Basis of Presentation and Responsibility for Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements of Pentair plc and its subsidiaries ("we," "us," "our," "Pentair," or the "Company") have been prepared following the requirements of the U.S. Securities and Exchange Commission ("SEC") for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America ("GAAP") can be condensed or omitted.

We are responsible for the unaudited condensed consolidated financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of those for a full year.

Our fiscal year ends on December 31. We report our interim quarterly periods on a calendar quarter basis.

Electrical separation

On April 3, 2018, our Board of Directors formally approved the plan to separate our Water business and Electrical business into two independent, publicly-traded companies (the "Separation") and certain details related to the Separation, including the record date, distribution date and distribution ratio. The Separation will occur by means of a distribution of the Company’s Electrical business, to be effected by the transfer of the Electrical business from the Company to nVent Electric plc (“nVent”) and the issuance of ordinary shares of nVent directly to holders of Company ordinary shares on a pro rata basis (the “Distribution”). The Distribution is expected to occur at 4:59 p.m., Eastern Time, on April 30, 2018.

Each Company shareholder will receive one ordinary share of nVent for every one ordinary share of Pentair held as of the close of business on April 17, 2018, the record date for the Distribution. nVent ordinary shares are expected to begin trading on the New York Stock Exchange on May 1, 2018, under the symbol "NVT." "When-issued" trading for nVent ordinary shares began on April 16, 2018 and will continue through April 30, 2018. Beginning on April 16, 2018 and continuing through April 30, 2018, there are two markets in Pentair ordinary shares: Pentair shares that trade in the "regular way" market trade with an entitlement to nVent ordinary shares to be distributed pursuant to the Distribution and Pentair shares that trade in the "ex-distribution" market trade without an entitlement to nVent ordinary shares.

Upon completion of the Separation, Electrical's jurisdiction of organization will be Ireland, but it will manage its affairs so that it will be centrally managed and controlled in the United Kingdom (the "U.K.") and therefore will have its tax residency in the U.K. The disclosures and financial statements within these condensed consolidated financial statements include the results of operations, financial condition and cash flows of the Electrical business as continuing operations.

Adoption of new accounting standards

On January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2017-07, "Retirement Benefits-Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." As a result of the adoption, the interest cost, expected return on plan assets and net actuarial gain/loss components of net periodic pension and post-retirement benefit cost have been reclassified from Selling, general and administrative expense to Other expense. Only the service cost component remains in Operating income and will be eligible for capitalization in assets on a prospective basis.

The effect of the retrospective presentation change related to the net periodic cost of our defined benefit pension and other post-retirement plans on our Condensed Consolidated Statements of Operations and Comprehensive Income was as follows:



	Three months ended March 31, 2017
In millions	Previously Reported		As Revised		Effect of Change
Selling, general and administrative expenses	$	253.9	$	251.7	$	(2.2	)
Operating income	138.4		140.6		2.2
Other expense	—		2.2		2.2

On January 1, 2018, we adopted ASU No. 2016-16, "Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory." The ASU requires the tax effects of all intra-entity sales of assets other than inventory to be recognized in the period in which the transaction occurs. The adoption resulted in a $215.8 million cumulative-effect adjustment recorded in retained earnings as of the beginning of 2018 that reflects a $254.3 million reduction of a prepaid long term tax asset, partially offset by the establishment of $38.5 million of deferred tax assets.

On January 1, 2018, we adopted ASU No. 2014-09, "Revenue from Contracts with Customers" and the related amendments ("ASC 606" or "the new revenue standard") using the modified retrospective method. As a result of adoption, the cumulative impact to our retained earnings at January 1, 2018 was $1.8 million. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.

A majority of our net sales continue to be recognized when products are shipped from our manufacturing facilities or delivery has occurred, depending on terms of the sale. Under the new standard, timing for recognition of certain revenue may be accelerated such that a portion of revenue will be recognized prior to shipment or delivery dependent upon contract-specific terms.

The impact of adopting the new standard primarily relates to the accounting for certain custom products manufactured by our Electrical segment. Previously revenue was recognized for these custom products upon shipment. However, as these products have no alternative use to the Company and we have an enforceable right to payment for our performance completed to date, revenue related to these custom products is now recognized over time. Additionally, the new revenue standard resulted in reclassifications on the Condensed Consolidated Balance Sheets related to accounting for sales returns.

As required by ASC 606, the impact of adoption of the new revenue standard on our Condensed Consolidated Statements of Operations and Comprehensive Income and Condensed Consolidated Balance Sheets was as follows:



Condensed Consolidated Statements of Operations and Comprehensive Income
	Three months ended March 31, 2018
In millions	As Reported		Balances without adoption of ASC 606		Effect of Change
Net sales	$	1,269.7	$	1,261.1	$	8.6
Cost of goods sold	807.7		801.3		6.4
Provision for income taxes	27.6		27.2		0.4
Net income from continuing operations	104.2		102.4		1.8



Condensed Consolidated Balance Sheets
	March 31, 2018
In millions	As Reported		Balances without adoption of ASC 606		Effect of Change
Assets
Accounts and notes receivable, net	$	985.2	$	977.3	$	7.9
Inventories	593.5		602.6		(9.1		)
Other current assets	232.8		222.8		10.0
Liabilities
Other current liabilities	480.6		473.8		6.8
Deferred tax liabilities	369.1		368.6		0.5
Equity
Retained Earnings	2,308.0		2,306.4		1.6

The cumulative effect of the changes made to our January 1, 2018 Condensed Consolidated Balance Sheet from the modified retrospective adoption of ASU 2016-16 and ASU 2014-09 was as follows:



Condensed Consolidated Balance Sheets
In millions	Balance at December 31, 2017		Adjustments due to ASU 2016-16			Adjustments due to ASU 2014-09			Balance at January 1, 2018
Assets
Accounts and notes receivable, net	$	831.6	$	—		$	6.5		$	838.1
Inventories	581.0		—			(3.4		)	577.6
Other current assets	222.9		—			3.4			226.3
Other non-current assets	429.9		(246.5		)	—			183.4
Liabilities
Other current liabilities	517.1		—			6.5			523.6
Deferred tax liabilities	394.8		(30.7		)	0.5			364.6
Equity
Retained Earnings	2,481.7		(215.8		)	1.8			2,267.7

New accounting standards issued but not yet adopted

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, "Leases" ("the new lease standard" or "ASC 842"), which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The new lease standard requirements are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and early adoption is permitted. The Company has begun evaluating the new lease standard, including the review and implementation of the necessary changes to our existing processes and systems that will be required to implement this new standard. While we are unable to quantify the impact at this time, we expect the primary impact to our consolidated financial position upon adoption will be the recognition, on a discounted basis, of our minimum commitments under noncancelable operating leases on our consolidated balance sheets resulting in the recording of right of use assets and lease obligations. We currently do not expect ASC 842 to have a material effect on either our consolidated statement of operations or consolidated statement of cash flow. We plan to adopt ASC 842 in the first quarter of 2019.