Edgar Filing: ITT Inc.

Document

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 June 30, 2018



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 Identification Number)

1133 Westchester Avenue, White Plains, NY 10604

(Principal Executive Office)

Telephone Number: (914) 641-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
Emerging growth company o	(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 1, 2018, there were 87.6 million shares of common stock ($1 par value per share) of the registrant outstanding.

TABLE OF CONTENTS



ITEM		PAGE
PART I – FINANCIAL INFORMATION
1.	Financial Statements (unaudited)
	Consolidated Condensed Statements of Operations	1
	Consolidated Condensed Statements of Comprehensive Income	2
	Consolidated Condensed Balance Sheets	3
	Consolidated Condensed Statements of Cash Flows	4
	Consolidated Condensed Statements of Changes in Shareholders' Equity	5
	Notes to Consolidated Condensed Financial Statements:
	Note 1. Description of Business, Basis of Presentation and Updates to Summary of Significant Accounting Policies	6
	Note 2. Recent Accounting Pronouncements	7
	Note 3. Segment Information	10
	Note 4. Revenue	11
	Note 5. Restructuring Actions	12
	Note 6. Income Taxes	13
	Note 7. Earnings Per Share Data	14
	Note 8. Receivables, Net	15
	Note 9. Inventories, Net	15
	Note 10. Other Current and Non-Current Assets	15
	Note 11. Plant, Property and Equipment, Net	16
	Note 12. Goodwill and Other Intangible Assets, Net	16
	Note 13. Accrued Liabilities and Other Non-Current Liabilities	17
	Note 14. Debt	17
	Note 15. Postretirement Benefit Plans	18
	Note 16. Long-Term Incentive Employee Compensation	18
	Note 17. Capital Stock	19
	Note 18. Commitments and Contingencies	20
	Note 19. Acquisitions	22
	Note 20. Subsequent Events	22

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Overview	23
	Discussion of Financial Results	23
	Liquidity	29
	Key Performance Indicators and Non-GAAP Measures	32
	Recent Accounting Pronouncements	37
	Critical Accounting Estimates	37
3.	Quantitative and Qualitative Disclosures about Market Risk	38
4.	Controls and Procedures	38
PART II – OTHER INFORMATION
1.	Legal Proceedings	39
1A.	Risk Factors	40
2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
3.	Defaults Upon Senior Securities	40
4.	Mine Safety Disclosures	40
5.	Other Information	41
6.	Exhibits	41
	Signature	42

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

Some of the information included herein includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our business, future financial results and the industry in which we operate, and other legal, regulatory and economic developments. These forward-looking statements include, but are not limited to, future strategic plans and other statements that describe the company’s business strategy, outlook, objectives, plans, intentions or goals, and any discussion of future events and future operating or financial performance.

We use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “future,” “may,” “will,” “could,” “should,” “potential,” “continue,” “guidance” and other similar expressions to identify such forward-looking statements. Forward-looking statements are uncertain and to some extent unpredictable, and involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such forward-looking statements.

Where in any forward-looking statement we express an expectation or belief as to future results or events, such expectation or belief is based on current plans and expectations of our management, expressed in good faith and believed to have a reasonable basis. However, there can be no assurance that the expectation or belief will occur or that anticipated results will be achieved or accomplished. More information on factors that could cause actual results or events to differ materially from those anticipated is included in our reports filed with the U.S. Securities and Exchange Commission (the SEC), including our Annual Report on Form 10-K for the year ended December 31, 2017 (particularly under the caption “Risk Factors”), our Quarterly Reports on Form 10-Q (including Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q) and in other documents we file from time to time with the SEC.

The forward-looking statements included in this Quarterly Report on Form 10-Q (this Report) speak only as of the date of this Report. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You can inspect, read and copy these reports, proxy statements and other information at the SEC’s Public Reference Room, which is located at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information regarding the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov where you may access our reports, proxy statements and other information that we file with, or furnish to, the SEC.

We make available free of charge at www.itt.com (in the “Investors” section) copies of materials we file with, or furnish to, the SEC. We also use the Investor Relations page of our website at www.itt.com (in the “Investors” section) to disclose important information to the public.

Information contained on our website, or that can be accessed through our website, does not constitute a part of this Report. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website. Our corporate headquarters is located at 1133 Westchester Avenue, White Plains, NY 10604 and the telephone number of this location is (914) 641-2000.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)



	Three Months					Six Months
For the Periods Ended June 30	2018		2017			2018			2017
Revenue	$	696.8	$	630.9		$	1,386.1		$	1,256.7
Costs of revenue	470.8		425.9			935.9			848.6
Gross profit	226.0		205.0			450.2			408.1
General and administrative expenses	63.0		64.6			128.1			130.3
Sales and marketing expenses	43.4		43.8			86.9			86.9
Research and development expenses	25.8		22.6			50.5			45.0
Asbestos-related costs (benefit), net	13.5		14.9			(6.2		)	29.8
Operating income	80.3		59.1			190.9			116.1
Interest and non-operating expenses, net	1.5		0.5			3.3			2.7
Income from continuing operations before income tax expense	78.8		58.6			187.6			113.4
Income tax expense	8.9		10.6			16.5			19.7
Income from continuing operations	69.9		48.0			171.1			93.7
(Loss) income from discontinued operations, including tax benefit of $0.1, $0.1, $0 and $0.2, respectively	—		(0.1		)	0.1			(0.2		)
Net income	69.9		47.9			171.2			93.5
Less: Income (loss) attributable to noncontrolling interests	0.2		0.1			0.3			(0.3		)
Net income attributable to ITT Inc.	$	69.7	$	47.8		$	170.9		$	93.8
Amounts attributable to ITT Inc.:
Income from continuing operations, net of tax	$	69.7	$	47.9		$	170.8		$	94.0
(Loss) income from discontinued operations, net of tax	—		(0.1		)	0.1			(0.2		)
Net income attributable to ITT Inc.	$	69.7	$	47.8		$	170.9		$	93.8
Earnings per share attributable to ITT Inc.:
Basic:
Continuing operations	$	0.80	$	0.54		$	1.95		$	1.06
Discontinued operations	—		—			—			—
Net income	$	0.80	$	0.54		$	1.95		$	1.06
Diluted:
Continuing operations	$	0.79	$	0.54		$	1.93		$	1.05
Discontinued operations	—		—			—			—
Net income	$	0.79	$	0.54		$	1.93		$	1.05
Weighted average common shares – basic	87.5		88.5			87.8			88.4
Weighted average common shares – diluted	88.4		89.0			88.7			89.1
Cash dividends declared per common share	$	0.134	$	0.128		$	0.268		$	0.256

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of the above statements of operations.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(IN MILLIONS)



	Three Months						Six Months
For the Periods Ended June 30	2018			2017			2018			2017
Net income	$	69.9		$	47.9		$	171.2		$	93.5
Other comprehensive (loss) income:
Net foreign currency translation adjustment	(47.1		)	42.5			(20.6		)	61.7
Net change in postretirement benefit plans, net of tax impacts of $0.4, $0.4, $0.8 and $0.9, respectively	1.1			1.2			2.2			2.3
Other comprehensive (loss) income	(46.0		)	43.7			(18.4		)	64.0
Comprehensive income	23.9			91.6			152.8			157.5
Less: Comprehensive income (loss) attributable to noncontrolling interests	0.2			0.1			0.3			(0.3		)
Comprehensive income attributable to ITT Inc.	$	23.7		$	91.5		$	152.5		$	157.8
Disclosure of reclassification adjustments to postretirement benefit plans
Reclassification adjustments (see Note 15):
Amortization of prior service benefit, net of tax expense of $(0.3), $(0.5), $(0.5) and $(1.0), respectively	$	(0.8	)	$	(0.7	)	$	(1.7	)	$	(1.4	)
Amortization of net actuarial loss, net of tax benefits of $0.7, $0.9, $1.3 and $1.9, respectively	1.9			1.9			3.9			3.7
Net change in postretirement benefit plans, net of tax	$	1.1		$	1.2		$	2.2		$	2.3

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of the above statements of comprehensive income.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)



	June 30, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	449.6		$	389.8
Receivables, net	560.4			629.6
Inventories, net	393.5			311.9
Other current assets	175.1			147.4
Total current assets	1,578.6			1,478.7
Plant, property and equipment, net	506.1			521.7
Goodwill	879.9			886.8
Other intangible assets, net	145.3			156.2
Asbestos-related assets	322.6			304.0
Deferred income taxes	164.0			149.9
Other non-current assets	203.2			202.9
Total non-current assets	2,221.1			2,221.5
Total assets	$	3,799.7		$	3,700.2
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term loans and current maturities of long-term debt	$	210.7		$	163.6
Accounts payable	331.2			351.4
Accrued liabilities	397.7			384.4
Total current liabilities	939.6			899.4
Asbestos-related liabilities	781.6			800.1
Postretirement benefits	223.5			227.3
Other non-current liabilities	172.7			175.6
Total non-current liabilities	1,177.8			1,203.0
Total liabilities	2,117.4			2,102.4
Shareholders’ equity:
Common stock:
Authorized – 250.0 shares, $1 par value per share
Issued and outstanding – 87.6 shares and 88.2 shares, respectively	87.6			88.2
Retained earnings	1,959.3			1,856.1
Total accumulated other comprehensive loss	(366.6		)	(348.2		)
Total ITT Inc. shareholders’ equity	1,680.3			1,596.1
Noncontrolling interests	2.0			1.7
Total shareholders’ equity	1,682.3			1,597.8
Total liabilities and shareholders’ equity	$	3,799.7		$	3,700.2

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of the above balance sheets.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN MILLIONS)



For the Six Months Ended June 30	2018			2017
Operating Activities
Net income	$	171.2		$	93.5
Less: Income (loss) from discontinued operations	0.1			(0.2		)
Less: Income (loss) attributable to noncontrolling interests	0.3			(0.3		)
Income from continuing operations attributable to ITT Inc.	170.8			94.0
Adjustments to income from continuing operations:
Depreciation and amortization	55.2			50.4
Equity-based compensation	10.2			7.3
Asbestos-related (benefit) costs, net	(6.2		)	29.8
Asbestos-related payments, net	(30.8		)	(30.7		)
Changes in assets and liabilities:
Change in receivables	(15.2		)	(35.6		)
Change in inventories	(22.8		)	2.3
Change in accounts payable	(14.2		)	(7.8		)
Change in accrued expenses	(23.0		)	(3.3		)
Change in accrued and deferred income taxes	(11.7		)	(3.1		)
Other, net	7.0			(10.7		)
Net Cash – Operating activities	119.3			92.6
Investing Activities
Capital expenditures	(46.3		)	(53.3		)
Acquisitions, net of cash acquired	—			(113.7		)
Other, net	0.9			2.5
Net Cash – Investing activities	(45.4		)	(164.5		)
Financing Activities
Commercial paper, net repayments	(162.4		)	9.4
Short-term revolving loans, borrowings	246.5			77.3
Short-term revolving loans, repayments	(23.5		)	(100.0		)
Long-term debt, issued	—			3.9
Long-term debt, repayments	(1.9		)	(0.7		)
Repurchase of common stock	(55.4		)	(32.8		)
Proceeds from issuance of common stock	4.7			6.5
Dividends paid	(12.0		)	(11.6		)
Other, net	(0.1		)	0.1
Net Cash – Financing activities	(4.1		)	(47.9		)
Exchange rate effects on cash and cash equivalents	(8.6		)	15.3
Net Cash – Operating activities of discontinued operations	(1.4		)	(0.9		)
Net change in cash and cash equivalents	59.8			(105.4		)
Cash and cash equivalents – beginning of year (includes restricted cash of $1.2 and $1.2, respectively)	391.0			461.9
Cash and cash equivalents – end of period (includes restricted cash of $1.2 and $1.2, respectively)	$	450.8		$	356.5
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest	$	1.1		$	2.1
Income taxes, net of refunds received	$	23.2		$	21.9

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of the above statements of cash flows.

CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(IN MILLIONS)



	Three Months						Six Months
For the Periods Ended June 30	2018			2017			2018			2017
Common Stock
Common stock, beginning balance	$	87.4		$	88.7		$	88.2		$	88.4
Activity from stock incentive plans	0.2			0.1			0.5			0.5
Share repurchases	—			(0.8		)	(1.1		)	(0.9		)
Common stock, ending balance	87.6			88.0			87.6			88.0
Retained Earnings
Retained earnings, beginning balance	1,891.8			1,832.6			1,856.1			1,789.2
Cumulative adjustment for accounting change (See Note 2)	—			—			(4.1		)	0.5
Net income attributable to ITT Inc.	69.7			47.8			170.9			93.8
Dividends declared	(11.8		)	(11.4		)	(23.7		)	(22.8		)
Activity from stock incentive plans	9.7			4.3			14.4			14.8
Share repurchases	(0.1		)	(29.7		)	(54.3		)	(31.9		)
Retained earnings, ending balance	1,959.3			1,843.6			1,959.3			1,843.6
Accumulated Other Comprehensive Loss
Postretirement benefit plans, beginning balance	(136.5		)	(144.1		)	(137.6		)	(145.2		)
Net change in postretirement benefit plans	1.1			1.2			2.2			2.3
Postretirement benefit plans, ending balance	(135.4		)	(142.9		)	(135.4		)	(142.9		)
Cumulative translation adjustment, beginning balance	(184.1		)	(286.8		)	(210.6		)	(306.0		)
Net cumulative translation adjustment	(47.1		)	42.5			(20.6		)	61.7
Cumulative translation adjustment, ending balance	(231.2		)	(244.3		)	(231.2		)	(244.3		)
Total accumulated other comprehensive loss	(366.6		)	(387.2		)	(366.6		)	(387.2		)
Noncontrolling interests
Noncontrolling interests, beginning balance	1.9			1.6			1.7			2.0
Income (loss) attributable to noncontrolling interests	0.2			0.1			0.3			(0.3		)
Other	(0.1		)	(0.1		)	—			(0.1		)
Noncontrolling interests, ending balance	2.0			1.6			2.0			1.6
Total Shareholders’ Equity
Total shareholders’ equity, beginning balance	1,660.5			1,492.0			1,597.8			1,428.4
Net change in common stock	0.2			(0.7		)	(0.6		)	(0.4		)
Net change in retained earnings	67.5			11.0			103.2			54.4
Net change in accumulated other comprehensive loss	(46.0		)	43.7			(18.4		)	64.0
Net change in noncontrolling interests	0.1			—			0.3			(0.4		)
Total shareholders’ equity, ending balance	$	1,682.3		$	1,546.0		$	1,682.3		$	1,546.0

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of the above statements of changes in shareholders’ equity.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(DOLLARS AND SHARES (EXCEPT PER SHARE AMOUNTS) IN MILLIONS, UNLESS OTHERWISE STATED)

NOTE 1

DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND UPDATES TO SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

ITT Inc. is a diversified manufacturer of highly engineered critical components and customized technology solutions for the transportation, industrial, and oil and gas markets. Unless the context otherwise indicates, references herein to “ITT,” “the Company,” and such words as “we,” “us,” and “our” include ITT Inc. and its subsidiaries. ITT operates through three segments: Industrial Process, consisting of industrial pumping and complementary equipment; Motion Technologies, consisting of friction and shock and vibration equipment; and Connect & Control Technologies, consisting of electronic connectors, fluid handling, motion control and noise and energy absorption products. Financial information for our segments is presented in Note 3, Segment Information.

Basis of Presentation

The unaudited consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the SEC and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in ITT’s Annual Report on Form 10-K for the year ended December 31, 2017 (the 2017 Annual Report) in preparing these unaudited financial statements, other than those described below. These financial statements should be read in conjunction with the financial statements and notes thereto included in our 2017 Annual Report.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are revised as additional information becomes available. Estimates and assumptions are used for, but not limited to, asbestos-related liabilities and recoveries from insurers, revenue recognition, unrecognized tax benefits, deferred tax valuation allowances, projected benefit obligations for postretirement plans, accounting for business combinations, goodwill and other intangible asset impairment testing, environmental liabilities, allowance for doubtful accounts and inventory valuation. Actual results could differ from these estimates.

ITT’s quarterly financial periods end on the Saturday that is generally closest to the last day of the calendar quarter, except for the last quarterly period of the fiscal year, which ends on December 31st. For ease of presentation, the quarterly financial statements included herein are described as ending on the last day of the calendar quarter.

Certain prior year amounts have been reclassified or restated to conform to the current year presentation. For further information, refer to Note 2, Recent Accounting Pronouncements.

Update to Summary of Significant Accounting Policies

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, we consider practical and contractual limitations in determining whether there is an alternative use for the product. For example, long-term design and build contracts are typically highly customized to a customer’s specifications. For contracts with no alternative use and an enforceable right to payment for work performed to date, including a reasonable profit if the contract were terminated at the customer’s convenience, we recognize revenue over time. All other product sales are recognized at a point in time.

For contracts recognized over time, we use the cost-to-total cost method or the units of delivery method, depending on the nature of the contract, including length of production time.

For contracts recognized at a point in time, we recognize revenue when control passes to the customer, which is generally based on shipping terms when title and risk and rewards pass to the customer. However, we also consider certain customer acceptance provisions as certain contracts with customers include installation, testing, certification or other acceptance provisions. In instances where contractual terms include a provision for customer acceptance, we consider whether we have previously demonstrated that the product meets the specified criteria based on either seller or customer-specified objective criteria in assessing whether control has passed to the customer.

For service contracts, we recognize revenue as the services are rendered if the customer is benefiting from the service as it is performed, or upon completion of the service. Separately priced extended warranties are recognized as a separate performance obligation over the warranty period.

The transaction price in our contracts consists of fixed consideration and the impact of variable consideration including returns, rebates and allowances and penalties. Variable consideration is generally estimated using a probability-weighted approach based on historical experience, known trends and current factors including market conditions and status of negotiations.

When there is more than one performance obligation, the transaction price is allocated to the performance obligations based on the relative estimated standalone selling prices. If not sold separately, estimated standalone selling prices are determined considering various factors including market and pricing trends, geography, product customization and profit objectives. Revenue is recognized when the appropriate revenue recognition criteria for the individual performance obligations have been satisfied.

Revenue is reported net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.

Shipping and handling activities are accounted for as activities to fulfill a promise to transfer a product to a customer. As such, shipping and handling activities are not evaluated as a separate performance qualification.

For most contracts, payment is due from the customer within 30 to 90 days after the product is delivered or the service has been performed. For design and build contracts, we generally collect progress payments from the customer throughout the term of the contract, resulting in contract assets or liabilities depending on the timing of the payments. Contract assets consist of unbilled amounts when revenue recognized exceeds customer billings. Contract liabilities consist of advance payments and billings in excess of revenue recognized.

Design and engineering costs for highly complex products to be sold under a long-term production-type contract are capitalized and amortized throughout the life of the related contract or anticipated contract. Other design and development costs are capitalized only if there is a contractual guarantee for reimbursement. Costs to obtain a contract (e.g., commissions) for contracts greater than one year are capitalized and amortized over the life of the related contract.

NOTE 2

RECENT ACCOUNTING PRONOUNCEMENTS

The Company considers the applicability and impact of all accounting standard updates (ASUs). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.

Accounting Pronouncements Recently Adopted

In May 2014, the FASB issued ASU 2014-09 amending the existing accounting standards for revenue recognition. The new standard was effective for ITT as of January 1, 2018. Most revenue streams are recorded consistently under both the new standard and the previous standard. However, the timing of revenue recognition of certain design and build contracts in our Industrial Process segment, recognized using the percentage of completion method under the previous standard, is now dependent on certain terms within the contract and therefore will vary based on the new guidance. ITT adopted this guidance using a modified retrospective approach. As of the date of adoption, we have recognized approximately $49 of revenue and $5 of operating income on open contracts in our Industrial Process segment using the percentage of completion method that under the new guidance are recognized at a point in time, resulting in a cumulative adjustment to the opening balance in retained earnings of $4, net of tax. The comparative information has not been restated and continues to be reported under the accounting guidance in effect in those periods. Additionally, the new guidance resulted in a change in balance sheet presentation. Certain progress payments, previously presented as a reduction of inventory, are now presented

within accrued liabilities. Unbilled receivables, previously presented within receivables, net, are now presented within other current or non-current assets.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet related to the adoption of ASU 2014-09 is as follows:



	Balance as of December 31, 2017			Cumulative Effect of Adjustments				Balance as of January 1, 2018
Assets:
Receivables, net		$	629.6		$	(71.9	)		$	557.7
Inventories, net		311.9			66.3				378.2
Other current assets		147.4			43.2				190.6
Deferred income taxes		149.9			1.0				150.9
Liabilities:
Accrued liabilities		384.4			43.7				428.1
Other non-current liabilities		175.6			(1.0		)		174.6
Equity:
Retained earnings		1,856.1			(4.1		)		1,852.0

The impacts to our Consolidated Statements of Operation for the three and six months ended June 30, 2018, and our Consolidated Balance Sheet as of June 30, 2018 had we not adopted ASU 2014-09 are as follows:



	Three Months							Six Months
As of or for the Periods Ended June 30, 2018	As Reported		Amounts under previous standard			Effect of Change		As Reported		Amounts under previous standard			Effect of Change
Statement of Operations
Revenue	$	696.8		$	699.2	$	2.4	$	1,386.1		$	1,394.3	$	8.2
Costs of revenue	470.8			472.4		1.6		935.9			943.2		7.3
Income tax expense	8.9			8.7		0.2		16.5			16.7		0.2
Net income	69.9			70.5		0.6		171.2			171.9		0.7

Balance Sheets
Assets:
Receivables, net								560.4			614.9		54.5
Inventories, net								393.5			324.0		(69.5		)
Other current assets								175.1			150.3		(24.8		)
Deferred income taxes								164.0			162.7		(1.3		)
Liabilities:
Accrued liabilities								397.7			350.8		(46.9		)
Other non-current liabilities								172.7			173.7		1.0
Equity:
Retained earnings								1,959.3			1,964.1		4.8

In March 2017, the FASB issued ASU 2017-07 which amends the Statement of Operations presentation for the components of net periodic benefit cost for entities that sponsor defined benefit pension and other postretirement plans. Under the ASU, entities are required to disaggregate the service cost component and present it with other current compensation costs for the related employees. All other components of net periodic benefit cost are no longer classified as an operating expense. In addition, only the service cost component will be eligible for capitalization on the balance sheet. The ASU requires a retrospective transition method to adopt the requirement to present service costs separately from the other components of net periodic benefit cost in the statements of operations, and a prospective transition method to adopt the requirement that prohibits capitalization of all components of net periodic benefit cost on the balance sheet except service costs. ITT adopted the ASU beginning in the first quarter of 2018. Service costs eligible for capitalization on the balance sheet in 2018 are considered immaterial. As a result of the adoption, our Consolidated Statement of Operations for the three and six months ended June 30, 2017 was restated as follows:



For the Three Months Ended June 30, 2017	Previously Reported				Effect of Change				Restated
Costs of revenue		$	426.5			$	(0.6	)		$	425.9
General and administrative expenses		65.3				(0.7		)		64.6
Sales and marketing expenses		43.9				(0.1		)		43.8
Operating income		57.7				1.4				59.1
Interest and non-operating (income) expenses, net		(0.9		)		1.4				0.5


For the Six Months Ended June 30, 2017	Previously Reported				Effect of Change				Restated
Costs of revenue		$	850.0			$	(1.4	)		$	848.6
General and administrative expenses		131.5				(1.2		)		130.3
Sales and marketing expenses		87.0				(0.1		)		86.9
Research and development expenses		45.1				(0.1		)		45.0
Operating income		113.3				2.8				116.1
Interest and non-operating (income) expenses, net		(0.1		)		2.8				2.7

In November 2016, the FASB issued ASU 2016-18 which requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the of the Statement of Cash Flows. In addition, when cash and restricted cash are presented on separate lines on the Balance Sheet, an entity is required to reconcile the total cash, cash equivalents and restricted cash in the Statement of Cash Flows to the related line items in the Balance Sheet. The ASU requires a retrospective transition method and ITT adopted the ASU beginning in the first quarter of 2018.

In March 2016, the FASB issued ASU 2016-09 to simplify several aspects of the accounting standard for employee share-based payment transactions, including the classification of excess tax benefits and deficiencies and the accounting for employee forfeitures. ITT elected to adopt this guidance as of January 1, 2017 resulting in a cumulative-effect adjustment of $1.0 to increase retained earnings. The increase to retained earnings was driven by previously unrecognized tax benefits due to net operating loss carryforwards of $2.1, offset by a reduction in retained earnings of $1.1, net of tax, due to a change in our accounting policy for the forfeiture of share-based compensation arrangements. For further information on our adoption of the new standard, refer to our 2017 Annual Report.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02 impacting the accounting for leases intending to increase transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. The revised standard will require entities to recognize a liability for their lease obligations and a corresponding asset representing the right to use the underlying asset over the lease term. Lease obligations are to be measured at the present value of lease payments and accounted for using the effective interest method. The accounting for the leased asset will differ slightly depending on whether the agreement is deemed to be a financing or operating lease. For financing leases, the leased asset is depreciated on a straight-line basis and recorded separately from the interest expense in the statements of operations, resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation

and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. The ASU requires that assets and liabilities be presented or disclosed separately and classified appropriately as current and noncurrent. The ASU further requires additional disclosure of certain qualitative and quantitative information related to lease agreements. The ASU is effective for the Company beginning in the first quarter 2019, at which time we expect to adopt the new standard. We are currently assessing our existing lease agreements and related financial disclosures to evaluate the impact of these amendments on our financial statements.

NOTE 3

SEGMENT INFORMATION

The Company’s segments are reported on the same basis used by our chief operating decision maker, for evaluating performance and for allocating resources. Our three reportable segments are referred to as: Industrial Process, Motion Technologies, and Connect & Control Technologies.

Industrial Process manufactures engineered fluid process equipment serving a diversified mix of customers in global industries such as chemical, oil and gas, mining, and other industrial process markets and is a provider of plant optimization and efficiency solutions and aftermarket services and parts.

Motion Technologies manufactures brake components and specialized sealing solutions, shock absorbers and damping technologies primarily for the global automotive, truck and trailer, public bus and rail transportation markets.

Connect & Control Technologies manufactures harsh-environment connector solutions and critical energy absorption and flow control components for the aerospace and defense, general industrial, medical, and oil and gas markets.

Corporate and Other consists of corporate office expenses including compensation, benefits, occupancy, depreciation and other administrative costs, as well as charges related to certain matters, such as asbestos and environmental liabilities, that are managed at a corporate level and are not included in segment results when evaluating performance or allocating resources. Assets of the segments exclude general corporate assets, which principally consist of cash, investments, asbestos-related receivables, deferred taxes, and certain property, plant and equipment.



	Revenue						Operating Income^(a)						Operating Margin
For the Three Months Ended June 30	2018			2017			2018			2017			2018		2017
Industrial Process	$	203.2		$	192.3		$	23.4		$	15.3		11.5	%	8.0	%
Motion Technologies	330.3			290.1			55.5			52.1			16.8	%	18.0	%
Connect & Control Technologies	164.1			149.6			27.3			14.2			16.6	%	9.5	%
Total segment results	697.6			632.0			106.2			81.6			15.2	%	12.9	%
Asbestos-related costs, net	—			—			(13.5		)	(14.9		)	—		—
Eliminations / Other corporate costs	(0.8		)	(1.1		)	(12.4		)	(7.6		)	—		—
Total Eliminations / Corporate and Other costs	(0.8		)	(1.1		)	(25.9		)	(22.5		)	—		—
Total	$	696.8		$	630.9		$	80.3		$	59.1		11.5	%	9.4	%


	Revenue						Operating Income^(a)						Operating Margin
For the Six Months Ended June 30	2018			2017			2018			2017			2018		2017
Industrial Process	$	393.0		$	378.4		$	40.3		$	23.4		10.3	%	6.2	%
Motion Technologies	672.5			577.4			117.4			107.1			17.5	%	18.5	%
Connect & Control Technologies	322.0			302.9			50.3			30.9			15.6	%	10.2	%
Total segment results	1,387.5			1,258.7			208.0			161.4			15.0	%	12.8	%
Asbestos-related benefit (costs), net	—			—			6.2			(29.8		)	—		—
Eliminations / Other corporate costs	(1.4		)	(2.0		)	(23.3		)	(15.5		)	—		—
Total Eliminations / Corporate and Other costs	(1.4		)	(2.0		)	(17.1		)	(45.3		)	—		—
Total