ITT Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter ended March 31, 2012. ITT is a global industrial manufacturer operating through Industrial Process, Motion Technologies, Interconnect Solutions and Control Technologies. Exelis and Xylem were spun off on October 31, 2011; their historical results are presented as discontinued operations. All share and per-share data reflect the one-for-two reverse stock split completed on October 31, 2011.
Financial performance and key metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $577 million | $533 million | 8.3% increase |
| Gross profit / margin | $173 million / 30.0% | $168 million / 31.5% | Margin down 150 bp |
| Operating income (loss) / margin | $37 million / 6.4% | $(10) million / (1.9)% | Income increased $47 million |
| Income (loss) from continuing operations | $10 million | $(22) million | Improved $32 million |
| Diluted EPS from continuing operations | $0.11 | $(0.23) | Improved $0.34 |
| Net income | $3 million | $121 million | Down $118 million |
| Net cash from operating activities | $18 million | $(45) million | Improved $63 million |
| Free cash flow | $61 million | $(38) million | Improved $99 million |
Adjusted income from continuing operations was $37 million, or $0.39 per diluted share, compared with $31 million, or $0.34 per diluted share, in the prior-year quarter. These are non-GAAP measures that exclude specified special items.
Segment revenue and operating income were: Industrial Process $226 million and $22 million; Motion Technologies $180 million and $27 million; Interconnect Solutions $93 million and $2 million; and Control Technologies $79 million and $13 million. Industrial Process provided the principal revenue growth, while Interconnect Solutions experienced a substantial decline.
Cash and cash equivalents were $728 million at March 31, 2012, compared with $690 million at December 31, 2011. Total current assets were $1.859 billion and current liabilities were $925 million. The filing does not provide a clear total debt balance; short-term borrowings included in current liabilities were $23 million. ITT had a $500 million four-year revolving credit agreement, with interest-coverage and leverage ratios within required thresholds. The company had extinguished $1.25 billion of long-term debt in the fourth quarter of 2011.
Capital expenditures were $13 million, share repurchases totaled $38 million on the cash flow statement, and dividends paid were $9 million. The company declared a quarterly dividend of $0.091 per share. ITT contributed $32 million to U.S. pension plans, including a $15 million discretionary contribution.
Material changes versus the prior comparable period
- Revenue increased 8.3%, driven primarily by a 34.5% increase in Industrial Process revenue, including stronger oil and gas, chemical, mining and project activity.
- Motion Technologies revenue decreased 2.2% on reported results but increased 2.2% organically; unfavorable foreign currency effects reduced reported revenue.
- Interconnect Solutions revenue fell 13.9% and operating income fell 81.8%, reflecting connector-industry weakness, lower production at a major smartphone customer, share declines and weaker aerospace and transportation demand.
- Gross margin declined because of unfavorable product mix and pricing, particularly in Industrial Process, and lower volume and mix in Interconnect Solutions.
- Transformation costs declined to $12 million pre-tax from $85 million, including $5 million in continuing operations versus $60 million previously. The prior-year period included a $55 million non-cash impairment charge.
- Interest and non-operating expense declined to $2 million from $25 million following the 2011 debt extinguishment.
- The effective tax rate increased to 71.4% from 37.1%, primarily because of a valuation allowance against U.S. deferred tax assets and unrecognized tax benefits on certain foreign losses.
- Net income declined sharply because the prior-year period included $143 million of income from discontinued operations; Q1 2012 included a $7 million loss from discontinued operations.
Guidance, outlook, risks and unusual items
- Management expected approximately $5 million to $10 million of additional net-of-tax Transformation costs during the remainder of 2012 and approximately $20 million to $25 million of related net after-tax cash outflows.
- Management expected an additional $5 million to $15 million of net-of-tax repositioning costs, with cash outflows of approximately $15 million to $25 million, during the remainder of 2012.
- Management expected no additional U.S. pension contributions during the remainder of 2012 after accelerating required contributions into the first quarter, although future statutory requirements may vary with asset returns and discount rates.
- Management expected slight Motion Technologies growth for the remainder of 2012 despite weakness in Western European automotive markets. Interconnect Solutions margins were expected to improve in the second half of 2012.
- Asbestos liabilities were $1.660 billion and related recovery assets were $949 million, producing estimated net exposure of $711 million. There were 95,682 open claims at March 31, 2012. Management stated that ultimate costs are not predictable and could materially adversely affect financial position, results and cash flows.
- Projected net asbestos cash outflows were expected to average $10 million to $20 million annually over the next five years and $35 million to $45 million over the remainder of the projection period. Certain insurance agreements were expected to exhaust within twelve months.
- Environmental liabilities were $101 million, with a reasonably possible range of $81 million to $172 million across 66 active sites.
- A bondholder lawsuit alleged improper calculation of the redemption price for 6.125% bonds originally issued in 2009; alleged damages exceeded $5 million and could exceed $15 million if extended to all holders. Management did not expect a material adverse effect.
- Other risks include commodity costs, foreign currency, economic and industry cyclicality, customer and geographic concentration, insurer recoveries, tax valuation allowances, pension funding, environmental matters, liquidity access and execution of restructuring actions.
Important facts for investors to verify
- Whether Industrial Process growth and project-heavy mix translate into sustainable margins after the expected second-quarter mix shift.
- Whether Interconnect Solutions volume, product mix and margins recover as management anticipated in the second half of 2012.
- The final amount and timing of remaining Transformation and repositioning costs and cash outflows.
- The sustainability of the unusually high 71.4% effective tax rate and the recoverability of U.S. deferred tax assets.
- Actual asbestos claim activity, insurance recoveries, policy exhaustion and net cash outflows relative to the company’s estimates.
- Current total debt, commercial paper usage and available borrowing capacity, as the filing does not present a single clear total-debt figure in the provided text.
- Future pension funding requirements and the effect of investment returns and discount rates on the underfunded $296 million postretirement obligation.
- Cash tax refunds expected during 2012, including the $85 million portion expected to be shared with or owed to Exelis.