ITT INC. (In millions, except per share amounts, unless otherwise stated) OVERVIEWITT Inc. is a diversified manufacturer of highly engineered critical components and customized technology solutions for the transportation, industrial, and energy markets. We manufacture components that are integral to the operation of systems and manufacturing processes in these key markets. Our products enable functionality for applications where reliability and performance are critically important to our customers and the users of their products. Our businesses share a common, repeatable operating model centered on our engineering capabilities. Each business applies its technology and engineering expertise to solve our customers' most pressing challenges. Our applied engineering provides a valuable business relationship with our customers given the critical nature of their applications. This in turn provides us with unique insight to our customers' requirements and enables us to develop solutions to assist our customers in achieving their business goals. Our technology and customer intimacy together produce opportunities to capture recurring revenue streams, aftermarket opportunities and long-lived platforms from original equipment manufacturers (OEMs). Our product and service offerings are organized into three segments: Motion Technologies (MT), Industrial Process (IP), and Connect & Control Technologies (CCT). See Note 3, Segment Information , in this Report for a summary description of each segment. Additional information is also available in our 2020 Annual Report within Part I, Item 1, "Description of Business". All comparisons included within Management's Discussion and Analysis of Financial Condition and Results of Operations refer to the comparable three and nine months endedSeptember 26, 2020 , unless stated otherwise. COVID-19 Update: The Company continues to respond to and recover from the challenges stemming from the COVID-19 pandemic, including managing significant market headwinds, supply chain disruptions, shipping delays, and reduced availability of skilled labor. We continue to be proactive in responding to these challenges, including working closely with our suppliers to minimize disruptions within our global supply chain. As a result, we've been able to continue delivering high quality products to our customers. Future impacts of COVID-19 on our business and financials remain uncertain and will be dependent on the duration of the COVID-19 pandemic, including variant strains of the virus, the timing, effectiveness and availability of, and people's receptivity to, vaccines or other medical remedies, potential impacts from mandatory vaccination requirements, and our ability to respond to future challenges posed by the COVID-19 pandemic. For additional discussion of risks related to COVID-19, see Part II, Item 1A, " Risk Factors " herein, as well as Part I, Item IA, "Risk Factors" in our 2020 Annual Report . 23 -------------------------------------------------------------------------------- Executive Summary During the third quarter of 2021, we delivered strong results, growing our revenue across all three segments and expanding our operating margin. The following table provides a summary of key performance indicators for the third quarter of 2021 as compared to the third quarter of 2020. Summary of Key Performance Indicators for the
Third Quarter of 2021
Revenue Segment Operating Income Segment Operating Margin EPS
$690 $111 16.1% $1.00
17% Increase 33% Increase 190bp Increase 282% Increase
Adjusted Segment Operating Adjusted Segment Operating Adjusted
Organic Revenue Income Margin EPS
$684 $116 16.8% $0.99
16% Increase 21% Increase 60bp Increase 21% Increase
Further details related to these results are contained elsewhere in the
Discussion of Financial Results section. Refer to the section titled " Key
Performance Indicators and Non-GAAP Measures " for definitions and
reconciliations between GAAP and non-GAAP metrics.
Our third quarter 2021 results include:
•Revenue of $689.6 increased $98.4 , including favorable foreign exchange of
$5.9 . Organic revenue improved 15.6%, as a result of strong top line growth
across all our segments. In particular, our MT segment saw strong growth in
Friction aftermarket and continued to significantly outperform the global OE
automotive market. Additionally, we experienced significant growth in our CCT
segment due to continued strength in connector sales, and our IP segment grew
thanks to short cycle products, including pump parts and valves, as a result of
strong performance in the industrial and biopharmaceutical markets.
•Segment operating income of $111.2 increased $27.3 , primarily driven by higher
sales volume, strategic commercial actions, and savings from productivity. These
items were partially offset by supply chain disruptions resulting in increased
raw material and shipping costs, strategic growth investments and a reversal of
temporary cost reductions that were executed in 2020.
•Income from continuing operations of $1.00 per diluted share increased $1.55 as
compared to the prior year loss of $0.55 per share, mainly due to the negative
impact of asbestos charges of $135.9 in the prior year period and higher segment
operating income. The prior year asbestos costs relate to extending the
projection period over which we expect asbestos claims to be filed against
InTelCo Management, LLC (InTelCo ), the entity holding legacy asbestos-related
assets and liabilities. Since then, we have divested our entire net asbestos
liability. Adjusted income from continuing operations was $0.99 per diluted
share, an improvement of $0.17 .
In terms of capital deployment, during the third quarter of 2021 we repurchased
0.5 shares of common stock for $50 , bringing our total year-to-date open-market
share repurchases to $100 . In addition, in the third quarter of 2021 we declared
a dividend of $0.22 per share, which was a 30% increase from the quarterly
dividends declared in 2020, bringing our total year-to-date dividend payments to
$57 .
24
--------------------------------------------------------------------------------DISCUSSION OF FINANCIAL RESULTS
Three Months Ended Nine Months Ended
October 2, September 26, September 26,
2021 2020 Change October 2, 2021 2020 Change
Revenue $ 689.6 $ 591.2 16.6 % $ 2,079.6 $ 1,769.2 17.5 %
Gross profit 222.0 190.6 16.5 % 675.6 563.6 19.9 %
Gross margin 32.2 % 32.2 % - bp 32.5 % 31.9 % 60 bp
Operating expenses(a)(b) 120.3 253.1 (52.5) % 284.4 496.3 (42.7) %
Operating expense to revenue ratio 17.4 % 42.8 % (2,540) bp 13.7 % 28.1 % (1,440) bp
Operating income (loss)(a)(b) 101.7 (62.5) 262.7 % 391.2 67.3 481.3 %
Operating margin 14.7 % (10.6) % 2,530 bp 18.8 % 3.8 % 1,500 bp
Interest and non-operating expenses
(income), net 0.5 1.2 (58.3) % (4.3) 4.0 207.5 %
Income tax expense (benefit) 14.1 (16.2) (187.0) % 182.7 (19.6) **
Effective tax rate 13.9 % 25.4 % (1,150) bp 46.2 % (31.0) % **
Income (loss) from continuing operations
attributable to ITT Inc. 86.6 (48.0) 280.4 % 211.8 82.1 158.0 %
Net income (loss) attributable to ITT
Inc. 87.5 (46.8) 287.0 % 212.7 86.0 147.3 %
** Resulting percentage or basis point change not considered meaningful.
(a) Operating expenses and operating income for the nine months ended October
2, 2021 include the impact of the divestiture of InTelCo. See Operating
Expenses section below for further information.
(b) Operating expenses and operating income for the three and nine months ended
September 26, 2020 include the impact of extending the projection period over
which we expect asbestos claims to be filed against InTelCo. See Operating
Expenses section below for further information.
REVENUE
The following table illustrates the revenue derived from each of our segments.
October 2, September 26, Organic Growth
For the Three Months Ended 2021 2020 Change (Decline)(a)
Motion Technologies $ 332.3 $ 271.8 22.3 % 20.3 %
Industrial Process 210.7 194.1 8.6 % 8.1 %
Connect & Control Technologies 147.1 125.9 16.8 % 17.0 %
Eliminations (0.5) (0.6)
Total Revenue $ 689.6 $ 591.2 16.6 % 15.6 %
October 2, September 26, Organic Growth
For the Nine Months Ended 2021 2020 Change (Decline)(a)
Motion Technologies $ 1,045.0 $ 769.0 35.9 % 30.3 %
Industrial Process 626.9 614.7 2.0 % 0.5 %
Connect & Control Technologies 408.9 387.5 5.5 % 4.6 %
Eliminations (1.2) (2.0)
Total Revenue $ 2,079.6 $ 1,769.2 17.5 % 14.4 %
(a)See the section titled " Key Performance Indicators and Non-GAAP Measures " for a definition and reconciliation of organic revenue.
25
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Motion Technologies
MT revenue for the three and nine months ended October 2, 2021 increased $60.5
and $276.0 , respectively. Excluding the impact of favorable foreign currency
translation of $5.3 and $43.1 for the three and nine months ended October 2,
2021 , organic revenue increased $55.2 and $232.9 , respectively. Sales from our
Friction business grew 21% and 35%, respectively, during the three- and
nine-month periods driven by strength in aftermarket and continued OE
outperformance versus automotive production rates. Wolverine sales improved 33%
and 30%, respectively, during the three- and nine-month periods due to growth in
sealings and shims. KONI & Axtone sales increased 5% for both the three- and
nine-month periods, primarily from strength in automotive aftermarket equipment,
partially offset by a decline in rail.
The automotive industry is currently experiencing a global semiconductor supply
shortage. This shortage has created supply chain disruptions for our automotive
OEM customers, resulting in temporary declines in production. As a result,
demand for our OEM brake pads and parts has been and may continue to be
adversely affected until the shortage is resolved. While this shortage has had
and may continue to have a negative impact on revenue, we continue to
significantly outperform automotive production rates globally.
Industrial Process
IP revenue for the three and nine months ended October 2, 2021 increased $16.6
and $12.2 , respectively. Both periods included favorable foreign currency
translation impacts of $0.8 and $9.4 , respectively. Organic revenue increased by
$15.8 during the three-month period, primarily driven by growth in our short
cycle business of 10% due to strength in the general industrial and mining
markets. Organic revenue for the nine-month period increased $2.8 , primarily
driven by growth in pump projects of 12% due to strength in the oil and gas and
general industrial markets. This was partially offset by a decline in our
short-cycle business of 2%, attributable to the first half of the year.
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 orders during the three and
nine months ended October 2, 2021 were $242.5 and $689.2 , respectively, an
increase of 25.5% and 12.2% as compared to the respective prior year periods.
Backlog as of October 2, 2021 was $412.0 , an increase of $44.6 , or 12.1%, as
compared to December 31, 2020 . Our backlog represents firm orders that have been
received, acknowledged, and entered into our production systems.
Connect & Control Technologies
CCT revenue for the three and nine months ended October 2, 2021 increased $21.2
and $21.4 , respectively, which included foreign currency translation impacts of
$(0.2) and $3.6 , respectively. Organic revenue increased $21.4 and $17.8 during
the three- and nine-month periods, respectively. The increase in both periods
was primarily driven by a strong performance in connector sales which grew 29%
and 18%, respectively. The nine-month period was negatively impacted by a 10%
revenue decline within the aerospace and defense markets. Although we have seen
an increase in commercial air travel, as airframers work through high levels of
inventory, we do not expect to see a significant improvement in sales until
2022.
26
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GROSS PROFIT
Gross profit for the three months ended October 2, 2021 and September 26, 2020
was $222.0 and $190.6 , respectively, reflecting a gross margin of 32.2% in both
periods. Gross profit for the nine months ended October 2, 2021 and
September 26, 2020 was $675.6 and $563.6 , respectively, reflecting a gross
margin of 32.5% and 31.9%, respectively. The increase in gross profit for the
three- and nine-month periods was primarily driven by higher sales volume,
productivity savings and strategic commercial actions. These items were
partially offset by increases in raw material, shipping, and labor costs, as
discussed further below.
Since 2020, the cost of raw materials, including commodities such as steel, used
in our production processes has significantly increased. The rising prices are
mainly a result of increased demand fueled by economic recovery from the
COVID-19 pandemic as well as lower supply since global production capacity was
cut in 2020. The impact of higher commodity prices on our financial results
during the third quarter of 2021 was partially mitigated by fixed-price supply
contracts with suppliers, especially in the first half of 2021. The expiration
of these fixed-price contracts, continued raw materials inflation, and supply
constraints had a negative impact on our third quarter financial results and are
expected to have an unfavorable impact on our fourth quarter financial results.
We have been able to offset some of this impact through price increases and
productivity savings, and we expect to be able to do so in the fourth quarter
and in 2022.
During 2021, worldwide supply chain challenges exacerbated by the COVID-19
pandemic and the rising demand for raw materials, as discussed above, have
created upward pressure on shipping costs globally. These supply chain
disruptions have contributed to congested shipping ports around the world,
causing shipping delays and, in many cases, additional costs to be incurred in
order to meet customer demand. As a result of these external pressures, our
shipping costs, including for inbound and outbound freight, have increased as
compared to the prior year, which has negatively impacted our gross profit. At
this time, we are unable to predict when these issues will be resolved.
Continued supply chain challenges resulting in incremental shipping costs could
have a material impact on our financial results.
The manufacturing industry is also currently experiencing a skilled labor
shortage. This shortage has created difficulties for the Company in attracting
and retaining factory employees and in meeting customer demand, resulting in
additional labor costs. Additionally, in September 2021 the current U.S.
administration issued a mandate on COVID-19 vaccinations as well as requirements
for unvaccinated employees to be tested weekly for COVID-19. Such requirements
could result in employee attrition and further difficulty in securing future
labor needs. As a result of these circumstances, our financial results have been
and may continue to be negatively impacted. For additional information regarding
the government-mandate on COVID-19 vaccination, see Part II, Item 1A, " Risk
Factors ".
OPERATING EXPENSES
The following table summarizes our operating expenses, including by segment.
Three Months Ended Nine Months Ended
October 2, September 26, October 2, September 26,
2021 2020 Change 2021 2020 Change
General and administrative expenses
18.7 %$ 168.2 $ 148.8 13.0 % Sales and marketing expenses 37.4 33.4 12.0 % 112.4 110.7 1.5 % Research and development expenses 22.5 19.7 14.2 % 70.0 61.3 14.2 % Asbestos-related costs (benefit), net - 141.4 (100.0) % (74.4) 116.7 163.8 % Restructuring costs 4.5 11.5 (60.9) % 8.2 42.5 (80.7) % Asset impairment charges - - - % - 16.3 (100.0) % Total operating expenses$ 120.3 $ 253.1 (52.5) %$ 284.4 $ 496.3 (42.7) % Total Operating Expenses By Segment: Motion Technologies$ 43.5 $ 31.8 36.8 %$ 126.5 $ 111.7 13.2 % Industrial Process 38.7 47.9 (19.2) % 114.7 161.5 (29.0) % Connect & Control Technologies 28.6 27.0 5.9 % 90.3 91.3 (1.1) % Corporate & Other 9.5 146.4 (93.5) % (47.1) 131.8 (135.7) % 27
-------------------------------------------------------------------------------- General and administrative (G&A) expenses for the three and nine months endedOctober 2, 2021 increased$8.8 and$19.4 , respectively. The increase was primarily due to higher incentive-based compensation as well as lower prior year personnel costs from proactive actions taken in response to the COVID-19 pandemic, which included a temporary reduction in executive compensation and suspension of select 401(k) benefits for certainU.S. employees that have since been reinstated. Last year, we also benefited from higher employee retention credits for the three- and nine-month periods, in connection with the 2020 CARES Act. The increase in both periods was partially offset by a decline in bad debt expense. In addition, environmental costs were higher for the nine-month period by$4.5 , primarily due to prior year insurance-related recoveries. Sales and marketing expenses increased$4.0 and$1.7 for the three and nine months endedOctober 2, 2021 , respectively, primarily driven by benefits in the prior year period from discretionary spending reductions and temporary personnel cost actions taken in response to the COVID-19 pandemic. Research and development expenses for the three and nine months endedOctober 2, 2021 increased$2.8 and$8.7 , respectively, due to continued strategic investments in innovation and new product development to drive future growth. Asbestos-related matters resulted in a net benefit of$74.4 for the nine months endedOctober 2, 2021 , due to the recognition of a pre-tax gain of$88.8 from the divestiture ofInTelCo , which was executed onJuly 1, 2021 . During the three and nine months endedSeptember 26, 2020 , we recognized costs of$135.9 as a result of extending our projection period to include pending claims and claims expected to be filed through 2052, reflecting the full time period over which we expected asbestos claims to be filed againstInTelCo . The nine months endedSeptember 26, 2020 benefited from insurance settlements resulting in a net gain of$48.3 . See Note 19, Commitments and Contingencies , to the Consolidated Condensed Financial Statements for further information. Restructuring costs decreased$7.0 and$34.3 , respectively, during the three and nine months endedOctober 2, 2021 . Restructuring costs recorded during the prior year were primarily related to cost actions taken as part of our 2020 Global Restructuring Plan, which is an organizational-wide restructuring plan to reduce the overall cost structure of the Company in response to challenges caused by the COVID-19 pandemic. See Note 5, Restructuring Actions , to the Consolidated Condensed Financial Statements for further information. Asset impairment charges during the nine months endedSeptember 26, 2020 were related to a business within IP that primarily serves the global upstream oil and gas market. See Note 11, Plant, Property and Equipment, net , and Note 12, Goodwill and Other intangible assets, net , to the Consolidated Condensed Financial Statements for further information. OPERATING INCOME The following table summarizes our operating income and margin by segment. Three Months Ended Nine Months Ended October 2, September 26, October 2, September 26, 2021 2020 Change 2021 2020 Change Motion Technologies$ 53.6 $ 50.4 6.3 %$ 194.3 $ 113.9 70.6 % Industrial Process 32.4 17.1 89.5 % 94.9 44.5 113.3 % Connect & Control Technologies 25.2 16.4 53.7 % 54.9 40.7 34.9 % Segment operating income 111.2 83.9 32.5 % 344.1 199.1 72.8 % Asbestos-related (costs) benefit, net - (141.4) (100.0) % 74.4 (116.7) (163.8) % Other corporate costs (9.5) (5.0) 90.0 % (27.3) (15.1) 80.8 % Total corporate and other (costs) benefit, net (9.5) (146.4) (93.5) % 47.1 (131.8) (135.7) % Total operating income (loss)$ 101.7 $ (62.5) 262.7 %$ 391.2 $ 67.3 481.3 % Operating margin: Motion Technologies 16.1 % 18.5 % (240) bp 18.6 % 14.8 % 380 bp Industrial Process 15.4 % 8.8 % 660 bp 15.1 % 7.2 % 790 bp Connect & Control Technologies 17.1 % 13.0 % 410 bp 13.4 % 10.5 % 290 bp Segment operating margin 16.1 % 14.2 % 190 bp 16.5 % 11.3 % 520 bp Consolidated operating margin 14.7 % (10.6) % 2,530 bp 18.8 % 3.8 % 1,500 bp 28
-------------------------------------------------------------------------------- MT operating income for the three and nine months endedOctober 2, 2021 increased$3.2 and$80.4 , respectively, primarily due to higher sales volume, strategic commercial actions and savings from net productivity. These items were partially offset by higher raw material and shipping costs due to supply chain challenges and strategic growth investments. IP operating income for the three and nine months endedOctober 2, 2021 increased$15.3 and$50.4 , respectively. The three-month period benefited from net productivity savings, higher sales volume, and favorable mix. The nine-month period benefited from net productivity savings, prior year cost actions, a decline in bad debt expense and prior period asset impairments of$16.3 . The increases for both periods were partially offset by unfavorable raw material prices, shipping, and labor costs. The nine-month period also experienced unfavorable product mix due to higher pump project sales. CCT operating income for the three and nine months endedOctober 2, 2021 increased$8.8 and$14.2 , respectively, driven by higher sales volume and savings from net productivity. These were partially offset by unfavorable raw material and labor costs. Other corporate costs for the three and nine months endedOctober 2, 2021 increased$4.5 and$12.2 , respectively. The increase for both periods was primarily driven by higher incentive-based compensation, as well as lower prior year personnel costs from proactive actions taken in response to the COVID-19 pandemic. The increase in other corporate costs for the nine-month period also reflected higher environmental-related costs of$4.5 due to insurance-related recoveries in the prior year. INTEREST AND NON-OPERATING EXPENSES AND INCOME, NET The following table summarizes our net interest and non-operating expenses (income). Three Months Ended Nine Months Ended October 2, September 26, September 26, 2021 2020 Change October 2, 2021 2020 Change Interest and non-operating expenses (income), net$ 0.5 $ 1.2 (58.3) %$ (4.3) $ 4.0 207.5 % The change during the three and nine months endedOctober 2, 2021 was due to a decline in postretirement-related costs mainly resulting from the termination of ourU.S. qualified pension plan, which occurred in the fourth quarter of 2020. The nine-month period also benefited from a$3.4 gain from the final pricing adjustment in the second quarter of 2021 related to the plan termination. INCOME TAX EXPENSE The following table summarizes our income tax expense (benefit) and effective tax rate. Three Months Ended Nine Months Ended October 2, October 2, 2021 September 26, 2020 2021 September 26, 2020 Income tax expense (benefit)$ 14.1 $ (16.2)$ 182.7 $ (19.6) Effective tax rate 13.9 % 25.4 % 46.2 % (31.0) % The income tax expense and effective tax rate for the three months endedOctober 2, 2021 reflects a reduction in the current forecasted full-year effective tax rate primarily due to earnings mix, as well as a$1.9 tax benefit from a valuation allowance reversal inBrazil . The income tax expense and effective tax rate for the nine months endedOctober 2, 2021 reflects the reversal of previously recorded deferred tax assets of$116.9 related to the Company's divestiture ofInTelCo . See Note 19, Commitments and Contingencies , for further information. The income tax benefit and effective tax rate for the three and nine months endedSeptember 26, 2020 is primarily due to the tax benefit resulting from the asbestos remeasurement charge of$135.9 in the third quarter. Additionally, the effective tax rate during the three-month period in 2020 includes a benefit of$3.2 related to previously unrecognized tax benefits from statute of limitations expirations. The effective tax rate for the nine-month period in 2020 also includes tax benefits of$27.2 resulting from an internal reorganization inEurope . 29 -------------------------------------------------------------------------------- This reorganization resulted in a refined projection of future earnings, which will result in the realization of a portion of our deferred tax assets. We are closely monitoring the potential passage of newU.S. tax legislation, which could result in substantial changes to the currentU.S. tax system, including changes to the statutory corporate tax rate. Further, changes in tax laws resulting from theOrganization for Economic Cooperation and Development's ("OECD") multi-jurisdictional plan of action to address base erosion and profit shifting could adversely impact our effective tax rate. As the effects of a change inU.S. tax law must be recognized in the period in which the new legislation is enacted, should new legislation be signed into law, our financial results could be materially impacted. See Note 6, Income Taxes , to the Consolidated Condensed Financial Statements for further information.
LIQUIDITY
Funding and Liquidity Strategy We monitor our funding needs and execute strategies to meet overall liquidity requirements, including the management of our capital structure, on both a short- and long-term basis. Significant factors that affect our overall management of liquidity include our cash flow from operations, credit ratings, the availability of commercial paper, access to bank lines of credit, term loans, and the ability to attract long-term capital on satisfactory terms. We assess these factors along with current market conditions on a continuous basis, and as a result, may alter the mix of our short- and long-term financing when it is advantageous to do so. We expect to have enough liquidity to fund operations for at least the next 12 months and beyond. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We have identified and continue to look for opportunities to access cash balances in excess of local operating requirements to meet our global liquidity needs in a cost-efficient manner. We plan to continue to transfer cash between certain international subsidiaries and theU.S. when it is cost effective to do so. We will also continue to support 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. During the nine months endedOctober 2, 2021 , we had net cash distributions from foreign countries to theU.S. of$48.3 . During the year endedDecember 31, 2020 , we had net cash distributions from foreign countries to theU.S. of$498.2 . The timing and amount of any additional future distributions remains under evaluation based on our jurisdictional cash needs. The Company also continues to evaluate the various global governmental programs instituted in response to COVID-19, including the American Rescue Plan Act of 2021 (ARPA). ARPA builds upon many of the measures in the CARES Act fromMarch 2020 and the Consolidated Appropriations Act fromDecember 2020 . ARPA and various global programs in the jurisdictions in which we operate generally provide for employee retention credits, workforce incentives, and incentive financing programs backed by governmental agencies. During the three and nine months endedOctober 2, 2021 , the Company recognized a benefit of$0.9 and$5.0 , respectively, from the employee retention credit. During the three and nine months endedSeptember 26, 2020 , the Company recognized a benefit of$1.8 and$8.7 , respectively. The benefit was recorded in operating income and related to the employer portion of payroll taxes. Certain non-U.S. jurisdictions have enacted similar stimulus measures. As ofOctober 2, 2021 , we have not incurred any borrowings under governmental loan programs. We continue to monitor any effects that may result from the ARPA and 2020 CARES Act or other similar legislation globally. 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, there can be no assurance as to what level of dividends, if any, will be paid in the future. In the third quarter of 2021, we declared a dividend of$0.22 per share for shareholders of record onSeptember 13, 2021 , which was a 30% increase from the quarterly dividends declared in 2020. Dividend payments during the nine months endedOctober 2, 2021 amounted to$57.0 . During the nine months endedOctober 2, 2021 andSeptember 26, 2020 , we repurchased and retired 1.1 and 1.7 shares of common stock for$100.0 and$73.2 , respectively, under our share repurchase plans. 30 -------------------------------------------------------------------------------- Separate from our share repurchase plans, the Company repurchased 0.2 and 0.2 shares during the nine months endedOctober 2, 2021 andSeptember 26, 2020 , respectively, for an aggregate price of$11.7 and$10.7 , respectively, in settlement of employee tax withholding obligations due upon the vesting of RSUs and PSUs. All repurchased shares are canceled immediately following the repurchases. Commercial Paper When available and economically feasible, we have accessed the commercial paper market through programs in place in theU.S. andEurope to supplement cash flows generated internally and to provide additional short-term funding. Commercial paper outstanding of$196.4 as ofOctober 2, 2021 was issued through both the Company'sU.S. and Euro programs. Commercial paper outstanding under theU.S. program was$150.0 , and was used to partially fund the divestiture of the entity holding legacy asbestos-related assets and liabilities (see Note 19, Commitments and Contingencies ). Commercial paper outstanding under the Euro program was$46.4 . As ofDecember 31, 2020 , we had commercial paper outstanding of$104.3 , issued entirely under the Company's Euro program. All outstanding commercial paper for both periods had maturity terms less than three months from the date of issuance. Revolving Credit Agreements 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). Upon its effectiveness, this agreement replaced our existing$500 revolving credit facility dueNovember 2022 (the 2014 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 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 ofOctober 2, 2021 andDecember 31, 2020 , we had no outstanding borrowings under the current or former revolving credit facility. See Note 14, Debt , to the Consolidated Condensed Financial Statements for further information. Sources and Uses of Liquidity Our principal source of liquidity is our cash flow generated from operating activities, which provides us with the ability to meet the majority of our short-term funding requirements. The following table summarizes net cash derived from or used in operating, investing, and financing activities from continuing operations, as well as net cash from discontinued operations. September 26, For the Nine Months Ended October 2, 2021 2020 Operating activities $ (127.9)$ 318.1 Investing activities (53.9) (50.4) Financing activities (74.2) (109.9) Foreign exchange (18.5) 12.2 Total net cash (used in) provided by continuing operations (274.5) 170.0 Net cash (used in) provided by discontinued operations 0.7 0.2 Net change in cash and cash equivalents $
(273.8)
Operating Activities The decrease in net cash from operating activities of$446 was primarily due to a one-time cash payment of$398.0 during the second quarter of 2021 related to the divestiture of the entity holding legacy asbestos-related assets and liabilities. In addition, we made working capital investments in our business to support sales growth. These items were partially offset by an increase in segment operating income. 31 -------------------------------------------------------------------------------- Investing Activities The increase in net cash used in investing activities was driven by an increase in capital expenditures, which were$52.6 and$47.6 during the nine months ended 2021 and 2020, respectively. Financing Activities The decrease in net cash used in financing activities of$35.7 was primarily driven by an increase in net commercial paper borrowings of$64.7 and prior year revolver repayments, net of borrowings, of$28.9 . These items were partially offset by an increase in repurchases of ITT common stock and dividends paid. 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 with accounting principles other than those generally accepted inthe United States 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 following non-GAAP measures to be key performance indicators. These measures may not be comparable to similarly titled measures reported by other companies. •"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. We believe 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. The following tables include a reconciliation of revenue to organic revenue by segment. Three Months Ended October 2, Industrial Connect & Control Total 2021 Motion Technologies Process Technologies Eliminations ITT 2021 Revenue$ 332.3 $ 210.7 $ 147.1 $ (0.5) $ 689.6 Foreign currency translation (5.3) (0.8) 0.2 - (5.9) 2021 Organic revenue$ 327.0 $ 209.9 $ 147.3 $ (0.5) $ 683.7 2020 Revenue$ 271.8 $ 194.1 $ 125.9 $ (0.6) $ 591.2 Organic growth 55.2 15.8 21.4 0.1 92.5 Percentage change 20.3 % 8.1 % 17.0 % 15.6 % Nine Months EndedOctober 2, 2021 2021 Revenue$ 1,045.0 $ 626.9 $ 408.9 $ (1.2) $ 2,079.6 Foreign currency translation (43.1) (9.4) (3.6) - (56.1) 2021 Organic revenue$ 1,001.9 $ 617.5 $ 405.3 $ (1.2) $ 2,023.5 2020 Revenue$ 769.0 $ 614.7 $ 387.5 $ (2.0) $ 1,769.2 Organic growth (decline) 232.9 2.8 17.8 0.8 254.3 Percentage change 30.3 % 0.5 % 4.6 % 14.4 % 32
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•"Adjusted operating income" and "Adjusted segment operating income" are defined
as operating income, adjusted to exclude special items that include, but are not
limited to, asbestos-related impacts, restructuring, certain asset impairment
charges, certain acquisition-related impacts, and unusual or infrequent
operating items. Special items represent charges or credits that impact current
results, which management views as unrelated to the Company's ongoing operations
and performance. "Adjusted operating margin" and "Adjusted segment operating
margin" are defined as adjusted operating income or adjusted segment operating
income divided by revenue. We believe that these financial measures are useful
to investors and other users of our financial statements in evaluating ongoing
operating profitability, as well as evaluating operating performance in relation
to our competitors.
The following tables include a reconciliation of operating income to adjusted
operating income by segment.
Motion
Industrial Connect & Control Total
Three Months Ended
Technologies Process Technologies Segment Corporate Total ITT
Operating income (loss)$ 53.6 $ 32.4 $ 25.2 $ 111.2 $ (9.5) $ 101.7 Restructuring costs 4.1 0.5 (0.1) 4.5 - 4.5 Other(b) - - - - 0.6 0.6 Adjusted operating income (loss)$ 57.7 $ 32.9 $ 25.1 $ 115.7 $ (8.9) $ 106.8 Adjusted operating margin 17.4 % 15.6 % 17.1 % 16.8 % 15.5 % Nine Months EndedOctober 2, 2021 Operating income$ 194.3 $ 94.9 $ 54.9 $ 344.1 $ 47.1 $
391.2
Asbestos-related benefit, net(a) - - - - (74.4) (74.4) Restructuring costs 4.1 1.4 2.4 7.9 0.3 8.2 Other(b) - - - - 2.3 2.3 Adjusted operating income (loss)$ 198.4 $ 96.3 $ 57.3 $ 352.0 $ (24.7) $ 327.3 Adjusted operating margin 19.0 % 15.4 % 14.0 % 16.9 % 15.7 % Three Months Ended September 26, Motion Industrial Connect & Control Total 2020 Technologies Process Technologies Segment Corporate Total ITT Operating income (loss)$ 50.4 $ 17.1 $ 16.4 $ 83.9 $ (146.4) $ (62.5) Restructuring costs - 10.2 1.3 11.5 - 11.5 Asbestos-related costs, net(a) - - - - 141.4 141.4 Other(c) - 0.1 - 0.1 0.3 0.4 Adjusted operating income (loss)$ 50.4 $ 27.4 $ 17.7 $ 95.5 $ (4.7) $ 90.8 Adjusted operating margin 18.5 % 14.1 % 14.1 % 16.2 % 15.4 % Nine Months EndedSeptember 26, 2020 Operating income (loss)$ 113.9 $ 44.5 $ 40.7 $ 199.1 $ (131.8) $ 67.3 Restructuring costs 14.0 18.1 8.0 40.1 2.4 42.5 Asbestos-related costs, net(a) - - - - 116.7 116.7 Asset impairment charges(d) - 16.3 - 16.3 - 16.3 Other(c) - 0.6 0.2 0.8 - 0.8 Adjusted operating income (loss)$ 127.9 $ 79.5 $ 48.9 $ 256.3 $ (12.7) $ 243.6 Adjusted operating margin 16.6 % 12.9 % 12.6 % 14.5 % 13.8 % (a)See Note 19, Commitments and Contingencies , for further information. (b)Includes accelerated amortization of an intangible asset. (c)Primarily includes acquisition-related costs and a gain on sale of excess property. (d)Asset impairment charges are related to a business within IP that primarily serves the global upstream oil and gas market. 33 -------------------------------------------------------------------------------- •"Adjusted income from continuing operations" is defined as income from continuing operations attributable toITT Inc. adjusted to exclude special items that include, but are not limited to, asbestos-related impacts, restructuring, certain asset impairment charges, pension termination and settlement impacts, certain acquisition-related impacts, income tax settlements or adjustments, and unusual or infrequent items. Special items represent charges or credits, on an after-tax basis, that impact current results, which management views as unrelated to the Company's ongoing operations and performance. The after-tax basis of each special item is determined using the jurisdictional tax rate of where the expense or benefit occurred. "Adjusted income from continuing operations per diluted share" (Adjusted EPS) is defined as adjusted income from continuing operations divided by diluted weighted average common shares outstanding. We believe that adjusted income from continuing operations and adjusted EPS are useful to investors and other users of our financial statements in evaluating ongoing operating profitability, as well as in evaluating operating performance in relation to our competitors. The following table includes reconciliations of income from continuing operations to adjusted income from continuing operations. Three Months Ended Nine Months Ended September 26, October 2, September 26, October 2, 2021 2020 2021 2020
Income (loss) from continuing operations attributable to
$ 86.6
- 107.6 39.1 88.3
Tax-related special items(b) (4.7) (0.1) 2.9 (33.3)
Restructuring costs, net of tax benefit of
3.0 10.6 6.1 34.0
Asset impairment charges, net of tax benefit of
- - - 16.2
Other, net of tax (benefit) expense of (
0.5 1.4 (0.8) 4.0
Adjusted income from continuing operations $ 85.4 $ 1.00 $ (0.55) $ 2.45 $ 0.94 Adjusted EPS$ 0.99 $ 0.82 $ 2.99 $ 2.19 (a)See Note 19, Commitments and Contingencies , for further information. (b)Tax-related special items primarily reflect the impacts of valuation allowances. (c)Asset impairment charges are related to a business within IP that primarily serves the global upstream oil and gas market. (d)Other special items for the three- and nine-month periods of 2021 include accelerated amortization of an intangible asset. The nine-month period also includes a benefit from the finalization of theU.S. qualified pension plan termination. Other special items for the three- and nine-month periods of 2020 primarily include costs associated with the termination ofU.S. qualified pension plan. 34
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RECENT ACCOUNTING PRONOUNCEMENTS See Note 2, Recent Accounting Pronouncements , to the Consolidated Condensed Financial Statements for information on recent accounting pronouncements. CRITICAL ACCOUNTING ESTIMATES The preparation of the Company's financial statements, in conformity with accounting principles generally accepted inthe United States of America , requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. The Company believes the most complex and sensitive judgments, because of their significance to the Consolidated Condensed Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2020 Annual Report describes the critical accounting estimates that are used in the preparation of the Consolidated Condensed Financial Statements. Actual results in these areas could differ from management's estimates. There have been no material changes concerning the Company's critical accounting estimates as described in our 2020 Annual Report .
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