ITT INC

NOTE 16

POSTRETIREMENT BENEFIT PLANS

Defined Contribution Plans

Substantially all of ITT’s U.S. and certain international employees are eligible to participate in a defined contribution plan. ITT sponsors numerous defined contribution savings plans, which allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. Certain plans require us to match a portion of the employee contributions. Company contributions charged to expense amounted to $17.3, $16.5 and $14.5 for 2023, 2022 and 2021, respectively.

The ITT Stock Fund, an investment option in our U.S. based defined contribution plan, is considered an employee stock ownership plan and, as a result, participants in the ITT Stock Fund may receive dividends in cash or may reinvest such dividends into the ITT Stock Fund. The ITT Stock Fund held approximately 0.1 shares of ITT common stock at December 31, 2023.

Defined Benefit Plans

ITT currently sponsors a number of defined benefit pension plans, primarily outside of the U.S., which have approximately 970 active participants. As of December 31, 2023, international pension plans represented 87% of our total projected pension benefit obligation. There is one remaining U.S. pension plan, which is frozen to new participants. International plan benefits are primarily determined based on participant years of service, future compensation, and age at retirement or termination.

ITT also provides health care and life insurance benefits for certain unionized employees in the U.S. upon retirement. Nearly all of these plans are closed to new participants. The majority of the liability pertains to retirees with postretirement medical insurance.

Other Postretirement Employee Benefit (OPEB) Plan Amendment and Remeasurement

On July 31, 2022, management approved changes to a postretirement medical plan, covering certain unionized employees and retirees within our IP business. These changes closed the plan to new hires and, beginning in 2023, plan participants will receive a fixed contribution into a Health Reimbursement account. The plan amendment resulted in a decrease in our other postretirement benefit obligation and a prior service credit of $8.1 in 2022. The prior service credit was reflected in other comprehensive income and will be recognized into net income over approximately 10 years.

Balance Sheet Information

The following table provides a summary of the funded status of our postretirement benefit plans and the presentation of the funded status within our Consolidated Balance Sheets.

A portion of our projected benefit obligation includes amounts that have not yet been recognized as expense in our results of operations. Such amounts are recorded within accumulated other comprehensive loss until they are amortized as a component of net periodic postretirement cost.

The following table provides a summary of amounts recorded within accumulated other comprehensive loss.

The following tables provide a rollforward of the benefit obligation, plan assets and funded status for our U.S. and international pension plans and our other employee-related defined benefit plans.

(a)The actuarial gain in 2022 is primarily due to an increase in discount rates during the year.

The accumulated benefit obligation for all defined benefit pension plans was $82.5 and $77.5 as of December 31, 2023 and 2022, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets is included in the following table.

Statements of Operations Information

The following table provides the components of net periodic postretirement cost and other amounts recognized in other comprehensive loss as they pertain to our defined benefit pension plans.

(a)2021 includes income of $3.4 from a pricing adjustment associated with the 2020 termination and sale of the U.S. qualified pension plan.

The following table provides the components of net periodic postretirement cost and other amounts recognized in other comprehensive loss as they pertain to other employee-related defined benefit plans.

Postretirement Plan Assumptions

The determination of projected benefit obligations and the recognition of expenses related to postretirement benefit plans are dependent on various assumptions that are judgmental and developed in consultation with external advisors. Management develops each assumption using relevant Company experience in conjunction with market-related data for each individual country in which such plans exist. Periodically, the Company performs experience studies to validate certain actuarial assumptions such as age of retirement, rates of turnover, utilization of optional forms of payments. The actuarial assumptions are based on the provisions of the applicable accounting pronouncements, review of various market data and discussion with our external advisors. Assumptions are reviewed annually and adjusted as necessary. Changes in these assumptions could materially affect our financial statements.

The following table provides the weighted-average assumptions used to determine projected benefit obligations and net periodic postretirement cost as they pertain to our U.S. and non-U.S. defined benefit pension plans and other employee-related defined benefit plans.

The discount rate is used to calculate the present value of expected future benefit payments at the measurement date. The discount rate assumption is based on current investment yields of high-quality fixed income investments during the retirement benefits maturity period. The pension discount rate is determined by considering an interest rate yield curve comprising AAA/AA bonds, with maturities that are generally between zero and 30 years, developed by the plan's actuaries. Annual benefit payments are then discounted to present value using this yield curve to develop a single discount rate matching the plan's characteristics.

We estimate the service and interest components of net periodic benefit cost of the U.S. defined benefit plans by discounting the individual expected cash flows underlying the service cost and interest cost using the applicable spot rates from the yield curve used to discount the cash flows in measuring the benefit obligation.

The rate of future compensation increase assumption for foreign plans reflects our long-term actual experience and future and near-term outlook. The rate of future compensation increase assumption is not applicable for the U.S. plan because the plan is frozen.

The Company has updated the mortality assumption to reflect the most recent projection update.

The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 7.3% for pre-age 65 retirees and 6.3% for post-age 65 retirees for 2024, decreasing ratably to 4.5% in 2031. To the extent that actual experience differs from these assumptions, the effect will be amortized over the average future working life or life expectancy of the plan participants.

Fair Value of Plan Assets

As of December 31, 2023 and 2022, our plan assets were not material.

Contributions

Our postretirement plans are largely unfunded, and therefore plan contributions generally reflect required benefit payments. We fund certain of our international pension plans in countries where funding is allowable and tax-efficient. During 2023 and 2022, we contributed $4.5 and $3.9, respectively, to our global pension plans and we anticipate making contributions of approximately $6 during 2024.

We contributed $5.0 and $7.1 to our other employee-related defined benefit plans during 2023 and 2022, respectively. We estimate that the 2024 contributions to our other employee-related defined benefit plans will be approximately $6.

Estimated Future Benefit Payments

The following table provides 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.

NOTE 17

LONG-TERM INCENTIVE EMPLOYEE COMPENSATION

The 2011 Omnibus Incentive Plan (2011 Incentive Plan) was approved by shareholders and established in May 2011 to provide for the awarding of options on common shares and full value restricted common shares or units to employees and non-employee directors. As of December 31, 2023,36.5 shares were available for future grants under the 2011 Incentive Plan. The Company can make shares available for the exercise of stock options or vesting of restricted shares or units by purchasing shares in the open market.

Our long-term incentive plan (LTIP) awards are comprised of two components: restricted stock units (RSUs) and performance stock units (PSUs). The majority of RSUs and PSUs settle in shares; however RSUs and PSUs granted to certain international employees are settled in cash. We account for equity-settled RSUs and PSUs as equity-based compensation awards. We account for cash-settled RSUs and PSUs as liability-based awards. PSUs contain equally weighted performance conditions for total shareholder return (TSR) and return on invested capital (ROIC). PSUs vest based on predetermined performance metrics that align with the Company's stock price and financial performance following a three-year performance period and are subject to a payout factor which includes a maximum and minimum payout. PSUs are accounted for as two distinct awards, a TSR award and a ROIC award.

LTIP costs are primarily recorded within General and administrative expenses in our Consolidated Statements of Operations, at their grant date fair value over the requisite service period (typically three years) on a straight-line basis and are reduced by forfeitures as they occur.

The following table summarizes our share-based compensation expense associated with our LTIP awards.

The income tax benefit realized during 2023, 2022 and 2021 associated with exercised stock options and vested restricted stock was $0.9, $2.4 and $3.2, respectively.

As of December 31, 2023, there was $25.0 of total unrecognized compensation cost related to non-vested equity awards. This cost is expected to be recognized ratably over a weighted-average period of 1.8 years. Additionally, unrecognized compensation cost related to liability-based awards was $2.4, which is expected to be recognized ratably over a weighted-average period of 1.9 years.

The fair value of equity-settled RSUs is determined using the closing price of the Company’s common stock on the date of grant. The fair value of cash-settled RSUs is remeasured using the closing price of ITT's common stock at the end of each reporting period. Recipients do not have voting rights and do not receive cash dividends during the restriction period. Dividend equivalents on RSUs, which are subject to forfeiture, are accrued and paid in cash upon vesting of the RSU. If a recipient retires or is terminated other than for cause, a pro rata portion of the RSU may vest.

For PSUs, the fair value of the ROIC award is based on the closing price of ITT common stock on the date of grant less the present value of expected dividend payments during the vesting period. For ROIC awards granted in 2023, a dividend yield of 1.24% was assumed based on ITT's annualized dividend payment of $1.16 per share and the March 3, 2023 closing stock price of $93.83. The fair value of the ROIC award is fixed on the grant date; however, a probability assessment is performed each reporting period to estimate the likelihood of achieving the ROIC targets and the amount of compensation to be recognized.

The fair value of the TSR award is measured using a Monte Carlo simulation on the date of grant, measuring potential total shareholder return for ITT relative to the other companies in the S&P 400 Capital Goods Index (the TSR Performance Group). The expected volatility of ITT's stock price is based on the historical volatility of a peer group while expected volatility for the other companies in the TSR Performance Group is based on their own stock price history. For TSR awards granted in 2023, all volatility and correlation measures were based on three years of daily historical price data through March 3, 2023, corresponding to the three-year performance period of the award. As the grant date occurs after the beginning of the performance period, actual TSR performance between the beginning of the performance period (December average closing stock price) and the grant date was reflected in the valuation. For TSR awards granted in 2023, a dividend yield of 1.24% was assumed based on ITT's annualized dividend payment of $1.16 per share and the March 3, 2023 closing stock price of $93.83.

The table below provides a rollforward of our outstanding RSUs and PSUs.

The table below provides the number of our outstanding shares by award type. Cash-settled RSUs and PSUs outstanding were not material.

As of December 31, 2023, substantially all RSUs outstanding are expected to vest. As of December 31, 2023, the total number of PSUs expected to vest based on current performance estimates, including those vested but pending issuance, was 0.4.

Non-Qualified Stock Options

Prior to 2017, our LTIP award grants also included non-qualified stock options (NQOs). NQOs outstanding and exercisable were nominal as of December 31, 2023, and 0.1 as of both December 31, 2022 and 2021. As of December 31, 2023, there wereno options "out-of-the-money" and all options outstanding were fully vested. NQOs exercised of 0.1 during each of the years ended December 31, 2023, 2022 and 2021 resulted in cash proceeds of $0.6, $1.8 and $1.2, respectively.

Employee Stock Purchase Plan

We sponsor the ITT Inc. 2023 Employee Stock Purchase Plan (2023 ESPP), pursuant to which eligible employees may elect to contribute from 1% to 10% of their eligible compensation, which includes after-tax base salary and annual bonus, subject to certain income limits, to purchase shares of ITT's common stock. The adoption of the 2023 ESPP was approved by our shareholders at our 2023 Annual Shareholders Meeting. The aggregate number of shares of ITT’s stock authorized for issuance under the 2023 ESPP was 0.5.

Pursuant to the terms of the 2023 ESPP, employees may purchase stock under the 2023 ESPP at a price equal to 95% of ITT’s closing stock price on the purchase date. For the year ended December 31, 2023, no stock-based compensation expense was recorded in connection with the 2023 ESPP because the criteria of a non-compensatory plan in accordance with ASC 718, Compensation - Stock Compensation, were met.