ITT Inc. 2017 Form 10-K Summary
Business context and reporting period
ITT Inc. is a diversified manufacturer of engineered components and technology solutions serving transportation, industrial, aerospace and defense, and oil and gas markets. Operations are organized into Industrial Process, Motion Technologies, and Connect & Control Technologies. The filing covers the fiscal year ended December 31, 2017, with comparative 2016 and 2015 information. ITT had approximately 10,000 employees, generated sales in more than 100 countries, and derived 67% of 2017 sales from outside the United States.
ITT acquired Axtone Railway Components on January 26, 2017 for $123.1 million. Axtone contributed approximately $74 million of 2017 revenue and was included in Motion Technologies.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $2,585.3 million | $2,405.4 million | 7.5% |
| Organic revenue growth | 3.2% | (7.3%) | Improved |
| Gross profit | $817.2 million | $758.2 million | 7.8% |
| Gross margin | 31.6% | 31.5% | +10 bps |
| Operating income | $309.7 million | $258.9 million | 19.6% |
| Operating margin | 12.0% | 10.8% | +120 bps |
| Income from continuing operations attributable to ITT | $115.0 million | $181.9 million | (36.8%) |
| Net income attributable to ITT | $113.5 million | $186.1 million | (39.0%) |
| Diluted EPS | $1.28 | $2.07 | (38.2%) |
| Operating cash flow | $247.4 million | $240.7 million | 2.8% |
| Capital expenditures | $113.3 million | $111.4 million | 1.7% |
| Adjusted free cash flow | $230.6 million | $200.5 million | 15.0% |
| Cash and cash equivalents | $389.8 million | $460.7 million | Decrease |
| Total debt and capital leases | $171.9 million | $216.3 million | Decrease |
The 2017 effective tax rate was 62.9%, including a provisional $129.2 million charge related to the Tax Cuts and Jobs Act. Excluding the Tax Act, the effective tax rate was 21.1%, compared with 29.4% in 2016. Adjusted income from continuing operations was $230.4 million, or $2.59 per diluted share, compared with $208.1 million, or $2.32 per diluted share, in 2016.
Commercial paper outstanding was $162.4 million at year-end, while ITT had no borrowings under its $500 million revolving credit facility. The facility matures in November 2021 and requires a leverage ratio no higher than 3.0 times and interest coverage of at least 3.0 times; ITT was compliant at year-end. Long-term debt and capital leases totaled $9.5 million.
Segment performance and material changes
- Industrial Process: Revenue declined 2.8% to $807.2 million, primarily because of lower project pump and valve activity in oil and gas, mining, and chemical markets. Operating income increased 77.6% to $59.5 million and margin improved to 7.4% from 4.0%, driven by restructuring, productivity, sourcing, and project execution improvements.
- Motion Technologies: Revenue increased 19.6% to $1,176.0 million, including Axtone and favorable foreign exchange. Organic revenue increased 9.8%, led by automotive brake-pad share gains and rail demand. Operating income increased 10.9% to $190.0 million, although margin declined to 16.2% from 17.4% due to pricing, mix, commodity costs, and investments supporting new platforms.
- Connect & Control Technologies: Revenue increased 1.6% to $605.6 million and operating income increased 2.3% to $66.7 million. Oil and gas connector revenue increased approximately 31%, but aerospace and defense revenue declined because of weaker commercial aerospace demand and restrictions affecting certain military-specification connectors.
- Orders and backlog: Total orders increased 6.2% organically to $2.52 billion. Backlog increased to $869.7 million from $785.1 million, with nearly all year-end 2017 backlog expected to be fulfilled during 2018.
- Cash deployment: ITT invested $113.7 million in the Axtone acquisition, spent $113.3 million on capital expenditures, paid $45.4 million in dividends, and repurchased approximately $30.0 million of common stock.
Guidance, outlook, risks, contingencies and unusual items
Management expects 2018 growth to be driven by global friction and rail share gains, improved short-cycle industrial and chemical pump demand, and stabilization in key end markets. Expected challenges include higher commodity costs, pricing pressure, non-functional corporate costs, and continued execution requirements. ITT planned approximately $50 million of 2018 share repurchases and announced a 5% increase in its first-quarter 2018 dividend to $0.134 per share.
- The fourth quarter included a $66.0 million loss from continuing operations attributable to ITT, primarily reflecting the Tax Act charge. Full-year profitability and adjusted results were positive.
- ITT recorded an asbestos liability of $877.2 million and estimated insurance recoveries of $368.7 million, resulting in net exposure of $508.5 million. The estimate covers pending claims and claims projected for the next 10 years, not claims beyond 2027. Future costs and recoveries are highly uncertain.
- There were approximately 26,000 pending active asbestos claims at December 31, 2017. Net asbestos cash outflows are projected at approximately $20 million to $30 million annually over the next five years, increasing thereafter.
- Environmental liabilities totaled $73.9 million, with a reasonably possible high-end exposure of $126.3 million. Management estimates annual environmental spending of $10 million to $12 million.
- The Department of Justice is investigating certain Connect & Control Technologies connector products. ITT accrued $5 million as its current best estimate of the minimum probable loss, but stated that the ultimate loss could be higher and could not be estimated.
- The Defense Logistics Agency removed six military-specification connector products from its Qualified Products List. Related annual sales were estimated at $8 million to $10 million, with uncertainty regarding further effects.
- ITT’s largest customer represented approximately 11.1% of 2017 revenue and approximately 11% of outstanding trade receivables. Combined sales to Continental and TRW represented 35% of Motion Technologies revenue.
- The Tax Act amounts were provisional under SAB 118. The filing states that the final impact could differ materially as additional analysis and regulatory guidance become available.
- Postretirement benefit obligations exceeded plan assets by $230.4 million at year-end. ITT expects approximately $5 million of global pension contributions and $8 million of other benefit contributions in 2018.
Most important facts for investors to verify
- Whether 2018 revenue and margin improvements materialize in Industrial Process, particularly in oil and gas, chemical, and mining markets.
- The sustainability of Motion Technologies’ organic growth and whether commodity and pricing pressures continue to compress margins.
- The outcome and commercial impact of the DOJ investigation and the military-connector Qualified Products List removal.
- Actual tax expense and cash taxes after finalization of the provisional Tax Act accounting, including GILTI and foreign-earnings rules.
- Future asbestos claims, insurance recoveries, insurer solvency, and net annual cash outflows beyond the company’s current 10-year estimate.
- Environmental remediation costs relative to the $73.9 million recorded liability and $126.3 million high-end estimate.
- Cash conversion after acquisition spending, capital expenditures, dividends, repurchases, pension contributions, and asbestos payments.
- Completion of the planned excess-property sale, which was expected to generate approximately $41 million of proceeds and a $38 million to $40 million gain if closed.