currency exchange rates; failure of markets to accept new product introductions and enhancements; the ability to successfully identify, finance, complete and integrate acquisitions; the ability to achieve the benefits of our restructuring plans, cost reduction initiatives and transformation program; risks associated with operating foreign businesses; the impact of raw material, logistics and labor costs and other inflation; the impact of seasonality of sales and weather conditions; our ability to comply with laws and regulations; the impact of changes in laws, regulations and administrative policy, including those that limit U.S. tax benefits or impact trade agreements and tariffs; the outcome of litigation and governmental proceedings; and the ability to achieve our long-term strategic operating and ESG goals. Additional information concerning these and other factors is contained in our filings with the U.S. Securities and Exchange Commission (the “SEC”), including this Annual Report on Form 10-K. All forward-looking statements speak only as of the date of this report. Pentair assumes no obligation, and disclaims any obligation, to update the information contained in this report.

Overview

Pentair plc and its consolidated subsidiaries (“we,” “us,” “our,” “Pentair” or the “Company”) is a pure play water industrial manufacturing company comprised of two reporting segments: Consumer Solutions and Industrial & Flow Technologies. We classify our operations into business segments based primarily on types of products offered and markets served. For the year ended December 31, 2021, the Consumer Solutions and Industrial & Flow Technologies segments represented approximately 62% and 38% of total revenues, respectively.

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.

On October 18, 2021, as part of both of our Consumer Solutions and Industrial & Flow Technologies reporting segments, we completed the acquisition of Pleatco Holdings, LLC and related entities (“Pleatco”) for $254.6 million in cash, net of cash acquired. Pleatco manufactures water filtration and clean air technologies for pool, spa and industrial air customers.

On May 19, 2021, as part of our Consumer Solutions reporting segment, we completed the acquisition of Ken’s Beverage, Inc. (“KBI”) for $83.1 million in cash, net of cash acquired. KBI provides beverage equipment and services to commercial customers.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic continues to persist throughout the U.S. and the world, with the continued potential for significant impact. The COVID-19 pandemic has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter-in-place” and “stay-at-home” orders, travel restrictions, business curtailments, limits on gatherings, vaccine and mask requirements, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the economic impacts of the COVID-19 pandemic.

Our businesses generally have been and continue to be considered essential under applicable government-mandated orders which has allowed us substantially to maintain business continuity at substantially all of our manufacturing facilities throughout the COVID-19 pandemic. While our facilities substantially remained operational during 2021, we continue to experience various degrees of manufacturing cost pressures and inefficiencies as a result of supply chain issues and, in certain businesses, increased demand. Although we regularly monitor the financial health and operations of companies in our supply chain, and use

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alternative suppliers when necessary and available, financial hardship or government restrictions on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to manufacture our products and adversely affect our operations. Further, as the COVID-19 pandemic conditions have improved and economic activity has increased, we have experienced supply chain challenges, including availability of materials, increased lead times, as well as inflation of raw materials, logistics and labor costs due to availability constraints and high demand. We expect the inflationary trends to continue in 2022.

In light of the ongoing COVID-19 pandemic, we maintain our commitment to protect the health and safety of our employees by continuing our enhanced safety protocols for those on-site at our manufacturing facilities, for those who provide manufacturing-support activities, and for those working in office environments. In addition, we have maintained flexibility for employees who do not need to be physically present at our facilities and sites to perform their job responsibilities remotely and essential business travel has generally remained the main travel activity.

The extent of the COVID-19 pandemic’s effect on our operational and financial performance in the future will depend on future developments, including the duration, geographic location and intensity of the pandemic, the impact of virus variants, the effectiveness of vaccinations, our continued ability to manufacture and distribute our products, as well as any future actions that may be taken by governmental authorities or by us relating to the pandemic. For more information regarding factors and events that may impact our business, results of operations and financial condition as a result of the COVID-19 pandemic, see Part I—ITEM 1A, “Risk Factors,” included herein.

Transformation Program

During 2021, we launched and committed resources to a program designed to accelerate growth and drive margin expansion through transformation across our businesses to elevate our capabilities, reduce complexity and streamline our processes (the “Transformation Program”). The Transformation Program is structured in multiple phases and is expected to empower us to work more efficiently and optimize our business to better serve our customers while meeting our financial objectives.

We are targeting at least 300 basis points of margin expansion by 2025 through:

•reducing business, product, and organizational complexity;

•elevating our proficiency in pricing, sourcing and operations effectiveness;

•delivering decision making speed through organizational clarity and improved processes;

•developing a future state digital enterprise; and

•modernizing general and administrative capabilities.

During 2021, we incurred transformation costs that primarily represented professional services and project management related charges. In 2022, we expect to continue to incur transformation costs that include professional services, project management and related design and execution charges, as well as costs related to both labor and non-labor restructuring and IT investments.

Key Trends and Uncertainties Regarding Our Existing Business

The following trends and uncertainties affected our financial performance in 2021, and are reasonably likely to impact our results in the future:

•There are many uncertainties regarding the COVID-19 pandemic, including the anticipated duration and severity of the pandemic, the spread of increasing number of virus variants, the extent of worldwide social, political and economic disruption it may continue to cause and the distribution and effectiveness of vaccines to address the COVID-19 virus. The broader implications of the COVID-19 pandemic that are reasonably likely to impact our business, financial condition, results of operations and cash flows cannot be determined at this time, and ultimately will be affected by a number of evolving factors including the length of time that the pandemic continues and the impact of vaccines on it, the impact of virus variants, the effectiveness of vaccinations, the pandemic’s effect on the demand for our products and services, our supply chain, and our manufacturing capacity, as well as the impact of governmental regulations imposed in response to the pandemic. See further discussion above under “COVID-19 Pandemic” for key trends and uncertainties with regard to the COVID-19 pandemic.

•We executed certain business restructuring initiatives unrelated to the COVID-19 pandemic aimed at reducing our fixed cost structure and realigning our business. We expect these actions to continue into 2022 and to drive margin growth.

•We created a transformation office and launched and committed resources to the Transformation Program designed to accelerate growth and drive margin expansion by driving operational excellence, reducing complexity and streamlining our processes. We expect to implement Transformation Program initiatives and incur transformation costs in 2022 and beyond.

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•We experienced supply chain challenges, including increased lead times for raw materials due to availability constraints and high demand. While we have elevated our engagement with our suppliers and used secondary suppliers and new methods of procurement where available to mitigate the supply chain pressures, we expect supply chain challenges to continue in 2022, and which may continue thereafter and could negatively impact our results of operations.

•We experienced inflationary increases of raw materials such as metals, resins and electronics (including drives and motors), as well as increases in logistics and labor costs. While we have taken pricing actions and we strive for productivity improvements that could help offset these inflationary cost increases, we expect inflationary cost increases to continue in 2022, and which may continue thereafter and could negatively impact our results of operations.

•We have identified specific product and geographic market opportunities that we find attractive and continue to pursue, both within and outside the U.S. We are reinforcing that our businesses 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.

In 2022, our operating objectives remain to focus on delivering our core while continuing to build out our future. We expect to execute these objectives by:

•Delivering revenue growth in our core businesses;

•Delivering income and cash by managing price/cost inflation, prioritization of growth investments and addressing the cost structures as necessary;

•Continued focus on capital allocation through:

◦Commitment to maintain our investment grade rating;

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

◦Supplement our business with strategically-aligned mergers and acquisitions.

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

•Implementation of Transformation Program initiatives that will drive operational excellence, reduce complexity and improve our organizational structure; and

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

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CONSOLIDATED RESULTS OF OPERATIONS

The consolidated results of operations were as follows:

N.M. Not Meaningful

Net sales

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

The 24.8 percent increase in consolidated net sales in 2021 from 2020 was primarily the result of:

•volume increase in our Consumer Solutions segment mainly driven by continued robust demand in our pool and water treatment businesses;

•volume increase in our Industrial & Flow Technologies segment primarily driven by strong demand in the residential and irrigation flow businesses as well as increased demand and recovery in our food and beverage and commercial flow businesses;

•increases in selling prices to mitigate a rise in inflationary costs; and

•favorable foreign currency effects in 2021 compared to the prior year.

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Gross profit

The gross profit as a percentage of net sales was unchanged when comparing 2021 and 2020, primarily as a result of:

•volume expansion in both our Consumer Solutions and Industrial & Flow Technologies segments;

•increases in selling prices to mitigate impacts of inflation;

•complexity reduction and exiting older, less profitable product lines in our residential and commercial flow businesses in our Industrial & Flow Technologies segment; and

•increased productivity in both the Consumer Solutions and Industrial & Flow Technologies segments.

This was offset by:

•inflationary cost increases due to tight supply of raw materials such as metals, resins and electronics (including drives and motors); and

•higher logistics and labor costs due to increased demand as well as factory labor wage increases.

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

The 1.4 percentage point decrease in SG&A expense as a percentage of net sales in 2021 from 2020 was driven by:

•leverage on certain fixed costs due to the significant increase in sales year over year;

•legal settlements and accrual reductions of $7.6 million in 2021;

•restructuring and other costs of $7.4 million in 2021, compared to $14.1 million in 2020; and

•lower amortization on definite-lived intangible assets.

This decrease was partially offset by:

•higher employee incentive compensation due to increased sales and segment income in our Consumer Solutions and Industrial & Flow Technologies segments; and

•costs of $11.7 million related to the transformation program launched in 2021.

Net interest expense

The 47.7 percent decrease in net interest expense in 2021 from 2020 was the result of:

•strong cash flows in 2021 used to reduce overall debt levels during the year compared to 2020; and

•lower interest rates on outstanding variable rate debt.

Provision for income taxes

The 6.1 percentage point decrease in the effective tax rate in 2021 from 2020 was primarily due to:

•the unfavorable impact of discrete items, including items related to the Coronavirus Aid, Relief, and Economic Security Act, and items related to final regulations as part of the Tax Cuts and Jobs Act of 2017 that placed limitations on the deductibility of certain interest expense for U.S. tax purposes that occurred during 2020 that did not occur in 2021; and

•the favorable impact resulting from changes in unrecognized tax benefits for tax positions taken in prior periods.

This decrease was partially offset by:

•the unfavorable mix of global earnings.

2020 Comparison with 2019

A discussion of changes in our consolidated results of operations, segment results of operations and liquidity and capital resources from the year ended December 31, 2020 to December 31, 2019 can be found in Part II, ITEM 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year

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ended December 31, 2020, which was filed with the SEC on February 16, 2021. However, such discussion is not incorporated by reference into, and does not constitute a part of, this Annual Report on Form 10-K.

SEGMENT RESULTS OF OPERATIONS

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

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

Consumer Solutions

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

Net sales

The components of the change in Consumer Solutions net sales were as follows:

The 34.4 percent increase in net sales for Consumer Solutions in 2021 from 2020 was primarily the result of:

•increased sales volume in our pool business due to consumers increasing their pool use while continuing to invest in their homes and backyards;

•increased sales volume in our water treatment business as residential demand remained strong and commercial demand improved due to recovery in the restaurant and hospitality industries in 2021;

•increases in selling prices to mitigate impacts of inflation;

•increased sales due to the Pleatco and KBI acquisitions that occurred in 2021; and

•favorable foreign currency effects in 2021 compared to the prior year.

.

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Segment income

The components of the change in Consumer Solutions segment income from the prior period were as follows:

The 0.3 percentage point decrease in segment income for Consumer Solutions as a percentage of net sales in 2021 from 2020 was primarily the result of:

•inflationary cost increases due to high demand and tight supply of raw materials such as metals, resins and electronics (including drives and motors) along with increased logistics and labor costs;

•delayed realization of full amount of announced price increases due to order backlogs; and

•higher sales rebates and employee incentive compensation expense in line with increased sales in our pool and water treatment businesses.

This decrease was partially offset by:

•increased sales volume in all of our businesses resulting in cost leverage and higher productivity; and

•increases in selling prices to mitigate the impacts of inflation.

Industrial & Flow Technologies

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

Net sales

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

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The 11.6 percent increase in net sales for Industrial & Flow Technologies in 2021 from 2020 was primarily the result of:

•increased sales volume in our residential and irrigation flow businesses in 2021 due to strong demand across all product lines in these businesses;

•increased sales volume in our food and beverage business in 2021 due to demand in sustainable gas solutions and beer membrane filtration systems along with recovery in short cycle orders;

•increased sales volume in our commercial flow business due to demand in our water supply and water disposal product lines;

•increases in selling prices to mitigate inflationary cost increases; and

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•favorable foreign currency effects compared to the prior year.

Segment income

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

The 2.1 percentage point increase in segment income for Industrial & Flow Technologies as a percentage of net sales in 2021 from 2020 was primarily the result of:

•increased sales volumes in our residential and irrigation flow and food and beverage businesses which resulted in increased leverage on fixed operating expenses and improved income drop-through;

•increases in selling prices to mitigate inflationary cost increases;

•complexity reduction and exiting older, less profitable product lines in our residential and commercial flow businesses; and

•increased productivity due to cost actions driving manufacturing efficiencies.

This increase was partially offset by:

•inflationary cost increases due to high demand and tight supply of metals, resins and electronics along with increased logistics due to supply chain constraints and labor costs due to workforce shortages.

BACKLOG OF ORDERS BY SEGMENT

The majority of our backlog is short cycle in nature with shipments within one year from when a customer places an order and a substantial portion of our revenues has historically resulted from orders received and products delivered in the same month. A portion of our backlog, particularly from orders for major capital projects, can take more than one year from order to delivery depending on the size and type of order. We record, as part of our backlog, all orders from external customers, which represent firm commitments, and are supported by a purchase order or other legitimate contract. Our backlog of orders is dependent upon when customers place orders and is not necessarily an indicator of our expected results for our 2022 net sales.

The increase in our backlog from the prior year was driven by a significant increase in orders due to higher than anticipated demand in our pool business and certain of our residential and commercial businesses, coupled with continuing supply chain disruptions and labor availability challenges.

LIQUIDITY AND CAPITAL RESOURCES

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

We experience seasonal cash flows primarily due to seasonal demand in a number of markets. Consistent with historical trends, we experienced seasonal cash usage in the first quarter of 2021 and drew on our revolving credit facility to fund our operations. This cash usage reversed in the second quarter of 2021 as the seasonality of our businesses peaked and generated significant

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cash to fund our operations. In the second half of 2021, we funded our operations using our continued strong cash flow and our revolving credit facility.

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

In 2021, we completed the acquisitions of KBI and Pleatco for total consideration of approximately $83.1 million and $254.6 million, respectively, in cash, net of cash acquired. We funded the purchase price for these acquisitions with cash on hand and borrowings under our revolving credit facility.

Summary of Cash Flows

Cash flows from continuing operations were as follows:

Operating activities

In 2021, net cash provided by operating activities of continuing operations primarily reflects net income from continuing operations of $633.5 million, net of non-cash depreciation and amortization. Additionally, we had a cash outflow of $20.8 million as a result of changes in net working capital, primarily due to increased sales demand and inflationary impacts leading to higher accounts receivable, inventory, accounts payable and other current liabilities balances.

In 2020, net cash provided by operating activities of continuing operations primarily reflects net income from continuing operations of $432.2 million, net of non-cash depreciation and amortization. Additionally, we had a cash inflow of $109.5 million as a result of changes in net working capital, primarily the result of accounts receivables collections and reduced accounts receivables due to the pool business early buy program shipments with extended payment terms moving from the fourth quarter of 2020 into 2021 due to continued strong demand.

Investing activities

Net cash used for investing activities of continuing operations in 2021 primarily reflects capital expenditures of $60.2 million and cash paid for acquisitions of $338.5 million in our Consumer Solutions and Industrial & Flow Technologies reporting segments, net of cash acquired.

Net cash used for investing activities of continuing operations in 2020 primarily reflects capital expenditures of $62.2 million and cash paid for acquisitions of $58.0 million in our Consumer Solutions reporting segment, net of cash acquired.

Financing activities

In 2021, net cash used for financing activities primarily relates to repayment of $103.8 million of senior notes, $150.0 million of share repurchases, dividend payments of $133.0 million and payments upon maturity of cross currency swaps of $14.7 million, partially offset by net borrowings of revolving long-term debt of $158.9 million.

In 2020, net cash used for financing activities primarily relates to repayment of commercial paper and revolving long-term debt of $117.5 million, repayment of $74.0 million of senior notes, $150.2 million of share repurchases and dividend payments of $127.1 million.

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Free Cash Flow

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

The following table is a reconciliation of free cash flow:

Debt and Capital

Pentair, Pentair Finance S.à r.l (“PFSA“) and Pentair, Inc. are parties to a credit agreement (the “Senior Credit Facility”), with Pentair as guarantor and PFSA and Pentair, Inc. as borrowers, which was amended and restated in December 2021, providing for a $900.0 million senior unsecured revolving credit facility and a $200.0 million senior unsecured term loan facility. The revolving credit facility has a maturity date of December 16, 2026 and the term loan facility has a maturity date of December 16, 2024. Borrowings under the Senior Credit Facility bear interest at a rate equal to an adjusted base rate, the London interbank offered rate, the euro interbank offered rate or the central bank rate, plus, in each case, an applicable margin. The applicable margin is based on, at PFSA’s election, Pentair’s leverage level or PFSA’s public credit rating.

As of December 31, 2021, total availability under the Senior Credit Facility was $705.0 million. In addition, PFSA has the option to request to increase the revolving credit facility and/or to enter into one or more additional tranches of term loans in an aggregate amount of up to $300.0 million, subject to customary conditions, including the commitment of the participating lenders.

Our debt agreements contain various financial covenants, but the most restrictive covenants are contained in the Senior Credit Facility. The Senior Credit Facility contains covenants requiring us not to permit (i) the ratio of our consolidated debt (net of our consolidated unrestricted cash and cash equivalents in excess of $5.0 million but not to exceed $250.0 million) to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization and non-cash share-based compensation expense (“EBITDA”) on the last day of any period of four consecutive fiscal quarters (each, a “testing period”) to exceed 3.75 to 1.00 (or, at PFSA’s election and subject to certain conditions, 4.25 to 1.00 for four testing periods in connection with certain material acquisitions) (the “Leverage Ratio”) and (ii) the ratio of our EBITDA to our consolidated interest expense, for the same period to be less than 3.00 to 1.00 as of the end of each fiscal quarter. For purposes of the Leverage Ratio, the Senior Credit Facility provides for the calculation of EBITDA giving pro forma effect to certain acquisitions, divestitures and liquidations during the period to which such calculation relates.

In addition to the Senior Credit Facility, we have various other credit facilities with an aggregate availability of $21.4 million, of which there were no outstanding borrowings at December 31, 2021. Borrowings under these credit facilities bear interest at variable rates.

We have $88.3 million aggregate principal amount of fixed rate senior notes maturing in the next twelve months. We classified this debt as long-term as of December 31, 2021 as we have the intent and ability to refinance such obligation on a long-term basis under the Senior Credit Facility.

As of December 31, 2021, we had $60.0 million of cash held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.

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Authorized shares

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

Share Repurchases

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

During the year ended December 31, 2020, we repurchased 3.7 million of our ordinary shares for $150.2 million under the 2018 Authorization.

During the year ended December 31, 2021, we repurchased 2.1 million of our ordinary shares for $150.0 million, of which 0.8 million shares, or $50.0 million, and 1.3 million shares, or $100.0 million, were repurchased pursuant to the 2018 Authorization and 2020 Authorization, respectively. As of December 31, 2021, we had $650.0 million available for share repurchases under the 2020 Authorization.

Dividends

On December 7, 2021, the Board of Directors approved a 5 percent increase in the Company’s regular quarterly dividend rate (from $0.20 per share to $0.21 per share) that was paid on February 4, 2022 to shareholders of record at the close of business on January 21, 2022. The balance of dividends payable included in Other current liabilities on our Consolidated Balance Sheets was $33.0 million at December 31, 2021. Dividends paid per ordinary share were $0.80, $0.76 and $0.72 for the years ended December 31, 2021, 2020 and 2019, respectively.

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 GAAP reported amount (e.g., retained earnings). Our distributable reserve balance was $8.4 billion and $8.8 billion as of December 31, 2021 and 2020, respectively.

Supplemental guarantor information

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

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

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The following table presents summarized financial information as of December 31, 2021 for the Parent Company Guarantor and Subsidiary Issuer on a combined basis after elimination of (i) intercompany transactions and balances among the guarantors and issuer and (ii) equity in earnings from and investments in any subsidiary that is a non-Guarantor or issuer.

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

Material cash requirements from contractual obligations and commitments

We expect to continue to have sufficient cash and borrowing capacity to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders quarterly. We believe we have the ability to meet our short-term and long-term cash requirements by using available cash and internally generated funds and to borrow under our committed and uncommitted credit facilities. The following summarizes our material cash requirements from significant contractual obligations and purchase commitments that impact our liquidity as of December 31, 2021:

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 significant contractual obligations described above, we will incur annual interest expense on outstanding variable rate debt. As of December 31, 2021, variable interest rate debt was $395.0 million at a weighted average interest rate of 1.07%.

The total gross liability for uncertain tax positions at December 31, 2021 was estimated to be $37.3 million. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, which is consistent with our past practices. As of December 31, 2021, we had recorded $0.2 million for the possible payment of penalties and $3.9 million related to the possible payment of interest.

COMMITMENTS AND CONTINGENCIES

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

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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 and applicable accounting rules. 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 15 of the Notes to Consolidated Financial Statements could change in the future.

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

In the ordinary course of business, we are required to commit to bonds, letters of credit and bank guarantees that require payments to our customers for any non-performance. The outstanding face value of these instruments fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit primarily to secure our performance to third parties under self-insurance programs.

As of December 31, 2021 and 2020, the outstanding value of bonds, letters of credit and bank guarantees totaled $104.5 million and $99.1 million, respectively.

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 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.

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

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

During 2021, a qualitative assessment was performed. As a result, it was determined that it was more likely than not that the fair value of the reporting units exceeded their respective carrying values. Factors considered in the analysis included the 2020 discounted cash flow fair value assessment of the reporting units and the calculated excess fair value over carrying amount, financial performance, forecasts and trends, market capitalization, regulatory and environmental issues, macro-economic conditions, industry and market considerations, raw material costs and management stability. We also consider the extent to which each of the adverse events and circumstances identified affect the comparison of the respective reporting unit’s fair value with its carrying amount. We place more weight on the events and circumstances that most affect the respective reporting unit’s fair value or the carrying amount of its net assets. We consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value exceeds the carrying amount.

Identifiable intangible assets

Our primary identifiable intangible assets include: customer relationships, trade names, proprietary technology and patents. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. We complete our annual impairment test the first day of the fourth quarter each year for those identifiable assets not subject to amortization.

The impairment test for trade names consists of a comparison of the fair value of the trade name with its carrying value. Fair value is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. The non-recurring fair value measurement is a “Level 3” measurement under the fair value hierarchy. No impairment charge was recorded during 2021 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 11 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 re-measurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension and other post-retirement plans or when assumptions change as they may each year. The 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 gain of $2.4 million in 2021, a pre-tax loss of $6.7 million in 2020 and a pre-tax gain of $3.4 million in 2019. 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 rates

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of bonds rated AA or higher available in the marketplace. There are no known or anticipated changes in our discount rate assumptions that will impact our pension expense in 2022.

Expected rate of return

The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader long-term market indices.

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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 actuarial estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.

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 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.