ITT Inc. 2021 Q2 Form 10-Q Summary
Business context and reporting period
ITT Inc. manufactures highly engineered components and technology solutions for transportation, industrial, and energy markets through Motion Technologies (MT), Industrial Process (IP), and Connect & Control Technologies (CCT). The quarter ended July 3, 2021, was a 13-week period, compared with the 13-week quarter ended June 27, 2020. Results are unaudited and presented in millions except per-share amounts.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $691.6 | $514.7 | $1,390.0 | $1,178.0 |
| Gross profit / margin | $224.6 / 32.5% | $163.6 / 31.8% | $453.6 / 32.6% | $373.0 / 31.7% |
| Operating income / margin | $179.6 / 26.0% | $20.5 / 4.0% | $289.5 / 20.8% | $129.8 / 11.0% |
| Net income attributable to ITT | $39.0 | $48.0 | $125.2 | $132.8 |
| Diluted EPS from continuing operations | $0.45 | $0.53 | $1.44 | $1.49 |
| Adjusted diluted EPS | $0.94 | $0.57 | $2.00 | $1.37 |
Q2 revenue increased 34.4%, including $25.2 of favorable foreign exchange; organic revenue increased 29.5%. Segment operating income rose 205.9% to $114.1, and segment operating margin expanded to 16.5% from 7.2%. Gross margin improved 70 basis points to 32.5%. Management attributed performance primarily to higher volume, productivity savings, and prior-year cost actions, partly offset by raw-material inflation and strategic growth investments.
- Motion Technologies: Q2 revenue increased 72.4% to $343.6 and operating income increased to $64.7 from $10.4; margin improved to 18.8% from 5.2%. Growth was driven by automotive recovery and outperformance versus global automotive production.
- Industrial Process: Revenue increased 10.7% to $213.9 and operating income increased to $31.5 from $18.5. Pump-project revenue increased, while service revenue remained weaker. Six-month orders were $446.7 and backlog was $383.9 at quarter-end.
- Connect & Control Technologies: Revenue increased 9.4% to $134.5 and operating income increased to $17.9 from $8.4. Connector strength offset continued commercial aerospace weakness.
Cash and cash equivalents were $578.8 at July 3, 2021, down from $859.8 at December 31, 2020. Six-month operating cash flow was negative $231.6, principally because of the $398.0 cash contribution supporting the asbestos-related divestiture, higher tax payments, and working-capital investment. Capital expenditures were $35.1. Financing cash flow was negative $5.1, including $38.1 of dividends and $61.4 of share repurchases, partially offset by $95.4 of commercial-paper borrowings.
Total debt and finance leases were $211.1, including $197.4 of commercial paper, compared with $119.8 at year-end 2020. No borrowings were outstanding under the $500 revolving credit facility at July 3. The company stated that it expected sufficient liquidity to fund operations for at least the next 12 months. On August 5, 2021, after quarter-end, ITT replaced that facility with a $700 revolving credit agreement maturing in August 2026, with potential commitments of up to $1,050 subject to lender consent.
Material changes versus the prior comparable period
- Revenue, gross profit, operating income, and segment margins improved substantially as markets recovered from COVID-19-related disruption and prior-year restructuring costs declined.
- Reported net income and GAAP EPS declined despite stronger operating performance because of a $28.1 after-tax loss associated with the asbestos-related divestiture and a $28.1 prior-year tax benefit.
- The effective tax rate increased to 78.6% in Q2 and 57.3% for the first six months, primarily because ITT recorded $116.9 of tax expense from reversing deferred tax assets related to the asbestos transaction.
- Restructuring costs declined to $0.1 in Q2 and $3.7 for the six months, versus $27.9 and $31.0, respectively, in the prior-year periods. The company expects approximately $3 of additional restructuring charges during the remainder of 2021.
- On July 1, 2021, ITT divested InTelCo Management LLC, the entity holding its asbestos-related assets and liabilities, for a $398.0 cash contribution. The transaction generated an $88.8 pretax gain but an after-tax loss of $28.1. ITT stated that it no longer has obligations for pending or future asbestos claims, while retaining uncapped and time-unlimited indemnification obligations for other historical InTelCo liabilities.
Outlook, management commentary, risks, and unusual items
The filing does not provide clear formal full-year revenue, earnings, or margin guidance. Management reported continued recovery but highlighted uncertainty from COVID-19 and the Delta variant, supply-chain disruption, semiconductor shortages affecting automotive customers, skilled-labor shortages, and inflation in steel, copper, tin, and other raw materials. Management expects raw-material inflation and supply constraints to become increasingly unfavorable in the second half of 2021, with partial mitigation from price increases and productivity savings.
Commercial aerospace demand remains pressured by COVID-19 and high OEM inventories; ITT does not expect significant improvement in CCT aerospace sales until early 2022. IP project activity can vary significantly because of customized, long-lead-time orders. The company expects to recognize approximately $560 to $580 of the $832.4 transaction price allocated to unsatisfied or partially satisfied performance obligations during the remainder of 2021.
Other risks include commodity and foreign-exchange volatility, customer capital-spending changes, manufacturing interruptions, quality and product-liability claims, cybersecurity, environmental remediation, tax examinations, government-contracting requirements, intellectual-property matters, and international regulatory and geopolitical developments. ITT reported 27 active environmental investigation or remediation sites, with a potential high-end environmental liability estimate of $91.8 versus an accrued environmental liability of $52.5.
Most important facts for investors to verify
- Whether the strong Q2 organic growth and 16.5% segment operating margin are sustainable after separating volume recovery, foreign exchange, prior-year cost actions, and restructuring comparisons.
- The effect of semiconductor shortages, raw-material inflation, supply constraints, and labor availability on second-half revenue and margins.
- The cash-flow and leverage implications of the $398.0 asbestos-related funding payment and increased commercial-paper borrowings.
- The scope and financial impact of ITT’s uncapped, time-unlimited indemnification for non-asbestos historical InTelCo liabilities.
- The resolution and potential cash impact of environmental matters, tax examinations, and unrecognized tax benefits.
- The terms, covenant headroom, and actual availability of the new $700 revolving credit facility entered into on August 5, 2021.
- The absence of clear formal full-year financial guidance in the filing and the timing of the anticipated commercial aerospace recovery.