ITT Inc. 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
ITT Inc. is a diversified manufacturer of engineered components and technology solutions serving transportation, industrial, oil and gas, aerospace and defense, and related markets. Operations are reported through Motion Technologies, Industrial Process, and Connect & Control Technologies. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $711.9 million | $680.6 million | $2,127.3 million | $2,066.7 million |
| Gross profit | $231.3 million | $226.5 million | $682.1 million | $676.7 million |
| Gross margin | 32.5% | 33.3% | 32.1% | 32.7% |
| Operating income | $152.5 million | $137.8 million | $329.1 million | $328.7 million |
| Operating margin | 21.4% | 20.2% | 15.5% | 15.9% |
| Net income attributable to ITT | $118.6 million | $110.9 million | $256.7 million | $281.8 million |
| Diluted EPS from continuing operations | $1.34 | $1.25 | $2.90 | $3.18 |
| Operating cash flow | Not separately provided | Not separately provided | $221.7 million | $246.6 million |
Q3 revenue increased 4.6%, while nine-month revenue increased 2.9%. Q3 adjusted EPS was $0.97, up from $0.82; nine-month adjusted EPS was $2.82, up from $2.41. Adjusted free cash flow was $193.8 million for the nine months, versus $214.1 million in 2018.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $555.7 million at September 30, 2019, compared with $561.2 million at December 31, 2018.
- Total debt and finance leases were $135.3 million, including $120.3 million of commercial paper, compared with $125.0 million at year-end 2018.
- The company had no borrowings under its $500 million revolving credit agreement, which may be increased to $700 million with lender consent. Required interest coverage and leverage ratios were met.
- Net cash used in investing activities was $180.8 million, including $113.1 million for acquisitions and $69.3 million of capital expenditures.
- During the nine months, ITT paid $26.1 million in dividends and repurchased $38.3 million of common stock.
Material Changes Versus the Prior Comparable Period
- Q3 operating income benefited from a $56.2 million net asbestos-related benefit, compared with a $4.3 million benefit in Q3 2018. The benefit primarily reflected the annual asbestos remeasurement and increased estimated insurance recoveries.
- Q3 2018 included a $38.0 million gain on the sale of a former operating location; there was no comparable gain in Q3 2019.
- Despite higher operating income, nine-month net income declined 8.9% because the prior-year period included significant tax benefits. The effective tax rate rose to 22.1% from 13.1%.
- Gross margins declined because of higher commodity costs, tariffs and unfavorable product mix, partly offset by productivity, supply-chain improvements and volume leverage.
- Segment revenue growth was led by Industrial Process, up 17.2% in Q3 and 15.2% year to date. Motion Technologies revenue declined 1.9% in Q3 and 4.6% year to date, while Connect & Control Technologies revenue increased 1.1% in Q3 and 3.1% year to date.
- Q3 orders declined 2.8%, and organic orders declined 3.7%, reflecting project delays, slower industrial demand, weaker defense activity and difficult prior-year comparisons.
- ITT acquired Rheinhütte Pumpen Group for approximately €81 million and Matrix Composites for $25.8 million. Preliminary goodwill recognized for the acquisitions totaled $45.3 million.
- Restructuring costs increased to $10.9 million for the nine months from $3.0 million in 2018.
Guidance, Outlook, Commentary and Risks
- Management described the global economic environment as challenging but cited continued operational-excellence, cost-reduction and supply-chain initiatives.
- Management expects to continue investing in a Connect & Control plating line, Industrial Process pump performance and cost initiatives, Motion Technologies product development, and expanded Mexican production capacity.
- Tariff effects remain uncertain. ITT is pursuing pricing, supplier negotiations, sourcing diversification and manufacturing-footprint actions to mitigate higher input costs.
- Industrial Process backlog was $425.2 million at September 30, 2019, down 4.3% from December 31, 2018.
- Asbestos liabilities and related recoveries remain significant. Recorded asbestos liability and related asset were $827.8 million and $407.1 million, respectively, for a net exposure of $420.7 million. Approximately 24,000 asbestos claims were pending.
- Management cannot reasonably estimate asbestos costs for claims filed beyond 2029 and states that future asbestos costs could materially adversely affect the financial statements. Projected net asbestos cash outflows are expected to average $20 million to $30 million annually over the next five years.
- Environmental liabilities were $62.4 million, with 29 active investigation or remediation sites and an estimated high-end potential liability of $109.0 million.
- The company settled a DOJ civil matter in Q2 2019 for $11 million and received a related $1 million insurance recovery.
- The company adopted the new lease standard in 2019, recognizing an $80.0 million right-of-use asset and an $83.4 million lease liability at adoption. The filing states that the expected credit-loss standard will be adopted beginning January 1, 2020, with its impact still under evaluation.
Most Important Facts for Investors to Verify
- Whether reported operating performance remains strong after excluding the unusually large asbestos benefit and other special items.
- The sustainability of demand, given the decline in orders and Industrial Process backlog.
- The effect of tariffs, commodity costs, foreign exchange and product mix on gross margins.
- The final purchase-price allocations and integration performance for Rheinhütte and Matrix.
- The ultimate magnitude and timing of asbestos liabilities, insurance recoveries and related cash outflows.
- The impact of the higher effective tax rate and the resolution of tax examinations and unrecognized tax benefits.
- Progress in restoring the remaining military-specification connector products to the Qualified Products List, expected by mid-2020.
- Future capital allocation among acquisitions, capital expenditures, dividends and the newly authorized $500 million share-repurchase program.