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. Several of the plans require us to match a percentage of the employee contributions up to certain limits. Company contributions charged to income amounted to $15.3, $13.5, and $8.2 for 2013, 2012 and 2011, respectively.

At the Distribution Date, the ITT Corporation Retirement Savings Plan for Salaried Employees was created, which increased Company contributions from a maximum of 3.5% of base pay to 6% or 7%, depending on age and years of service, of total eligible pay which includes base pay, overtime and qualified bonuses. Additionally, for five years subsequent to the Distribution Date, the Company will provide transition credits to certain employees up to 5% of eligible pay.

The ITT Stock Fund, an investment option under the ITT Corporation Retirement Savings Plan for Salaried Employees and the ITT Hourly Savings 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 0.3 shares of ITT common stock at December 31, 2013.

Defined Benefit Plans

ITT sponsors several defined benefit pension plans which have approximately 2,400 active participants; however, most of these plans have been closed to new participants for several years. As of December 31, 2013, of our total projected benefit obligation, the ITT Pension Plan for Bargaining Unit Employees Seneca Falls represented 35%, the ITT Consolidated Hourly Pension Plan represented 38%, other U.S. plans represented 4% and international pension plans represented 23%. The U.S. plans are generally for hourly employees with a flat dollar benefit formula based on years of service. 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 eligible U.S. employees upon retirement. In some cases, the plan is still open to new employees, but for the majority of our businesses these plans are closed to new participants. The majority of the liability pertains to retirees with postretirement medical insurance.

During 2013, management approved changes to certain of our defined benefit pension and postretirement plans, including the merging of plans and the elimination of future benefit accruals for plan participants as of December 31, 2013. These changes resulted in a decrease to ITT's net postretirement liability of $23.3 and a curtailment loss of $1.2. Future defined contribution plan changes were also approved increasing Company contributions for most U.S. hourly employees to a maximum of 6.0% of total eligible pay.

Balance Sheet Information

Amounts recognized as assets or liabilities in the Consolidated Balance Sheets for postretirement benefit plans reflect the funded status. 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 Sheet as of December 31, 2013 and 2012.



	2013									2012
	Pension			Other Benefits			Total			Pension			Other Benefits			Total
Fair value of plan assets	$	268.8		$	9.2		$	278.0		$	249.1		$	7.9		$	257.0
Projected benefit obligation	366.0			166.6			532.6			387.0			213.0			600.0
Funded status	$	(97.2	)	$	(157.4	)	$	(254.6	)	$	(137.9	)	$	(205.1	)	$	(343.0	)
Amounts reported within:
Non-current assets	$	1.9		$	—		$	1.9		$	—		$	—		$	—
Accrued liabilities	(4.8		)	(8.4		)	(13.2		)	(4.2		)	(8.5		)	(12.7		)
Non-current liabilities	(94.3		)	(149.0		)	(243.3		)	(133.7		)	(196.6		)	(330.3		)

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 at December 31, 2013 and 2012.



	2013								2012
	Pension		Other Benefits			Total			Pension		Other Benefits			Total
Net actuarial loss	$	126.9	$	39.4		$	166.3		$	175.7	$	75.0		$	250.7
Prior service cost (benefit)	2.8		(22.2		)	(19.4		)	4.8		(3.7		)	1.1
Total	$	129.7	$	17.2		$	146.9		$	180.5	$	71.3		$	251.8

The following table provides a rollforward of the projected benefit obligations for our U.S. and international pension plans for the years ended December 31, 2013 and 2012.



	2013									2012
	U.S.			Int’l			Total			U.S.			Int’l			Total
Change in benefit obligation
Benefit obligation – January 1	$	303.6		$	83.4		$	387.0		$	277.8		$	52.3		$	330.1
Service cost	4.9			1.7			6.6			4.8			1.0			5.8
Interest cost	12.1			2.5			14.6			12.9			2.5			15.4
Amendments	0.1			—			0.1			—			—			—
Actuarial (gain) loss	(22.9		)	(1.8		)	(24.7		)	24.2			14.8			39.0
Benefits and expenses paid	(16.6		)	(3.2		)	(19.8		)	(16.1		)	(3.1		)	(19.2		)
Assumed in acquisition	—			—			—			—			15.0			15.0
Foreign currency translation	—			2.2			2.2			—			0.9			0.9
Benefit obligation – December 31	$	281.2		$	84.8		$	366.0		$	303.6		$	83.4		$	387.0

The following table provides a rollforward of the projected benefit obligations for our other employee-related defined benefit plans for the years ended December 31, 2013 and 2012.



	2013			2012
Change in benefit obligation
Benefit obligation – January 1	$	213.0		$	191.8
Service cost	2.9			2.5
Interest cost	8.3			9.5
Amendments	(19.0		)	(3.1		)
Actuarial (gain) loss	(30.4		)	22.0
Benefits paid	(8.2		)	(9.7		)
Benefit obligation – December 31	$	166.6		$	213.0

The following table provides a rollforward of the pension plan assets and the funded status for our U.S. and international pension plans for the years ended December 31, 2013 and 2012.



	2013									2012
	U.S.			Int’l			Total			U.S.			Int’l			Total
Change in plan assets
Plan assets – January 1	$	247.1		$	2.0		$	249.1		$	182.3		$	2.0		$	184.3
Actual return on plan assets	35.4			0.1			35.5			22.6			0.1			22.7
Employer contributions	0.9			2.8			3.7			58.3			3.0			61.3
Benefits and expenses paid	(16.6		)	(2.9		)	(19.5		)	(16.1		)	(3.1		)	(19.2		)
Plan assets – December 31	$	266.8		$	2.0		$	268.8		$	247.1		$	2.0		$	249.1
Funded status at end of year	$	(14.4	)	$	(82.8	)	$	(97.2	)	$	(56.5	)	$	(81.4	)	$	(137.9	)

The following table provides a rollforward of the other employee-related defined benefit plan assets and the funded status for the years ended December 31, 2013 and 2012.



	2013			2012
Change in plan assets
Plan assets – January 1	$	7.9		$	7.5
Actual return on plan assets	1.3			0.4
Employer contributions	8.2			9.7
Benefits paid	(8.2		)	(9.7		)
Plan assets – December 31	$	9.2		$	7.9
Funded status at end of year	$	(157.4	)	$	(205.1	)

The accumulated benefit obligation for all defined benefit pension plans was $363.0 and $383.7 at December 31, 2013 and 2012, respectively. The following table provides information for pension plans with an accumulated benefit obligation in excess of plan assets.



	2013		2012
Projected benefit obligation	$	237.7	$	387.0
Accumulated benefit obligation	234.6		383.7
Fair value of plan assets	138.6		249.1

Income Statement Information

The following table provides the components of net periodic postretirement cost and other amounts recognized in other comprehensive loss for each of the years ended December 31, 2013, 2012 and 2011 as they pertain to our defined benefit pension plans.



	2013									2012									2011
	U.S.			Int’l			Total			U.S.			Int’l			Total			U.S.			Int’l			Total
Net periodic postretirement cost
Service cost	$	4.9		$	1.7		$	6.6		$	4.8		$	1.0		$	5.8		$	5.6		$	0.9		$	6.5
Interest cost	12.1			2.5			14.6			12.9			2.5			15.4			13.4			2.5			15.9
Expected return on plan assets	(19.5		)	(0.1		)	(19.6		)	(18.2		)	(0.1		)	(18.3		)	(18.9		)	(0.1		)	(19.0		)
Amortization of net actuarial loss (gain)	8.3			0.6			8.9			6.5			(0.2		)	6.3			3.7			(0.1		)	3.6
Amortization of prior service cost	0.8			—			0.8			0.9			—			0.9			1.2			—			1.2
Net periodic postretirement cost	6.6			4.7			11.3			6.9			3.2			10.1			5.0			3.2			8.2
Effect of curtailment / Special termination benefit	1.2			—			1.2			—			—			—			2.5			—			2.5
Total net periodic postretirement cost	7.8			4.7			12.5			6.9			3.2			10.1			7.5			3.2			10.7
Other changes in plan assets and benefit obligations recognized in other comprehensive loss
Net actuarial (gain) loss	(40.0		)	(1.8		)	(41.8		)	19.8			14.8			34.6			51.6			(1.1		)	50.5
Amortization of net actuarial (loss) gain	(8.3		)	(0.6		)	(8.9		)	(6.5		)	0.2			(6.3		)	(3.7		)	0.1			(3.6		)
Amortization of prior service cost	(0.8		)	—			(0.8		)	(0.9		)	—			(0.9		)	(2.8		)	—			(2.8		)
Foreign currency translation	—			0.5			0.5			—			0.4			0.4			—			—			—
Total change recognized in other comprehensive loss	(49.1		)	(1.9		)	(51.0		)	12.4			15.4			27.8			45.1			(1.0		)	44.1
Total impact from net periodic postretirement cost and changes in other comprehensive loss	$	(41.3	)	$	2.8		$	(38.5	)	$	19.3		$	18.6		$	37.9		$	52.6		$	2.2		$	54.8

Additionally, during 2011, ITT recorded expenses of approximately $15.3 related to the participation of ITT employees in the former U.S. ITT Salaried Retirement Plan (SRP). In connection with the Distribution, Exelis became the plan sponsor of the SRP and assumed all assets and liabilities of the plan. ITT's U.S. salaried employees ceased to accrue retirement benefits under the SRP and all benefits accrued as of the Distribution Date were frozen.



	2013			2012			2011
Net periodic postretirement cost
Service cost	$	2.9		$	2.5		$	1.8
Interest cost	8.3			9.5			9.5
Expected return on plan assets	(0.6		)	(0.5		)	(0.6		)
Amortization of net actuarial loss	4.3			4.6			2.6
Amortization of prior service credit	(0.4		)	(0.1		)	(0.1		)
Total net periodic postretirement cost	14.5			16.0			13.2
Other changes in plan assets and benefit obligations recognized in other comprehensive loss
Net actuarial (gain) loss	(31.1		)	22.1			14.5
Prior service credit	(19.0		)	(3.1		)	—
Amortization of net actuarial loss	(4.3		)	(4.6		)	(2.6		)
Amortization of prior service credit	0.4			0.1			0.1
Total changes recognized in other comprehensive loss	(54.0		)	14.5			12.0
Total impact from net periodic postretirement cost and changes in other comprehensive loss	$	(39.5	)	$	30.5		$	25.2

The following table provides the estimated net actuarial loss and prior service cost that is expected to be amortized from accumulated other comprehensive income into net periodic postretirement cost during 2014.



	Pension		Other Benefits			Total
Net actuarial loss	$	6.6	$	2.3		$	8.9
Prior service cost (credit)	0.6		(6.0		)	(5.4		)
Total	$	7.2	$	(3.7	)	$	3.5

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. Assumptions are reviewed annually and adjusted as necessary. The actuarial assumptions are based on the provisions of the applicable accounting pronouncements, review of various market data and discussion with our external advisors. 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 defined benefit pension plans.



	2013				2012
	U.S.		Int’l		U.S.		Int’l
Obligation Assumptions:
Discount rate	4.8	%	3.2	%	4.1	%	3.1	%
Rate of future compensation increase	N/A		3.4	%	N/A		3.2	%
Cost Assumptions:
Discount rate	4.1	%	3.1	%	4.8	%	4.8	%
Expected return on plan assets	8.0	%	4.7	%	8.0	%	4.7	%

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



	2013		2012
Obligation Assumptions:
Discount rate	4.7	%	4.1	%
Cost Assumptions:
Discount rate	4.1	%	4.8	%
Expected return on plan assets	8.0	%	8.0	%

The assumed discount rates reflect our expectation of the present value of expected future cash payments for benefits at the measurement date. We base the discount rate assumption on investment yields of high-quality fixed income securities at the measurement date during the expected benefits payment period. The discount rates were determined by considering an interest rate yield curve comprised of high quality corporate bonds, with maturities generally between zero and thirty years. Annual benefit payments are then discounted to present value using this yield curve to develop a single-point discount rate matching the plan’s payment characteristics.

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 U.S. plans because the benefit formula is based on a years of service approach.

The expected long-term rate of return on assets reflects the expected returns for each major asset class in which the plans invest, the weight of each asset class in the target mix, the correlations among asset classes and their expected volatilities. Our expected return on plan assets is estimated by evaluating both historical returns and estimates of future returns based on our target asset allocation. Specifically, we estimate future returns based on independent estimates of asset class returns weighted by the target investment allocation.

Prior to the Distribution of Exelis and Xylem, the Company’s U.S. postretirement plans participated in a master trust that invested in asset classes that historically generated asset returns in excess of the expected long-term rate of return on plan assets. With the distribution of certain postretirement benefit plans and their respective plan assets to Exelis and Xylem, we developed a new target asset allocation that is expected to generate a lower level of returns on plan assets than were realized in the past. Based on this approach, in 2012 our weighted average estimate of the long-term annual rate of return on assets for pension plans was reduced to 8%. For postretirement plans that participate in the current master trust and participated in the master trust distributed to Exelis, the chart below shows actual returns compared to the expected long-term returns for our postretirement plans that were utilized in the calculation of the net periodic postretirement cost for each respective year.



	2013		2012		2011
Expected rate of return on plan assets	8.0	%	8.0	%	9.0	%
Actual rate of return on plan assets	14.2	%	11.1	%	(3.2	)%

For the recognition of net periodic postretirement cost, the calculation of the expected return on plan assets is generally derived using a market-related value of plan assets based on average asset values at the measurement date over the last five years. The use of fair value, rather than a market-related value, of plan assets could materially affect net periodic postretirement cost.

The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 8.0% for pre-age 65 retirees and 6.3% for post-age 65 retirees for 2014, decreasing ratably to 4.5% in 2021. Increasing the health care trend rates by one percent per year would have the effect of increasing the benefit obligation by $18.2 and the aggregate annual service and interest cost components by $2.0. A decrease of one percent in the health care trend rate would reduce the benefit obligation by $15.6 and the aggregate annual service and interest cost components by $1.6. 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.

Investment Policy

The investment strategy for managing worldwide postretirement benefit plan assets is to seek an optimal rate of return relative to an appropriate level of risk for each plan. Investment strategies vary by plan, depending on the specific characteristics of the plan, such as plan size and design, funded status, liability profile and legal requirements.

Substantially all of the postretirement benefit plan assets are managed on a commingled basis in a master investment trust. With respect to the master investment trust, the Company allows itself broad discretion to invest tactically to respond to changing market conditions, while staying reasonably within the target asset allocation ranges prescribed by its investment guidelines. In making these asset allocation decisions, the Company takes into account recent and expected returns and volatility of returns for each asset class, the expected correlation of returns among the different investments, as well as anticipated funding and cash flows. To enhance returns and mitigate risk, the Company diversifies its investments by strategy, asset class, geography and sector.

The following table provides the allocation of plan assets held in the master investment trust by asset category, as of December 31, 2013 and 2012, and the related targeted asset allocation ranges by asset category.



	2013		2012		Target Allocation Range
U.S. equities	37	%	35	%	30-40 %
International equities	30	%	29	%	20-40 %
Fixed income	32	%	35	%	25-45 %
Cash and other	1	%	1	%	0-5 %

The strategies and allocations of plan assets outside of the U.S. are managed locally and may differ significantly from those in the U.S. In general and as of December 31, 2013, non-U.S. plan assets of approximately $2.0 are managed closely to their strategic allocations.

Fair Value of Plan Assets

In measuring plan assets at fair value, a fair value hierarchy is applied which categorizes and prioritizes the inputs used to estimate fair value into three levels. The fair value hierarchy is based on maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value. Classification within the fair value hierarchy is based on the lowest level input that is significant to the fair value measurement. The three levels of the fair value hierarchy are defined as follows:


•	Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

•

Level 2 inputs are other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices (in non-active markets or in active markets for similar assets or liabilities), inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.


•	Level 3 inputs are unobservable inputs for the assets or liabilities.

In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from the pricing service, the Company has evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value, including net asset value (NAV). Additionally, in certain circumstances, the Company may adjust NAV reported by an asset manager when sufficient evidence indicates NAV is not representative of fair value.

The following is a description of the valuation methodologies and inputs used to measure fair value for major categories of investments.


•	Equities – Open ended mutual funds, collective trusts and commingled funds are measured at NAV. These funds are generally classified within Level 2 of the fair value hierarchy.

•

Fixed income – U.S. government securities are generally valued using quoted prices of securities with similar characteristics. Corporate bonds and notes are generally valued by using pricing models (e.g., discounted cash flows), quoted prices of securities with similar characteristics or broker quotes. Fixed income securities are generally classified in Level 2 of the fair value hierarchy. Other employee benefit plan assets include an investment in a structured security valued using broker quotes. Due to the significance of unobservable inputs involved in the broker quote, the investment is classified within Level 3 of the fair value hierarchy.

The following table provides the fair value of plan assets held by our postretirement benefit plans, at December 31, 2013 and 2012, by asset class.



	Pension				Other Benefits
2013	Total		Level 2		Total		Level 3
Equities:
U.S.	$	98.2	$	98.2	$	—	$	—
International	56.6		56.6		—		—
Emerging Markets	25.5		25.5		—		—
Fixed income	85.0		85.0		9.2		9.2
Cash and other	3.5		3.5		—		—
Total	$	268.8	$	268.8	$	9.2	$	9.2



	Pension				Other Benefits
2012	Total		Level 2		Total		Level 3
Equities:
U.S.	$	86.9	$	86.9	$	—	$	—
International	46.0		46.0		—		—
Emerging Markets	26.2		26.2		—		—
Fixed income	86.1		86.1		7.9		7.9
Cash and other	3.9		3.9		—		—
Total	$	249.1	$	249.1	$	7.9	$	7.9

There have been no significant realized or unrealized gains and losses, purchases, sales, settlements or transfers of assets within our other employee-related benefit plans measured using significant unobservable inputs (Level 3).

Contributions

While we make contributions to our postretirement benefit plans when considered necessary or advantageous to do so, the minimum funding requirements established by local government funding or taxing authorities, or established by other agreements, may influence future contributions. Funding requirements under IRS rules are a major consideration in making contributions to our post-retirement plans. In addition, we fund certain of our international pension plans in countries where funding is allowable and tax-efficient. During 2013 and 2012, we contributed $11.9 and $71.0 to our postretirement benefit plans, respectively, of which $0.9 and $58.3 was to U.S. pension plans.

We anticipate making contributions to our global postretirement plans of $15.0 during 2014, of which $1.8 has been made in the first quarter.

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.



	U.S. Pension		Int’l Pension		Other Benefits
2014	$	16.3	$	5.0	$	10.5
2015	16.7		4.2		10.7
2016	17.2		4.0		10.9
2017	17.7		4.3		11.0
2018	18.1		4.1		11.0
2019 – 2022	95.4		22.1		53.2