ITT Inc. 2020 Form 10-K Summary
Business context and reporting period
ITT Inc. is a diversified manufacturer of engineered components and technology solutions serving transportation, industrial and energy markets. Its three reportable segments are Motion Technologies (MT), Industrial Process (IP), and Connect & Control Technologies (CCT). The filing covers the fiscal year ended December 31, 2020; amounts are in millions unless otherwise stated. Approximately 67% of revenue was generated outside the United States, and the Company had approximately 9,700 employees in 35 countries.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $2,477.8 | $2,846.4 | (12.9%) |
| Gross profit / margin | $782.2 / 31.6% | $910.1 / 32.0% | Margin down 40 bps |
| Operating income / margin | $226.5 / 9.1% | $411.4 / 14.5% | (44.9%); margin down 540 bps |
| Income from continuing operations attributable to ITT | $68.5 | $323.4 | (78.8%) |
| Net income attributable to ITT | $72.5 | $325.1 | (77.7%) |
| Diluted EPS from continuing operations | $0.78 | $3.65 | Down $2.87 |
| Adjusted EPS | $3.20 | $3.81 | (16%) |
| Operating cash flow | $435.9 | $357.7 | +21.9% |
| Capital expenditures | $63.7 | $91.4 | Down $27.7 |
| Operating cash flow less capital expenditures | Approximately $372 | Approximately $266 | +40% |
Segment revenue was $1,121.1 for MT, $843.0 for IP and $516.5 for CCT. Segment operating income was $184.0, $77.6 and $57.0, respectively, with segment margins of 16.4%, 9.2% and 11.0%.
Cash and cash equivalents were $859.8 at year-end. Total debt was $119.8, including $104.3 of commercial paper and $15.5 of long-term debt. ITT had no borrowings outstanding under its $500 revolving credit facility or its two $200 incremental 364-day facilities at year-end. Management reported approximately $1.6 billion of available liquidity, including cash, revolver capacity and undrawn incremental facilities.
Dividends paid were $59.0, or $0.676 per share, and the Company repurchased $84.2 of common stock, including employee tax-withholding repurchases. The first-quarter 2021 quarterly dividend was raised to $0.22 per share.
Material changes versus the prior comparable period
- Revenue declined primarily because COVID-19 reduced automotive, aerospace, industrial and oil-and-gas demand. Organic revenue declined 13.8%.
- MT revenue declined 9.7%, IP revenue declined 10.7%, and CCT revenue declined 22.2%. CCT aerospace and defense revenue declined 32%.
- Operating expenses increased 11.4% to $555.7, principally because of $66.3 of net asbestos-related costs, $43.0 of restructuring costs and $16.3 of asset impairment charges.
- Gross margin decreased because of lower volume and higher commodity costs, partly offset by productivity, supply-chain and restructuring savings.
- Income from continuing operations was reduced by a $136.9 pension settlement charge related to termination of the U.S. qualified pension plan and by higher asbestos costs.
- In the third quarter, ITT extended its asbestos liability projection through 2052, increasing the estimated liability by $155.7. Year-end asbestos liabilities were $932.0, offset by recorded asbestos-related assets of $444.7.
- The Company initiated a global restructuring plan, recording $43.8 through year-end and expecting total plan costs of $51.1, implying approximately $7.3 of additional costs in 2021.
- IP recorded $16.3 of asset impairment charges related principally to an upstream oil-and-gas business and related intangible assets.
- Operating cash flow improved despite lower earnings because of stronger collections, inventory management and cost containment. Capital expenditures and acquisition spending also declined.
Outlook, management commentary and risks
Management stated that the business improved sequentially during the second half of 2020, with fourth-quarter revenue of $708.6 and segment operating income of $119.5. Management expects 2021 to remain affected by COVID-19 uncertainty, recovery timing, potential supply-chain disruptions, higher commodity costs, constrained customer capital budgets and uncertain oil-and-gas market conditions. No specific full-year 2021 revenue or earnings guidance is provided in the filing text.
Management’s strategy emphasizes customer centricity, operational excellence, innovation, productivity, geographic expansion, targeted close-to-core acquisitions and disciplined cash deployment. ITT expects to continue productivity and innovation initiatives in 2021 and stated that liquidity should be sufficient to fund operations for at least the next 12 months and beyond.
- COVID-19: Potential effects include facility closures, lower demand, employee illness, supply-chain disruption, customer or supplier bankruptcies, delayed collections, increased borrowing needs and reduced capital-market access.
- Asbestos: Liability and insurance recovery estimates are highly judgmental. The Company estimates that insurers will recover approximately 48% of asbestos indemnity and defense costs over the projected period, with recovery rates expected to decline over time. Net after-tax defense and indemnity cash outflows are projected at $20 million to $30 million annually over the next ten years.
- Environmental matters: Recorded environmental liabilities were $58.3, with a reasonably possible high-end estimate of $97.6. The Company estimates approximately $5 per year of environmental investigation and remediation spending based on historical experience.
- Customer concentration: Continental represented approximately 9.1% of consolidated 2020 revenue and approximately 20% of MT revenue.
- Market and operating exposure: Risks include automotive and aerospace cycles, oil-and-gas and mining capital spending, commodity prices, tariffs, foreign exchange, competition, product quality, cybersecurity, intellectual property, government contracting and international operations.
- Taxes and contingencies: The Company was under examination in multiple jurisdictions; unrecognized tax benefits were $41.5, and the amount potentially changing over the next 12 months was estimated at approximately $15.
Important facts for investors to verify
- Reconcile GAAP EPS of $0.78 with adjusted EPS of $3.20, including the pension termination, asbestos, restructuring, impairment and tax-related items.
- Review the sensitivity of asbestos liabilities and insurance receivables to claims trends, insurer solvency, coverage litigation and recoveries below the estimated 48% rate.
- Assess whether the reported cash-flow strength is sustainable after the reversal of working-capital benefits and the resumption of normal capital spending.
- Monitor recovery trends in automotive, aerospace, industrial and oil-and-gas end markets, including IP backlog of $367.4 at year-end.
- Evaluate the effect of commodity inflation, tariffs and expiring fixed-price supply contracts on 2021 margins.
- Confirm execution of the restructuring plan and whether the expected $51.1 of total costs produces the anticipated savings.
- Review liquidity, commercial paper access, covenant compliance and the maturity or renewal of the incremental revolving facilities.
- Consider the potential impact of environmental liabilities, tax examinations, guarantees of $150.5 and indemnification obligations related to prior divestitures and spin-offs.