ITT Corporation: 2015 First-Quarter Form 10-Q Summary
Business context and reporting period
ITT is a diversified manufacturer of engineered components and technology solutions serving energy, transportation and industrial markets. Its reportable segments are Industrial Process, Motion Technologies, Interconnect Solutions and Control Technologies. The filing covers the three months ended March 31, 2015, with comparisons to March 31, 2014. Amounts are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|
| Revenue | $588.7 | $674.5 | Down 12.7% |
| Gross profit | $199.0 | $214.8 | Down 7.4% |
| Gross margin | 33.8% | 31.8% | Up 200 basis points |
| Operating income | $57.9 | $48.3 | Up 19.9% |
| Operating margin | 9.8% | 7.2% | Up 260 basis points |
| Income from continuing operations attributable to ITT | $38.7 | $33.2 | Up 16.6% |
| Adjusted income from continuing operations | $59.9 | $57.4 | Up 4.4% |
| Net income attributable to ITT | $42.1 | $32.2 | Up 30.7% |
| Diluted EPS | $0.46 | $0.35 | Up $0.11 |
| Adjusted diluted EPS from continuing operations | $0.65 | $0.62 | Up $0.03 |
- Revenue declined primarily because of $50.6 of unfavorable foreign-currency translation and a 5.2% organic decline. Management cited weakness in industrial, oil and gas, aerospace and defense markets.
- Operating income benefited from lower restructuring costs, prior restructuring and Lean savings, cost containment and lower corporate costs. These benefits more than offset lower volume, foreign exchange effects and Interconnect Solutions production-transition disruptions.
- Income from discontinued operations was $3.4, compared with a $1.0 loss in the prior-year quarter, principally reflecting a German tax audit related to a business spun off in 2011.
- Income tax expense increased to $18.1 from $13.0, and the effective tax rate rose to 31.9% from 27.5%, primarily because no tax benefit was recorded for a German operating loss.
- Net cash provided by operating activities was $8.2, compared with cash used of $13.2 in Q1 2014. Capital expenditures were $30.2, resulting in reported adjusted free cash flow of negative $9.1.
- Cash and cash equivalents were $570.1 at March 31, 2015, compared with $584.0 at December 31, 2014. Net cash decreased $13.9 during the quarter, including a $15.8 foreign-exchange impact.
- Commercial paper outstanding was $113.5 at quarter-end, with a weighted-average interest rate of 0.67% and maturities of less than one month. No commercial paper was outstanding at December 31, 2014. No amounts were outstanding under the $500 revolving credit agreement.
- ITT repurchased approximately $80.0 of common stock under its repurchase program and declared a quarterly dividend of $0.1183 per share, a 7.5% increase from the prior year.
Segment results
| Segment | Q1 2015 revenue | Revenue change | Q1 2015 operating margin |
|---|
| Industrial Process | $255.6 | Down 10.5% | 8.0% |
| Motion Technologies | $191.2 | Down 12.2% | 21.4% |
| Interconnect Solutions | $77.5 | Down 22.5% | 6.2% |
| Control Technologies | $65.8 | Down 9.7% | 21.7% |
- Motion Technologies was the only segment with organic revenue growth, up 2.8%, driven by global OEM automotive brake-pad platforms.
- Interconnect Solutions was adversely affected by weak demand, end-of-life platforms and production-line relocation from Santa Ana to Nogales, Mexico.
- Industrial Process revenue and orders were pressured by project delays and oil and gas, chemical and industrial-market weakness. Backlog was $601.0 at March 31, 2015.
- Total orders declined 12.9% to $607.7, including a $54.3 foreign-exchange impact; organic orders declined 5.1%.
Material changes, outlook and unusual items
- In March 2015, ITT initiated Industrial Process restructuring actions involving approximately 200 planned headcount reductions. Expected aggregate costs were approximately $13 to $14 of pre-tax cash costs and $4 to $5 of non-cash costs; $8.9 was recorded in Q1, with approximately $8 to $10 expected over the following six months.
- Restructuring costs were $9.3, compared with $15.3 in Q1 2014. Interconnect Solutions recorded a $0.2 reversal of a prior restructuring liability and does not expect additional charges for that action.
- Management expected to complete an additional $20 of share repurchases during the remainder of 2015. The filing does not provide formal consolidated revenue or earnings guidance.
- Early in Q2 2015, ITT acquired Hartzell Aerospace for $53.1, funded with additional commercial paper. Hartzell reported 2014 revenue of $34 and was assigned to Control Technologies.
- Net asbestos-related costs were $15.4 in Q1. The recorded asbestos liability was $1,226.4, offset by estimated insurance recoveries of $468.1, for net exposure of $758.3. Management cannot reasonably estimate costs for claims beyond the next 10 years.
- ITT reported 47 thousand active asbestos claims at March 31, 2015. Projected net asbestos cash outflows average $15 to $25 annually over the next five years and approximately $40 to $50 annually over the remaining projection period, subject to significant uncertainty.
- Environmental liabilities, net of related assets, were $77.9, with 52 active investigation or remediation sites and a potential high-end liability estimate of $152.
- Unrecognized tax benefits could change by approximately $86.6 over the next 12 months because of audits, statute expirations and other events.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether weaker organic orders, particularly in Industrial Process and Interconnect Solutions, persist or convert into lower revenue and backlog.
- The timing and realized savings from Industrial Process restructuring and the remaining $8 to $10 of expected costs.
- Whether Interconnect Solutions completes the Nogales production transition without further delays, disruption or margin pressure.
- The sustainability of operating-margin expansion after excluding restructuring, asbestos and other special items.
- Cash conversion, working-capital requirements and reliance on commercial paper, particularly after the Hartzell acquisition and share repurchases.
- Actual asbestos claims, insurance recoveries and cash payments relative to recorded estimates, including exposure beyond the 10-year projection period.
- Results of ongoing tax examinations, including the U.S. federal audit and potential changes to unrecognized tax benefits.
