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; 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 negative impacts of the COVID-19 pandemic on the global economy, our customers and suppliers, and customer demand; overall global economic and business conditions impacting our business, including the strength of housing and related markets; demand, competition and pricing pressures 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 and cost reduction initiatives; risks associated with operating foreign businesses; the impact of material cost 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 limitU.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 goals. Additional information concerning these and other factors is contained in our filings with theU.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. OverviewPentair 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 endedDecember 31, 2020 , the Consumer Solutions and Industrial & Flow Technologies segments represented approximately 58% and 42% of total revenues, respectively. Although our jurisdiction of organization isIreland , we manage our affairs so that we are centrally managed and controlled in theUnited Kingdom (the "U.K.") and therefore have our tax residency in theU.K. OnApril 30, 2018 , we completed the separation of our Electrical business from the rest ofPentair (the "Separation") by means of a dividend in specie of the Electrical business, which was effected by the transfer of the Electrical business fromPentair to nVent and the issuance by nVent of nVent ordinary shares directly toPentair shareholders (the "Distribution"). We did not retain an equity interest in nVent. The results of the Electrical business have been presented as discontinued operations for all periods presented. The Electrical business was previously disclosed as a stand-alone reporting segment. InFebruary 2019 , as part of Consumer Solutions, we completed the acquisitions ofAquion, Inc. ("Aquion") and Pelican Water Systems ("Pelican") for$163.4 million and$121.1 million , respectively, in cash, net of cash acquired and final working capital true-ups. Aquion offers a diverse line of water conditioners, water filters, drinking-water purifiers, ozone and ultraviolet disinfection systems, reverse osmosis systems and acid neutralizers for the residential and commercial water treatment industry. Pelican provides residential whole home water treatment systems. COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic continues to spread throughoutthe United States ("U.S.") and the world, with the continued potential for significant impact. The COVID-19 pandemic has resulted in governments around the world implementing increasingly 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, 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. The effects of the COVID-19 pandemic have had and may continue to have an unfavorable impact on certain parts of our business. 22 -------------------------------------------------------------------------------- Health and safety From the earliest signs of the outbreak, we have taken proactive action to protect the health and safety of our employees, customers, and suppliers. We have enacted rigorous safety measures in our sites, including implementing social distancing protocols, implementing working from home arrangements for those employees who do not need to be physically present on the manufacturing floor and do not provide manufacturing-support activities, suspending travel, extensively and frequently disinfecting our workspaces, conducting temperature monitoring at our facilities, and providing or accommodating the wearing of facial coverings to those employees who must be physically present in their workplace and where facial coverings are required by local government orders. We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, and suppliers. For the year endedDecember 31, 2020 , we incurred$10.4 million of costs related to providing for the health and safety of our employees specific to the COVID-19 pandemic. Operations We have important manufacturing operations in theU.S. and around the world that have been affected by the COVID-19 pandemic, and we have taken certain actions to help curb its spread. Government-mandated measures providing for business curtailments or shutdowns generally exclude certain essential businesses and services, including businesses that manufacture and sell products that are considered essential to daily lives or otherwise operate in essential or critical sectors. While substantially all of our manufacturing facilities are considered essential and have remained operational, we have experienced intermittent partial or full factory closures at certain facilities as a result of these measures or the need to sanitize the facilities and address employee well-being. We also experienced brief interruptions in operations due to government-mandated shutdowns at our sites inIndia ,Italy , andNew Zealand during the year endedDecember 31, 2020 . While sanitation-related closures or governmental shutdowns may occur again in the future, all of our manufacturing facilities currently remain operational. In addition, we have experienced disruptions at some of our facilities with higher absenteeism due to the COVID-19 pandemic. Supply The COVID-19 pandemic has impacted our factory productivity and supply chain. Certain of our suppliers, particularly in our pool and flow businesses, faced difficulties maintaining operations in light of manufacturing shutdowns and interruptions due to the COVID-19 pandemic, which negatively impacted our production and contributed to an increase in backlog. During the third quarter of 2020, we identified second source suppliers and increased supply for key items in our pool business to reduce the production and capacity challenges we encountered in the second quarter of 2020 as a result of supply chain issues and increased demand. These supply chain and capacity challenges have led to higher transportation and labor costs in order to timely deliver finished goods to our customers. Restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, have in certain cases resulted, and may continue to result, in higher costs and delays, both for obtaining raw materials and components and shipping finished goods to customers, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers. Although we regularly monitor the financial health and operations of companies in our supply chain, and use 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. Demand The COVID-19 pandemic has significantly increased economic and demand uncertainty. We have experienced and expect to continue to experience reductions in customer demand in several of our end-markets. Within our Consumer Solutions segment, the COVID-19 pandemic has impacted demand in each of our businesses. Our pool business has experienced high demand as consumers sheltered-in-place and have spent more time at home. While shelter-in-place orders impacted our ability to reach our customers in our residential water treatment business at the beginning of the second quarter of 2020, we started to see stabilization in demand in this business towards the end of the second quarter and then saw demand rebound in the second half of 2020 as consumers became more comfortable allowing dealers back into their homes to test their water and install new systems. Our commercial filtration business was negatively impacted by restaurant and hospitality industry closures or operations at limited capacity acrossNorth America andEurope in the second quarter and to a lesser extent in the second half of 2020. New or extended government-mandated shutdowns could impact demand for our Consumer Solutions products in the future. 23 -------------------------------------------------------------------------------- Within our Industrial & Flow Technologies segment, demand for our residential flow products was initially negatively impacted due to store closures as a result of state-wide orders in theU.S. However, sell through improved throughout the year driven by pent up demand from the earlier closures. Demand continued to remain soft in our commercial and infrastructure flow businesses, but stabilized in the third quarter of 2020. In our industrial filtration business, demand is mostly driven by customer capital spending, which was reduced and/or delayed beginning in the second quarter of 2020 across most industries served. In addition, lower asset utilization drove down demand in industrial filtration aftermarket sales. Furthermore, many of our commercial customers have been negatively impacted due to worldwide lockdowns as a result of the COVID-19 pandemic. While we are preparing for this business to remain under pressure in the near term, we expect long-term demand drivers for this business not to be significantly changed. The current COVID-19 pandemic or continued spread of COVID-19 has caused a global economic slowdown, and a possibility of a global recession. In the event of a recession, demand for our products would decline and our business and results of operations would be adversely affected. Cost mitigation actions With the continuing uncertainty in light of the COVID-19 pandemic, we have taken steps across our organization to align costs with lower sales volumes. These steps include renegotiation with suppliers to reduce input costs, driving manufacturing direct labor reductions in line with volume drop, delaying, reducing or eliminating purchased services and travel and, where appropriate, temporary furloughs and hiring freezes. Additionally, we are proactively managing our working capital and reviewing our capital spending plan, but have not deferred strategic ongoing initiatives. We also continue to monitor government economic stabilization efforts and have participated in certain legislative provisions, such as deferring estimated tax payments, and may apply for job retention credits. We continue to monitor the rapidly evolving situation including the development of vaccines and their distribution to address the COVID-19 virus and guidance from international and domestic authorities, including federal, state and local public health authorities, and may take additional actions based on their requirements and recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of the COVID-19 pandemic on our financial condition, results of operations or cash flows in the future. In addition, see Part I -I TEM 1A, "Risk Factors," included herein for our risk factors regarding risks associated with the COVID-19 pandemic. Key Trends and Uncertainties Regarding Our Existing Business The following trends and uncertainties affected our financial performance in 2020, and will likely 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 extent of worldwide social, political and economic disruption it may continue to cause and the development and distribution of vaccines to address the COVID-19 virus. The broader implications of the COVID-19 pandemic on 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, its 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. •During 2020, 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 2021 and to drive margin growth. •We have identified specific product and geographic market opportunities that we find attractive and continue to pursue, both within and outside theU.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. •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. 24 -------------------------------------------------------------------------------- In 2021, 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 buybacks; and •Supplement our business with strategically-aligned mergers and acquisitions. •Focused growth initiatives that accelerate our investments in digital, technology and services expansion; and •Building a high performance growth culture and delivering on our commitments while living ourWin Right values. CONSOLIDATED RESULTS OF OPERATIONS The consolidated results of operations were as follows: Years ended December 31 % / point change In millions 2020 2019 2018 2020 vs 2019 2019 vs 2018 Net sales$ 3,017.8 $ 2,957.2 $ 2,965.1 2.0 % (0.3) % Cost of goods sold 1,960.2 1,905.7 1,917.4 2.9 % (0.6) % Gross profit 1,057.6 1,051.5 1,047.7 0.6 % 0.4 % % of net sales 35.0 % 35.6 % 35.3 % (0.6) pts 0.3 pts Selling, general and administrative 520.5 540.1 534.3 (3.6) % 1.1 % % of net sales 17.2 % 18.3 % 18.0 % (1.1) pts 0.3 pts Research and development 75.7 78.9 76.7 (4.1) % 2.9 % % of net sales 2.5 % 2.7 % 2.6 % (0.2) pts 0.1 pts Operating income 461.4 432.5 436.7 6.7 % (1.0) % % of net sales 15.3 % 14.6 % 14.7 % 0.7 pts (0.1) pts Loss (gain) on sale of businesses 0.1 (2.2) 7.3 N.M. N.M. Loss on early extinguishment of debt - - 17.1 N.M. N.M. Net interest expense 23.9 30.1 32.6 (20.6) % (7.7) % Other expense (income) 5.3 (2.9) (0.1) N.M. N.M. Income from continuing operations before income taxes 432.1 407.5 379.8 6.0 % 7.3 % Provision for income taxes 75.0 45.8 58.1 63.8 % (21.2) % Effective tax rate 17.4 % 11.2 % 15.3 % 6.2 pts (4.1) pts N.M. Not Meaningful 25
-------------------------------------------------------------------------------- Net sales The components of the consolidated net sales change were as follows: 2020 vs 2019 2019 vs 2018 Volume 0.4 % (3.9) % Price 0.9 2.6 Core growth 1.3 (1.3) Acquisition 0.5 2.5 Currency 0.2 (1.5) Total 2.0 % (0.3) % The 2.0 percent increase in consolidated net sales in 2020 from 2019 was primarily the result of: •selective increases in selling prices to mitigate inflationary cost increases; •increased sales due to the Aquion and Pelican acquisitions inFebruary 2019 and other small acquisitions in our Consumer Solutions segment in the fourth quarter of 2019 and first half of 2020; •volume increase in our Consumer Solutions segment mainly driven by our pool business; •volume increase in our residential and irrigation flow businesses in our Industrial & Flow Technologies segment; and •favorable foreign currency effects in 2020 compared to the prior year. This increase was partially offset by: •sales volume declines in certain businesses within our Industrial & Flow Technologies segment due to the impacts of the COVID-19 pandemic. Gross profit The 0.6 percentage point decrease in gross profit as a percentage of net sales in 2020 from 2019 was primarily the result of: •unfavorable mix within the pool and commercial and infrastructure flow businesses; •lower volumes within our commercial water supply, water disposal, industrial filtration and food and beverage businesses; •higher transportation and labor costs due to increased demand in our pool business; •costs related to providing for the health and safety of our employees specific to the COVID-19 pandemic of$8.6 million for the year endedDecember 31, 2020 ; and •inflationary increases related to certain raw materials. This decrease was partially offset by: •increased productivity due to higher volumes in our pool business; •selective increases in selling prices to mitigate impacts of inflation; and •increased productivity due to cost actions such as temporary furloughs and hiring freezes in response to the COVID-19 pandemic driving manufacturing efficiencies and lower operating expenses. Selling, general and administrative ("SG&A") The 1.1 percentage point decrease in SG&A expense as a percentage of net sales in 2020 from 2019 was driven by: •asset impairment charges of$21.2 million in 2019; •reduction in travel and entertainment, trade show and advertising expenses due to the COVID-19 pandemic; and •restructuring and other costs of$15.4 million in 2020, compared to$21.0 million in 2019. 26 -------------------------------------------------------------------------------- This decrease was partially offset by: •higher employee compensation incentive expense compared to the prior year. Net interest expense The 20.6 percent decrease in net interest expense in 2020 from 2019 was the result of: •cross currency swaps entered into inJune 2019 andDecember 2019 resulting in more interest income in 2020 than in the prior period; •lower interest rate revolving credit facilities replacing higher interest rate fixed rate debt that matured during the second half of 2019; and •strong cash flows in 2020 leading to lower overall debt levels. Provision for income taxes The 6.2 percentage point increase in the effective tax rate in 2020 from 2019 was primarily due to: •the unfavorable impact of discrete items, including items related to the CARES Act, and items related to final regulations as part of the Tax Cuts and Jobs Act of 2017 that place limitations on the deductibility of certain interest expense forU.S. tax purposes. 2019 Comparison with 2018 A discussion of changes in our consolidated results of operations and liquidity and capital resources from the year endedDecember 31, 2019 toDecember 31, 2018 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 endedDecember 31, 2019 , which was filed with theSEC onFebruary 25, 2020 . 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 activities, impairments and other unusual non-operating items. Consumer Solutions The net sales and segment income for Consumer Solutions were as follows: Years ended December 31 % / point change In millions 2020 2019 2018 2020 vs 2019 2019 vs 2018 Net sales$ 1,742.9 $ 1,611.7 $ 1,578.4 8.1 % 2.1 % Segment income 419.1 379.6 392.9 10.4 % (3.4) % % of net sales 24.0 % 23.6 % 24.9 % 0.4 pts (1.3) pts 27
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Net sales The components of the change in Consumer Solutions net sales were as follows:
2020 vs 2019 2019 vs 2018 Volume 6.3 % (6.2) % Price 0.8 3.3 Core growth 7.1 (2.9) Acquisition 1.0 5.8 Currency - (0.8) Total 8.1 % 2.1 % The 8.1 percent increase in net sales for Consumer Solutions in 2020 from 2019 was primarily the result of: •increased sales volume across several of the product lines in our pool business due to consumers' desire to invest in their pools and backyards while sheltering-in-place due to the COVID-19 pandemic; •higher sales volumes in our residential filtration product lines inNorth America andChina during the second half of 2020; •selective increases in selling prices to mitigate impacts of inflation; and •increased sales due to the Aquion and Pelican acquisitions that occurred inFebruary 2019 and other small acquisitions in the fourth quarter of 2019 and during 2020. This increase was partially offset by: •sales decreases for 2020 due to lower demand in the water treatment business as government-mandated shutdown and shelter-in-place orders and commercial closures due to the COVID-19 pandemic impacting the ability to reach customers; and •higher-than-usual rebate activity that lowered price due to sales growth in our pool business. The 2.1 percent increase in net sales for Consumer Solutions in 2019 from 2018 was primarily the result of: •increased sales due to the acquisitions of Aquion and Pelican in the first quarter of 2019; and •selective increases in selling prices to mitigate inflationary cost increases. This increase was partially offset by: •sales volume declines in our pool business due to cold, wet weather during the first half of 2019 in key markets; •higher than anticipated inventory levels in some of our key distribution channels impacting our pool business during the first nine months of 2019; •sales volume declines in our residential and commercial components business; and •unfavorable foreign currency effects compared to the same period of the prior year. 28 -------------------------------------------------------------------------------- Segment income The components of the change in Consumer Solutions segment income from the prior period were as follows: 2020 2019 Growth 1.1 pts (1.4) pts Acquisition (divestiture) 0.4 (0.4) Inflation (1.3) (2.9) Productivity/Price 0.2 3.4 Total 0.4 pts (1.3) pts The 0.4 percentage point increase in segment income for Consumer Solutions as a percentage of net sales in 2020 from 2019 was primarily the result of: •increased sales volume in our pool business; •reduction in travel and entertainment, trade show and advertising expenses due to the COVID-19 pandemic and other cost reduction initiatives; •impact of Aquion and Pelican acquisitions; and •selective increases in selling prices to mitigate the impacts of inflation. This increase was partially offset by: •lower sales volume in the higher margin commercial filtration business; •higher sales rebates and employee incentive compensation expense in line with increased sales in our pool business; •higher transportation and labor costs due to increased demand in our pool business; and •inflationary increases related to certain raw materials. The 1.3 percentage point decrease in segment income for Consumer Solutions as a percentage of net sales in 2019 from 2018 was primarily the result of: •declines in core sales volume in our pool business resulting in unfavorable sales mix; •increased investment in both research and development and sales and marketing to drive growth; and •inflationary increases related to raw material and labor costs. This decrease was partially offset by: •selective increases in selling prices to mitigate inflationary cost increases; and •productivity and cost savings generated from PIMS initiatives, including lean and supply management practices. Industrial & Flow Technologies The net sales and segment income for Industrial & Flow Technologies were as follows: Years ended December 31 % / point change In millions 2020 2019 2018 2020 vs 2019 2019 vs 2018 Net sales$ 1,273.6 $ 1,344.1 $ 1,385.4 (5.2) % (3.0) % Segment income 164.6 199.0 198.8 (17.3) % 0.1 % % of net sales 12.9 % 14.8 % 14.3 % (1.9) pts 0.5 pts 29
-------------------------------------------------------------------------------- Net sales The components of the change in Industrial & Flow Technologies net sales were as follows: 2020 vs 2019 2019 vs 2018 Volume (6.5) % (1.4) % Price 0.9 1.9 Core growth (5.6) 0.5 Acquisition (divestiture) - (1.3) Currency 0.4 (2.2) Total (5.2) % (3.0) % The 5.2 percent decrease in net sales for Industrial & Flow Technologies in 2020 from 2019 was primarily the result of: •decreased sales volume in our commercial water supply and water disposal, industrial filtration and food and beverage businesses due to less project sales as a result of customers deferring their capital spending and less service and aftermarket revenue driven by reduced consumption and travel restrictions from government-mandated shutdowns and "shelter-in-place" orders due to the COVID-19 pandemic; •decreased sales volume in our residential and irrigation flow businesses in the first half of 2020 due to market conditions resulting from the COVID-19 pandemic. This decrease was partially offset by: •increased sales volume in our residential and irrigation flow businesses in the second half of 2020 due to strong demand in the residential water supply, water disposal and specialty spray product lines; •sales growth in our infrastructure business as a result of strong backlog entering 2020; •selective increases in selling prices to mitigate inflationary cost increases; and •favorable foreign currency effects compared to the same period of the prior year. The 3.0 percent decrease in net sales for Industrial & Flow Technologies in 2019 from 2018 was primarily the result of: •decreased sales volume in our agriculture-related business due to cold, wet weather in the first half of 2019; •unfavorable foreign currency effects compared to the same period of the prior year; and •the impact of divestitures in our agriculture-related business inBrazil and commercial flow business inAustralia . This decrease was partially offset by: •increased sales volume in our industrial filtration and food and beverage businesses; and •selective increases in selling prices to mitigate inflationary cost increases. Segment income The components of the change in Industrial & Flow Technologies segment income from the prior period were as follows: 2020 2019 Growth (2.5) pts 0.4 pts Inflation (1.0) (2.5) Productivity/Price 1.6 2.6 Total (1.9) pts 0.5 pts The 1.9 percentage point decrease in segment income for Industrial & Flow Technologies as a percentage of net sales in 2020 from 2019 was primarily the result of: •decreased sales volumes in our residential and irrigation flow business in the first half of 2020 due to the COVID-19 pandemic, which resulted in decreased leverage on fixed operating expenses; 30 -------------------------------------------------------------------------------- •decreased sales volume in our commercial water supply and water disposal, industrial filtration and food and beverage businesses due to the COVID-19 pandemic along with unfavorable mix within our commercial and infrastructure flow and industrial filtration businesses; and •inflationary increases related to raw material and labor costs. This decrease was partially offset by: •selective increases in selling prices to mitigate inflationary cost increases; •lower sales incentive expense in line with decreased sales; and •increased productivity due to cost actions driving manufacturing efficiencies and lower operating expenses. The 0.5 percentage point increase in segment income for Industrial & Flow Technologies as a percentage of net sales in 2019 from 2018 was primarily the result of: •selective increases in selling prices to mitigate inflationary cost increases; •increased productivity; and •increased volume and favorable mix in our industrial filtration and food and beverage businesses.
This increase was partially offset by: •inflationary increases related to raw material and labor costs. BACKLOG OF ORDERS BY SEGMENT
December 31 In millions 2020 2019 $ change % change Consumer Solutions$ 459.1 $ 138.2 $ 320.9 232.2 %
Industrial & Flow Technologies 288.7 251.2 37.5 14.9 % Total
$ 747.8 $ 389.4 $ 358.4 92.0 % A substantial portion of our revenues result from orders received and products delivered in the same month. Our backlog typically has a short manufacturing cycle and products generally ship within 90 days of the date on which a customer places an order. However, a portion of our backlog, particularly from orders for major capital projects, can take more than one year 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. The increase in our backlog atDecember 31, 2020 compared to 2019 was mainly a result of increased demand in our pool business. We expect the majority of our backlog atDecember 31, 2020 will be shipped in 2021. 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 2020 and drew on our revolving credit facility to repay commercial paper and to fund our operations. This cash usage reversed in the second quarter of 2020 as the seasonality of our businesses peaked. Consistent with historical seasonal patterns, the second quarter of 2020 generated significant cash to fund our operations and we used this cash to significantly reduce the draw on our revolving credit facility. We continued to experience strong cash flow in the second half of 2020, causing our revolving credit facility balance to remain low atDecember 31, 2020 compared to the prior year end. 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 31 -------------------------------------------------------------------------------- (generally including extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by temperature, heavy flooding and droughts. We expect to continue to have sufficient cash and borrowing capacity to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders quarterly. We believe our existing liquidity position, coupled with our currently anticipated operating cash flows, will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months. Although the impact of the COVID-19 pandemic on our future results is uncertain, we believe we are well-positioned to manage our business and have the ability and sufficient capacity to meet these cash requirements by using available cash, internally generated funds and borrowing under our committed and uncommitted credit facilities. We are committed to maintaining investment grade credit ratings and a solid liquidity position. Summary of Cash Flows Cash flows from continuing operations were as follows: Years ended December 31 In millions 2020 2019 2018
Cash provided by (used for):
Operating activities$574.2 $345.2 $458.1 Investing activities (117.9) (331.9) (61.7) Financing activities (435.9) (17.1) (407.9) Operating activities 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, the Company 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. In 2019, net cash provided by operating activities of continuing operations primarily reflects net income from continuing operations of$462.9 million , net of non-cash depreciation, amortization and asset impairment, partially offset by a cash outflow of$105.4 million as a result of changes in net working capital and$20.9 million of pension and other post-retirement plan contributions, including$11.1 million of contributions made in conjunction with the termination of the Pentair Salaried Plan during 2019. Investing activities 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. Net cash used for investing activities of continuing operations in 2019 primarily reflects capital expenditures of$58.5 million and cash paid for the Aquion and Pelican acquisitions, partially offset by$15.3 million of proceeds received from divestitures primarily related to our former aquaculture business. Financing activities 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 the 3.625% Senior Notes due in 2020 of$74.0 million ,$150.2 million of share repurchases and dividend payments of$127.1 million . In 2019, net cash used for financing activities primarily relates to repayment of senior notes due in 2019 totaling$401.5 million ,$150.0 million of share repurchases and payment of dividends of$122.7 million , partially offset by proceeds from long-term debt of$600.0 million and net receipts of commercial paper and revolving long-term debt of$51.5 million . 32 -------------------------------------------------------------------------------- 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: Years ended December 31 In millions 2020
2019 2018 Net cash provided by operating activities of continuing operations
$ 574.2 $ 345.2 $ 458.1 Capital expenditures of continuing operations (62.2)
(58.5) (48.2) Proceeds from sale of property and equipment of continuing operations
0.1 0.6 0.2 Free cash flow from continuing operations$ 512.1 $ 287.3 $ 410.1 Net cash (used for) provided by operating activities of discontinued operations (0.6) 7.8 (19.0) Capital expenditures of discontinued operations - - (7.4) Proceeds from sale of property and equipment of discontinued operations - - 2.3 Free cash flow$ 511.5 $ 295.1 $ 386.0 Debt and Capital InApril 2018 ,Pentair ,Pentair Investments Switzerland GmbH ("PISG"),Pentair Finance S.à r.l ("PFSA") andPentair, Inc. entered into a credit agreement, providing for an$800.0 million senior unsecured revolving credit facility with a term of five years (the "Senior Credit Facility"), withPentair and PISG as guarantors andPFSA andPentair, Inc. as borrowers. InJune 2020 ,Pentair assumed the PISG guarantee. The Senior Credit Facility has a maturity date ofApril 25, 2023 . Borrowings under the Senior Credit Facility bear interest at a rate equal to an adjusted base rate or the London Interbank Offered Rate, plus, in each case, an applicable margin. The applicable margin is based on, at PFSA's election,Pentair's leverage level or PFSA's public credit rating. InMay 2019 , PFSA executed an increase of the Senior Credit Facility by$100.0 million for a total commitment up to$900.0 million in the aggregate. InDecember 2019 , the Senior Credit Facility was amended to provide for the extension of term loans in an aggregate amount of$200.0 million (the "Term Loans"). The Term Loans are in addition to the Senior Credit Facility commitment. In addition, PFSA has the option to further increase the Senior Credit Facility in an aggregate amount of up to$300.0 million , through a combination of increases to the total commitment amount of the Senior Credit Facility and/or one or more tranches of term loans in addition to the Term Loans, subject to customary conditions, including the commitment of the participating lenders. PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Senior Credit Facility. PFSA uses the Senior Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. PFSA had no commercial paper outstanding as ofDecember 31, 2020 and$117.8 million as ofDecember 31, 2019 , all of which was classified as long-term debt as we have the intent and the ability to refinance such obligations on a long-term basis under the Senior Credit Facility. InMarch 2020 , the commercial paper market began to experience high levels of volatility due to uncertainty related to the COVID-19 pandemic. The volatility impacted both market access to and pricing of commercial paper. As a cost mitigation action, we withdrew our credit ratings to access the commercial paper market in the second quarter of 2020 and continued to use the revolving credit facility, along with cash generated from operations, to fund our general operations. As ofDecember 31, 2020 , total availability under the Senior Credit Facility was$863.9 million . 33 -------------------------------------------------------------------------------- Our debt agreements contain various financial covenants, but the most restrictive covenants are contained in the Senior Credit Facility. The Senior Credit Facility contains covenants requiring us not to permit (i) the ratio of our consolidated debt (net of our consolidated unrestricted cash in excess of$5.0 million but not to exceed$250.0 million ) to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization and non-cash share-based compensation expense ("EBITDA") on the last day of any period of four consecutive fiscal quarters to exceed 3.75 to 1.00 (the "Leverage Ratio") and (ii) the ratio of our EBITDA to our consolidated interest expense, for the same period to be less than 3.00 to 1.00 as of the end of each fiscal quarter. For purposes of the Leverage Ratio, the Senior Credit Facility provides for the calculation of EBITDA giving pro forma effect to certain acquisitions, divestitures and liquidations during the period to which such calculation relates. Our debt agreements contain various financial covenants. As ofDecember 31, 2020 , we were in compliance with all financial covenants in our debt agreements. 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 atDecember 31, 2020 . Borrowings under these credit facilities bear interest at variable rates. We have$103.8 million aggregate principal amount of fixed rate senior notes maturing in the next twelve months. We classified this debt as long-term as ofDecember 31, 2020 as we have the intent and ability to refinance such obligation on a long-term basis under the Senior Credit Facility. As ofDecember 31, 2020 , we had$56.9 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 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 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. Authorized shares Our authorized share capital consists of 426.0 million ordinary shares with a par value of$0.01 per share. Share Repurchases InMay 2018 , the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of$750.0 million (the "2018 Authorization"). The 2018 Authorization expires onMay 31, 2021 . OnDecember 8, 2020 , the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of$750.0 million (the "2020 Authorization"). The 2020 Authorization expires onDecember 31, 2025 . The 2020 Authorization supplements the 2018 Authorization. During the year endedDecember 31, 2019 , we repurchased 4.0 million of our ordinary shares for$150.0 million under the 2018 Authorization. During the year endedDecember 31, 2020 , we repurchased 3.7 million of our ordinary shares for$150.2 million under the 2018 Authorization. As ofDecember 31, 2020 , we had$99.7 million and$750.0 million available for share repurchases under the 2018 Authorization and 2020 Authorization, respectively. Dividends OnDecember 8, 2020 , the Board of Directors approved a 5 percent increase in the Company's regular quarterly dividend rate (from$0.19 per share to$0.20 per share) that was paid onFebruary 5, 2021 to shareholders of record at the close of business onJanuary 22, 2021 . The balance of dividends payable included in Other current liabilities on our Consolidated Balance Sheets was$33.2 million atDecember 31, 2020 . Dividends paid per ordinary share were$0.76 ,$0.72 and$1.05 for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Under Irish law, the payment of future cash dividends and repurchases of shares may be paid only out ofPentair 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 theIrish High Court . Distributable reserves are not linked to a GAAP reported amount (e.g., retained earnings). Our distributable reserve balance was$8.8 billion and$6.6 billion as ofDecember 31, 2020 and 2019, respectively. 34 -------------------------------------------------------------------------------- Supplemental guarantor informationPentair plc (the "Parent Company Guarantor"), fully and unconditionally, guarantees the senior notes of PFSA (the "Subsidiary Issuer"). The Subsidiary Issuer is a Luxembourg private limited liability company and 100 percent-owned subsidiary of the Parent Company Guarantor. The Parent Company Guarantor is a holding company established to own directly and indirectly substantially all of its operating and other subsidiaries. The Subsidiary Issuer is a holding company formed to own directly and indirectly substantially all of its operating and other subsidiaries and to issue debt securities, including the senior notes.The Parent Company Guarantor's principal source of cash flow, including cash flow to make payments on the senior notes pursuant to the guarantees, is dividends from its subsidiaries. The Subsidiary Issuer's principal source of cash flow is interest income from its subsidiaries. None of the subsidiaries of the Parent Company Guarantor or the Subsidiary Issuer is under any direct obligation to pay or otherwise fund amounts due on the senior notes or the guarantees, whether in the form of dividends, distributions, loans or other payments. In addition, there may be statutory and regulatory limitations on the payment of dividends from certain subsidiaries of the Parent Company Guarantor or the Subsidiary Issuer. If such subsidiaries are unable to transfer funds to the Parent Company Guarantor or the Subsidiary Issuer and sufficient cash or liquidity is not otherwise available, the Parent Company Guarantor or the Subsidiary Issuer may not be able to make principal and interest payments on their outstanding debt, including the senior notes or the guarantees. The following table presents summarized financial information as ofDecember 31, 2020 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. December 31, In millions 2020 Current assets (1) $ 8.2 Noncurrent assets (2) 1,040.9 Current liabilities (3) 608.3 Noncurrent liabilities (4) 1,283.0
(1) Includes assets due from non-guarantor subsidiaries of
(2) Includes assets due from non-guarantor subsidiaries of
(3) Includes liabilities due to non-guarantor subsidiaries of
(4) Includes liabilities due to non-guarantor subsidiaries of
The Parent Company Guarantor and Subsidiary Issuer do not have material results of operations on a combined basis. Contractual obligations The following summarizes our significant contractual obligations that impact our liquidity: Years ended December 31 In millions 2021 2022 2023 2024 2025 Thereafter Total Debt obligations$ 103.8 $ 88.3 $ 236.1 $ -$ 19.3 $ 400.0 $ 847.5 Interest obligations on fixed-rate debt 24.3 21.7 18.9 18.9 18.9 72.0 174.7 Operating lease obligations, net of sublease rentals 26.2 22.9 19.5 14.8 6.0 9.5 98.9 Purchase and marketing obligations 26.9 8.5 4.6 3.8 3.8 6.2 53.8 Pension and other post-retirement plan contributions 8.5 8.6 8.7 8.8 8.6 40.3 83.5
Total contractual obligations, net
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 ofDecember 31, 2020 , variable interest rate debt was$236.1 million at a weighted average interest rate of 1.23%. 35 -------------------------------------------------------------------------------- The total gross liability for uncertain tax positions atDecember 31, 2020 was estimated to be$46.3 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 ofDecember 31, 2020 , we had recorded$0.2 million for the possible payment of penalties and$4.6 million related to the possible payment of interest. Off-balance sheet arrangements AtDecember 31, 2020 , we had no off-balance sheet financing arrangements. 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. 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 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 ofPentair 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 ofDecember 31, 2020 and 2019, the outstanding value of bonds, letters of credit and bank guarantees totaled$99.1 million and$91.3 million , respectively. 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. 36 -------------------------------------------------------------------------------- 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 intangiblesGoodwill Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased and liabilities assumed. We test our goodwill for impairment at least annually during the fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. We perform our annual or interim goodwill impairment test by comparing the fair value of the relevant reporting unit with its carrying amount. We would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. We have the option to perform a qualitative assessment to determine whether it is necessary to perform the quantitative goodwill impairment test. However, we may elect to perform the quantitative goodwill impairment test even if no indications of a potential impairment exist. During 2020, a quantitative assessment was performed. The fair value of each reporting unit was determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. The non-recurring fair value measurement is a "Level 3" measurement under the fair value hierarchy. For the 2020 annual impairment test, the estimated fair value exceeded the carrying value in each of our reporting units, therefore, no impairment charge was required. During 2019, a qualitative assessment was performed. We determined that it was more likely than not that the fair value of the reporting units exceeded their respective carrying values. Factors considered in the analysis included the last discounted cash flow fair value assessment of reporting units and the calculated excess fair value over carrying amount, financial performance, forecasts and trends, market capitalization, regulatory and environmental issues, macro-economic conditions, industry and market considerations, raw material costs and management stability. We also consider the extent to which each of the adverse events and circumstances identified affect the comparison of the respective reporting unit's fair value with its carrying amount. We place more weight on the events and circumstances that most affect the respective reporting unit's fair value or the carrying amount of its net assets. We consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value exceeds the carrying amount. 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. 37 -------------------------------------------------------------------------------- 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. There was no impairment charge recorded in any of the years presented for identifiable intangible assets. Pension and other post-retirement plans We sponsorU.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 loss of$6.7 million in 2020, a pre-tax gain of$3.4 million in 2019 and a pre-tax loss of$3.6 million in 2018. 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 ourDecember 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of bonds rated AA or higher available in the marketplace. There are no known or anticipated changes in our discount rate assumptions that will impact our pension expense in 2021. Expected 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. 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 determined 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. 38
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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.
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