ITT INC. The following discussion should be read in conjunction with the consolidated financial statements and the notes related thereto. As we noted earlier in the
Forward-Looking and Cautionary Statements of this Annual Report on Form 10-K, this Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations , and Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk (along with other sections of this Annual Report), may contain forward-looking statements. The risks discussed in Part I, Item 1A, Risk Factors , and other risks identified in this Annual Report on Form 10-K could cause our actual results to differ materially from those expressed by such forward-looking statements. All comparisons included within this Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations , refer to results for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , unless stated otherwise. Additionally, all financial results and share repurchases other than per share amounts are reported in millions, unless stated otherwise. Please refer to our Annual Report on Form 10-K ( 2021 Annual Report ) for a discussion of the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 .
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). Refer 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
During 2022, despite challenging macroeconomic conditions, we delivered strong
results, which included revenue and operating income growth, segment operating
margin expansion, EPS growth and effective deployment of capital. The following
table provides a summary of key performance indicators for 2022 in comparison to
2021.
Revenue Segment Operating Income Segment Operating Margin EPS
$2,988 $512 17.1% $4.40
8% Increase 10% Increase 20bp Increase 21% Increase
Adjusted Segment Operating Adjusted Segment Operating Adjusted
Organic Revenue Income Margin EPS
$3,102 $514 17.2% $4.44
12% Increase 8% Increase Flat 10% Increase
See the section titled " Key Performance Indicators and Non-GAAP Measures " for a definition and reconciliation of organic revenue, adjusted segment operating income, adjusted segment operating margin, and adjusted EPS.
Our 2022 results include:
•Revenue of$2,987.7 increased$222.7 , despite unfavorable foreign currency impacts of$160.9 . Organic revenue increased 12.2% due to strong growth in MT's Friction and IP's short-cycle businesses, higher volume in CCT's connectors and components, and price recovery across all segments. In addition, revenue from the acquisition ofHabonim Industrial Valves and Actuators Ltd (Habonim) contributed$46.5 to total revenue growth. •Segment operating income of$511.9 increased$45.2 , due to price recovery, productivity savings, higher sales volume and higher gain on sales of long-lived assets. The increase was partially offset by higher raw material, overhead, and labor costs and unfavorable foreign currency impacts resulting from challenging global macroeconomic conditions. 25 -------------------------------------------------------------------------------- •Income from continuing operations was$4.40 per diluted share, an increase of$0.76 as compared to the prior year. The increase was primarily due to higher segment operating income, as discussed above, and lower share count resulting from an increase in open-market share repurchases. In addition, the prior year included an after-tax loss of$28.1 from the divestiture of our legacy net asbestos liability. Throughout 2022, we faced unprecedented challenges stemming from continued supply chain disruptions, inflation, foreign currency headwinds, COVID-19 lockdowns and theRussia -Ukraine war. We overcame these challenges through a relentless focus on our strategic priorities, which included price recovery and productivity. In addition, we remained committed to effective capital allocation, deploying$610 during the year, including the following:
•We acquired Habonim, a leading provider of industrial valves and actuators, which expanded IP's valves business.
•We invested inCRP Technology Srl and CRP USA LLC (collectively "CRP"), leaders in developing and manufacturing reinforced composite materials for 3D printing, which increases our additive manufacturing technology capabilities.
•We increased our capital expenditures by 18% over the prior year primarily to fund capacity investments in our MT segment that will support the growth in electric vehicles and to drive further productivity.
•We repurchased 3.0 shares of common stock on the open market for
•We paid out$88 in dividends to our shareholders. Our dividends declared in 2022 of$1.056 per share represented a 20% increase over the dividends per share declared in 2021. Macroeconomic Conditions During 2022, global macroeconomic conditions have been, and continue to be, influenced by a number of factors, including, but not limited to, theRussia -Ukraine war, the COVID-19 pandemic, labor shortages, supply chain disruptions, inflation, changes to monetary and fiscal policies by central banks and governments around the world, and the erosion of foreign currencies relative to theU.S. dollar. These items are described further below. These conditions may lead to increased foreign currency impact on our revenues due to strengthening of theU.S. dollar as well as decreased demand for our products, increased costs, and reduced margins. Future impacts on our business and financial results as a result of these conditions are not estimable at this time and depend, in part, on the extent to which these conditions improve or worsen. For additional discussion of the risks related to general macroeconomic conditions, see Part I, Item 1A, Risk Factors , herein.
Russia-Ukraine War
InFebruary 2022 ,the United States and other leading nations announced targeted economic sanctions onRussia and certain Russian citizens in response toRussia's war withUkraine , which has increased regional instability and global economic and political uncertainty. As described in Part I, Item 1A, Risk Factors , our business may be sensitive to global economic conditions, which can be negatively impacted by instability in the geopolitical environment. Our annual direct sales to customers inRussia andUkraine were approximately$11 and$38 in 2022 and 2021, respectively. During the year endedDecember 31, 2022 , we recorded total charges of$7.9 primarily related to inventory and accounts receivable write-downs to reflect the increased risks facing some of our customers that serve the regions impacted by theRussia -Ukraine war. If the conflict expands to greaterEurope , we may experience a further reduction in demand for our products. We are currently exploring alternatives for our operations inRussia , which could include a sale, disposition or wind down of operations, or a combination of these, although we cannot provide any assurance of the timeline for or the success of these alternatives. Such alternatives may cause us to incur additional costs, such as severance and other expenses. For additional discussion of the risks related to theRussia -Ukraine war, see Part I, Item 1A, Risk Factors , herein. 26 --------------------------------------------------------------------------------
COVID-19 Pandemic
The Company continues to actively monitor the ongoing impacts of COVID-19. During 2022, certain of our businesses experienced high levels of employee illness and absenteeism resulting from regional COVID-19 outbreaks and government-mandated workplace safety measures, which has led to us incurring additional costs. Some governments around the world, includingChina , have instituted COVID-19 lockdowns that led to further absenteeism, global supply chain challenges, and temporary negative impacts on demand in some of our end-markets, such as passenger vehicles. InDecember 2022 ,China lifted many of its COVID-19 safety measures, including lockdowns. We continue to proactively respond to the challenges posed by COVID-19 to protect the health and safety of our employees and to continue delivering to our customers. Challenges resulting from the COVID-19 pandemic have adversely impacted, and may continue to adversely impact, our business and financial results. For additional discussion of risks related to COVID-19, see Part I, Item 1A, Risk Factors , herein.
Inflationary Pressures
Since 2020, the cost of energy and raw materials we use in our production processes, including commodities such as steel, oil, copper, and tin, have significantly increased. The rising prices are primarily due to reduced supply caused by supply chain disruptions primarily as a result of the COVID-19 pandemic and theRussia -Ukraine war. These factors have contributed to congested shipping ports around the world and higher inbound and outbound freight costs to meet customer demand. InOctober 2022 , theOrganization of the Petroleum Exporting Countries (OPEC) announced plans to cut production of oil beginning in November by two million barrels per day, which represents approximately 2% of daily global output. These production cuts are expected to continue until the end of 2023. The global energy market could be further disrupted by continued geopolitical tensions betweenRussia and theEuropean Union as well as by the lifting of COVID-19 lockdowns inChina . While any future impacts are uncertain, such disruptions are expected to exacerbate inflationary pressures on energy, which could result in increased costs and reduced demand for our products.
The manufacturing industry is also currently experiencing a skilled labor shortage, which has created difficulties in attracting and retaining factory employees and has resulted in higher labor costs and backlog.
During 2022, central banks around the world have been raising interest rates to counter inflation. Rising interest rates have increased our cost of debt and may adversely impact customer behavior, including demand for our products. These conditions have contributed to a strengthening of theU.S. dollar relative to foreign currencies, which has resulted in unfavorable foreign currency translation impacts.
These events have had and may continue to have a significant impact on our business and financial results. We have been able to offset most of these negative impacts through pricing actions and productivity savings, which we continue to pursue.
27
--------------------------------------------------------------------------------
DISCUSSION OF FINANCIAL RESULTS
2022 VERSUS 2021
For the Year Ended December 31 2022 2021 Change
Revenue $ 2,987.7 $ 2,765.0 8.1 %
Gross profit 922.3 899.5 2.5 %
Operating expenses 454.3 395.2 15.0 %
Operating income 468.0 504.3 (7.2) %
Interest and non-operating expense (income), net 6.2 (4.8) (229.2) %
Income tax expense 91.1 189.6 (52.0) %
Income from continuing operations attributable to
368.3 314.8 17.0 %
Net income attributable to ITT Inc. $ 367.0 $ 316.3 16.0 %
Gross margin 30.9 % 32.5 % (160) bp
Operating expense to revenue ratio 15.2 % 14.3 % 90 bp
Operating margin 15.7 % 18.2 % (250) bp
Effective tax rate 19.7 % 37.2 % (1,750) bp
All comparisons included within the Discussion of Financial Results for 2022
versus 2021 refer to results for the year ended December 31, 2022 compared to
the year ended December 31, 2021 , unless stated otherwise.
REVENUE
The following table summarizes the revenue derived from each of our segments.
Organic
For the Year Ended December 31 2022 2021 Change growth(a) Motion Technologies$ 1,374.0 $ 1,368.6 0.4 % 8.8 % Industrial Process 971.0 843.2 15.2 % 13.0 % Connect & Control Technologies 645.6 554.7 16.4 % 19.7 % Eliminations (2.9) (1.5) Total Revenue$ 2,987.7 $ 2,765.0 8.1 % 12.2 %
(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 endedDecember 31, 2022 increased$5.4 . Excluding the unfavorable foreign currency translation impact of$114.4 , organic revenue increased$119.8 primarily due to improved price recovery and higher volume. Our Friction business grew 12% driven by strong OEM outperformance, and our Wolverine business grew 9% driven by strength in sealing materials. Since the start of the COVID-19 pandemic in 2020, the automotive industry has been, and continues to be, impacted by a global semiconductor supply shortage. This shortage has created supply chain disruptions for our automotive OEM customers, resulting in temporary declines in production and lower demand for our OEM brake pads and parts. There are indications that semiconductor capacity may soon begin to free up in some end markets. As semiconductors become more accessible, we expect that OEMs will expand production. However, future sales growth remains uncertain and depends, in part, on the extent to which global macroeconomic conditions improve or worsen, as discussed in the Macroeconomic Conditions section above. 28 --------------------------------------------------------------------------------
Industrial Process
IP revenue for the year endedDecember 31, 2022 increased$127.8 . Excluding the revenue from the acquisition of Habonim of$46.5 and unfavorable foreign currency translation impact of$28.2 , organic revenue increased$109.5 primarily driven by higher volume and improved price recovery. Specifically, our short-cycle business grew 15%, primarily within the general industrial and chemical markets. The increase was partially offset by a decline in pump project revenue of 15%, primarily within the chemical market. 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 2022 were$1,101.9 , an increase of 17.1% compared to the prior year, including$271.1 of orders in the fourth quarter, which represents 7.8% growth from last year. IP's backlog as ofDecember 31, 2022 was$580.0 , reflecting an increase of$135.6 , or 30.5%, compared toDecember 31, 2021 . Our backlog represents firm orders that have been received, acknowledged, and entered into our production systems.
Connect & Control Technologies
CCT revenue for the year endedDecember 31, 2022 increased$90.9 . Excluding the unfavorable foreign currency impact of$18.3 , organic revenue increased$109.2 primarily driven by higher volume and improved price recovery. Within CCT, connector sales grew by 21%, primarily within the general industrial and aerospace and defense markets, while component sales grew by 20% due to strength within the aerospace and defense markets. 29 --------------------------------------------------------------------------------
GROSS PROFIT
Gross profit for 2022 was$922.3 , reflecting a gross margin of 30.9%. Gross profit for 2021 was$899.5 , reflecting a gross margin of 32.5%. The increase in gross profit was primarily driven by an increase in revenue, described above, partially offset by increases in raw material, overhead and labor costs, which were driven by inflationary pressures as discussed above. In addition, the current year included costs incurred related to theRussia -Ukraine war, including inventory write-downs. The contraction in gross margin during the year was similarly driven by the increase in costs. See above for further discussion of global macroeconomic conditions, which has contributed to the increase in costs. OPERATING EXPENSES
The following table provides further information by expense type, as well as a breakdown of operating expense by segment.
For the Year Ended December 31 2022 2021
Change
General and administrative expenses(a)
156.9 150.8 4.0 %
Research and development expenses 96.5 94.9 1.7
%
Gain on sale of long-lived assets (16.3) (7.0) 132.9 % Restructuring costs 3.8 9.6 (60.4) % Asset impairment charges 1.8 - - % Asbestos-related benefit, net - (74.4) (100.0) % Total operating expenses$ 454.3 $ 395.2 15.0 % By Segment: Motion Technologies$ 140.9 $ 158.0 (10.8) % Industrial Process 150.0 155.8 (3.7) % Connect & Control Technologies 119.6 119.0 0.5 % Corporate & Other 43.8 (37.6) (216.5) %
(a)The prior year presentation has been updated to conform to the current year presentation.
General and administrative (G&A) expenses decreased
Sales and marketing expenses increased
Research and development (R&D) expenses increased
Gain on sale of long-lived assets increased$9.3 for the year endedDecember 31, 2022 . The increase was due to the sale of a building that was previously held within our IP segment. See Note 11, Plant, Property and Equipment, Net , to the Consolidated Financial Statements for further information. Restructuring costs decreased$5.8 for the year endedDecember 31, 2022 as actions taken in prior periods near completion. Restructuring costs recorded in the prior year were mainly related to the closure of a site inGermany within our MT segment, as well as cost actions taken as part of our 2020 Global Restructuring Plan. See Note 5, Restructuring Actions , to the Consolidated Financial Statements for further information. Asset impairment charges during the year endedDecember 31, 2022 were primarily related to the relocation of our corporate headquarters during 2022. See Note 14, Leases , to the Consolidated Financial Statements for further information. Asbestos-related matters resulted in a net benefit of$74.4 for the year endedDecember 31, 2021 due to a pre-tax gain of$88.8 stemming from the divestiture of the entity holding asbestos-related assets and liabilities in 2021. See Note 20, Commitments and Contingencies , to the Consolidated Financial Statements for further information. 30 --------------------------------------------------------------------------------
OPERATING INCOME
The following table summarizes our operating income and operating margin by segment.
For the Year Ended December 31 2022 2021 Change Motion Technologies$ 208.5 $ 258.2 (19.2) % Industrial Process 187.6 126.8 47.9 % Connect & Control Technologies 115.8 81.7 41.7 % Segment operating income 511.9 466.7 9.7 % Asbestos-related benefit, net - 74.4 (100.0) % Other corporate costs (43.9) (36.8) 19.3 % Total corporate and other (costs) benefit, net (43.9) 37.6 (216.8) % Total operating income$ 468.0 $ 504.3 (7.2) % Operating margin: Motion Technologies 15.2 % 18.9 % (370) bp Industrial Process 19.3 % 15.0 % 430 bp Connect & Control Technologies 17.9 % 14.7 % 320 bp Segment operating margin 17.1 % 16.9 % 20 bp Consolidated operating margin 15.7 % 18.2 % (250) bp MT operating income for the year endedDecember 31, 2022 decreased$49.7 primarily due to higher raw material, overhead and labor costs, as well as unfavorable foreign currency impacts and product mix. The current year also included charges of$3.0 in connection with theRussia -Ukraine war while the prior year included a gain of$7.0 related to the sale of land previously held by our KONI business. The decrease was partially offset by productivity savings, improved price recovery and higher volume. IP operating income for the year endedDecember 31, 2022 increased$60.8 . The increase in operating income was primarily driven by improved price recovery, productivity savings and higher volume. The increase was partially offset by higher raw material, overhead and labor costs, as well as unfavorable foreign currency impacts. The current year also included a gain of$14.7 related to the sale of a building and charges of$4.9 in connection with theRussia -Ukraine war. CCT operating income for the year endedDecember 31, 2022 increased$34.1 , driven by higher volume, improved price recovery and productivity savings. The increase was partially offset by unfavorable raw material costs, product mix and foreign currency impacts. Other corporate costs, net, increased$7.1 for the year endedDecember 31, 2022 . The increase was primarily driven by higher strategic investment-related costs, lower corporate-owned life insurance (COLI) investment gains and a$1.7 asset impairment charge related to the relocation of the Company's corporate headquarters. The increase was partially offset by lower incentive-based compensation costs. 31 --------------------------------------------------------------------------------
INTEREST AND NON-OPERATING EXPENSE (INCOME), NET
The following table summarizes our interest and non-operating expense (income), net.
For the Year Ended December 31 2022 2021
Change
Interest expense (income), net$ 6.4 $ (1.1) (681.8) % Non-operating postretirement costs (benefit), net 1.1 (1.3) (184.6) % Miscellaneous income, net (1.3) (2.4) (45.8) % Total interest and non-operating expense (income), net$ 6.2 $ (4.8)
(229.2) %
The increase in interest and non-operating expense for the year endedDecember 31, 2022 is primarily due to higher interest expense associated with greater outstanding commercial paper borrowings and a higher average interest rate. The prior year period also included a gain of$3.4 from the final pricing adjustment related to the termination of ourU.S. qualified pension plan.
INCOME TAX EXPENSE
The following table summarizes our income tax expense and effective tax rate.
For the Year Ended December 31 2022 2021 Change Income tax expense$ 91.1 $ 189.6 (52.0) % Effective tax rate 19.7 % 37.2 % (1,750) bps The lower effective tax rate in 2022 compared to 2021 resulted from the Company recording tax expense in 2021 on the reversal of previously recorded deferred tax assets of$116.9 related to the Company's divestiture of the entity holding asbestos-related assets and liabilities. See Note 20, Commitments and Contingencies , for further information. Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized forU.S. tax purposes effectiveJanuary 1, 2022 . The mandatory capitalization requirement increases our deferred tax assets and cash tax liabilities. OnAugust 16, 2022 ,Congress passed the Inflation Reduction Act of 2022. The tax provisions most applicable to us are the newly introduced 15% corporate alternative minimum tax on book income and 1% excise tax on stock repurchases, which are both effectiveJanuary 1, 2023 . While we do not anticipate these changes to be significant, they could impact our consolidated financial position and we will continue to monitor as new information and guidance becomes available. 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 Czechia,Germany ,Hong Kong ,India ,Italy ,Japan , theU.S. andVenezuela . 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 is not expected to change by a significant amount.
See Note 6, Income Taxes , to the Consolidated Financial Statements for further information on tax-related matters.
32
--------------------------------------------------------------------------------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 support our growth and expansion in markets outside of theU.S. through the enhancement of existing products and development of new products, increased capital spending, and potential foreign acquisitions. We 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 transfer cash between certain international subsidiaries and theU.S. when it is cost effective to do so. Net cash distributions from foreign countries to theU.S. during the years endedDecember 31, 2022 and 2021 were$74.0 and$116.9 , respectively. The timing and amount of any additional future distributions remains under evaluation based on our jurisdictional cash needs.
Capital Resources
As ofDecember 31, 2022 , 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$1,050 under the agreement. In addition, we have market access to secure longer-term funding, if needed. Our commercial paper program is supported by our 2021 Revolving Credit Agreement and our policy is to maintain unused committed bank lines of credit in an amount greater than outstanding commercial paper balances. These sources of capital are described further below. Commercial Paper When available and economically feasible, we have accessed the commercial paper market through programs in place in theU.S. andEurope to supplement cash flows generated internally and to provide additional short-term funding.
The following table presents our outstanding commercial paper borrowings. See Note 15, Debt , for further information.
As of December 31 2022 2021
Commercial Paper Outstanding -
Total Commercial Paper Outstanding$ 448.3 195.4 The increase in commercial paper outstanding fromDecember 31, 2021 toDecember 31, 2022 was primarily related to share repurchase activity and the Habonim acquisition. See Note 18, Capital Stock , and Note 23, Acquisitions and Investments , for further information. All outstanding commercial paper for both periods had maturity terms of less than three months from the date of issuance. Our average daily outstanding commercial paper balance for the years ended 2022 and 2021 was$459.6 and$133.5 , respectively, and the maximum outstanding commercial paper during each of those respective years was$561.7 and$197.5 .
Revolving Credit Agreement
OnAugust 5, 2021 , we entered into a revolving credit facility agreement with a syndicate of third party lenders includingBank of America, N.A ., as administrative agent (the 2021 Revolving Credit Agreement). The 2021 Revolving Credit Agreement matures inAugust 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 inU.S. dollars, Euros, British 33 -------------------------------------------------------------------------------- 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 ofDecember 31, 2022 and 2021, we had no outstanding borrowings under the current or former revolving credit agreements. See Note 15, Debt , to the Consolidated Financial Statements for further information.
Long-term Debt
Long-term debt is generally defined as any debt with an original maturity greater than 12 months. Our long-term debt is primarily related to outstanding Italian government loans maturing inJune 2027 . Our long-term debt carries a weighted average fixed interest rate of 0.66% and requires annual principal and interest payments of approximately$2.5 , on average, through maturity. The table below provides our long-term debt outstanding as ofDecember 31, 2022 and 2021. As of December 31 2022 2021
Current portion of long-term debt
$ 9.9 $ 12.1
See Note 15, Debt , for further information.
Credit ratings
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
Short-Term Long-Term
Rating Agency Ratings Ratings
Standard & Poor's A-2 BBB
Moody's Investors Service P-2 Baa2
Fitch Ratings F2 BBB+
There were no changes to our credit ratings during 2022. Please refer to the rating agency websites and press releases for more information.
Sources and Uses of Liquidity
In addition to the capital resources discussed above, 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 endedDecember 31, 2022 and 2021. For the Year Ended December 31 2022 2021 Operating activities$ 277.7 $ (8.4) Investing activities (255.1) (82.3) Financing activities (83.3) (99.8) Foreign exchange (25.8) (22.6)
Total net cash used in continuing operations
0.1 0.8
Net change in cash and cash equivalents
Operating Activities
The increase in net cash from operating activities of$286.1 was primarily due to the prior year payment of$398.0 to fund the asbestos-related divestiture and higher segment operating income. This was partially offset by increased working capital investments to support sales growth and mitigate continued supply chain disruptions, and the timing of accounts receivable collections. 34 --------------------------------------------------------------------------------
Investing Activities
The increase in net cash used in investing activities of$172.8 was primarily driven by our acquisition of Habonim of$139.9 and investment in CRP of$23.0 . Refer to Note 23, Acquisitions and Investments , for further information. In addition, capital expenditures increased by$15.5 over the prior year.
Financing Activities
The decrease in net cash used in financing activities of$16.5 was primarily driven by an increase in net commercial paper borrowings of$164.3 . This was partially offset by increases in repurchases of ITT common stock of$140.5 and dividends paid of$12.1 . Dividends 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 declared in 2022 were$87.7 , compared to$76.2 in 2021, reflecting annual per share amounts of$1.056 and$0.88 , respectively. In the first quarter of 2023, we declared a quarterly dividend of$0.29 per share for shareholders of record onMarch 9, 2023 , which will be paid onApril 3, 2023 .
Open-market Share Repurchases
OnOctober 30, 2019 , the Board of Directors approved our current program, an indefinite term$500 open-market share repurchase program (the 2019 Plan) under which$139 remains available. During the years endedDecember 31, 2022 andDecember 31, 2021 , we spent$245.3 and$104.8 , respectively, on open-market share repurchases under our share repurchase programs. All repurchased shares are retired immediately following the repurchases. See Note 18, Capital Stock for more information.
Asbestos
During 2021, we completed the divestiture ofInTelCo 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 toInTelCo . As a result of the divestiture transaction, we do not expect to incur any asbestos-related cash outflows in the future. 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.
2022 2021
U.S. Non-U.S. Other Non-U.S. Other
As of December 31 Pension Pension Benefits Total U.S. Pension Pension Benefits Total Fair value of plan assets $ -$ 0.4 $ -$ 0.4 $ -$ 0.5 $ -$ 0.5 Projected benefit obligation 11.2 67.9 70.7 149.8 14.8 93.1 106.4 214.3 Funded status$ (11.2) $ (67.5) $ (70.7) $ (149.4) $ (14.8) $ (92.6) $ (106.4) $ (213.8) Our non-U.S. pension plans, which are typically not funded due to local regulations, had a decline in projected benefit obligation of$25.2 during 2022, 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$35.7 during 2022 primarily due to an increase in the discount rate and an amendment to a plan covering certain unionized employees and retirees within our IP business. Contributions to ourU.S. and non-U.S. pension and other postretirement plans were$11.0 and$10.5 during 2022 and 2021, respectively, which were used to fund participant benefits. We currently estimate 2023 contributions to our pension and other postretirement benefits plans of approximately$13 .
See Note 16, Postretirement Benefit Plans , for additional financial information related to our postretirement obligations.
35
--------------------------------------------------------------------------------Contractual Obligations
The following table summarizes ITT's commitment to make future payments under
long-term contractual obligations as of
Payments Due By Period
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Long-term debt $ 9.9 $ 2.2 $ 4.5 $ 3.2 $ -
Operating leases 89.5 21.6 32.1 20.4 15.4
Purchase obligations(a) 109.3 98.3 11.0 - -
Postretirement benefit payments(b) 149.4 12.4 21.9 20.4 94.7
Other long-term obligations(c) 68.9 6.1 17.7 6.0 39.1
Total $ 427.0 $ 140.6 $ 87.2 $ 50.0 $ 149.2 In addition to the amounts presented in the table above, we have recorded
liabilities for uncertain tax positions of
(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.
(c)Other long-term obligations include amounts recorded in our Consolidated Balance Sheet as ofDecember 31, 2022 , including estimated environmental payments and employee compensation agreements. We estimate based on historical experience that we will spend, on average, approximately$5 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. As ofDecember 31, 2022 , our recorded environmental liability was$57.1 . See Note 20, Commitments and Contingencies , to the Consolidated Financial Statements for further information. 36 --------------------------------------------------------------------------------
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 ofDecember 31, 2022 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$141.7 of guarantees, letters of credit and similar arrangements outstanding as ofDecember 31, 2022 , 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 ofDecember 31, 2022 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. 37 --------------------------------------------------------------------------------
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 endedDecember 31, 2022 is provided below. Motion Industrial Connect & Control Total Technologies Process Technologies Eliminations ITT 2022 Revenue$ 1,374.0 $ 971.0 $ 645.6$ (2.9) $ 2,987.7 Acquisitions - (46.5) - - (46.5) Foreign currency translation 114.4 28.2 18.3 - 160.9 2022 Organic revenue 1,488.4 952.7 663.9 (2.9) 3,102.1 2021 Revenue 1,368.6 843.2 554.7 (1.5) 2,765.0 Organic revenue growth$ 119.8 $ 109.5 $ 109.2$ (1.4) $ 337.1 Percentage change 8.8 % 13.0 % 19.7 % 12.2 % 38
-------------------------------------------------------------------------------- •"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, certain gain on sale of long-lived assets, restructuring, severance, certain asset impairment charges, certain acquisition-related impacts, unusual or infrequent operating items and, for 2021, asbestos-related impacts. 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
Motion Industrial Connect & Control Total
Year Ended December 31, 2022 Technologies Process Technologies Segment Corporate ITT Inc.
Operating income $ 208.5 $ 187.6 $ 115.8 $ 511.9 $ (43.9) $ 468.0
Gain on sale of long-lived assets(a) - (15.5) - (15.5) - (15.5)
Impacts related to Russia-Ukraine war 3.1 4.8 - 7.9 - 7.9 Restructuring costs 2.7 1.3 - 4.0 (0.2) 3.8 Acquisition-related costs - 3.2 - 3.2 0.5 3.7 Asset impairment charges - - - - 1.7 1.7 Other(b) 1.3 1.2 - 2.5 1.7 4.2 Adjusted operating income (loss)$ 215.6 $ 182.6 $ 115.8 $ 514.0 $ (40.2) $ 473.8 Operating margin 15.2 % 19.3 % 17.9 % 17.1 % 15.7 % Adjusted operating margin 15.7 % 18.8 % 17.9 % 17.2 %
15.9 %
Year EndedDecember 31, 2021 Operating income$ 258.2 $ 126.8 $ 81.7 $ 466.7 $ 37.6 $ 504.3 Asbestos-related benefit, net - - - - (74.4) (74.4) Restructuring costs 3.9 3.1 2.4 9.4 0.2 9.6 Other(c) - 0.6 - 0.6 2.5 3.1 Adjusted operating income (loss)$ 262.1 $ 130.5 $ 84.1 $ 476.7 $ (34.1) $ 442.6 Operating margin 18.9 % 15.0 % 14.7 % 16.9 % 18.2 % Adjusted operating margin 19.2 % 15.5 % 15.2 % 17.2 %
16.0 %
(a)2022 includes a gain of
(b)2022 includes severance charges and accelerated amortization of an intangible asset.
(c)2021 includes accelerated amortization of an intangible asset and acquisition-related costs.
39
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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, certain gain on sale of long-lived assets,
restructuring, severance, certain asset impairment charges, pension termination
and settlement impacts, certain acquisition-related impacts, income tax
settlements or adjustments, unusual or infrequent items and, for 2021,
asbestos-related impacts. 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
2022 2021
Income from continuing operations attributable to ITT Inc. $ 368.3 $ 314.8
Gain on sale of long-lived assets, net of tax expense of $3.8 and $0.0 (a) (11.7) -
Impacts from
6.6 -
Acquisition-related costs, net of tax benefit of
3.4 0.5
Restructuring costs, net of tax benefit of
2.7 7.2
Asset impairment charges, net of tax benefit of
1.3 -
Tax-related special items(b) (2.3) (10.5)
Net asbestos-related costs, net of tax expense of
- 39.1
Other costs (income), net of tax (benefit) expense of
3.2 (0.6)
Adjusted income from continuing operations $ 371.5 $ 350.5
Income from continuing operations attributable to ITT Inc. per diluted
share (EPS) $ 4.40 $ 3.64
Adjusted EPS $ 4.44 $ 4.05 (a)2022 includes a gain of
(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.
2022 2021
Charge on undistributed foreign earnings $ (0.3) $ 4.0
Change in deferred tax asset valuation allowance (1.2) (1.9)
Change in uncertain tax positions (0.7) (15.3)
Other (0.1) 2.7
Net tax-related special items $ (2.3) $ (10.5)
(c)Other special items for 2022 consists primarily of employee severance expense, while 2021 consists primarily of a benefit from the finalization of theU.S. Qualified Pension Plan termination funding. In addition, both years include accelerated amortization expense of an intangible asset. 40 --------------------------------------------------------------------------------
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.
41
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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 providedU.S. taxes because these earnings are considered indefinitely reinvested outside of theU.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 theU.S. and accrueU.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 byU.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. 42 --------------------------------------------------------------------------------
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 CCT 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 2022, 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,
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$57.1 atDecember 31, 2022 , 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 43 -------------------------------------------------------------------------------- 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
Recent Accounting Pronouncements
See Note 2, Recent Accounting Pronouncements , to the Consolidated Financial Statements for a complete discussion of recent accounting pronouncements.
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