ITT INC. (ITT) FY 2021 MD&A

OVERVIEW

ITT Inc., through its worldwide subsidiaries, is a diversified manufacturer of highly engineered critical components and customized technology solutions for the transportation, industrial and energy markets. Our product and service offerings are organized into three segments: Motion Technologies (MT), Industrial Process (IP), and Connect & Control Technologies (CCT). We refer you to Part I, Item 1, Description of Business for a further overview of our company, segments, products and service offerings, and other information about the business.

EXECUTIVE SUMMARY

In 2021 we delivered strong results, which included double-digit revenue growth, 400 basis points of segment operating margin expansion, and effective deployment of capital. The following table provides a summary of key performance indicators for 2021 in comparison to 2020.

See the section titled "Key Performance Indicators and Non-GAAP Measures" for a definition and reconciliation of organic revenue, adjusted segment operating income, adjusted income from continuing operations, and adjusted EPS.

Our 2021 results include:

•Revenue of $2,765.0 increased $287.2, including favorable foreign exchange of $48.1. Organic revenue improved 9.6% as a result of strong top-line performance within our MT and CCT segments. MT experienced significant growth in its Friction business, which continued to outperform the global automotive market, while CCT saw strong growth in connector sales.

•Segment operating income of $466.7 increased $148.1, primarily driven by higher sales volume, strategic commercial actions, a reduction in restructuring costs, prior year asset impairment charges, and savings from productivity actions. The increase was partially offset by supply chain disruptions resulting in increased raw material and shipping costs, strategic growth investments and a reversal of temporary cost reductions that were executed in 2020.

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•Income from continuing operations of $314.8 increased $246.3, primarily due to higher segment operating income, prior year pension settlement charges of $108.2, net of tax (see Note 16, Postretirement Benefit Plans) and prior year asbestos charges of $48.9, net of tax (see Note 20, Commitments and Contingencies). During 2021, we divested our entire net asbestos liability, which resulted in an after-tax loss of $28.1. Consequently, earnings per diluted share increased from $0.78 to $3.64.

In 2021, we were focused on execution and value-creation, while managing the continued challenges caused by the COVID-19 pandemic. We implemented strategic actions to minimize the impact of disruption to our global supply chain. The following examples highlight some of the strategic actions we took during the year to position us for continued success:

•We invested in additional capacity at our Friction plants to support the automotive share gains achieved with new and existing customers, including content on over 30 electric vehicle platforms.

•We continue to extend and accelerate value-analysis-value engineering (VA/VE) product redesign, which now encompasses 30% of IP's product portfolio.

•We divested our legacy asbestos liabilities, reducing our overall risk profile and allowing us additional flexibility without the time and resource constraints associated with having to manage these long-term liabilities.

In addition to the above strategic deployments of capital, during 2021 we repurchased 1.2 shares of common stock on the open market for $105 and paid out $76 in dividends to our shareholders. Our dividends declared in 2021 of $0.88 per share represented a 30% increase over the dividends per share declared in 2020.

COVID-19 Update:

During 2021, we continued to be proactive in our response to the challenges stemming from the COVID-19 pandemic. We worked closely with our suppliers in an effort to minimize disruptions within our global supply chain, which included limited availability and inflationary pressures on key raw materials, supplier and shipping delays, and industry-wide shortages of skilled labor. We worked closely with customers to minimize these disruptions and implemented strategic commercial actions to mitigate the impact of rising material and shipping costs. As a result, we have been able to deliver for our customers and cultivate growth opportunities despite this challenging macroeconomic environment.

Future impacts of COVID-19 on our business and financials remain uncertain and will be dependent on the duration of the COVID-19 pandemic, including variant strains of the virus, the timing, effectiveness, and availability of, and people’s receptivity to, vaccines or other medical remedies, potential impacts from any mandatory vaccination requirements, and our ability to respond to future challenges posed by the pandemic. See Part II, Item 1A, Risk Factors, for an additional discussion of risk related to COVID-19.

DISCUSSION OF FINANCIAL RESULTS

2021 VERSUS 2020

All comparisons included within the Discussion of Financial Results for 2021 versus 2020 refer to results for the year ended December 31, 2021 compared to the year ended December 31, 2020, unless stated otherwise.

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REVENUE

The following table summarizes the revenue derived from each of our segments.

(a)See the section titled "Key Performance Indicators and Non-GAAP Measures" for a definition and reconciliation of organic revenue.

Motion Technologies

MT revenue for the year ended December 31, 2021 increased $247.5. Excluding the impact of favorable foreign currency translation of $39.9, organic revenue increased $207.6, primarily due to growth in our Friction business of 21% driven by continued OE outperformance versus automotive production rates and strength in aftermarket. In addition, our Wolverine business grew 17% driven by strength in sealings. Our KONI & Axtone business grew 4% driven by strength in automotive aftermarket equipment, partially offset by a decline in rail.

The automotive industry experienced a global semiconductor supply shortage throughout 2021. The shortage continues to create supply chain disruptions and production declines for our automotive OEM customers. As a result, demand for our OEM brake pads and parts was and may continue to be adversely affected until the shortage is resolved. Although this shortage has had and may continue to have a negative impact on revenue, we continue to significantly outperform automotive production rates globally.

Industrial Process

IP revenue for the year ended December 31, 2021 increased $0.2. Excluding the impact of favorable foreign currency translation of $6.3, organic revenue decreased $6.1 primarily driven by a decline in sales of baseline pumps of 7% mainly within the chemical and energy markets. Additionally, pump projects decreased 5% primarily within the chemical and mining markets. This was partially offset by growth in parts and valves across all end markets.

The level of order and shipment activity at IP can vary significantly from period to period due to pump projects which are highly engineered, customized to customer needs, and have longer lead times. Total IP orders during 2021 were $940.8, an increase of 17.9% compared to the prior year, including $251.6 of orders in the fourth quarter, which represents 37.0% growth from last year. IP's backlog as of December 31, 2021 was $444.4, reflecting an increase of $77.0, or 21.0%, compared to December 31, 2020. Our backlog represents firm orders that have been received, acknowledged, and entered into our production systems.

Connect & Control Technologies

CCT revenue for the year ended December 31, 2021 increased $38.2. Excluding the impact of favorable foreign currency impact of $1.9, organic revenue increased $36.3 driven by growth in connector sales of 20%. This increase was partially offset by an 11% decline in component sales, primarily within the aerospace market. Although we have seen an increase in commercial air travel, we do not expect to see a significant improvement in aerospace sales until the second half of 2022, at the earliest, given what we believe are high levels of inventory that airframers continue to work through.

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GROSS PROFIT

Gross profit for 2021 was $899.5, reflecting a gross margin of 32.5%. Gross profit for 2020 was $782.2, reflecting a gross margin of 31.6%. The increase in gross profit was primarily driven by higher sales volume, productivity savings and strategic commercial actions. These items were partially offset by increases in raw material, shipping, and labor costs, as discussed further below.

Since 2020, the cost of raw materials, including commodities such as steel, that we use in our production processes has significantly increased. The rising prices are mainly a result of increased demand fueled by economic recovery from the COVID-19 pandemic, as well as lower supply since global production capacity was cut in 2020. The impact of higher commodity prices on our financial results during 2021 was partially mitigated by fixed-price supply contracts with suppliers, especially in the first half of 2021. The expiration of these fixed-price contracts, continued raw materials inflation, and supply constraints may continue to unfavorably impact our financial results during 2022. We have been able to offset some of this impact through strategic commercial actions and productivity savings, which we will continue pursuing in 2022.

During 2021, worldwide supply chain challenges exacerbated by the COVID-19 pandemic and the rising demand for physical goods have created upward pressure on shipping costs globally. These supply chain disruptions have contributed to congested shipping ports around the world, causing shipping delays and, in many cases, additional costs to be incurred in order to meet customer demand. As a result of these external pressures, our shipping costs, including for inbound and outbound freight, have increased as compared to the prior year, which has negatively impacted our gross profit. At this time, we are unable to predict when these issues will be resolved. Continued supply chain challenges could have a material impact on our future financial results.

The manufacturing industry is also currently experiencing a skilled labor shortage. This shortage has created difficulties for the Company in attracting and retaining factory employees and in meeting customer demand, resulting in additional labor costs. In addition, in Italy and Germany, which produced sales of 24% and 11% of our consolidated 2021 revenue, respectively, the government has mandated proof of vaccination, a negative rapid swab test, or recent recovery from COVID-19 to be able to go to the workplace. These mandates went into effect during the fourth quarter of 2021, and could create further employee attrition and difficulty in securing future labor needs. If similar mandates to the Italian or German mandates are issued in the U.S. or other jurisdictions in which we operate, similar attrition and employment issues may arise. As a result of these circumstances, our financial results have been, and may continue to be, negatively impacted. For additional information regarding the government-mandate on COVID-19 vaccination, see Part II, Item 1A, Risk Factors.

OPERATING EXPENSES

The following table provides further information by expense type, as well as a breakdown of operating expense by segment.

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General and administrative (G&A) expenses for the year ended December 31, 2021 increased $15.6. The increase was primarily due to higher personnel costs, which was partially the result of temporary cost actions in the prior year taken in response to the COVID-19 pandemic, which included a temporary reduction in executive compensation and suspension of select 401(k) benefits for certain U.S. employees that were reinstated for 2021. Last year, we also benefited from higher employee retention credits in connection with the Coronavirus Aid, Relief, and Economic Security Act (the 2020 CARES Act). Additionally, environmental costs were higher in 2021 by $5.8, primarily due to prior-year insurance-related recoveries.

The increase in G&A expenses was partially offset by favorable foreign currency impact of $9.5, lower bad debt expense of $8.2, and a land sale gain of $7.0.

Sales and marketing expenses for the year ended December 31, 2021 increased $4.3, primarily driven by higher incentive-based compensation in the current year, as well as prior year discretionary spending reductions and temporary personnel cost actions taken in response to the COVID-19 pandemic.

Research and development (R&D) expenses for the year ended December 31, 2021 increased $10.0 due to continued strategic investments in innovation and new product development to drive future growth.

Asbestos-related matters resulted in a net benefit of $74.4 for the year ended December 31, 2021, due to the recognition of a pre-tax gain of $88.8 from the divestiture of InTelCo, which was executed on July 1, 2021. During the year ended December 31, 2020, we recognized costs of $135.9 related to extending our projection period to include pending claims and claims expected to be filed through 2052, reflecting the full time period over which we expected asbestos claims to be filed against InTelCo. The prior year benefited from insurance settlement agreements resulting in a net gain of $100.4. The following table summarizes our total net asbestos-related charges.

See Note 20, Commitments and Contingencies, to the Consolidated Condensed Financial Statements for further information.

Restructuring costs decreased $33.4 during the year ended December 31, 2021. Restructuring costs recorded in the prior year were mainly related to cost actions taken as part of our 2020 Global Restructuring Plan, which was an organizational-wide restructuring to reduce the overall cost structure of the Company in response to the challenges caused by the COVID-19 pandemic. See Note 5, Restructuring Actions, to the Consolidated Condensed Financial Statements for further information.

Asset impairment charges during the year ended December 31, 2020 were related to a business within IP that primarily serves the global upstream oil and gas market. See Note 11, Plant, Property and Equipment, Net, and Note 12, Goodwill and Other Intangible Assets, Net, to the Consolidated Condensed Financial Statements for further information.

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OPERATING INCOME

The following table summarizes our operating income and operating margin by segment.

MT operating income for the year ended December 31, 2021 increased $74.2 primarily due to higher sales volume, strategic commercial actions, savings from net productivity, lower restructuring costs of $8.8, and a gain on sale of land of $7.0. The increase was partially offset by higher raw material costs, which were due to supply chain challenges, and strategic investments to drive future growth.

IP operating income for the year ended December 31, 2021 increased $49.2. The increase in operating income was primarily driven by net productivity savings, lower restructuring costs of $16.4, prior year asset impairments of $16.3, and a reduction in bad debt expense of $7.4 mainly from collections of aged receivables. The increase was partially offset by unfavorable raw material, shipping, and labor costs.

CCT operating income for the year ended December 31, 2021 increased $24.7, driven by savings from net productivity, higher sales volume, and lower restructuring costs of $6.1. The increase was partially offset by higher raw material costs.

Other corporate costs, net, increased $11.0 primarily driven by higher personnel costs, which was partially the result of temporary prior year cost actions taken in response to the COVID-19 pandemic. The increase in other corporate costs was also attributable to higher environmental-related costs of $5.6, which was primarily driven by insurance-related recoveries in the prior year.

INTEREST AND NON-OPERATING (INCOME) EXPENSE, NET

The following table summarizes our interest and non-operating (income) expense, net.

The decrease in non-operating postretirement costs was due to the termination of our U.S. qualified pension plan and transfer of the plan's liabilities to an insurance company in the prior year. In connection with the termination, we recognized a settlement charge of $136.9, which primarily represents the acceleration of deferred charges previously accrued in accumulated other comprehensive loss and derecognition of the net assets of the plan. See Note 16, Postretirement Benefit Plans, to the Consolidated Condensed Financial Statements for further information.

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INCOME TAX EXPENSE

The following table summarizes our income tax expense and effective tax rate.

The higher effective tax rate in 2021 compared to 2020 resulted from the Company recording tax expense on the reversal of previously recorded deferred tax assets of $116.9 resulting from the Company's divestiture of the entity holding asbestos-related assets and liabilities (see Note 20, Commitments and Contingencies, for further information). The lower effective rate in 2020 included a benefit of $25.9 resulting from an internal reorganization in Europe. The reorganization increased projections of future earnings, which will result in the realization of a portion of our deferred tax assets. This benefit was partially offset by the recognition of a $21.7 valuation allowance on our Germany and UK entities.

The Company’s financial condition and results of operations have been and may continue to be adversely affected by the COVID-19 pandemic and the governmental and market reactions to COVID-19. The impacts on earnings have already had, and may continue to have, an impact on the Company’s overall effective tax rate.

We operate in various tax jurisdictions and are subject to examination by tax authorities in these jurisdictions. We are currently under examination in several jurisdictions including the Czech Republic, Germany, Hong Kong, India, Italy, Japan, the U.S. and Venezuela. The calculation of our tax liability for unrecognized tax benefits includes dealing with uncertainties in the application of complex tax laws and regulations in various tax jurisdictions. Due to the complexity of some uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit. Over the next 12 months, the net amount of the tax liability for unrecognized tax benefits in foreign and domestic jurisdictions could change by approximately $1 due to changes in audit status, expiration of statutes of limitations and other events.

See Note 6, Income Taxes, to the Consolidated Financial Statements for further information on tax-related matters.

LIQUIDITY AND CAPITAL RESOURCES

Funding and Liquidity Strategy

We monitor our funding needs and execute strategies to meet overall liquidity requirements, including the management of our capital structure, on both a short- and long-term basis. Significant factors that affect our overall management of liquidity include our cash flow from operations, credit ratings, the availability of commercial paper, access to bank lines of credit, term loans, and the ability to attract long-term capital on satisfactory terms. We assess these factors along with current market conditions on a continuous basis, and as a result, may alter the mix of our short- and long-term financing when it is advantageous to do so. We expect to have enough liquidity to fund operations for at least the next 12 months and beyond.

We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We have identified and continue to look for opportunities to access cash balances in excess of local operating requirements to meet our global liquidity needs in a cost-efficient manner. We plan to continue transferring cash between certain international subsidiaries and the U.S. when it is cost effective to do so. We will also continue to support growth and expansion in markets outside of the U.S. through the enhancement of existing products and development of new products, increased capital spending, and potential foreign acquisitions. Net cash distributions from foreign countries to the U.S. during the years ended December 31, 2021 and 2020 were $116.9 and $498.2, respectively. In 2020, we distributed a larger amount of cash as a precautionary measure in response to the COVID-19 pandemic. The timing and amount of any additional future distributions remains under evaluation based on our jurisdictional cash needs.

The Company continues to evaluate the various global governmental programs instituted in response to COVID-19, including the American Rescue Plan Act of 2021 (ARPA). ARPA builds upon many of the measures in the 2020 CARES Act and the Consolidated Appropriations Act of 2020, and generally provides for various workforce incentives, including an employee retention credit. However, on November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act, which repealed the employee retention credit effective September

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30, 2021. During the years ended December 31, 2021 and 2020, the Company recognized a benefit within operating income of $5.1 and $10.4, respectively, related to the employee retention credit. As of December 31, 2021, we have not incurred any borrowings under governmental loan programs. We continue to monitor the effects that ARPA, the 2020 CARES Act, and other similar legislation globally may have on our liquidity position.

The amount and timing of dividends payable on our common stock are within the sole discretion of our Board of Directors and will be based on, and affected by, a number of factors, including our financial position and results of operations, available cash, expected capital spending plans, prevailing business conditions, and other factors the Board of Directors deems relevant. Therefore, we cannot provide any assurance as to what level of dividends, if any, will be paid in the future. Aggregate dividends paid in 2021 were $75.8, compared to $59.0 in 2020, reflecting annual per share amounts of $0.880 and $0.676, respectively. In the first quarter of 2022, we declared a quarterly dividend of $0.26 per share for shareholders of record on March 9, 2022, which will be paid on April 4, 2022.

In 2021 and 2020, we repurchased and retired 1.2 and 1.7 shares of common stock for $104.8 and $73.2, respectively, under our share repurchase plans. Separate from our share repurchase plans, the Company repurchased 0.1 shares and 0.2 shares for an aggregate price of $11.7 and $11.0 during 2021 and 2020, respectively, in settlement of employee tax withholding obligations due upon the vesting of RSUs and PSUs. All repurchased shares are canceled immediately following the repurchases.

Commercial Paper

When available and economically feasible, we have accessed the commercial paper market through programs in place in the U.S. and Europe to supplement cash flows generated internally and to provide additional short-term funding for strategic investments and other funding requirements. We manage our short-term liquidity through the use of our commercial paper program by adjusting the level of commercial paper borrowings as opportunities to deploy additional capital arise and it is cost effective to do so. As of December 31, 2021, we had total commercial paper outstanding of $195.4, issued through both the Company's U.S. and Euro programs. We had $150.0 of commercial paper outstanding under the U.S. program, which was used to partially fund the divestiture of the entity holding legacy asbestos-related assets and liabilities (see Note 20, Commitments and Contingencies). We had $45.4 of commercial paper outstanding under the Euro program. As of December 31, 2020, we had commercial paper outstanding of $104.3, issued entirely under the Company's Euro program. All outstanding commercial paper for both periods had maturity terms less than three months from the date of issuance. Our average daily outstanding commercial paper balance for the years ended 2021 and 2020 was $133.5 and $76.4, respectively, and the maximum outstanding commercial paper during each of those respective years was $197.5 and $159.1.

Revolving Credit Agreement

On August 5, 2021, we entered into a revolving credit facility agreement with a syndicate of third party lenders including Bank of America, N.A., as administrative agent (the 2021 Revolving Credit Agreement). The 2021 Revolving Credit Agreement matures in August 2026 and provides for an aggregate principal amount of up to $700 of (i) revolving extensions of credit (the revolving loans) outstanding at any time, and (ii) letters of credit for a face amount up to $100 at any time outstanding. Subject to certain conditions, we are permitted to terminate permanently the total commitments and reduce commitments by a minimum aggregate amount of $10 or any whole multiple of $1 in excess thereof. Borrowings under the credit facility are available in U.S. dollars, Euros, British pound sterling or any other currency that may be requested by us, subject to the approval of the administrative agent and each lender. We are permitted to request that lenders increase the commitments under the facility by up to $350 for a maximum aggregate principal amount of $1,050; however, this is subject to certain conditions and therefore may not be available to us. As of December 31, 2021 and 2020, we had no outstanding borrowings under the current or former revolving credit agreements. See Note 15, Debt, to the Consolidated Condensed Financial Statements for further information.

The Company's ability to access the global capital markets and the related cost of financing is dependent upon, among other factors, the Company's credit ratings. Our credit ratings as of December 31, 2021 were as follows:

There were no changes to our credit ratings during 2021. Please refer to the rating agency websites and press releases for more information.

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Sources and Uses of Liquidity

Our principal source of liquidity is our cash flow generated from operating activities, which provides us with the ability to meet the majority of our short-term funding requirements. The following table summarizes net cash derived from operating, investing, and financing activities for the years ended December 31, 2021 and 2020.

Operating Activities

The decrease in net cash from operating activities of $444.3 was primarily due to a one-time cash payment of $398.0 related to the divestiture of the entity holding legacy asbestos-related assets and liabilities. In addition, we made working capital investments in our business to support sales growth. These items were partially offset by an increase in segment operating income.

Investing Activities

The increase in net cash used in investing activities of $16.5 was driven by an increase in capital expenditures of $24.7 to support future growth initiatives, partially offset by cash proceeds of $7.1 related to a sale of land within our MT segment.

Financing Activities

The decrease in net cash used in financing activities of $58.8 was primarily driven by an increase in net commercial paper borrowings of $82.3 and prior year revolver repayments, net of borrowings, of $28.9. This was partially offset by an increase in repurchases of ITT common stock of $32.3 and dividends paid of $16.8.

Asbestos

During 2021, we completed the divestiture of InTelCo Management LLC (InTelCo), a former subsidiary which holds our legacy asbestos-related assets and liabilities, relieving us from any obligation with respect to pending and future asbestos claims. In connection with the divestiture, we contributed approximately $398 to InTelCo. As a result of the divestiture transaction, we will no longer incur any asbestos-related cash outflows. See Note 20, Commitments and Contingencies, for additional information.

Funding of Postretirement Plans

The following table provides a summary of the funded status of our postretirement benefit plans as of December 31, 2021 and 2020.

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In 2020, we completed the termination of our U.S. qualified pension plan by providing lump sum payments to eligible participants who elected to receive them, and by purchasing a group annuity contract from MassMutual Life Insurance Company (MassMutual) for the remaining projected benefit obligation. The termination was funded with plan assets of approximately $320 and cash of $8.4. Our non-U.S. pension plans, which are typically not funded due to local regulations, had a decline in projected benefit obligation of $15.9 during 2021, primarily due to a higher discount rate and favorable foreign currency translation. Our other employee-related benefit plans are generally unfunded plans as well. The projected benefit obligation of these plans declined by $11.9 during 2021 primarily due to an increase in the discount rate.

Contributions to our U.S. and non-U.S. pension and other postretirement plans were $10.5 and $18.0 during 2021 and 2020, respectively, which were used to fund participant benefits. We currently estimate 2022 contributions to our pension and other postretirement benefits plans of $14.

See Note 16, Postretirement Benefit Plans, for additional financial information related to our postretirement obligations.

Capital Resources

Long-term debt is generally defined as any debt with an original maturity greater than 12 months. As of December 31, 2021, we have access to short- and long-term funding sources. These include access to the capital markets through a commercial paper program, as well as $700 of available borrowing capacity under our 2021 Revolving Credit Agreement, which may potentially be expanded to $1,050 under the agreement. In addition, we have market access to secure longer-term funding, if needed. Our commercial paper program is supported by our 2021 Revolving Credit Agreement and our policy is to maintain unused committed bank lines of credit in an amount greater than outstanding commercial paper balances.

The table below provides long-term debt outstanding as of December 31, 2021 and 2020.

Contractual Obligations

The following table summarizes ITT’s commitment to make future payments under long-term contractual obligations as of December 31, 2021.

In addition to the amounts presented in the table above, we have recorded liabilities for uncertain tax positions of $2.8 in our Consolidated Balance Sheet at December 31, 2021. This amount has been excluded from the contractual obligations table due to an inability to reasonably estimate the timing of payments in individual years.

(a)Represents unconditional purchase agreements that are enforceable and legally binding and that specify all significant terms to purchase goods or services, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase agreements that are cancellable without penalty have been excluded.

(b)Represents the projected timing of payments for benefits earned to date and the expectation that certain future service will be earned by current active employees for our pension and other employee-related benefit plans. See Note 16, Postretirement Benefit Plans, for additional financial information related to our postretirement obligations.

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(c)Other long-term obligations include amounts recorded on our December 31, 2021 Consolidated Balance Sheet, including estimated environmental payments and employee compensation agreements. We estimate based on historical experience that we will spend approximately $4 per year on environmental investigation and remediation. A portion of our environmental investigation and remediation costs are legally mandated through various orders and agreements with state and federal oversight agencies. At December 31, 2021, our recorded environmental liability was $54.1. See Note 20, Commitments and Contingencies, to the Consolidated Financial Statements for further information.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements represent transactions, agreements or other contractual arrangements with unconsolidated entities, where an obligation or contingent interest exists. Our off-balance sheet arrangements, as of December 31, 2021, consist of indemnities related to acquisition and disposition agreements and certain third-party guarantees.

Indemnities

Since our founding in 1920, we have acquired and disposed of numerous businesses. The related acquisition and disposition agreements allocate certain assets and liabilities among the parties and contain various representation and warranty clauses and may provide indemnities for a misrepresentation or breach of the representations and warranties by either party or for assumed or excluded liabilities. These provisions address a variety of subjects. The term and monetary amounts of each such provision are defined in the specific agreements and may be affected by various conditions and external factors. Many of the provisions have expired either by operation of law or as a result of the terms of the agreement. We do not have a liability recorded for these expired provisions and are not aware of any claims or other information that would give rise to material payments under such provisions.

Guarantees

We had $129.4 of guarantees, letters of credit and similar arrangements outstanding at December 31, 2021, primarily pertaining to commercial or performance guarantees and insurance matters. We have not recorded any material loss contingencies under these guarantees, letters of credit and similar arrangements as of December 31, 2021 as the likelihood of nonperformance by the underlying obligors is considered remote. From time to time, we may provide certain third-party guarantees that may be affected by various conditions and external factors, some of which could require that payments be made under such guarantees. We do not consider the maximum exposure or current recorded liabilities under our third-party guarantees to be material either individually or in the aggregate. We do not believe such payments would have a material adverse impact on our financial statements.

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KEY PERFORMANCE INDICATORS AND NON-GAAP MEASURES

Management reviews a variety of key performance indicators including revenue, segment operating income and margins, and earnings per share, some of which are calculated other than in accordance with accounting principles generally accepted in the United State of America (GAAP). In addition, we consider certain measures to be useful to management and investors when evaluating our operating performance for the periods presented. These measures provide a tool for evaluating our ongoing operations and management of assets from period to period. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, acquisitions, dividends, and share repurchases. Some of these metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for measures determined in accordance with GAAP. We consider the non-GAAP measures disclosed in this Annual Report on Form 10-K to be key performance indicators. These measures, which may not be comparable to similarly titled measures reported by other companies, consist of the following:

•“Organic revenue” is defined as revenue, excluding the impacts of foreign currency fluctuations and acquisitions. The period-over-period change resulting from foreign currency fluctuations is estimated using a fixed exchange rate for both the current and prior periods. Management believes that reporting organic revenue provides useful information to investors by facilitating comparisons of our revenue performance with prior and future periods and to our peers. A reconciliation of revenue to organic revenue for the year ended December 31, 2021 is provided below.

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•“Adjusted operating income” and “Adjusted segment operating income” are defined as operating income, adjusted to exclude special items that include, but are not limited to, asbestos-related impacts, restructuring, certain asset impairment charges, certain acquisition-related impacts, and unusual or infrequent operating items. Special items represent charges or credits that impact current results, which management views as unrelated to the Company’s ongoing operations and performance. “Adjusted operating margin” and “Adjusted segment operating margin” are defined as adjusted operating income or adjusted segment operating income divided by revenue. We believe that these financial measures are useful to investors and other users of our financial statements in evaluating ongoing operating profitability, as well as in evaluating operating performance in relation to our competitors.

A reconciliation of operating income to adjusted operating income for the years ended December 31, 2021 and 2020 are provided in the tables below.

(a)Asset impairment charges in 2020 are related to a business within IP that primarily serves the global upstream oil and gas market.

(b)Other costs at Corporate primarily reflects accelerated amortization of an intangible asset.

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•“Adjusted income from continuing operations” is defined as income from continuing operations attributable to ITT Inc. adjusted to exclude special items that include, but are not limited to, asbestos-related impacts, restructuring, certain asset impairment charges, pension termination and settlement impacts, certain acquisition-related impacts, income tax settlements or adjustments, and unusual or infrequent items. Special items represent charges or credits, on an after-tax basis, that impact current results, which management views as unrelated to the Company’s ongoing operations and performance. The after-tax basis of each special item is determined using the jurisdictional tax rate of where the expense or benefit occurred. “Adjusted income from continuing operations per diluted share” (Adjusted EPS) is defined as adjusted income from continuing operations divided by diluted weighted average common shares outstanding. We believe that adjusted income from continuing operations and adjusted EPS are useful to investors and other users of our financial statements in evaluating ongoing operating profitability, as well as in evaluating operating performance in relation to our competitors.

A reconciliation of adjusted income from continuing operations, including adjusted earnings per diluted share, to income from continuing operations and income from continuing operations per diluted share for the years ended December 31, 2021 and 2020 are provided in the table below.

(a)Asset impairment charges in 2020 are related to a business within IP that primarily serves the global upstream oil and gas market.

(b)The following table details significant components of the tax-related special items. See Note 6, Income Taxes, to Consolidated Financial Statements for further information.

(c)Other costs primarily relates to accelerated amortization of certain intangible assets.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements and related disclosures in accordance with GAAP requires us to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant accounting policies used in the preparation of the financial statements are discussed in Note 1, Description of Business, Basis of Presentation and Summary of Significant Accounting Policies, to the Consolidated Financial Statements. An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes to the estimate that are reasonably possible could materially affect the financial statements. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of ITT’s Board of Directors.

The accounting estimates and assumptions discussed below are those that we consider most critical to fully understanding our financial statements and evaluating our results as they are inherently uncertain, involve the most subjective or complex judgments, include areas where different estimates reasonably could have been used, and the use of an alternative estimate that is reasonably possible could materially affect the financial statements. We base our estimates on historical experience and other data and assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management believes the accounting estimates employed and the resulting balances reported in the Consolidated Financial Statements are reasonable; however, actual results could differ materially from our estimates and assumptions.

Revenue Recognition

Revenue is derived from the sale of products and services to customers. We recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. For product sales, other than certain long-term construction and production type contracts where we have no alternative use for the product and have an enforceable right to payment, we recognize revenue at the time control of our promised goods or services passes to the customer, generally when products are shipped and the contractual terms have been fulfilled.

We recognize revenue for certain highly customized long-term design and build projects using the cost-to-cost method, based upon the percentage of costs incurred to total projected costs. Revenue and profit recognized under the cost-to-cost method are based on management’s estimates of measures such as total contract revenues, contract costs and the extent of progress toward completion. Due to the long-term nature of the contracts, these estimates are subject to uncertainties and require significant judgment. Estimates of contract costs include labor hours and rates, and material costs. These estimates consider historical performance, the complexity of the work to be performed, the estimated time to complete the project, and other economic factors such as inflation and market rates. We update our estimates on a periodic basis and any revisions to such estimates are recorded in earnings in the period in which they are determined. Provisions for estimated losses, if any, on uncompleted long-term contracts, are made in the period in which such losses are determined.

For contracts recognized at a point in time, provisions for estimated losses, if any, on uncompleted arrangements, are recognized in the period in which such losses are determined. These estimates are subject to uncertainties and require significant judgment. They may consider historical performance, the complexity of the work to be performed, the estimated time to complete the project, and other economic factors such as inflation.

Additionally, accruals for estimated expenses related to sales returns and warranties are made at the time products are sold. Reserves for sales returns, rebates and other allowances are established using historical information on the frequency of returns for a particular product and period over which products can be returned. For distributors and resellers, our typical return period is less than 180 days. Future market conditions and product transitions may require us to take actions to increase customer incentive offerings, possibly resulting in a reduction in revenue at the time the incentive is offered.

Warranty accruals are established using historical information on the nature, frequency, and average cost of warranty claims and estimates of future costs. Our standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. Although we engage in extensive product quality programs and processes, we base our estimated warranty obligation on product warranty terms offered to customers, ongoing product failure rates, materials usage, service delivery costs incurred in correcting a product failure, and specific product class failures outside of our baseline experience and associated overhead costs. If actual product failure rates, repair rates, or any other post-sales support costs differ from these estimates, revisions to the estimated warranty liability would be required.

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For certain highly complex contracts, design, engineering, and other preproduction costs may be capitalized if the costs relate directly to a contract or anticipated contract that the entity can specifically identify, the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future and the costs are expected to be recovered. In addition to direct labor and materials to fulfill a contract or anticipated contract, we exercise judgment in determining which costs are allocated, including allocations of contract management and depreciation of tooling used to fulfill the contract. Additionally, overall contract profitability is estimated in determining cost recoverability.

Income Taxes

Deferred income tax assets and liabilities are determined based on the estimated future tax effects of differences between the financial reporting and tax bases of assets and liabilities, applying currently enacted tax rates in effect for the year in which we expect the differences will reverse. We periodically assess the likelihood that we will be able to recover our deferred tax assets, and we reflect any changes to our estimate of the amount we are more likely than not to realize as a valuation allowance, with a corresponding adjustment to earnings or other comprehensive income (loss), as appropriate. The ultimate realization of deferred tax assets depends on the generation of future taxable income (including the reversals of deferred tax liabilities) during the periods in which those deferred tax assets will become deductible.

The Company assesses all available positive and negative evidence regarding the realizability of its deferred tax assets. Significant judgment is required in assessing the need for any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, both positive and negative, including the future reversal of existing taxable temporary differences, taxable income in carryback periods, prudent and feasible tax planning strategies, estimated future taxable income, and whether we have a recent history of losses. The valuation allowance can be affected by changes to tax regulations, interpretations and rulings, changes to enacted statutory tax rates, and changes to future taxable income estimates.

Our effective tax rate reflects the impact of certain undistributed foreign earnings for which we have not provided U.S. taxes because these earnings are considered indefinitely reinvested outside of the U.S. We plan foreign earnings remittance amounts based on projected cash flow needs, as well as the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Based on these assumptions, we estimate the amount we will distribute to the U.S. and accrue U.S. and foreign taxes on these planned foreign remittance amounts. Material changes in our estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could impact our effective tax rate. Our provision for income taxes could be adversely impacted by changes in our geographic mix of earnings or changes in the enacted tax rates in the jurisdictions in which we conduct our business.

The calculation of our deferred and other tax balances involves significant management judgment when dealing with uncertainties in the application of complex tax regulations and rulings in a multitude of taxing jurisdictions across our global operations. The Company is routinely audited by U.S. federal, state and foreign tax authorities, the results of which could cause proposed assessments against the Company. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues based on our estimate of whether, and to the extent to which, additional taxes will be due. Furthermore, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position in consideration of applicable tax statutes and related interpretations and precedents and the expected outcome of the proceedings (or negotiations) with the taxing authorities. Tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized on ultimate settlement.

We adjust our liability for uncertain tax positions in light of changing facts and circumstances; however, the ultimate resolution of a tax examination may differ from the amounts recorded in the financial statements for a number of reasons, including the Company’s decision to settle rather than litigate a matter, relevant legal precedent related to similar matters, and the Company’s success in supporting its filing positions with the tax authorities. If our estimate of tax liabilities proves different than the ultimate outcome, such differences will affect the provision for income taxes in the period in which such determination is made.

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Goodwill and Other Intangible Assets

We review goodwill and indefinite-lived intangible assets for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We also review the carrying value of our finite-lived intangible assets for potential impairment when impairment indicators arise. We conduct our annual impairment tests as of the first day of the fourth quarter. When reviewing for impairment, we may opt to make an initial qualitative evaluation, which considers present events and circumstances, to determine the likelihood of impairment. Our decision to perform a qualitative impairment assessment for an individual reporting unit in a given year is influenced by a number of factors, including the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, changes in macroeconomic, industry and reporting-unit specific conditions and the amount of time in between quantitative fair value measurements. If the likelihood of impairment is not considered to be more likely than not, then no further testing is performed.

In cases when we opt not to perform a qualitative evaluation, or the qualitative evaluation indicates that the likelihood of impairment is more likely than not, we then perform a quantitative impairment test for goodwill. We test each reporting unit for goodwill impairment quantitatively at a minimum of once every three years. We compare the estimated fair value of each reporting unit to its carrying value. If the estimated fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired. If the carrying value of the net assets assigned to the reporting unit exceeds its fair value, then we record an impairment loss equal to the difference. In our annual impairment test for indefinite-lived intangible assets, we compare the fair value of those assets to their carrying value. We recognize an impairment loss when the estimated fair value of the indefinite-lived intangible asset is less than its carrying value.

We estimate the fair value of our reporting units using an income approach. Under the income approach, we calculate fair value based on the present value of estimated future cash flows. We estimate the fair value of our indefinite-lived intangible assets using the relief from royalty method. The relief from royalty method estimates the portion of a company’s earnings attributable to an intellectual property asset based on an assumed royalty rate that the company would have paid had the asset not been owned.

Determining the fair value of a reporting unit or an indefinite-lived intangible asset is judgmental in nature and involves the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates, future economic and market conditions, and the identification of appropriate market comparable data. In addition, the identification of reporting units and the allocation of assets and liabilities to the reporting units when determining the carrying value of each reporting unit also requires judgment. Goodwill is tested for impairment at the reporting unit level, which, based on the applicable accounting guidance, is either the operating segment or one level below (e.g., the divisions of our Connect & Control Technology segment). The fair value of our reporting units and indefinite-lived intangible assets are based on estimates and assumptions that are believed to be reasonable. Significant changes to these estimates and assumptions could adversely impact our conclusions. Actual future results may differ from those estimates. During the fourth quarter of 2021, we performed our annual impairment assessment and determined that the estimated fair values of our goodwill reporting units were substantially in excess of each of their carrying values. Had different reporting units been identified or had different valuation techniques or assumptions been utilized, the results of our impairment tests could have resulted in an impairment loss, which could have been material.

See Note 12, Goodwill and Other Intangible Assets, Net, to the Consolidated Financial Statements for more information.

Environmental Liabilities

We are subject to various federal, state, local, and foreign environmental laws and regulations that require environmental assessment or remediation efforts. Accruals for environmental exposures are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. Significant judgment is required to determine both the likelihood of a loss and the estimated amount of loss. Engineering studies, probability techniques, historical experience, and other factors are used to identify and evaluate remediation alternatives and their related costs in estimating our reserve for environmental liabilities. Our environmental reserve of $54.1 at December 31, 2021, represents management’s estimate of undiscounted costs expected to be incurred related to environmental assessment or remediation efforts, including related legal fees, without regard to potential recoveries from insurance companies or other third parties. Our estimated liability is reduced to reflect the participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially

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capable of paying their respective share of the relevant costs and that share can be reasonably estimated. Our environmental accruals are reviewed and adjusted for progress of investigation and remediation efforts and as additional technical or legal information become available, such as the impact of negotiations with regulators and other potentially responsible parties, settlements, rulings, advice of legal counsel, and other current information.

We closely monitor our environmental responsibilities, together with trends in the environmental laws. Environmental remediation reserves are subject to numerous inherent uncertainties that affect our ability to estimate our share of the costs. Such uncertainties involve incomplete information regarding particular sites, incomplete information regarding other potentially responsible parties, uncertainty regarding the nature and extent of contamination at each site, uncertainties concerning the extent of remediation required under existing regulations, uncertainties concerning our share of any remediation liability, if any, widely varying cost estimates associated with potential alternative remedial approaches, uncertainty with regard to the length of time required to remediate a particular site, uncertainties concerning the potential effects of continuing improvements in remediation technology, and unpredictable nature and timing of changes in environmental standards and regulatory requirements. The effect of legislative or regulatory changes on environmental standards could be material to the Company’s financial statements. Additionally, violations by us of such laws and regulations, discovery of previously unknown or more extensive contamination, litigation involving environmental impacts, our inability to recover costs associated with any such developments, or financial insolvency of other potentially responsible parties could have a material adverse effect on our financial statements.

Although it is not possible to predict with certainty the ultimate costs of environmental remediation, the reasonably possible high-end of our estimated environmental liability range at December 31, 2021 was $93.8.

Recent Accounting Pronouncements

See Note 2, Recent Accounting Pronouncements, to the Consolidated Financial Statements for a complete discussion of recent accounting pronouncements.