ITT Inc. 2016 Form 10-K Summary
Business context and reporting period
ITT is a diversified manufacturer of engineered components and technology solutions serving energy, transportation, aerospace, defense and industrial markets. Reportable segments are Industrial Process, Motion Technologies, Interconnect Solutions and Control Technologies. The filing covers the fiscal year ended December 31, 2016; amounts are in millions except per-share data.
ITT had approximately 9,500 employees in 35 countries, generated 63% of sales outside the United States and reported revenue from more than 100 countries. A May 2016 holding-company reorganization made ITT Inc. the publicly traded successor issuer.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $2,405.4 | $2,485.6 | (3.2%) |
| Gross profit / margin | $758.2 / 31.5% | $809.1 / 32.6% | Margin down 110 bp |
| Operating income / margin | $258.9 / 10.8% | $380.1 / 15.3% | Income down 31.9%; margin down 450 bp |
| Income from continuing operations attributable to ITT | $181.9 | $312.4 | Down 41.8% |
| Adjusted income from continuing operations | $208.1 | $231.7 | Down 10.2% |
| Diluted EPS from continuing operations | $2.02 | $3.44 | Down 41.3% |
| Adjusted diluted EPS | $2.32 | $2.55 | Down 9.0% |
| Net income attributable to ITT | $186.1 | $351.8 | Down 47.1% |
| Cash flow from operating activities | $240.7 | $229.7 | Up 4.8% |
| Capital expenditures | $111.4 | $86.7 | Up $24.7 |
| Adjusted free cash flow | $200.5 | $199.6 | Essentially flat |
| Cash and cash equivalents | $460.7 | $415.7 | Up $45.0 |
| Total debt and capital leases | $216.3 | $248.5 | Down $32.2 |
Segment revenue and operating income were: Industrial Process $830.1 and $33.5, Motion Technologies $983.4 and $171.4, Interconnect Solutions $309.6 and $19.1, and Control Technologies $287.0 and $46.1. Motion Technologies was the largest contributor to revenue and operating income.
Liquidity included $113.5 of commercial paper, $100.0 of short-term revolving borrowings and $2.8 of long-term debt and capital leases at year-end. ITT had $400 of unused committed credit capacity under its $500 revolving credit agreement, which was extended to November 2021. The company remained within its 3.0 times leverage and interest-coverage covenant thresholds. Credit ratings were investment grade: S&P BBB, Moody’s Baa3 and Fitch BBB+.
Material changes versus the prior comparable period
- Organic revenue declined 7.3%, primarily because of weakness in oil and gas, mining, chemical and general industrial markets. Those markets collectively declined 21% organically.
- Industrial Process revenue fell 25.5% and operating income fell 76.3%, with backlog declining to $347.2 from $410.9.
- Motion Technologies revenue increased 28.2%, including $126.4 of incremental Wolverine revenue; organic revenue increased 12.3% due mainly to automotive brake-pad share gains. Operating margin improved to 17.4% from 16.5%.
- Interconnect Solutions revenue declined 5.6%, principally because of lower oil and gas and defense demand, while operating margin improved to 6.2% from 3.7% as relocation-related disruptions subsided.
- Control Technologies revenue increased 2.1%, while organic revenue was flat; operating margin increased to 16.1% from 15.1%.
- The 2015 results included a $100.7 asbestos-related benefit from a change in defense strategy. The 2016 asbestos-related benefit was $25.6, materially reducing the year-over-year operating comparison.
- The effective tax rate increased to 29.4% from 18.3%, primarily due to deferred tax liabilities on foreign earnings that were no longer considered indefinitely reinvested.
- ITT spent $70.0 on share repurchases, paid $44.6 of dividends and returned approximately $114 to shareholders. The quarterly dividend increased to $0.124 from $0.1183 per share.
Guidance, outlook, risks and unusual items
Management did not provide a conventional revenue or earnings-per-share forecast in the filing. For 2017, management expected continued uncertainty in global oil markets, pricing pressure, rising commodity costs, a stronger U.S. dollar and uncertainty regarding new U.S. administration policies. ITT planned approximately $30 of restructuring and realignment actions and expected continued strength in automotive and rail businesses. Management also indicated potential additional share repurchases of up to $65 if suitable acquisition targets were not actionable.
ITT completed the $120.6 acquisition of Axtone Railway Components on January 26, 2017. Axtone had estimated 2016 revenue of approximately $80 and was to be reported within Motion Technologies; it was not included in 2016 results.
- Asbestos: The recorded undiscounted liability for pending and estimated claims through 2026 was $954.3, with an insurance recovery asset of $380.6 and net exposure of $573.7. Management estimated net asbestos cash outflows of $15 to $25 annually over the next five years, rising to approximately $30 to $40 annually thereafter. Claims beyond 2026 were not accrued and could be material.
- Environmental matters: The recorded environmental liability was $76.6, with a reasonably possible high-end estimate of $127.6. Management estimated annual environmental spending of $10 to $15.
- Government investigation: ITT is responding to a Department of Defense Inspector General civil subpoena concerning certain Interconnect Solutions products purchased or used by the U.S. government. The timing and outcome were not estimable.
- Restructuring and pension items: Restructuring costs were $26.3, including $20.5 in Industrial Process. ITT also recorded a $12.7 pretax pension settlement charge and undertook a voluntary pension settlement program.
- Market exposures: A hypothetical 10% currency movement would have affected pretax earnings by approximately $18; a 100-basis-point increase in interest rates would have increased annual interest expense by approximately $2.1; and a 10% change in steel prices was estimated to affect pretax earnings by approximately $5 to $7.
- Customer concentration: One customer represented approximately 10.5% of consolidated 2016 revenue and approximately 12% of year-end trade receivables.
Most important facts for investors to verify
- Whether Industrial Process demand and backlog stabilize, particularly in oil and gas, mining and general industrial markets.
- The sustainability of Motion Technologies’ automotive growth, customer concentration and Wolverine-related synergies.
- The timing and amount of asbestos payments and insurer recoveries, including exposure beyond the 10-year accrual horizon.
- The financial impact, if any, of the Department of Defense investigation and environmental contingencies.
- Whether planned restructuring actions and Lean initiatives offset pricing, commodity, currency and volume pressures.
- The purchase accounting, leverage impact and operating contribution of the Axtone acquisition.
- The effect of foreign earnings repatriation, tax examinations and changes in deferred tax liabilities on future tax rates and cash flow.