ITT Corporation 2009 Form 10-K Summary
Business context and reporting period
ITT Corporation is a global engineering and manufacturing company with approximately 40,200 employees in 62 countries. Its three reporting segments are Defense Electronics & Services, Fluid Technology, and Motion & Flow Control. The filing covers the fiscal year ended December 31, 2009; quarterly data are included, but this is an annual Form 10-K rather than a standalone Q4 filing.
Financial performance and position
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Revenue | $10,904.5 million | $11,694.8 million | Down 6.8% |
| Gross profit / margin | $3,060.7 million / 28.1% | $3,255.4 million / 27.8% | Profit down 6.0%; margin up 30 bps |
| Operating income / margin | $909.4 million / 8.3% | $1,210.1 million / 10.3% | Down 24.8%; margin down 200 bps |
| Income from continuing operations | $650.7 million | $775.2 million | Down 16.1% |
| Net income | $643.7 million | $794.7 million | Down 19.0% |
| Diluted EPS from continuing operations | $3.54 | $4.21 | Down 15.9% |
| Adjusted diluted EPS | $3.78 | $4.03 | Down 6.2% |
| Cash flow from operations | $1,269.7 million | $1,119.6 million | Up $150.1 million |
| Free cash flow | $998.1 million | Not clearly provided in the filing text | 2009 included a $100.0 million pension contribution |
| Cash and equivalents | $1,215.6 million | $964.9 million | Up $250.7 million |
| Total debt | $1,505.8 million | $2,146.9 million | Down $641.1 million |
| Net debt | $290.2 million | $1,182.0 million | Down $891.8 million |
| Debt / total capitalization | 28.0% | 41.2% | Down 13.2 percentage points |
Revenue declines were concentrated in Fluid Technology, down 12.4% to $3,363.3 million, and Motion & Flow Control, down 20.9% to $1,253.0 million. Defense revenue was essentially flat, increasing 0.2% to $6,296.8 million, while Defense operating income increased 6.7% to $776.0 million and margin improved to 12.3%. Fluid operating income fell 16.2% to $392.9 million, and Motion & Flow operating income fell 38.3% to $118.2 million.
Organic revenue declined 4.7%, with an additional $223.7 million adverse foreign-currency impact. Orders declined 8.8% to $10,689.7 million, although fourth-quarter orders increased 2.6% year over year. Year-end backlog was $6,387.0 million, including $5,187.2 million of funded Defense backlog, $823.8 million of Fluid backlog, and $376.0 million of Motion & Flow backlog.
Gross margin improved because productivity, sourcing, and material-cost initiatives more than offset volume declines. SG&A declined 7.8% to $1,576.4 million, while research and development increased 5.6% to $258.1 million. Capital expenditures were $271.6 million, and dividends paid were $147.9 million. No shares were repurchased in 2009.
Material changes versus the prior comparable period
- Operating results weakened because of the global economic downturn, lower commercial volumes, and unfavorable currency translation, particularly in residential and commercial water, industrial, aerospace, automotive, connectors, and marine markets.
- ITT issued $1.0 billion of senior unsecured notes in May 2009: $500.0 million at 4.9% due 2014 and $500.0 million at 6.125% due 2019. Proceeds and operating cash were used primarily to repay short-term debt.
- Commercial paper declined from $1,618.7 million at year-end 2008 to $55.0 million at year-end 2009. The company reported compliance with its $1.75 billion revolving credit facility covenants.
- ITT recorded a significant asbestos-related charge. The 2009 charge to continuing operations was $237.5 million pretax and $130.7 million after tax, primarily for estimated unasserted claims over the next ten years.
- Restructuring and asset impairment charges were $79.3 million, including actions targeting 1,092 position eliminations and facility, sourcing, and footprint changes. Management projected approximately $61 million of 2010 savings and $272 million of savings during 2011-2014 from 2009 actions.
- The postretirement plans remained underfunded by approximately $1.8 billion at year-end. ITT contributed $161.0 million in 2009, including a voluntary $100.0 million contribution, and expected approximately $140.0 million of net periodic postretirement cost in 2010.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific 2010 revenue or earnings forecast. Its outlook emphasized productivity, operating-margin expansion, free-cash-flow generation, growth investments, emerging markets, water infrastructure, air-traffic control, cyber security, and non-Defense applications. The Defense segment realignment, announced in January 2010, will consolidate seven divisions into three, be renamed ITT Defense & Information Solutions, and is expected to generate approximately $20 million to $30 million of 2010 restructuring expense with incremental margin benefits expected in 2011.
Management identified continued global economic uncertainty, U.S. Defense budget decisions, timing and funding of government orders, municipal project delays, real-estate weakness, commercial aviation weakness, connector-industry cyclicality, automotive and marine demand, foreign exchange, raw-material costs, suppliers, pension funding, tax matters, cybersecurity, intellectual property, environmental liabilities, and litigation as material risks. Approximately 53% of 2009 revenue was ultimately sold to the U.S. Government, and government contracts may be fixed-price or subject to termination.
As of December 31, 2009, recorded asbestos liabilities were $933.2 million, related asbestos assets were $666.3 million, and net exposure was $266.9 million. Management estimated net annual asbestos cash outflows of $10 million to $15 million over the next several years, increasing to approximately $30 million to $40 million by 2019, but stated that claims beyond the next ten years cannot reasonably be estimated. Environmental liabilities were $139.7 million, with an estimated range of $113.4 million to $248.6 million.
On February 17, 2010, ITT agreed to acquire Nova Analytics Corporation for approximately $390 million, subject to customary conditions and regulatory approvals. The purchase was expected to be funded with cash and commercial paper and was projected to close by the end of March 2010. The company also declared a first-quarter 2010 dividend of $0.25 per share.
Deloitte & Touche issued an unqualified audit opinion on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2009.
Important facts investors should verify
- Reconcile reported EPS with adjusted EPS and assess the recurring versus unusual effects of the asbestos charge and favorable tax items.
- Review the assumptions, insurance recoveries, insurer solvency, and claims trends underlying the $933.2 million asbestos liability and $666.3 million asset.
- Monitor commercial and funded Defense backlog, government appropriations, contract awards, and the impact of the 2010 Defense realignment.
- Test whether productivity and restructuring savings offset continued weakness in Fluid and Motion & Flow markets and higher postretirement costs.
- Assess liquidity after the planned Nova acquisition, including commercial-paper usage, the revolving credit facility, debt maturities, and pension contributions.
- Evaluate the sensitivity of pension obligations and future funding needs to discount rates, asset returns, and changes in legislation.
- Review environmental, product-liability, silica, tax, export-compliance, and derivative litigation disclosures for changes after the filing date.