UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-05672 ITT INC. State of Indiana 81-1197930 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Iden ...

[PART I](index=4&type=section&id=PART%20I) [Business Description](index=4&type=section&id=ITEM%201.%20DESCRIPTION%20OF%20BUSINESS) ITT Inc. is a diversified manufacturer of highly engineered components and technology solutions for transportation, industrial, and oil and gas markets Company Snapshot (2018) | Metric | Value | | :--- | :--- | | 2018 Revenue | $2.75 Billion | | Employees | Approx. 10,000 in 35 Countries | | Revenue Outside U.S. | 68% | | Sales Presence | Over 100 Countries | - The company's business is organized into three primary segments: - **Motion Technologies (MT):** Produces friction, shock, and vibration equipment - **Industrial Process (IP):** Delivers industrial flow equipment and services - **Connect & Control Technologies (CCT):** Manufactures electronic connectors and various control products[21](index=21&type=chunk) - ITT's operating strategy is centered on disciplined organic growth through market expansion and new product development, combined with operational improvements using Lean Six Sigma principles to enhance productivity and reduce costs[26](index=26&type=chunk) Backlog by Segment (in millions) | Segment | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Motion Technologies | $303.1 | $299.7 | $201.2 | | Industrial Process | $444.2 | $385.5 | $347.2 | | Connect & Control Technologies | $273.7 | $233.5 | $236.7 | | **Total ITT Inc.** | **$1,021.0** | **$918.7** | **$785.1** | [Motion Technologies (MT)](index=5&type=section&id=Motion%20Technologies%20(MT)) The MT segment manufactures brake pads, shock absorbers, and energy absorption components for the global transportation industry - MT's primary products include **brake pads**, **shims**, **shock absorbers**, and **sealing technologies** for the transportation sector[29](index=29&type=chunk) - Sales to Continental, MT's largest customer, accounted for **23% of the segment's 2018 revenue**, largely driven by OEM specifications for ITT brake pads within Continental's systems[32](index=32&type=chunk) [Industrial Process (IP)](index=6&type=section&id=Industrial%20Process%20(IP)) The IP segment manufactures and services industrial pumps, valves, and plant optimization systems for diverse markets - IP's portfolio includes industrial pumps (**Goulds Pumps, Bornemann**), valves (**Engineered Valves**), and aftermarket services (**PRO Services, i-ALERT**)[39](index=39&type=chunk) - Independent industrial distributors contribute to approximately **one-third of the segment's revenue** through an extensive global network[43](index=43&type=chunk) [Connect & Control Technologies (CCT)](index=7&type=section&id=Connect%20%26%20Control%20Technologies%20(CCT)) The CCT segment designs and manufactures highly engineered connectors and control products for critical applications - CCT's product portfolio includes high-performance electrical connectors (**Cannon, VEAM, BIW**) and control products like actuators, pumps, and switches for various critical applications[47](index=47&type=chunk)[51](index=51&type=chunk) - Distributors accounted for about **30% of the segment's 2018 revenue**, with products sold both directly and through numerous channels[46](index=46&type=chunk) [Risk Factors](index=12&type=section&id=ITEM%201A.%20RISK%20FACTORS) ITT faces significant risks from asbestos claims, global economic conditions, international operations, tariffs, and customer concentration - The company faces significant uncertainty from pending and future asbestos claims, with potential material adverse effects on financial condition, and has indemnified its 2011 spin-offs for certain pre-spin-off asbestos claims[76](index=76&type=chunk)[78](index=78&type=chunk)[79](index=79&type=chunk) - International operations, accounting for **68% of total sales in 2018**, expose the company to various risks including unfavorable laws, currency repatriation restrictions, political instability, and changes in tariffs[83](index=83&type=chunk) - Recently announced U.S. tariffs have negatively impacted the price of certain parts and materials, and continued trade disputes could adversely affect demand, costs, customers, and suppliers[87](index=87&type=chunk) - Sales to Continental, ITT's largest customer, accounted for approximately **11% of total revenue in 2018**, posing a material adverse risk if this customer relationship is lost[102](index=102&type=chunk) [Unresolved Staff Comments](index=21&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) The company reported no unresolved staff comments from the SEC - None[127](index=127&type=chunk) [Properties](index=22&type=section&id=ITEM%202.%20PROPERTIES) ITT operates 24 owned and 29 leased manufacturing facilities globally, totaling 7.3 million square feet, deemed adequate for its needs Owned Manufacturing Facilities by Region (as of Dec 31, 2018) | Region | Number of Facilities | Area (sq. ft. in thousands) | | :--- | :--- | :--- | | North America | 10 | 2,438.0 | | Europe | 11 | 2,169.2 | | Asia | 2 | 704.4 | | South America | 1 | 42.7 | | **Total** | **24** | **5,354.3** | Leased Manufacturing Facilities by Region (as of Dec 31, 2018) | Region | Number of Facilities | Area (sq. ft. in thousands) | | :--- | :--- | :--- | | North America | 12 | 534.6 | | Europe | 9 | 459.5 | | Asia | 6 | 807.7 | | South America | 2 | 49.6 | | **Total** | **29** | **1,851.4** | [Legal Proceedings](index=23&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) ITT faces significant legal proceedings, primarily asbestos claims with a net liability of **$472.6 million**, and a **$10 million** accrual for a DOJ investigation - As of December 31, 2018, the company recorded an undiscounted asbestos-related liability of **$849.3 million** and an associated insurance recovery asset of **$376.7 million**, resulting in a net exposure of **$472.6 million** for claims estimated over the next 10 years[133](index=133&type=chunk) - The company is cooperating with a U.S. Department of Justice (DOJ) civil investigation into certain connector products, with a **$10 million** accrual recorded as the best estimate of probable loss, and the Criminal Division of the DOJ has declined to prosecute[135](index=135&type=chunk) [Mine Safety Disclosures](index=23&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the company - Not applicable[136](index=136&type=chunk) [Executive Officers](index=24&type=section&id=Executive%20Officers%20of%20the%20Registrant) This section lists the executive officers, including **Luca Savi** who became CEO and President in January 2019 - **Luca Savi** was appointed Chief Executive Officer and President, effective January 2019[138](index=138&type=chunk) - On December 31, 2018, **Denise L. Ramos** retired from her role as Chief Executive Officer and Director[69](index=69&type=chunk) [PART II](index=26&type=section&id=PART%20II) [Market for Common Equity and Related Matters](index=26&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT%27S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) ITT's common stock trades on the NYSE, with no open-market share repurchases in Q4 2018, and a **$100** investment yielding **$117.74** by 2018 - The company's common stock is traded on the NYSE under the symbol **"ITT"**[141](index=141&type=chunk) - No open-market share repurchases of common stock were made during the quarter ended December 31, 2018[144](index=144&type=chunk) Cumulative Total Return (Based on $100 investment on 12/31/2013) | Index | 12/31/2013 | 12/31/2018 | | :--- | :--- | :--- | | ITT Inc. | $100.00 | $117.74 | | S&P 400 Mid-Cap | $100.00 | $133.91 | | S&P 400 Capital Goods | $100.00 | $134.00 | [Selected Financial Data](index=28&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) This section summarizes five-year financial data, showing 2018 revenue of **$2,745.1 million** and net income of **$333.7 million** Selected Financial Data (in millions, except per share amounts) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Revenue | $2,745.1 | $2,585.3 | $2,405.4 | | Gross Profit | $887.2 | $819.9 | $760.9 | | Operating Income | $397.3 | $319.3 | $276.6 | | Net Income attributable to ITT Inc. | $333.7 | $113.5 | $186.1 | | Diluted EPS | $3.76 | $1.28 | $2.07 | | Dividends declared per share | $0.536 | $0.512 | $0.496 | [Management's Discussion and Analysis (MD&A)](index=29&type=section&id=ITEM%207.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) ITT achieved record revenue and orders in 2018, driven by strong operational performance and organic growth, while maintaining robust liquidity and managing key risks [Executive Summary](index=29&type=section&id=EXECUTIVE%20SUMMARY) In 2018, ITT delivered strong financial results with record revenue and orders, driven by organic growth and strategic capital deployment 2018 Key Performance Indicators vs. 2017 | Metric | 2018 Value | YoY Change | | :--- | :--- | :--- | | Revenue | $2,745M | +6% | | Orders | $2,892M | +10% | | Segment Operating Income | $411M | +27% | | EPS | $3.75 | +$2.46 | | Operating Cash Flow | $372M | +50% | - Organic revenue increased **4.2%**, driven by growth in industrial and transportation markets, including market share gains in automotive and strength in rail and commercial aerospace[159](index=159&type=chunk) - Capital deployment in 2018 included returning **$97 million** to shareholders, comprising **$47 million** in dividends and **$50 million** through share repurchases[160](index=160&type=chunk) [Financial Results: 2018 vs. 2017](index=31&type=section&id=DISCUSSION%20OF%20FINANCIAL%20RESULTS%202018%20VERSUS%202017) In 2018, revenue increased **6.2%** to **$2,745.1 million**, with operating income up **24.4%** and a significantly lower effective tax rate due to prior-year tax reform impact Financial Performance Comparison (2018 vs. 2017) | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Revenue | $2,745.1M | $2,585.3M | +6.2% | | Gross Profit | $887.2M | $819.9M | +8.2% | | Operating Income | $397.3M | $319.3M | +24.4% | | Operating Margin | 14.5% | 12.4% | +210bp | | Net Income | $333.7M | $113.5M | +194.0% | Segment Revenue Growth (2018 vs. 2017) | Segment | Total Growth | Organic Growth | | :--- | :--- | :--- | | Motion Technologies | 8.3% | 4.2% | | Industrial Process | 2.5% | 2.7% | | Connect & Control Technologies | 6.8% | 5.9% | - The increase in operating income includes a net gain of **$38.5 million** from the sale of a former operating location[181](index=181&type=chunk)[185](index=185&type=chunk) - The effective tax rate decreased from **62.9% in 2017 to 14.8% in 2018**, primarily due to the 2017 rate including a **$129.2 million** provisional charge related to the U.S. Tax Cuts and Jobs Act[194](index=194&type=chunk)[195](index=195&type=chunk) [Financial Results: 2017 vs. 2016](index=37&type=section&id=DISCUSSION%20OF%20FINANCIAL%20RESULTS%202017%20VERSUS%202016) In 2017, revenue grew **7.5%** to **$2,585.3 million**, with operating income up **15.4%**, but income from continuing operations fell **36.8%** due to a **$129.2 million** provisional tax expense from U.S. tax reform Financial Performance Comparison (2017 vs. 2016) | Metric | 2017 | 2016 | Change | | :--- | :--- | :--- | :--- | | Revenue | $2,585.3M | $2,405.4M | +7.5% | | Operating Income | $319.3M | $276.6M | +15.4% | | Operating Margin | 12.4% | 11.5% | +90bp | | Income from Continuing Ops | $115.0M | $181.9M | -36.8% | | Effective Tax Rate | 62.9% | 29.4% | +3,350bp | - Motion Technologies revenue grew **19.6%**, including **$74.0 million** from the Axtone acquisition, with organic revenue for the segment growing **9.8%**[202](index=202&type=chunk) - The effective tax rate surged to **62.9% in 2017**, primarily due to a **$129.2 million** provisional tax expense related to the U.S. Tax Act[224](index=224&type=chunk) [Liquidity and Capital Resources](index=41&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) ITT maintains strong liquidity through operating cash flows and credit facilities, with net cash from operations increasing to **$371.8 million** in 2018, and projected asbestos outflows of **$20-$30 million** annually Summary of Cash Flows (in millions) | Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Operating | $371.8 | $247.2 | $240.7 | | Investing | $(52.3) | $(223.2) | $(54.4) | | Financing | $(128.8) | $(112.5) | $(141.9) | - The company has access to a **$500 million** revolving credit agreement, which matures in November 2021 and had no outstanding borrowings as of December 31, 2018[232](index=232&type=chunk) - In 2018, the company repurchased **1.0 million shares** for **$50.0 million** under its share repurchase program[229](index=229&type=chunk) - Projected net cash outflows for asbestos defense and indemnity are expected to average **$20 to $30 million annually** over the next five years[247](index=247&type=chunk) [Key Performance Indicators and Non-GAAP Measures](index=47&type=section&id=KEY%20PERFORMANCE%20INDICATORS%20AND%20NON-GAAP%20MEASURES) This section defines and reconciles non-GAAP measures, showing 2018 organic revenue growth of **4.2%**, adjusted segment operating income of **$414.2 million**, and adjusted free cash flow of **$308.9 million** Reconciliation of Revenue to Organic Revenue (2018) | (in millions) | Amount | | :--- | :--- | | 2018 Revenue | $2,745.1 | | Less: Acquisitions | $(5.5) | | Less: Foreign currency translation | $(45.7) | | **2018 Organic Revenue** | **$2,693.9** | | 2017 Revenue | $2,585.3 | | **Organic Revenue Growth** | **4.2%** | Reconciliation of Net Income to Adjusted EPS (2018) | (in millions, except per share) | Amount | | :--- | :--- | | Income from continuing operations | $332.4 | | After-tax special items adjustments | $(45.5) | | **Adjusted income from continuing operations** | **$286.9** | | Diluted EPS | $3.75 | | **Adjusted Diluted EPS** | **$3.23** | Adjusted Free Cash Flow Reconciliation (2018) | (in millions) | Amount | | :--- | :--- | | Net cash - Operating activities | $371.8 | | Capital expenditures | $(95.5) | | Adjustments (Insurance, Asbestos, Restructuring, etc.) | $32.6 | | **Adjusted free cash flow** | **$308.9** | | **Adjusted free cash flow conversion** | **107.7%** | [Critical Accounting Estimates](index=51&type=section&id=CRITICAL%20ACCOUNTING%20ESTIMATES) The company's critical accounting estimates involve significant judgment, particularly for asbestos matters, revenue recognition, goodwill impairment, and environmental liabilities - **Asbestos Matters:** The liability estimate is based on a 10-year forecast of claims and is highly sensitive to assumptions about mesothelioma and lung cancer claims, which represent approximately **99%** of the indemnity liability[279](index=279&type=chunk)[280](index=280&type=chunk) - **Revenue Recognition:** For certain highly customized long-term projects, revenue is recognized over time using a cost-to-cost method, which requires significant estimates of total contract revenues and costs[290](index=290&type=chunk) - **Goodwill Impairment:** Goodwill is tested for impairment annually using an income approach, which involves significant estimates of future cash flows, growth rates, and discount rates[301](index=301&type=chunk)[304](index=304&type=chunk) - **Environmental Liabilities:** Accruals for environmental remediation are recorded when a liability is probable and reasonably estimable, with a recorded liability of **$66.8 million** and a reasonably possible high-end range of **$115.9 million** as of December 31, 2018[306](index=306&type=chunk)[308](index=308&type=chunk) [Market Risk Disclosures](index=56&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) ITT is exposed to market risks from foreign currency, interest rates, and commodity prices, with a **10%** adverse currency change impacting pre-tax earnings by **$30 million** - A hypothetical **10%** change in foreign currency exchange rates would have resulted in a translation impact to pre-tax earnings of approximately **$30 million** for 2018[311](index=311&type=chunk) - A hypothetical **100 basis point** increase in interest rates would result in approximately **$1 million** of additional annual interest expense based on current variable rate debt levels[313](index=313&type=chunk) - A hypothetical **10%** change in steel prices would impact pre-tax earnings by approximately **$6 to $8 million**[314](index=314&type=chunk) [Financial Statements and Supplementary Data](index=56&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section contains the company's audited consolidated financial statements for 2016-2018, including statements of operations, balance sheets, cash flows, and accompanying notes - This section includes the full consolidated financial statements and supplementary data as indexed on page **59** of the report[315](index=315&type=chunk)[351](index=351&type=chunk) [Changes in and Disagreements with Accountants](index=56&type=section&id=ITEM%209.%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) The company reported no changes in or disagreements with its accountants on accounting and financial disclosure - None[316](index=316&type=chunk) [Controls and Procedures](index=57&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Based on an evaluation as of December 31, 2018, the CEO and CFO concluded that the company's disclosure controls and procedures are **effective**[319](index=319&type=chunk) - Management assessed internal control over financial reporting based on the **2013 COSO framework** and determined that it was **effective** as of December 31, 2018[323](index=323&type=chunk)[324](index=324&type=chunk) [Other Information](index=58&type=section&id=ITEM%209B.%20OTHER%20INFORMATION) This section includes a disclosure regarding a **€1.3 million** performance bond related to a former Iranian customer of the acquired Bornemann subsidiary - A performance bond of **€1.3 million** related to a former Iranian customer of the acquired Bornemann subsidiary remains outstanding, with annual fees of approximately **€11 thousand** paid in 2018[329](index=329&type=chunk) [PART III](index=60&type=section&id=PART%20III) [Directors, Executive Officers and Corporate Governance](index=60&type=section&id=ITEM%2010.%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the **2019 Proxy Statement**[338](index=338&type=chunk) [Executive Compensation](index=60&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) Information on executive compensation, including discussion and analysis, is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the **2019 Proxy Statement**[343](index=343&type=chunk) [Security Ownership and Related Matters](index=60&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) Information on security ownership of beneficial owners and management is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the **2019 Proxy Statement**[344](index=344&type=chunk) [Certain Relationships, Related Transactions, and Director Independence](index=60&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) Information on related party transactions and director independence is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the **2019 Proxy Statement**[345](index=345&type=chunk) [Principal Accounting Fees and Services](index=60&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTING%20FEES%20AND%20SERVICES) Information on principal accounting fees and services is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the **2019 Proxy Statement**[346](index=346&type=chunk) [PART IV](index=61&type=section&id=PART%20IV) [Exhibits and Financial Statement Schedules](index=61&type=section&id=ITEM%2015.%20EXHIBITS%20AND%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report - This section lists the documents filed as part of the report, including financial statements and exhibits[347](index=347&type=chunk) [Form 10-K Summary](index=61&type=section&id=ITEM%2016.%20FORM%2010-K%20SUMMARY) This item is not applicable - Not Applicable[348](index=348&type=chunk)