ITT Inc. Form 10-Q Summary
Business Context and Reporting Period
ITT Inc. is a diversified manufacturer of engineered components and technology solutions serving transportation, industrial, oil and gas, aerospace and defense, and related markets. Its reportable segments are Motion Technologies, Industrial Process, and Connect & Control Technologies. This unaudited filing covers the quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Financial Performance and Position
| Metric | Three Months 2019 | Three Months 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Revenue | $719.9 million | $696.8 million | $1,415.4 million | $1,386.1 million |
| Gross profit | $232.0 million | $226.0 million | $450.8 million | $450.2 million |
| Gross margin | 32.2% | 32.4% | 31.8% | 32.5% |
| Operating income | $86.0 million | $80.3 million | $176.6 million | $190.9 million |
| Operating margin | 11.9% | 11.5% | 12.5% | 13.8% |
| Net income attributable to ITT | $66.8 million | $69.7 million | $138.1 million | $170.9 million |
| Diluted EPS from continuing operations | $0.75 | $0.79 | $1.56 | $1.93 |
| Operating cash flow | Not separately provided | Not separately provided | $101.1 million | $119.3 million |
Second-quarter revenue increased 3.3%, while organic revenue increased 5.4% excluding foreign currency and acquisition effects. Six-month revenue increased 2.1%, or 5.2% organically. Segment operating income was $107.6 million in the quarter and $218.1 million year to date; segment margins were 14.9% and 15.4%, respectively.
- Industrial Process revenue increased 14.5% in the quarter and 14.1% year to date, supported by pump projects, aftermarket activity, and the Rheinhütte acquisition.
- Connect & Control Technologies revenue increased 3.7% in the quarter and 4.1% year to date, with strength in commercial aerospace.
- Motion Technologies revenue declined 3.8% in the quarter and 5.9% year to date, primarily from foreign exchange, global automotive weakness, and lower Wolverine sales.
- Orders declined 6.6% in the quarter and 4.7% year to date; organic orders declined 4.9% and 1.7%, respectively. Oil and gas project delays and difficult prior-year comparisons were significant factors.
Cash and cash equivalents were $531.9 million at June 30, 2019, compared with $561.2 million at December 31, 2018. Net cash used in investing activities was $132.3 million, including $87.3 million for the Rheinhütte acquisition and $45.8 million of capital expenditures. Adjusted free cash flow was $82.1 million, compared with $91.0 million in the prior-year period.
Total debt and finance leases were $163.7 million, including $148.0 million of commercial paper, compared with $125.0 million at year-end 2018. ITT had no borrowings under its $500 million revolving credit agreement, which may be increased to $700 million with lender consent; required interest coverage and leverage ratios were satisfied.
Material Changes Versus the Prior Comparable Period
- Quarterly operating income increased 7.1% and operating margin improved 40 basis points, primarily from lower corporate costs, productivity, volume leverage, and cost containment.
- Six-month operating income declined 7.5% and operating margin declined 130 basis points, principally because 2018 included a $32.1 million asbestos insurance settlement benefit.
- Gross margins declined due to higher commodity costs and tariffs, unfavorable foreign exchange, and product mix, partly offset by pricing and productivity actions.
- The effective tax rate increased to 22.3% for the quarter and 22.0% year to date, compared with 11.3% and 8.8%, respectively. Prior-year results benefited from tax items, including a deferred tax liability reduction and German valuation allowance reversals.
- ITT adopted the new lease accounting standard on January 1, 2019, recognizing an $80.0 million right-of-use asset and an $83.4 million lease liability at adoption.
- Rheinhütte Pumpen Group was acquired on April 30, 2019, for €81 million net of cash acquired. The transaction added preliminary goodwill of $54.6 million. Matrix Composites was acquired on July 3, 2019, after the reporting period, for $29 million including a $3 million earn-out.
Outlook, Commentary, Risks and Unusual Items
Management stated that operational excellence, productivity, supply-chain initiatives, cost reduction, and strategic acquisitions are intended to support growth and offset market uncertainty. The filing does not provide a clear quantitative full-year revenue, earnings, or cash-flow guidance figure.
- Management cited an increasingly challenging economic environment, weaker automotive demand, project delays, lower oil and gas orders, tariffs, commodity inflation, foreign exchange, and unfavorable mix as risks.
- Industrial Process backlog was $425.3 million at June 30, 2019, down 4.3% from December 31, 2018.
- Tariff impacts remain uncertain and cannot be reliably estimated by the company.
- ITT settled a DOJ civil matter in the second quarter for $11 million and received a related $1 million insurance recovery; the company made no admission of wrongdoing.
- Approximately 24,000 asbestos claims were pending. The recorded asbestos liability was $835.8 million, offset by estimated insurance recoveries of $354.6 million, resulting in net exposure of $481.2 million.
- Management projects net asbestos cash outflows of approximately $20 million to $30 million annually over the next five years, increasing to approximately $35 million to $45 million annually later in the projection period. Claims beyond 2029 are not recorded because they are not reasonably estimable.
- Environmental liabilities were $63.5 million, with 30 active investigation or remediation sites and an estimated potential high-end liability of $110.5 million.
- Tax authorities are examining ITT in multiple jurisdictions. Unrecognized tax benefits could change by approximately $14 million over the next 12 months.
- The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile GAAP results with management’s adjusted EPS, adjusted segment operating income, and adjusted free cash flow measures.
- Assess whether declining orders, the Industrial Process backlog reduction, and automotive and oil and gas weakness could affect future revenue.
- Monitor asbestos claims, insurance recoveries, environmental obligations, and the potential for future cash outflows beyond recorded estimates.
- Evaluate the impact of tariffs, commodity costs, foreign exchange, and product mix on gross margins.
- Review the final purchase-price accounting and integration performance for Rheinhütte and the post-period Matrix acquisition.
- Confirm liquidity headroom, commercial paper dependence, debt maturities, and compliance with revolving-credit covenants.