ITT Inc. Form 10-Q Summary
Business Context and Reporting Period
ITT Inc. is a diversified manufacturer of engineered components and technology solutions serving energy, transportation and industrial markets through Industrial Process, Motion Technologies, Interconnect Solutions and Control Technologies. This unaudited report covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. A holding-company reorganization was completed on May 16, 2016.
Financial Performance and Position
| Metric | Three Months 2016 | Three Months 2015 | Nine Months 2016 | Nine Months 2015 |
|---|---|---|---|---|
| Revenue | $581.7 million | $601.9 million | $1,817.0 million | $1,818.8 million |
| Gross profit / margin | $183.9 million / 31.6% | $194.9 million / 32.4% | $584.8 million / 32.2% | $607.8 million / 33.4% |
| Operating income / margin | $134.8 million / 23.2% | $103.9 million / 17.3% | $235.3 million / 12.9% | $326.3 million / 17.9% |
| Income from continuing operations attributable to ITT | $88.3 million | $96.5 million | $158.3 million | $275.8 million |
| Net income attributable to ITT | $90.1 million | $130.7 million | $160.3 million | $315.1 million |
| Diluted EPS from continuing operations | $0.98 | $1.07 | $1.76 | $3.04 |
- Cash flow: Nine-month operating cash flow was $146.7 million versus $147.1 million in 2015. Capital expenditures were $68.1 million, producing reported adjusted free cash flow of $130.0 million, compared with $120.4 million in 2015.
- Liquidity: Cash and equivalents were $475.8 million at September 30, 2016, versus $415.7 million at December 31, 2015. Total debt and capital leases were $254.2 million, including $151.0 million of commercial paper and $100.0 million drawn under a $500.0 million revolving facility. The company reported compliance with its credit-facility covenants.
- Balance sheet: Total assets were $3.718 billion and shareholders’ equity was $1.458 billion at September 30, 2016. Net asbestos exposure was $566.0 million, consisting of a $951.8 million liability and $385.8 million of estimated insurance recoveries.
- Capital returns: ITT repurchased $66.6 million of shares under its repurchase program during the first nine months and declared a quarterly dividend of $0.124 per share, a 4.8% increase from the prior year.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 3.4%, while nine-month revenue was essentially flat. Organic revenue declined 9.5% in the quarter and 6.1% year to date.
- Industrial Process revenue fell 27.9% in the quarter and 24.1% year to date, driven by weakness in oil and gas, mining, chemical and industrial markets. Its nine-month operating margin declined to 3.2% from 11.8%.
- Motion Technologies revenue increased 32.7% in the quarter and 36.0% year to date, supported by automotive growth, share gains and the Wolverine acquisition. Nine-month operating income increased 30.5%.
- Interconnect Solutions revenue declined 5.1% in the quarter and 5.4% year to date, primarily due to lower oil and gas demand. Control Technologies revenue increased modestly, but operating income declined 17.1% in the quarter and 16.0% year to date.
- Consolidated operating income increased 29.7% in the quarter but declined 27.9% year to date. The quarterly increase was heavily influenced by an $81.8 million asbestos remeasurement benefit versus a $44.8 million benefit in the prior year.
- The effective tax rate increased to 34.3% from 10.6% in the quarter and to 32.2% from 16.1% year to date, primarily due to deferred tax liabilities on certain foreign earnings. The prior-year period benefited from tax-audit settlements and valuation-allowance releases.
- Discontinued operations contributed only $1.8 million in the quarter and $2.0 million year to date, versus $34.2 million and $39.3 million, respectively, in 2015, when tax-related settlements produced substantial benefits.
- Restructuring costs increased to $23.8 million year to date from $17.8 million. Industrial Process actions primarily involved severance for approximately 370 employees during 2016 and were expected to be substantially complete within three months after the reporting date.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide specific full-year revenue or earnings guidance in the supplied filing text. It expects continued volatility in the global macroeconomic environment, particularly in oil and gas.
- Oil and gas-related products represented approximately 20% of 2015 revenue. Sustained low prices and reduced customer capital spending may cause lower demand, pricing pressure, order cancellations, collection issues, restructuring or impairment charges.
- Industrial Process backlog was $370.8 million at September 30, 2016, down 9.8% from December 31, 2015; its nine-month book-to-bill ratio was 0.95.
- Asbestos estimates remain highly uncertain. Approximately 30,000 claims were pending at September 30, 2016. Management cannot reasonably estimate claims beyond the next 10 years and states that future costs could materially adversely affect results. Projected net asbestos cash outflows are $15 million to $25 million annually over the next five years, increasing thereafter.
- The company is responding to a Department of Defense Inspector General civil subpoena concerning Interconnect Solutions products. The filing states that the timing and outcome cannot be estimated.
- Environmental liabilities were $75.5 million, with 40 active investigation or remediation sites and an estimated high-end potential liability of $127.7 million.
- On November 3, 2016, ITT agreed to acquire Axtone Railway Group for approximately $118 million, subject to customary adjustments and approvals, with closing expected in the first quarter of 2017.
- ITT expects a non-cash pretax pension settlement charge of approximately $18 million to $20 million in the fourth quarter of 2016.
Most Important Facts for Investors to Verify
- Whether asbestos remeasurement benefits and future insurance recoveries are sustainable and how actual claims and cash payments compare with estimates.
- Industrial Process demand, backlog, pricing, margins and the pace and effectiveness of restructuring actions.
- Organic order trends, particularly in oil and gas, mining, connectors and transportation markets.
- The effect of the elevated effective tax rate and foreign-earnings tax liabilities on future earnings and cash taxes.
- Commercial paper availability, revolving-credit utilization, covenant headroom and the company’s ability to fund acquisitions and shareholder returns.
- The eventual resolution and potential financial impact of the Department of Defense investigation and environmental matters.
- The closing terms, financing and integration risks associated with the Axtone acquisition and the fourth-quarter pension settlement charge.