ITT Inc. 2022 Third-Quarter Form 10-Q Summary
Business context and reporting period
ITT is a diversified manufacturer of engineered components and technology solutions serving transportation, industrial, and energy markets through Motion Technologies, Industrial Process, and Connect & Control Technologies. The filing covers the three and nine months ended October 1, 2022, compared with October 2, 2021.
ITT acquired Habonim Industrial Valves and Actuators for $139.9 million in April 2022; its results are included in Industrial Process beginning in the second quarter.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Revenue | $753.6 million | $689.6 million | $2,213.1 million | $2,079.6 million |
| Gross profit | $233.4 million | $222.0 million | $674.0 million | $675.6 million |
| Gross margin | 31.0% | 32.2% | 30.5% | 32.5% |
| Operating income | $122.0 million | $101.7 million | $317.1 million | $391.2 million |
| Operating margin | 16.2% | 14.7% | 14.3% | 18.8% |
| Net income attributable to ITT | $102.4 million | $87.5 million | $251.8 million | $212.7 million |
| Diluted EPS | $1.23 | $1.01 | $3.00 | $2.46 |
Q3 organic revenue increased 14.9%, excluding acquisitions and foreign-currency effects. Reported revenue growth was 9.3%, reflecting a $54.3 million unfavorable foreign-currency impact and $15.3 million of Habonim revenue. Q3 segment operating income increased 19.1% to $132.4 million, with segment margin rising to 17.6% from 16.1%.
- Motion Technologies revenue increased 3.0% reported and 14.9% organically; operating margin declined to 15.8% from 16.1%.
- Industrial Process revenue increased 17.9% reported and 14.6% organically; operating margin increased to 19.4% from 15.4%.
- Connect & Control Technologies revenue increased 10.9% reported and 15.4% organically; operating margin increased to 18.6% from 17.1%.
Cash flow, liquidity, debt, and capital allocation
- Operating cash flow was $115.2 million for the first nine months of 2022, compared with an outflow of $127.9 million in the prior-year period. The prior-year result included a $398.0 million cash contribution related to the asbestos divestiture.
- Investing cash flow was an outflow of $244.8 million, including $146.9 million for acquisitions, $25.6 million for investments in unconsolidated subsidiaries, and $73.7 million of capital expenditures.
- Financing cash flow was $43.0 million, including $363.1 million of net commercial-paper borrowings, $245.6 million of share repurchases, and $66.1 million of dividends.
- Cash and cash equivalents were $514.5 million at October 1, 2022, down from $647.5 million at December 31, 2021.
- Total debt and finance leases were $549.6 million, including $536.2 million of commercial paper, compared with $207.5 million at year-end 2021. The increase primarily funded share repurchases and the Habonim acquisition.
- ITT had no borrowings under its $700 million revolving credit facility, which matures in August 2026. The facility permits potential increases of up to $350 million, subject to lender consent, and all financial covenants were met at quarter-end.
- Management stated that it expects sufficient liquidity to fund operations for at least the next 12 months and beyond.
Material changes, outlook, and unusual items
- Q3 profitability benefited from pricing actions, productivity savings, and higher volumes, but gross margin remained below the prior year because of raw-material, energy, labor, shipping, and COVID-related costs.
- Year-to-date operating income and margin declined versus 2021 because the prior-year period included a $74.4 million net asbestos-related benefit, including an $88.8 million pre-tax divestiture gain. ITT states that it has no continuing obligation for pending or future asbestos claims following the divestiture.
- ITT estimated an $85 million negative revenue impact for 2022 from the Russia-Ukraine war. It recorded $8.2 million of related charges during the first nine months, primarily inventory and receivable write-downs, and suspended operations in Russia. Possible sale, disposition, or wind-down activities could generate additional impairment, severance, or other costs.
- Supply-chain disruption, labor shortages, inflation, rising interest rates, COVID-19 effects, and U.S.-dollar strength remain significant pressures. Foreign-currency translation reduced nine-month revenue by $114.7 million.
- Industrial Process backlog was $592.4 million at October 1, 2022, up 33% from December 31, 2021. Unsatisfied or partially satisfied performance obligations totaled $1.0668 billion, of which approximately $480 million to $500 million was expected to be recognized during the remainder of 2022.
- ITT declared a quarterly dividend of $0.264 per share, 20% above the 2021 quarterly dividend, and had $138.8 million remaining under its share-repurchase authorization at October 1, 2022.
- The Inflation Reduction Act’s 1% excise tax on net stock repurchases begins after December 31, 2022. Management did not expect the new corporate alternative minimum tax to apply immediately but noted potential future effects on taxes and cash flow.
- Environmental liabilities totaled $55.8 million, with 28 active investigation or remediation sites. Management estimated a potential high-end environmental liability of $98 million and acknowledged that outcomes could materially affect the financial statements.
- The company’s postretirement plan amendment and remeasurement reduced the projected benefit obligation by $16.9 million and is expected to reduce annual benefit payments by approximately $1 million beginning in 2023.
Most important facts for investors to verify
- Whether pricing and productivity actions continue to offset inflation, supply-chain costs, and labor pressures without further gross-margin erosion.
- The sustainability of organic growth across the three segments, particularly automotive demand in Motion Technologies and project timing in Industrial Process.
- Commercial-paper refinancing and interest-rate exposure given the increase in short-term debt and higher borrowing costs.
- The financial and operational consequences of any sale, disposition, or wind-down of ITT’s Russian operations.
- The resolution of preliminary purchase-price allocations for Habonim and the Clippard product-line acquisition.
- Potential exposure from environmental matters, tax examinations, foreign-exchange movements, cybersecurity, and geopolitical disruption.
- The extent to which share repurchases, dividends, acquisitions, and capital expenditures affect liquidity and leverage.