ITT Corporation Form 10-Q Summary
Business Context and Reporting Period
ITT Corporation is a diversified manufacturer of engineered components and technology solutions serving energy, transportation and industrial markets. Reportable segments are Industrial Process, Motion Technologies, Interconnect Solutions and Control Technologies. This unaudited filing covers the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $601.9 million | $657.1 million | $1,818.8 million | $1,994.6 million |
| Gross profit | $194.9 million | $219.9 million | $607.8 million | $649.5 million |
| Gross margin | 32.4% | 33.5% | 33.4% | 32.6% |
| Operating income | $103.9 million | $119.7 million | $326.3 million | $222.5 million |
| Operating margin | 17.3% | 18.2% | 17.9% | 11.2% |
| Income from continuing operations | $96.5 million | $81.0 million | $275.8 million | $156.8 million |
| Net income attributable to ITT | $130.7 million | $80.3 million | $315.1 million | $150.8 million |
| Diluted EPS | $1.45 | $0.86 | $3.47 | $1.62 |
- Adjusted income from continuing operations was $56.9 million, or $0.63 per diluted share, in Q3 2015, compared with $61.7 million, or $0.66 per diluted share, in Q3 2014. For the nine months, adjusted income was $179.0 million, or $1.97 per diluted share, versus $174.5 million, or $1.88 per diluted share.
- Net cash provided by operating activities increased to $147.1 million for the first nine months, from $131.9 million in 2014. Adjusted free cash flow was $120.4 million, compared with $88.2 million.
- Capital expenditures were $64.2 million; investing cash outflow was $111.4 million, including the $53.5 million Hartzell Aerospace acquisition.
- Financing cash outflow was $90.2 million, including $83.9 million of share repurchases and $21.6 million of dividends paid. Cash decreased by $79.1 million to $504.9 million at September 30, 2015.
- Commercial paper outstanding was $10.5 million at a weighted-average interest rate of 0.68%. No amounts were outstanding under the $500 million revolving credit facility at quarter-end; the facility permits up to $700 million with additional commitments.
- Total assets were $3.478 billion and total liabilities were $2.111 billion. Shareholders’ equity was $1.367 billion.
- The quarterly dividend declared was $0.1183 per share, a 7.5% increase from the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 8.4%, primarily due to a $50.8 million unfavorable foreign-currency impact; organic revenue declined 1.8%. Nine-month revenue declined 8.8%, with organic revenue down 1.9%.
- Orders declined 23.0% in Q3, or 16.7% organically, reflecting weakness in oil and gas, industrial markets, aerospace aftermarket and connectors. Nine-month orders declined 9.4% organically.
- Motion Technologies was the strongest operating business on an organic basis, with Q3 organic revenue growth of 4.1%. Industrial Process organic revenue declined 0.7%, while Interconnect Solutions and Control Technologies declined 10.6% and 10.7%, respectively.
- Interconnect Solutions operating income fell 67.9% in Q3 and 62.9% for the nine months, driven by lower volumes, market weakness and operational disruptions related to the North American footprint transition.
- Industrial Process operating income increased 9.7% in Q3 and 18.8% for the nine months due to restructuring, Lean, sourcing and cost-control savings.
- The nine-month operating income comparison benefited materially from a $100.7 million net asbestos-related benefit recorded in Q2 2015. Q3 included a $30.3 million asbestos-related benefit versus $42.5 million in the prior year.
- The effective tax rate fell to 10.6% in Q3 and 16.1% for the nine months, from 31.9% and 28.8%, respectively, primarily due to settlement of a U.S. tax audit, recognition of previously unrecognized tax positions and other favorable international tax items.
- Restructuring costs were $17.8 million for the first nine months. The company expects approximately $6 million to $7 million of additional Industrial Process restructuring costs over the following three to six months.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide clear formal full-year financial guidance. Management described continued weakness in global industrial, oil and gas, connector, rail and certain aerospace markets, while citing automotive OEM platform wins, aftermarket demand, Lean initiatives and restructuring savings as offsets.
- Industrial Process backlog was $475.9 million at September 30, down 21.1% from December 31, 2014, reflecting lower project bookings, oil and gas weakness and capital-project delays.
- On October 5, 2015, ITT acquired Wolverine Automotive Holdings for $300 million net of cash acquired, funded partly with a $200 million borrowing under the revolving credit facility. Wolverine will be reported within Motion Technologies.
- Asbestos liability was $1.049 billion, with estimated insurance recoveries of $416.9 million and net exposure of $631.9 million. ITT estimates net asbestos cash outflows of $15 million to $25 million annually over the next five years, increasing to approximately $35 million to $45 million annually thereafter during the projection period.
- There were approximately 38,000 pending active asbestos claims. The company cannot reasonably estimate costs for claims filed beyond 2025 and warns that actual future costs or recoveries could materially differ from estimates.
- ITT faces 53 active environmental investigation or remediation sites and estimated potential high-end environmental liability of $136 million. A Department of Defense Inspector General subpoena concerning certain Interconnect Solutions products is in an early stage, and the outcome cannot yet be estimated.
- Over the next 12 months, unrecognized tax benefits could change by approximately $17.7 million due to audits, statute expirations and other events.
- Key operating risks include foreign-currency movements, weak end markets, order and backlog contraction, execution of restructuring and facility transitions, asbestos and environmental contingencies, tax examinations and acquisition integration.
Investor Verification Checklist
- Verify the sustainability of reported earnings excluding the $100.7 million asbestos benefit and U.S. tax-audit-related benefits.
- Track Interconnect Solutions’ operational transition, volume recovery and margin restoration.
- Assess Industrial Process backlog, orders and exposure to oil and gas, chemical and mining capital spending.
- Reconcile cash usage after the Wolverine acquisition, including the new $200 million revolving-credit borrowing.
- Monitor asbestos claims, insurer recoveries, projected cash outflows and changes in the 10-year liability estimate.
- Evaluate whether adjusted free cash flow remains available after restructuring, asbestos, dividends, repurchases and acquisition spending.
- Review the impact of foreign exchange, tax settlements and other special items when comparing future results with 2015.