COMMITMENTS AND CONTINGENCIES

From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses. Some of these proceedings allege damages relating to environmental exposures, intellectual property matters, copyright infringement, personal injury claims, employment and employee benefit matters, government contract issues and commercial or contractual disputes and acquisitions or divestitures. We will continue to defend vigorously against all claims. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information including our assessment of the merits of the particular claim, as well as our current reserves and insurance coverage, we do not expect that such legal proceedings will have a material adverse impact on our financial statements, unless otherwise noted below.

Asbestos Matters

Subsidiaries of ITT, including ITT LLC (f/k/a ITT Corporation) and Goulds Pumps LLC (f/k/a Goulds Pumps, Inc.), have been sued, along with many other legacy companies in product liability lawsuits alleging personal injury due to asbestos exposure. These claims generally allege that certain products sold by our subsidiaries prior to 1985 contained a part manufactured by a third party (e.g., a gasket) which contained asbestos. To the extent these third-party parts may have contained asbestos, it was encapsulated in the gasket (or other) material and was non-friable. As of September 30, 2016, there were approximately 30 thousand pending claims against ITT subsidiaries, filed in various state and federal courts alleging injury as a result of exposure to asbestos. Activity related to these asserted asbestos claims during the period was as follows:



For the Nine Months Ended September 30 (in thousands)	2016
Pending claims – Beginning	37
New claims	3
Settlements	(1	)
Dismissals	(9	)
Pending claims – Ending	30

Frequently, plaintiffs are unable to identify any ITT LLC or Goulds Pumps LLC products as a source of asbestos exposure. Our experience to date is that a majority of resolved claims are dismissed without any payment from ITT subsidiaries. Management believes that a large majority of the pending claims have little or no value. In addition, because claims are sometimes dismissed in large groups, the average cost per resolved claim can fluctuate significantly from period to period. ITT expects more asbestos-related suits will be filed in the future, and ITT will continue to aggressively defend or seek a reasonable resolution, as appropriate.

Asbestos litigation is a unique form of litigation. Frequently, the plaintiff sues a large number of defendants and does not state a specific claim amount. After filing complaint, the plaintiff engages defendants in settlement negotiations to establish a settlement value based on certain criteria, including the number of defendants in the case. Rarely do the plaintiffs seek to collect all damages from one defendant. Rather, they seek to spread the liability, and thus the payments, among many defendants. As a result of this and other factors, the Company is unable to estimate the maximum potential exposure to pending claims and claims estimated to be filed over the next 10 years.

Estimating our exposure to pending asbestos claims and those that may be filed in the future is subject to significant uncertainty and risk as there are multiple variables that can affect the timing, severity, quality, quantity and resolution of claims. Any predictions with respect to the variables impacting the estimate of the asbestos liability and related asset are subject to even greater uncertainty as the projection period lengthens. In light of the uncertainties and variables inherent in the long-term projection of the Company's asbestos exposures, although it is probable that the Company will incur additional costs for asbestos claims filed beyond the next 10 years, which additional costs may be material, we do not believe there is a reasonable basis for estimating those costs at this time.

The asbestos liability and related receivables reflect management's best estimate of future events. However, future events affecting the key factors and other variables for either the asbestos liability or the related receivables could cause actual costs or recoveries to be materially higher or lower than currently estimated. Due to these uncertainties, as well as our inability to reasonably estimate any additional asbestos liability for claims which may be filed beyond the next 10 years, it is difficult to predict the ultimate cost of resolving all pending and unasserted asbestos claims. We believe it is possible that future events affecting the key factors and other variables within the next 10 years, as well as the cost of asbestos claims filed beyond the next 10 years, net of expected recoveries, could have a material adverse effect on our financial statements.

Income Statement Costs/Benefit

In the third quarter of each year, we conduct our annual remeasurement with the assistance of outside consultants in order to review and update the underlying assumptions used in our asbestos liability and related asset estimates. In each remeasurement, the underlying assumptions are updated based on our actual experience since our previous annual remeasurement, and we reassess the appropriate reference period used in determining each assumption and our expectations regarding future conditions, including inflation.

Based on the results of this study, in the third quarter of 2016, we decreased our estimated undiscounted asbestos liability, including legal fees, by $75.9, reflecting a decrease in costs the company estimates will be incurred to resolve all pending claims, as well as unasserted claims estimated to be filed over the next 10 years. The decrease in our estimated liability is a result of several developments, including favorable experience in dismissal rates and settlement values. These favorable factors were offset, in part, by an increase in number of cases expected to be adjudicated. Further, in the third quarter of 2016, the Company increased its estimated asbestos-related assets by $5.9, primarily due to an increase in expected recoveries due to a favorable court decision.

During each of the first and second quarters of 2016, we entered into a settlement agreement with an insurer to settle responsibility for multiple insurance claims. Under the terms of the settlements, the insurers agreed to a payment or specified series of payments to a QSF, resulting in a benefit of $2.6 and a loss of $4.7, respectively.

During the second quarter of 2015, the Company changed its asbestos defense strategy and retained a single firm to defend the Company in all asbestos litigation. This long-term strategy streamlined the Company’s management of cases and significantly reduced defense costs. Our agreement with the defense firm was initially limited to a certain set of claims and the remaining claims were expected to transition within the next four years; however, ITT was able to transition the remaining claims during the second quarter of 2016 as a result of the settlement described above. Based on the terms of the agreement, the Company adjusted its asbestos liability and related assets and recognized a net benefit of $4.9 and $100.7 during the nine months ended September 30, 2016 and 2015, respectively, for the revised estimate of the cost to defend pending claims and claims expected to be filed over the next 10 years.

In addition to the charges associated with our annual remeasurement, we record a net asbestos charge each quarter to maintain a rolling 10-year forecast period. The table below summarizes the total net asbestos charges for the three and nine months ended September 30, 2016 and 2015.



	Three Months						Nine Months
For the Periods Ended September 30	2016			2015			2016			2015
Asbestos provision	$	13.7		$	15.7		$	44.3		$	47.0
Net asbestos remeasurement benefit	(81.8		)	(44.8		)	(81.8		)	(44.8		)
Defense cost adjustment	—			—			(4.9		)	(100.7		)
Settlement agreements	—			(1.2		)	2.1			(1.2		)
Asbestos-related benefit, net	$	(68.1	)	$	(30.3	)	$	(40.3	)	$	(99.7	)

Changes in Financial Position

The following table provides a rollforward of the estimated asbestos liability and related assets for the nine months ended September 30, 2016 and 2015.



	2016									2015
For the Nine Months Ended September 30	Liability			Asset			Net			Liability			Asset			Net
Beginning balance	$	1,042.8		$	412.0		$	630.8		$	1,223.2		$	476.4		$	746.8
Asbestos provision	51.6			7.3			44.3			54.8			7.8			47.0
Asbestos remeasurement	(75.9		)	5.9			(81.8		)	(52.7		)	(7.9		)	(44.8		)
Defense costs adjustment	(4.9		)	—			(4.9		)	(124.2		)	(23.5		)	(100.7		)
Settlement agreements	—			(2.1		)	2.1			—			1.2			(1.2		)
Net cash activity	(61.8		)	(37.3		)	(24.5		)	(52.3		)	(37.1		)	(15.2		)
Ending balance	$	951.8		$	385.8		$	566.0		$	1,048.8		$	416.9		$	631.9
Current portion	$	76.1		$	66.0					$	87.6		$	74.5
Noncurrent portion	$	875.7		$	319.8					$	961.2		$	342.4

Environmental

In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and site remediation. These sites are in various stages of investigation or remediation and in many of these proceedings our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites formerly or currently owned or operated by ITT, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation or remediation. These sites include instances where we have been identified as a potentially responsible party under federal and state environmental laws and regulations.

The following table provides a rollforward of the estimated environmental liability for the nine months ended September 30, 2016 and 2015.



For the Nine Months Ended September 30	2016			2015
Environmental liability - beginning balance	$	82.6		$	89.9
Change in estimates for pre-existing accruals
Continuing operations	2.4			1.4
Discontinued operations	0.7			(2.8		)
Net cash activity	(10.2		)	(9.1		)
Foreign currency	—			(0.4		)
Environmental liability - ending balance	$	75.5		$	79.0

In the fourth quarter of 2015, ITT entered into a settlement agreement with one of our insurance providers whereby the provider agreed to pay the net present value of the remaining limits of the policy amounting to approximately $34.2. In the first quarter of 2016, the Company received $2.0 in cash and $32.2 was deposited into a QSF which can be drawn upon to pay certain future environmental expenses associated with remediation sites covered under the policy, including sites owned by a former subsidiary of the Company. The Company recorded $23.0 of deferred income related to the settlement representing the excess of QSF monies over the probable liabilities associated with the covered remediation sites. In addition to the QSF asset, there is a receivable of $2.0 from other third parties for reimbursement of environmental costs. The total environmental-related asset as of September 30, 2016 and December 31, 2015 was $34.1 and $12.8, respectively.

We are currently involved with 40 active environmental investigation and remediation sites. At September 30, 2016, we have estimated the potential high-end liability range of environmental-related matters to be $127.7.

As actual costs incurred at identified sites in future periods may vary from our current estimates given the inherent uncertainties in evaluating environmental exposures, management believes it is possible that the outcome of these uncertainties may have a material adverse effect on our financial statements.

Other Matters

The Company is responding to a civil subpoena from the Department of Defense, Office of the Inspector General, which was issued in the second quarter of 2015 as part of an investigation being led by the Civil Division of the U.S. Department of Justice. The subpoena and related investigation involve certain products manufactured by the Company’s Interconnect Solutions segment that are purchased or used by the U.S. government. The Company is cooperating with the government and is unable to estimate the timing or outcome of this matter.