ITT Inc. Form 10-K Summary
Business Context and Reporting Period
ITT Inc. filed its Form 10-K for the fiscal year ended December 31, 2021. ITT is a diversified manufacturer of highly engineered components and customized technology solutions serving transportation, industrial, energy, aerospace, defense, and related markets. Operations are organized into Motion Technologies (MT), Industrial Process (IP), and Connect & Control Technologies (CCT). The company reported approximately $2.8 billion of sales across approximately 125 countries, with 70% of revenue generated outside the United States and approximately 9,900 employees in 35 countries.
Financial Results and Key Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $2,765.0 million | $2,477.8 million | 11.6% increase |
| Gross profit | $899.5 million | $782.2 million | 15.0% increase |
| Gross margin | 32.5% | 31.6% | 90 basis-point increase |
| Operating income | $504.3 million | $226.5 million | 122.6% increase |
| Operating margin | 18.2% | 9.1% | 910 basis-point increase |
| Income from continuing operations attributable to ITT | $314.8 million | $68.5 million | 359.6% increase |
| Diluted EPS from continuing operations | $3.64 | $0.78 | Increase |
| Net income attributable to ITT | $316.3 million | $72.5 million | 336.3% increase |
| Effective tax rate | 37.2% | 18.0% | Increase |
Adjusted revenue was $2,717 million, up 10%; adjusted segment operating income was $477 million, up 27%; adjusted income from continuing operations was $350.5 million, up 26%; and adjusted diluted EPS was $4.05, up 27%. These are non-GAAP measures and should be evaluated against the company’s reconciliations.
- Motion Technologies: Revenue of $1,368.6 million, up 22.1%; operating income of $258.2 million, up 40.3%; operating margin increased to 18.9% from 16.4%.
- Industrial Process: Revenue of $843.2 million, essentially flat; operating income of $126.8 million, up 63.4%; operating margin increased to 15.0% from 9.2%. Orders increased 17.9% to $940.8 million, and year-end backlog increased 21.0% to $444.4 million.
- Connect & Control Technologies: Revenue of $554.7 million, up 7.4%; operating income of $81.7 million, up 43.3%; operating margin increased to 14.7% from 11.0%.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Net cash used in operating activities was $8.4 million, compared with $435.9 million of cash provided in 2020. The decline primarily reflected the $398.0 million cash contribution related to the divestiture of the entity holding legacy asbestos liabilities and increased working capital investment.
- Capital expenditures were $88.4 million, compared with $63.7 million in 2020. Net cash used in investing activities was $82.3 million.
- Net cash used in financing activities was $99.8 million, including $116.5 million of share repurchases and $75.8 million of dividends.
- Cash and cash equivalents were $647.5 million at December 31, 2021, compared with $859.8 million at year-end 2020.
- Total debt was $207.5 million, consisting primarily of $195.4 million of commercial paper and $12.1 million of long-term debt. ITT had no borrowings under its revolving credit facility.
- The company entered into a $700 million revolving credit facility maturing in August 2026, with potential commitments of up to $1.05 billion subject to conditions. Management stated that liquidity should be sufficient to fund operations for at least the next 12 months and beyond.
- ITT repurchased 1.2 million shares for $104.8 million under its share repurchase program and paid $0.88 per share in declared dividends, a 30% increase from 2020.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by MT, particularly automotive friction products, and by CCT connector sales. IP revenue was flat because declines in baseline pumps and project pumps offset growth in parts and valves.
- Operating performance improved from higher volume, productivity savings, commercial actions, lower restructuring costs, and the absence of 2020 asset impairment charges. Results were partially offset by higher raw material, shipping, and labor costs.
- Operating expenses declined to $395.2 million from $555.7 million, primarily because 2021 included a $74.4 million net asbestos-related benefit, compared with $66.3 million of net asbestos-related costs in 2020. Restructuring costs also declined to $9.6 million from $43.0 million.
- Income from continuing operations benefited from the absence of the $108.2 million after-tax pension settlement charge recorded in 2020 and the absence of $48.9 million of after-tax asbestos charges recorded in 2020. These benefits were partly offset by a $28.1 million after-tax loss associated with the 2021 asbestos divestiture.
- The effective tax rate increased substantially because ITT recorded $116.9 million of tax expense from reversing deferred tax assets related to the asbestos divestiture.
- Inventory increased to $430.9 million from $360.5 million, and receivables increased to $555.1 million from $507.5 million, reflecting growth and working capital investment.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide specific 2022 revenue or earnings guidance. Management expects supply-chain disruptions, inflation, labor shortages, raw-material and shipping-cost pressures, and tariff effects to continue in 2022, but reported that pricing actions, productivity savings, fixed-price supplier contracts, and supply-chain initiatives partially mitigated these pressures in 2021.
- COVID-19 remains a significant uncertainty, including potential variants, workplace restrictions, vaccination requirements, employee illness, labor shortages, supply interruptions, customer financial distress, and changes in demand.
- Automotive semiconductor shortages affected OEM customers and may continue to affect demand, although MT continued to outperform global automotive production rates.
- CCT component sales declined 11%, primarily in aerospace. Management did not expect significant aerospace improvement until the second half of 2022 at the earliest because of customer inventory levels.
- Continental AG represented approximately 9.8% of consolidated 2021 revenue. Its 10-year aftermarket agreement with MT was scheduled to expire in 2023, and renewal discussions were ongoing at the filing date.
- ITT completed the divestiture of InTelCo Management LLC on July 1, 2021. The transaction transferred legacy asbestos-related assets and liabilities, eliminated reported asbestos-related cash outflows, generated an $88.8 million pretax gain, and resulted in a $28.1 million after-tax loss due to related tax expense.
- Environmental liabilities were $54.1 million at year-end, with a reasonably possible high-end estimated exposure of $93.8 million. ITT estimated approximately $4 million of annual environmental investigation and remediation spending based on historical experience.
- Postretirement benefit obligations totaled $213.8 million at year-end, and the company estimated approximately $14 million of 2022 contributions to pension and other postretirement plans.
- Other principal risks include customer concentration, cyclical aerospace, energy, chemical, mining, and automotive markets; foreign-exchange and commodity-price volatility; cybersecurity; product liability; government contracting; tax audits; environmental matters; and liabilities associated with past divestitures.
Important Facts for Investors to Verify
- Assess the sustainability of 2021 earnings excluding the asbestos divestiture benefit, lower restructuring costs, prior-year pension charges, and other special items.
- Monitor operating cash flow and working capital, particularly inventory and receivables, after the one-time $398.0 million asbestos-related contribution.
- Verify the extent to which pricing actions and productivity savings offset continued steel, component, freight, and labor inflation in 2022.
- Track IP order conversion and backlog fulfillment, automotive semiconductor conditions, and the timing of aerospace recovery.
- Review the renewal outcome and commercial terms of the Continental aftermarket agreement scheduled to expire in 2023.
- Evaluate liquidity and refinancing exposure associated with $195.4 million of commercial paper and compliance with the revolving facility’s leverage covenant.
- Review environmental reserves, indemnification obligations related to InTelCo and other historical businesses, tax examinations, and the potential range of contingent liabilities.