ITT Inc.

and shorter lead times. Regarding our other capital deployment priorities, we increased our dividend rate by 30% after 15% the year before. This represents an annual dividend yield of approximately 1%. Our share repurchases this quarter will drive a 1% reduction in our weighted average share count for the full year. We will continue to drive repurchase activity in the future under our existing $500 million authorization. And lastly, as we discussed last quarter, we divested our legacy as best as liability to portfolio company of Warburg Pincus. This has reduced ITT's risk profile and allows us additional capital flexibility. To accelerate our M&A activity, we're investing in our capabilities. I'm happy to welcome Bartek Makowiecki to ITT. Bartek leads strategy development and will drive all merger and acquisition activities, including ITT's newly launched corporate venture vehicle. On this front, we made one initial venture investment in Q3 for connectors-related assets, and we have a growing pipeline of leading technologies to enhance our existing product portfolio. We have stepped up our M&A pipeline and cultivation activities, and are looking forward to bringing great companies into ITT in the near future. Let me now turn the call over to Emmanuel on slide six to provide further color on our third quarter results and 2021 outlook. Emmanuel, over to you.

Thank you, Luca, and good morning, everyone. As you heard, motion technologies again delivered a solid performance driven by strength in the friction aftermarkets. In our OE business, frictions market outperformance was over 1,000 basis points this quarter, significantly above our historical average, despite large declines in global auto production levels. For all of ITT, we estimate that the supply chain disruptions deducted approximately 350 basis points from our sales growth this quarter. However, we expect to recover a majority of the pushed out sales in the next few quarters. We also saw double-digit organic sales growth in IP short cycle and continued strong demand for industrial connectors. And, similar to what we saw in Q2, demand in commercial aerospace is increasing, as exhibited by the 70% growth in aerospace orders. On segment margin, CCT grew margin by 300 basis points and IP by 150 basis. while MT declined 110 basis points, mainly due to raw material inflation. We overcame a 470 basis point inflation headwind to drive 60 basis points of adjusted segment margin expansion. On adjusted EPS, despite the challenges Luca highlighted in his introduction, we drove a 42 cent operational improvement year over year through a combination of higher sales volumes, strategic pricing actions, and productivity across the enterprise. We continue to realize benefits from prior restructuring, including our 2020 cost action plan, and we're carefully managing the unwinding of temporary cost actions taken in 2020 to ensure these costs align with the pace of ITT's recovery. Turning to cash, we achieved an adjusted trailing 12-month free cash flow margin of more than 11% this quarter due to higher segment operating income. On a year-to-date basis, excluding the asbestos payment in Q2, adjusted free cash flow declined by, driven by strategic investments in working capital. Let's turn to slide seven. As I mentioned earlier, our performance this quarter was largely operationally driven. our year-over-year growth was significantly impacted by 23-cent headwind related to raw material inflation and a 9-cent headwind from prior environmental settlements and temporary cost actions. Partially offsetting these items was a roughly 4-cent benefit from foreign currency. We also realized a slightly lower effective tax rate versus the prior year, which drove a 2-cent benefit. This was due to effective tax planning strategies related to our patent portfolio abroad. We now expect our four-year effective tax rate to be approximately 20.75%. Let's turn to slide eight to look further at the segments. Motion Technologies Q3 organic revenue growth of 20% was primarily driven by strength in the aftermarket as the friction OE business declined slightly given the supply chain headwinds affecting OEMs. This and the raw material inflation also impacted operating margin as we had signaled last quarter. The friction team is working diligently with our customers to drive equitable price recovery action given the significant inflation we're seeing today. We were able to pass price increases onto our customers this quarter and manage the impact of contractual price concessions. However, there is much more to be done to compensate for the inflation we are experiencing. Our Motion Technologies team will continue to methodically execute incremental pricing actions in Q4 and 2022. We also experienced significant production inefficiencies resulting from large variations in customer orders patterns. However, as with last quarter, our friction OE business executed very well, with over 99% on-time performance across all friction plants. In challenging economic conditions, friction continues to be widely recognized as the highest quality and most reliable supplier in the market. And in KONI, we continue to improve our quality performance and remain deeply focused on serving our customers amidst supply chain disruptions. Finally, we also continued to evaluate strategic footprint actions and announced one additional plan closure in Europe this quarter, which will drive further cost competitiveness within our rail business. For industrial process, revenue was up 8% organically. This was driven primarily by short cycle demand across parts, valves, and services. Serving our customers this quarter required tremendous focus, coordination, and effort by the IP team to overcome supply chain disruptions. Our all-hands-on-deck approach made this happen. As we signaled last quarter, we see the project funnel continuing to grow, and IP was able to capture a significant share as evidenced by the 36% organic order growth in projects this quarter. we see this constructive momentum continuing and expect to deliver similar year-over-year growth in Q4. IP margin expanded 150 basis points to 15.6%, with an incremental margin of 33%. This was driven by higher sales volume, favorable mix given the higher proportion of short cycle sales, productivity and price, partially offset by labor and material inflation, as well as higher freight charges, given shipping delays. Similar to MT, we're making progress on footprint optimization and have executed one planned closure during the quarter with another planned in Brazil in Q4. In connect and control technologies, we continued to drive a recovery from both a sales and margin perspective. With incremental margin of 35%, CCT generated segment margin above 17%. This is a 300 basis points improvement over prior year. The margin expansion was the result of continued volume leverage and strong productivity, including restructuring savings, despite inflationary headwinds. This margin profile is approaching pre-pandemic levels, but with approximately $20 million less in revenue. While there is much work to be done to further solidify this performance, we are very encouraged by the work the team has done thus far, and it gives us confidence in the future prospects at CCT. Let's now turn to slide nine to look at the growth in orders in the third quarter. As you can see, our teams have done a good job capturing the demand, leading to solid order growth in Q2 and Q3. A few highlights to note. First, we're continuing to win new awards on conventional OE, hybrid, and new electric vehicle platforms in MT. It is important to note that our ability to win a majority of the EV competitions that we bid on is key to creating the long-term growth platform that Luca talked about. Second, in industrial process, the strength we anticipated in short cycle is materializing. but even more encouraging is the order growth and continuing recovery in long cycle pump projects. Both the number and the size of orders in the funnel is increasing, and we have seen a steady sequential order increase throughout 2021. This is the result of our relentless focus on customer centricity and operational excellence, which is increasingly recognized by our OE customers. Third, CCT orders were up 40% organically on the strength of our connector portfolio, particularly in North America. The commercial connector performance, especially with our distribution partners, is encouraging, and we're working to replicate this strong momentum across all our customers. We also continue to see a gradual recovery in commercial aerospace, which will further bolster the sales growth in CCT over the next several years. CCT backlog is up 17% organically, or $40 million, since year end, with a book-to-bill of 1.06. This is a notable improvement for CCT since this time last quarter. With all this in mind, let's turn to slide 10 to discuss improvements in our four-year outlook. Through two quarters, we had raised our organic sales outlook by 600 basis points and adjusted EPS by 37 cents versus the midpoint of our original guidance. Given our strong performance, today we are again raising the midpoint of our adjusted EPS range by an additional six cents to reflect the stronger than anticipated results and lower tax rates. We're not anticipating any improvement in the market headwinds in the near term. Nevertheless, in 2021, we expect to comfortably exceed pre-pandemic adjusted EPS levels. As we look ahead to the fourth quarter, we expect revenue to be the strongest of the year thanks to IP and CCT. IP will grow revenue in the low single-digit range, while CCT will drive mid-10% revenue growth. Facing a tough comparison after a strong Q4 last year and the continued impact from constrained OEM demand, empty revenue will decline by mid-single digits in Q4. However, we expect to largely outperform the global auto markets. In total, this will drive approximately flat to slightly up organic revenue growth in Q4. From a segment margin standpoint, we expect all businesses to expand sequentially with CCT growing triple digits and IP building on its strong Q3 performance. Year over year, we expect segment margin to grow approximately 50 to 75 basis points. Because of an exceptionally strong Q4 last year, Q4 adjusted EPS will grow in the low single-digit range year over year, and this will drive four-year adjusted EPS above 2019. With that, let me pass it back to Luca.

Thanks, Emmanuel. Let me wrap it up. First, ITT has performed extremely well in a challenging climate. We fought through adversity, and we're winning in the market. Second, We have a resilient set of businesses that have demonstrated over and over again the ability to effectively manage multiple external factors while investing in long-term growth. We delivered strong growth in revenue and margin, while not all of our markets have fully recovered yet. Third, whilst we are continuing to invest for long-term growth and sustainability, our funnel of opportunities is increasing, And the growth in orders throughout 2021 will pave the way for continued outperformance. Lastly, we have deployed over 2.8 times our year-to-date adjusted free cash flow through our asbestos divestiture, dividends, and share repurchases. And we are increasing our focus on M&A. We are in a favorable position to execute acquisitions given our balance sheet strength. and we are growing our pipeline and expanding our target cultivation activity. As I said earlier, there is a lot to be excited about at ITT. As ever, it has been my pleasure speaking with you all this morning, and we will happily take your questions now. Catherine, please open the line for Q&A.