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 Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. On May 16, 2016, ITT completed a holding-company reorganization, with ITT Inc. becoming the publicly traded successor issuer.
Financial Performance and Position
| Metric | Three Months 2016 | Three Months 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Revenue | $626.2 million | $628.2 million | $1,235.3 million | $1,216.9 million |
| Gross profit | $205.6 million | $213.9 million | $400.9 million | $412.9 million |
| Gross margin | 32.8% | 34.0% | 32.5% | 33.9% |
| Operating income | $49.5 million | $164.5 million | $100.5 million | $222.4 million |
| Operating margin | 7.9% | 26.2% | 8.1% | 18.3% |
| Net income attributable to ITT | $32.8 million | $142.3 million | $70.2 million | $184.4 million |
| Diluted EPS from continuing operations | $0.36 | $1.56 | $0.78 | $1.97 |
- Operating cash flow for the six months was $71.6 million, versus $89.5 million in 2015. Capital expenditures were $46.1 million, producing reported free cash flow of approximately $25.5 million before management's adjustments.
- Management's adjusted free cash flow was $54.7 million, compared with $65.7 million in the prior-year period.
- Cash and cash equivalents were $433.3 million at June 30, 2016, compared with $415.7 million at December 31, 2015.
- Total debt and capital leases were $221.4 million, including $117.9 million of commercial paper, $100.0 million of revolving-credit borrowings and $2.4 million of long-term debt and capital leases.
- The company had a $500 million revolving credit facility maturing in November 2019, with $100.0 million outstanding and financial covenants satisfied.
- Receivables increased to $625.1 million and inventories to $299.3 million from year-end 2015 balances of $584.9 million and $292.7 million, respectively.
- The quarterly dividend declared was $0.124 per share, a 4.8% increase from the prior year. ITT repurchased $27.5 million of common stock during the first six months and was considering up to an additional $50 million of repurchases by year-end.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue was essentially flat, while six-month revenue increased 1.5%. Organic revenue declined 6.3% in the quarter and 4.5% year to date, excluding acquisitions, divestitures and foreign exchange.
- The decline in reported operating income was primarily attributable to a $100.7 million asbestos-related benefit recorded in the second quarter of 2015. Excluding special items, adjusted income from continuing operations declined 3.2% in the quarter to $60.2 million and declined 7.0% year to date to $113.5 million.
- Industrial Process revenue declined 25.5% in the quarter and 22.1% year to date, reflecting weakness in oil and gas, mining, chemical and industrial markets. Its six-month operating margin fell to 3.6% from 11.4%.
- Motion Technologies revenue increased 40.8% in the quarter and 37.5% year to date, including contributions from the 2015 Wolverine acquisition and automotive platform share gains. Six-month operating income increased 27.7% to $99.6 million, although margin declined to 19.3% from 20.8%.
- Interconnect Solutions revenue declined 4.7% in the quarter and 5.6% year to date, while operating income improved through restructuring and productivity savings.
- Control Technologies revenue increased 0.4% in the quarter and 4.6% year to date, but six-month operating income declined 15.5% due to relocation costs, unfavorable mix and higher restructuring and due-diligence costs.
- Restructuring costs were $19.8 million in the first six months, compared with $16.0 million in 2015. Industrial Process accounted for $17.0 million, primarily severance for approximately 350 employees.
Guidance, Outlook, Risks and Unusual Items
- Management expected persistent macroeconomic and end-market volatility through the remainder of 2016, particularly in oil and gas, mining and Industrial Process aftermarket businesses. Second-half Industrial Process orders were not expected to improve materially.
- Management expected automotive aftermarket growth in Motion Technologies to partly offset Industrial Process weakness, although seasonal sequential volume declines were anticipated in the second half.
- Oil and gas-related products represented approximately 20% of 2015 revenue. Lower industry capital spending, delayed maintenance and replacement activity, pricing pressure and project deferrals were identified as significant risks.
- Industrial Process recorded a $4.1 million trade-name impairment in the second quarter because of challenging upstream oil and gas conditions.
- Asbestos-related liabilities were $1,038.0 million with estimated insurance recoveries of $390.9 million, resulting in net exposure of $647.1 million. Approximately 35,000 asbestos claims were pending at June 30, 2016. Management estimated net asbestos cash outflows of $15 million to $25 million annually over the next five years, subject to substantial uncertainty.
- The company estimated a high-end environmental liability exposure of $130 million across 40 active sites; recorded environmental liabilities were $76.8 million at June 30, 2016. A $34.2 million environmental-related asset was established primarily through an insurance settlement and qualified settlement fund.
- ITT was responding to a Department of Defense Inspector General subpoena concerning certain Interconnect Solutions products used by the U.S. government. The company could not estimate the timing or outcome.
- Tax authorities were examining ITT in multiple jurisdictions. Unrecognized tax benefits could change by approximately $18 million over the following 12 months, excluding potential effects under the Tax Matters Agreement with Exelis and Xylem.
- The filing states that forward-looking results remain subject to economic, market, foreign exchange, litigation, environmental, asbestos, tax, regulatory and customer-spending risks.
Important Facts for Investors to Verify
- Reconcile reported earnings with adjusted results, particularly the significant asbestos benefit recorded in second-quarter 2015.
- Monitor Industrial Process orders, backlog of $367.3 million at June 30, 2016, and its six-month book-to-bill ratio of 0.92.
- Assess whether Motion Technologies growth and Wolverine integration can offset continued Industrial Process weakness.
- Track asbestos claims, insurance recoveries, projected cash outflows and the material unestimated exposure beyond the ten-year forecast period.
- Review liquidity concentration in international subsidiaries, commercial paper access, revolving-credit covenants and the timing of potential share repurchases.
- Follow developments in the Department of Defense investigation, environmental remediation matters and tax examinations.