ITT Corporation — Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
ITT Corporation is a diversified manufacturer of engineered components and technology solutions serving energy, transportation and industrial markets. Reportable segments are Industrial Process, Motion Technologies, Interconnect Solutions and Control Technologies. The filing covers the quarter ended March 31, 2013; comparative results are for the quarter ended March 31, 2012. Amounts are in millions except per-share data.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $608.2 | $568.1 | 7.1% |
| Gross profit / margin | $190.5 / 31.3% | $170.2 / 30.0% | Profit +11.9%; margin +130 bp |
| Operating income / margin | $37.2 / 6.1% | $36.7 / 6.5% | Income +1.4%; margin -40 bp |
| Income from continuing operations attributable to ITT | $19.1 | $10.5 | 81.9% |
| Diluted EPS from continuing operations | $0.20 | $0.11 | +$0.09 |
| Net income attributable to ITT | $20.8 | $3.2 | 550.0% |
| Adjusted income from continuing operations | $44.2 | $36.8 | 20.1% |
| Adjusted diluted EPS | $0.47 | $0.39 | +$0.08 |
| Cash flow from operating activities | $(12.3) | $18.4 | Declined $30.7 |
| Capital expenditures | $16.7 | $13.0 | Increased $3.7 |
Cash and cash equivalents were $483.1 at March 31, 2013, compared with $544.5 at December 31, 2012. Total debt and capital leases were $55.1, including $43.5 of commercial paper, compared with $26.9 at year-end. ITT had no borrowings under its $500 revolving credit facility and remained within its interest coverage and leverage covenants.
Total assets were $3,373.6 and shareholders’ equity was $667.0 at March 31, 2013. Receivables increased to $506.2 from $440.3 at year-end, while inventories increased to $314.9 from $304.2. The company repurchased $48.2 of common stock and declared a quarterly dividend of $0.10 per share.
Material Changes Versus the Prior Comparable Period
- Reported revenue growth was primarily driven by $31.1 of first-quarter revenue from the Bornemann acquisition, completed in November 2012, and 7.2% growth in Motion Technologies. Organic revenue growth was 1.7%.
- Industrial Process revenue increased 13.5%, but organic revenue was flat. Motion Technologies revenue increased 7.2%, while Interconnect Solutions and Control Technologies revenue declined 2.3% and 2.1%, respectively.
- Gross margin improved to 31.3%, reflecting sourcing, productivity and Lean initiatives and Bornemann contributions. Operating margin declined because operating expenses rose 14.8%, including acquisition, restructuring and asbestos-related costs.
- Motion Technologies operating income increased 20.9%; Control Technologies increased 9.1%. Interconnect Solutions moved to a $1.3 operating loss from $1.9 of operating income, primarily due to $4.4 of restructuring costs and unfavorable product mix.
- The effective tax rate declined to 43.5% from 70.1% in the prior year, when ITT recorded a valuation allowance on U.S. deferred tax assets. ITT continues to maintain a full valuation allowance against its U.S. net deferred tax assets.
- Net income benefited from $1.7 of income from discontinued operations, compared with a $7.3 loss in Q1 2012. The 2013 amount primarily reflected reversal of a warranty reserve.
- Operating cash flow turned negative, principally because Q1 2012 benefited from a $103.4 federal tax refund. Working-capital investment in receivables and inventories also used cash.
Outlook, Commentary, Risks and Unusual Items
- Management stated that first-quarter results were in line with beginning-of-year expectations. It expects 2013 growth to be driven by oil and gas, chemical and industrial pumps and automotive share gains. Mining and defense are expected to remain headwinds.
- Management remains cautious about the pace of market recoveries in the second half of 2013. Organic orders increased 1.9%; total orders increased 12.6%, aided by Bornemann and a $13.1 mining order scheduled to ship in 2014.
- Management is implementing a five-year Lean transformation program and reported productivity, sourcing and on-time-delivery improvements. Bornemann integration and expected cost synergies were described as progressing in line with expectations.
- ITT recognized $3.9 of repositioning costs in Q1 2013 and expects approximately $20.0 to $30.0 of additional repositioning costs during the remainder of 2013, plus approximately $10.0 thereafter. Expected related cash outflows are approximately $25.0 to $35.0 for the remainder of 2013 and approximately $10.0 thereafter.
- Net asbestos-related expense was $16.0. At March 31, 2013, asbestos liabilities were $1,338.7 and related assets were $586.6, producing net estimated exposure of $752.1. The company had 64 thousand active asbestos claims and states that ultimate costs, including claims beyond 2023, cannot be reasonably estimated.
- Asbestos insurance recoveries are estimated at 42% of indemnity and defense costs over the current 10-year projection period. Certain insurance agreements may exhaust within the next 12 months, potentially increasing near-term net cash outflows.
- Environmental liabilities, net of related assets, were $82.2. The reasonably possible gross liability range was $76.8 to $167.5 across 59 active sites.
- Bornemann completed the wind-down of its Iranian activities by March 8, 2013. Post-acquisition Iranian revenue and operating income were €2.2 million and €1.5 million, respectively; a €1.3 million performance bond was expected to be cancelled in Q2 2013.
- A Venezuelan currency devaluation resulted in a $1.2 remeasurement charge. Management estimated that an additional 10% adverse movement in the Bolivar would reduce operating income by approximately $1.0.
- The filing provides no specific full-year numerical revenue or earnings guidance. Forward-looking statements remain subject to market, foreign-exchange, acquisition, litigation, asbestos, environmental, tax and execution risks.
Most Important Facts for Investors to Verify
- Whether organic revenue and order growth accelerate, particularly in Industrial Process, Interconnect Solutions and emerging markets.
- Whether Interconnect Solutions’ restructuring improves profitability after the Q1 operating loss and $4.4 restructuring charge.
- The pace and cash cost of repositioning activities and the effectiveness of the Lean transformation program.
- Working-capital conversion and the sustainability of operating cash flow after the prior-year tax-refund comparison.
- Bornemann’s integration, synergies, purchase-price allocation and any revisions to preliminary acquisition estimates.
- Changes in asbestos claim volumes, insurance recoveries, coverage litigation and projected net cash outflows.
- Environmental remediation developments and potential liability relative to the disclosed $76.8–$167.5 gross range.
- The continued impact of U.S. deferred-tax valuation allowances and possible changes in unrecognized tax benefits.