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 markets. Reportable segments are Industrial Process, Motion Technologies, and Connect & Control Technologies. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $645.0 million | $581.7 million | $1,901.7 million | $1,817.0 million |
| Gross profit | $203.1 million | $183.9 million | $609.8 million | $584.8 million |
| Gross margin | 31.5% | 31.6% | 32.1% | 32.2% |
| Operating income | $127.8 million | $134.8 million | $241.1 million | $235.3 million |
| Operating margin | 19.8% | 23.2% | 12.7% | 12.9% |
| Net income attributable to ITT | $86.9 million | $90.1 million | $180.7 million | $160.3 million |
| Diluted EPS from continuing operations | $0.98 | $0.98 | $2.03 | $1.76 |
Third-quarter revenue increased 10.9%, while nine-month revenue increased 4.7%. Organic revenue growth was 4.8% in the quarter and 1.6% year to date. Third-quarter orders were $658.6 million, up 14.9%, with organic orders up 8.4%. Nine-month orders were $1,955.5 million, with organic orders up 5.5%.
- Motion Technologies was the primary growth driver, with third-quarter revenue up 25.7%, including $19.6 million from the Axtone acquisition and 11.9% organic growth.
- Industrial Process revenue was essentially flat in the quarter but declined 7.0% year to date, reflecting weaker project pump and valve activity.
- Connect & Control Technologies revenue was approximately flat in the quarter and up 1.2% year to date.
- Segment operating income increased 14.3% in the quarter and 11.7% year to date, but consolidated operating income declined in the quarter because of higher corporate costs and a smaller asbestos-related benefit.
- The effective tax rate declined to 31.8% in the quarter and 25.0% year to date, versus 34.3% and 32.2%, respectively, in 2016.
Cash flow, liquidity, debt and capital allocation
- Nine-month operating cash flow was $178.4 million, versus $146.7 million in 2016.
- Capital expenditures were $79.2 million, compared with $68.1 million; adjusted free cash flow was $164.7 million, compared with $130.0 million.
- Investing cash use increased to $189.3 million, principally because of the $113.7 million net acquisition of Axtone and higher capital expenditures.
- Cash and cash equivalents were $395.6 million at September 30, 2017, down from $460.7 million at December 31, 2016.
- Total debt and capital leases were $196.7 million, down from $216.3 million at year-end. This included $130.9 million of commercial paper and $59.1 million drawn under a $500 million revolving credit agreement.
- The revolving credit agreement matures in November 2021. ITT reported compliance with its interest coverage and leverage covenants.
- ITT paid $22.8 million of dividends during the first nine months and declared a third-quarter dividend of $0.128 per share, a 3.2% increase from the prior year.
- The company repurchased $32.9 million of common stock during the first nine months. Approximately $140.6 million remained available under the repurchase authorization at September 30, 2017.
Material changes, outlook and unusual items
- ITT completed the acquisition of Axtone Railway Components on January 26, 2017, for $123.1 million net of cash acquired. Preliminary goodwill recorded was $79.5 million; purchase accounting remained subject to finalization.
- The third-quarter asbestos remeasurement generated a net benefit of $76.4 million, contributing to a total net asbestos-related benefit of $62.8 million. The benefit was lower than the $81.8 million remeasurement benefit in the prior-year quarter.
- At September 30, the estimated asbestos liability was $875.5 million, with estimated insurance recoveries of $374.3 million and net exposure of $501.2 million. Management expects related net cash outflows to continue for many years.
- Third-quarter results included a $3.7 million pension curtailment loss, $4.7 million of restructuring costs, and $3.3 million of acquisition-related expenses.
- Management cited productivity improvements, stronger transportation markets, automotive and rail share gains, and improved Industrial Process project execution. Commodity cost inflation, unfavorable pricing and mix, aerospace weakness, and higher corporate incentive compensation costs remained pressures.
- The Defense Logistics Agency removed six military-specification connector products from the Qualified Products List. Estimated annual sales associated with those products were $8 million to $10 million, and the duration and further effects of the restriction were uncertain.
- The Department of Justice is investigating certain Connect & Control Technologies connector products. ITT accrued $5 million as its current best estimate of the minimum probable civil loss, but stated that the actual loss could be higher and could not currently be estimated.
- ITT expects to receive approximately $41 million from a pending property sale and anticipates recognizing a gain of approximately $38 million to $40 million at closing, subject to remaining conditions.
- The filing does not provide a specific quantitative full-year revenue or earnings guidance range.
Key investor verification items
- Assess the sustainability of earnings excluding the significant asbestos-related benefit and other special items.
- Verify Axtone integration, purchase-price accounting, goodwill valuation and contribution to Motion Technologies.
- Monitor Industrial Process recovery, oil and gas project activity, backlog of $375.5 million, and the effect of restructuring actions.
- Track commodity costs, pricing and mix, capacity investments, and margins in Motion Technologies.
- Determine the duration and financial effect of the military-specification connector QPL removal and the related DOJ investigation.
- Evaluate asbestos claim trends, insurance recoveries, projected cash outflows and the risk of material changes beyond the recorded 10-year estimate.
- Review environmental liabilities, including 35 active investigation or remediation sites and a potential high-end liability estimate of $119.6 million.
- Confirm adoption impacts from the new revenue-recognition standard expected in the first quarter of 2018 and the lease standard expected in 2019.