ITT Corporation: Form 10-Q Summary
Business context and reporting period
ITT Corporation is a diversified manufacturer of engineered components and technology solutions serving energy, transportation, industrial, aerospace and defense markets. Its reportable segments are Industrial Process, Motion Technologies, Interconnect Solutions and Control Technologies. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Financial performance and liquidity
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $628.2 million | $663.0 million | $1,216.9 million | $1,337.5 million |
| Gross profit | $213.9 million | $214.8 million | $412.9 million | $429.6 million |
| Gross margin | 34.0% | 32.4% | 33.9% | 32.1% |
| Operating income | $164.5 million | $54.5 million | $222.4 million | $102.8 million |
| Operating margin | 26.2% | 8.2% | 18.3% | 7.7% |
| Net income attributable to ITT | $142.3 million | $38.3 million | $184.4 million | $70.5 million |
| Diluted EPS | $1.58 | $0.41 | $2.03 | $0.76 |
| Effective tax rate | 14.3% | 23.0% | 18.8% | 25.1% |
- Revenue declined 5.2% in the quarter and 9.0% year to date, primarily because of unfavorable foreign-currency translation of $52.2 million and $102.8 million, respectively. Organic revenue increased 1.3% in the quarter but declined 2.0% year to date.
- Net cash provided by operating activities was $89.5 million for the six months, compared with $84.3 million in 2014. Capital expenditures were $46.0 million, and reported adjusted free cash flow was $65.7 million versus $62.2 million.
- Investing cash flow was negative $140.2 million, including the $53.5 million Hartzell Aerospace acquisition and net purchases of short-term investments. Financing cash flow was negative $19.6 million, including $83.7 million of share repurchases and $11.0 million of dividends paid.
- Cash and cash equivalents were $497.4 million at June 30, 2015, compared with $584.0 million at December 31, 2014. Total current assets were $1.63 billion and current liabilities were $816.0 million.
- Commercial paper outstanding was $68.7 million at a weighted-average rate of 0.64%. ITT had no borrowings under its $500 million revolving credit agreement and remained within its required interest coverage and leverage thresholds. The facility permits increases of up to $200 million, subject to lender consent.
- Cash dividends declared were $0.1183 per share in the second quarter, a 7.5% increase from the prior-year quarter. The company repurchased $83.7 million of common stock during the first six months.
Material changes versus the prior comparable period
- Operating income increased 201.8% in the quarter and 116.3% year to date. The primary driver was a $100.7 million net asbestos-related benefit recognized in the second quarter, together with cost reductions from restructuring, Lean initiatives and cost controls.
- Excluding special items, adjusted income from continuing operations increased to $62.2 million, or $0.69 per diluted share, from $55.4 million, or $0.60 per diluted share, in the second quarter. Year-to-date adjusted income increased to $122.1 million, or $1.34 per diluted share, from $112.8 million, or $1.21 per diluted share.
- Industrial Process and Motion Technologies improved operating income and margins. Interconnect Solutions reported a second-quarter operating loss of $0.8 million, compared with income of $12.3 million, due to lower volumes, market weakness and operational disruptions related to the North American footprint transition. Control Technologies operating income declined 24.7% in the quarter.
- Second-quarter orders declined 13.1% to $586.2 million, including an $88.2 million total foreign-currency impact and a 6.4% organic decline. Six-month orders declined 13.0% to $1.19 billion on a 5.7% organic decline.
- Industrial Process backlog was $540.3 million at June 30, down 10.5% from December 31, 2014, reflecting lower project bookings and market uncertainty.
- Restructuring costs were $16.0 million year to date. ITT expects approximately $12 million of cash restructuring costs for the 2015 Interconnect Solutions program and approximately $7 million to $9 million of remaining costs for the 2015 Industrial Process actions.
- On March 31, 2015, ITT acquired Hartzell Aerospace for $53.5 million, funded with commercial paper. The acquisition added approximately $10 million of second-quarter revenue and was allocated to Control Technologies.
Guidance, outlook, commentary and risks
- The filing does not provide a clear consolidated full-year financial guidance range. Management cited continued foreign-exchange pressure, weak oil and gas, chemical and industrial markets, declining Interconnect Solutions demand, aerospace shipment timing and operational disruption risks.
- Management reported positive organic second-quarter revenue at Industrial Process and Motion Technologies, but orders were weaker, particularly for engineered pumps and connectors. Continued OEM automotive platform wins were a partial offset.
- Asbestos remains the most significant unusual item and contingency. At June 30, the recorded undiscounted asbestos liability was $1.105 billion, with $434.3 million of estimated insurance recoveries and net exposure of $670.9 million. The company expects related cash payments to continue through approximately 2028.
- ITT estimates net asbestos cash outflows of approximately $15 million to $25 million annually over the next five years and approximately $40 million to $50 million annually over the remaining projection period, but emphasizes that actual outcomes may vary materially.
- There were approximately 43,000 active pending asbestos claims at June 30, 2015. Claims beyond the next ten years are not recorded because they cannot be reasonably estimated.
- Environmental liabilities had a recorded net balance of $73.9 million, with 52 active investigation or remediation sites and a potential high-end liability estimate of $140 million.
- ITT received a Department of Defense Inspector General civil subpoena concerning products manufactured by Interconnect Solutions. The inquiry was in an early stage, and the company could not estimate its timing or outcome.
- Tax authorities are examining the company in several jurisdictions. The filing states that unrecognized tax benefits could change by approximately $87.1 million over the next twelve months.
- Management stated that disclosure controls and procedures were effective and that there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Determine the portion of reported earnings growth attributable to the $100.7 million asbestos benefit, tax-related items and other special items rather than recurring operations.
- Track Interconnect Solutions’ operational recovery, restructuring execution, market share and order trends.
- Monitor orders, backlog and end-market exposure in Industrial Process, particularly oil and gas, chemical and industrial markets.
- Assess whether foreign-exchange effects, weak emerging-market demand and aerospace shipment timing continue to pressure revenue.
- Review asbestos claim frequency, defense-cost savings, insurance recoveries and future cash outflows against recorded estimates.
- Verify the integration and contribution of Hartzell Aerospace and the effect of commercial paper borrowings on liquidity.
- Follow the Department of Defense inquiry, environmental matters and pending tax examinations for potential financial effects.