Pentair (PNR) FY2025 Earnings Quality Report

Grade: F — Water Solutions Goodwill at Risk Plus Rising Receivables

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed February 24, 2026, FY ended December 31, 2025) + Yahoo Finance

Auditor: Deloitte & Touche LLP — Unqualified opinion (1 critical audit matter: goodwill impairment assessment for a Water Solutions reporting unit) — auditor since 1977

One-line verdict: Pentair is a pure-play water company with three segments — Pool (38% of sales), Flow (37%), and Water Solutions (25%) — and its FY2025 story is one of margin expansion against flat volume. Revenue grew 2.3% to $4.18B, driven entirely by 4% pricing offset by -2.1% volume. Gross margin expanded 130 bps to 40.5%, and operating income grew 6.7% to $857M. The Transformation Program and "80/20 principles" are driving the margin story. But the balance sheet has $3.54B of goodwill plus $1.07B of intangibles — 119% of equity — and Deloitte has specifically flagged goodwill impairment testing for a $1.05B Water Solutions reporting unit as the critical audit matter. The company took a $30.9M intangible write-off on a Water Solutions customer relationship in Q2 2025 related to a business exit, plus another $49.1M in asset impairment and write-offs overall. Cash of $102M covers only 6% of debt of $1.77B. Receivables jumped 19% ($565M → $673M) while revenue grew only 2.3% — the second consecutive year of this pattern.

Business Transformation and Segmentation Change

Pentair is reorganizing. From MD&A: "Effective January 1, 2026, we reorganized the composition of our Flow and Water Solutions reportable segments to move our residential and irrigation flow business from our Flow segment into our Water Solutions segment, reflecting how we expect to manage our business in 2026. The Pool segment remains unchanged."

This means the FY2025 segment numbers will not be directly comparable to the FY2026 numbers, and investors will need to reconcile restated historicals when the FY2026 10-K is filed. The reorganization also coincides with the ongoing Transformation Program — focused on "pricing excellence, sourcing excellence, operations excellence and organizational effectiveness."

80/20 Principles: Implemented in 2025, this is a deliberate decision to concentrate on the "top 20% of customers generating 80% of profits." Per the risk factor discussion: "it is possible our revenues could be reduced by exiting certain customers and products." This is intentional revenue loss in pursuit of margin expansion.

Recent acquisitions:

Both are tuck-ins. The Hydra-Stop deal is the main driver of the 7% YoY increase in goodwill + intangibles.

Financial Performance: Pricing-Led Growth

From the Consolidated Statements of Operations:

Sales components per MD&A:

The growth is entirely pricing and currency — volume is declining. The MD&A attributes this to "increased selling prices across all of our segments to mitigate inflationary cost increases" plus "increased sales volume within our Pool segment due to higher demand compared to the prior year" offset by "decreased sales volume within our Flow and Water Solutions segments."

Gross margin expansion of 130 bps came from "increased selling prices across all our segments to mitigate inflationary cost increases; and increased productivity across all our segments mainly driven by transformation initiatives" — partially offset by "inflationary cost increases, including higher tariffs, certain raw materials and labor costs; and asset impairment and write-offs of $17.1 million recorded in 2025, compared to $11.3 million recorded in 2024."

SG&A impairments: Per MD&A: "an impairment charge of $30.9 million related to the write-off of a definite-lived customer relationship intangible asset resulting from a business exit within our Water Solutions segment during the second quarter of 2025." This is material — it is the first warning signal that Water Solutions goodwill may be at risk.

Interest expense fell 21.7% reflecting "lower debt levels throughout 2025 compared to 2024 as a result of the repayment of $250.0 million toward the remaining principal under the Term Loan Facility… during the second quarter of 2025."

Loss on sale of business of $26.3M is a discrete item — the disposal of a Water Solutions sub-business, likely linked to the 80/20 customer exit strategy.

Cash Flow: Strong CFFO Conversion

Cash flow conversion continues to improve — FCF grew 38% over two years to $746M. The 2023 ratio of 1.00 was a concern; 2024-2025 show a healthy acceleration as working capital normalizes and Transformation Program savings flow through.

Note the asset impairment and write-offs of $49.1M in 2025 — 2.8x the 2024 level. This ties to both the 80/20 customer exits and the Water Solutions segment weakness.

Balance Sheet: Thin Cash, Concentrated Goodwill

Accounts receivable jumped $108M (+19.1%) while revenue grew only $93M (+2.3%). This is a red flag — DSO increased from 51 days to 59 days (+8 days YoY). The cash flow statement shows "Accounts receivable" as a use of cash of $(93.1)M in 2025, versus $(11.2)M in 2024 and $(24.4)M in 2023. The acceleration is real and worth watching: either channel stuffing, an aging receivables book, or the Hydra-Stop acquisition (acquired Sep 2025) contributing partial-year AR but full-year inclusion in the balance sheet.

Goodwill of $3,538M + Intangibles of $1,073M = $4,611M, which is 119% of the $3,869M equity base. Goodwill rose $251M in 2025, primarily from the Hydra-Stop acquisition.

Cash of $102M covers only 6% of $1.77B total debt. Debt/EBITDA at 1.9x is healthy, but the minimal cash cushion provides no flexibility.

Critical Audit Matter: The Water Solutions Reporting Unit

Deloitte's sole critical audit matter is specific and pointed: the goodwill impairment assessment for "a reporting unit with a carrying value of $1,052.1 million within the Water Solutions reportable segment."

"The principal consideration for our determination that performing procedures relating to the goodwill impairment test for a reporting unit with a carrying value of $1,052.1 million within the Water Solutions reportable segment as a critical audit matter is due to: i) a high degree of auditor judgment, subjectivity, and effort in performing procedures to assess management's significant assumptions related to evaluation of potential triggering events within the reporting unit that could have a significant effect on the Company's qualitative assessment; ii) the determination of whether further quantitative analysis of goodwill impairment was required."

Deloitte's procedures included "the use of professionals with specialized skill and knowledge" and "assessed the appropriateness and mathematical accuracy of the discount rate (i.e., weighted average cost of capital (WACC)) calculations for the reporting unit."

The fact pattern here is notable:

Deloitte determined no impairment was required for FY2025, but the qualitative assessment is a judgment call. Any softening in the Water Solutions fundamentals in FY2026 could trigger a quantitative test and potentially a material impairment.

The 18-Point Screening

Revenue Quality

A2 is a real concern: AR grew 19.1% while revenue grew 2.3%. Even accounting for Hydra-Stop's September 2025 acquisition, the pattern is adverse.

Expense Quality

Cash Flow Quality

Balance Sheet

Acquisition Risk

Manipulation Score

Components: DSRI 1.165 (receivables intensity rising — the AR build), GMI 0.967 (margin expanding — positive), AQI 1.00, SGI 1.023, DEPI 1.007, SGAI 1.066 (SG&A rising faster than sales, consistent with restructuring costs), TATA -0.0234, LVGI 0.962.

The DSRI of 1.165 is the highest contributor and reflects the AR build. If AR continues to grow in FY2026 as aggressively, the M-Score could deteriorate toward the -2.22 threshold.

Key Risks from the 10-K

1. Goodwill Impairment — Water Solutions Reporting Unit

From the Critical Audit Matter: "$1,052.1 million" of goodwill in a single Water Solutions reporting unit that Deloitte specifically flagged. Combined with $30.9M of intangible impairment already taken on a Water Solutions customer relationship, and the 80/20 customer exit strategy, this reporting unit has multiple red flags. Any softening in Water Solutions fundamentals could trigger a material goodwill write-down.

2. Tariff Exposure and Supreme Court Decision

From MD&A: "In addition, on February 20, 2026, the U.S. Supreme Court struck down certain tariffs imposed under the International Emergency Powers Act. It is unclear at this time what impact this decision will have on our future financial results, including whether we will be able to obtain refunds of amounts previously collected for such tariffs or the level of replacement tariffs the current U.S. Administration imposes through other means."

This is a timely disclosure — the February 20, 2026 Supreme Court ruling may offer a refund opportunity, but it also creates uncertainty about FY2026 tariff exposure.

3. OECD Pillar Two Minimum Tax

From MD&A: "The Organization for Economic Co-operation and Development Pillar Two Model Rules ( Pillar Two ) for a global 15.0% minimum tax have been adopted by a number of jurisdictions in which we operate. Pillar Two has negatively impacted our effective tax rate in 2025 and is likely to continue to impact our effective tax rate in the future."

Pentair is incorporated in Ireland but tax resident in the UK — both Pillar Two-implementing jurisdictions. The FY2025 ETR of 14.1% is likely to rise toward 15-16% over the next 2-3 years as Pillar Two transitional rules expire.

4. 80/20 Customer Exit Revenue Loss

From Risk Factors: "it is possible our revenues could be reduced by exiting certain customers and products." Management is intentionally giving up revenue to improve margins — this is a strategic choice, but it introduces execution risk. If the exited revenue is not replaced with higher-quality growth, the top line will stagnate.

5. Housing Market Exposure

From Risk Factors: "the overall strength of the global economy and various regional economies and our customers confidence in these economies, industrial and governmental capital spending, the strength of residential and commercial real estate markets, residential housing markets." The Pool segment (38% of sales) is heavily leveraged to U.S. residential housing. A downturn would hit directly.

6. Asbestos Legacy Litigation

From Item 1A: "Our subsidiaries are party to asbestos-related litigation." Pentair has historical industrial subsidiaries with asbestos tail liabilities. Captive insurance may not cover all claims.

7. Inflation and Raw Materials

Pentair uses "metals and resins, drives and motors" as primary raw materials. The company explicitly notes "pressure on global manufacturing to continue into 2026" and expects "supply chain pressures and inflationary cost increases" to continue.

Summary

Grade: F. Three hard fails — C4 (cash-to-debt 6%), D1 (goodwill+intangibles 119% of equity), and A2 (AR outpacing revenue for 2 years). The combination is enough to drive the grade.

Pentair is executing well operationally: 130 bps of gross margin expansion, 80 bps of operating margin expansion, and 22% increase in FCF/NI over three years. The Transformation Program is delivering measurable results.

But the earnings quality signals are mixed. The AR acceleration is real — $108M AR build on $93M revenue growth. Deloitte's critical audit matter specifically flagging a $1.05B Water Solutions reporting unit is a meaningful warning. The $30.9M intangible write-off in Q2 2025, followed by the business exit, is consistent with underlying Water Solutions weakness that could metastasize into a larger goodwill impairment in FY2026.

The key questions for investors: (1) Does the January 1, 2026 segment reorganization trigger a fresh goodwill allocation that reveals hidden Water Solutions weakness? (2) Does the 80/20 customer exit strategy actually generate margin improvement in FY2026 that outweighs the revenue loss? (3) Does the AR acceleration reverse in Q1-Q2 2026, or continue? The answers will determine whether FY2026 is a margin-expansion story or an impairment-recognition story.

**Disclaimer**: This report is based on Pentair's FY2025 10-K filed with SEC EDGAR on February 24, 2026. Pentair is organized in Ireland and UK tax-resident. This is NOT investment advice.

Data: SEC EDGAR 10-K + Yahoo Finance

Auditor: Deloitte & Touche LLP (Unqualified opinion, 1 critical audit matter — goodwill impairment assessment for a Water Solutions reporting unit with $1,052.1M carrying value)

Fiscal year ended: December 31, 2025