ITT Corporation 2012 Form 10-K Summary
Business context and reporting period
ITT Corporation filed its annual report for the fiscal year ended December 31, 2012. ITT is a diversified manufacturer of engineered components and technology solutions serving energy, transportation, aerospace, defense and industrial markets. Its four reportable segments are Industrial Process, Motion Technologies, Interconnect Solutions and Control Technologies. The filing presents Exelis and Xylem as discontinued operations following the October 31, 2011 spin-off.
ITT had approximately 9,000 employees, operations in more than 30 countries and 61.0% of 2012 sales outside the United States. The fourth quarter of 2012 generated revenue of $554.3 million, income from continuing operations of $22.1 million and net income of $32.4 million.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $2,227.8 million | $2,085.6 million | 6.8% increase |
| Gross profit | $680.2 million | $645.0 million | 5.5% increase |
| Gross margin | 30.5% | 30.9% | Down 40 basis points |
| Operating income (loss) | $151.5 million | $(244.9) million | Returned to profitability |
| Operating margin | 6.8% | (11.7)% | Improved 1,850 basis points |
| Income from continuing operations | $109.5 million | $(576.5) million | Returned to profitability |
| Diluted EPS from continuing operations | $1.16 | $(6.22) | Improved |
| Net income (loss) | $125.4 million | $(129.5) million | Returned to profitability |
| Operating cash flow | $247.1 million | $(322.4) million | Improved $569.5 million |
| Adjusted free cash flow | $271.1 million | $(30.0) million | Improved |
| Cash and cash equivalents | $544.5 million | $689.8 million | Down $145.3 million |
| Total debt and capital leases | $26.9 million | $6.5 million | Increase primarily from Bornemann debt |
Adjusted income from continuing operations was $158.0 million, or $1.68 per diluted share, compared with $117.9 million, or $1.20 per diluted share, in 2011. Adjusted free cash flow conversion was 172% in 2012. Capital expenditures were $83.8 million, and the company spent $193.2 million on acquisitions, principally the Bornemann acquisition.
ITT had no commercial paper outstanding at year-end and no borrowings under its $500 million revolving credit facility. The company reported compliance with its 3.0 times maximum leverage and minimum interest coverage covenants. It paid $34.2 million of dividends and repurchased $116.8 million of common stock during 2012.
Material changes versus the prior comparable period
- Industrial Process revenue increased 24.7% to $955.8 million, supported by oil and gas, mining, North American activity, backlog fulfillment and the Bornemann acquisition. Operating income increased 8.5% to $99.3 million, although operating margin declined to 10.4% from 11.9%.
- Motion Technologies revenue declined 1.3% to $626.2 million because of unfavorable foreign currency translation; organic revenue increased 6.0%. Operating income declined 2.6% to $83.1 million.
- Interconnect Solutions revenue declined 10.1% to $375.7 million, while operating income fell 81.7% to $6.9 million. The filing cites market-share losses, weaker connector demand, distributor inventory rebalancing and declines in communications, aerospace and transportation.
- Control Technologies revenue declined 2.9% to $277.1 million, partly because a Chinese rail program ended. Operating income increased 5.6% to $58.3 million and operating margin improved to 21.0%.
- Asbestos-related costs declined to $50.9 million from $100.4 million. A September 2012 settlement reduced recorded asbestos liabilities by $245.2 million and related assets by $233.8 million, and provided a $10.0 million cash payment.
- Transformation costs declined to $13.0 million from $396.1 million in 2011. Management did not expect significant additional transformation costs after 2012.
- ITT acquired Bornemann for $193.2 million net of cash acquired on November 28, 2012. Bornemann contributed $10.5 million of 2012 revenue and a $4.6 million operating loss from acquisition through year-end.
- ITT sold its Shape Cutting Businesses for net proceeds of $38.4 million and recorded $15.9 million of earnings from discontinued operations, including a $9.0 million pretax gain on sale.
Guidance, outlook, commentary and risks
Management’s long-term objectives are approximately 5% to 7% average annual organic revenue growth, 50 to 70 basis points of annual operating-margin expansion, adjusted free cash flow conversion above 105% and adjusted EPS growth of 10% to 15% annually. For 2013, management emphasized margin improvement, Lean and Value-Based Lean Six Sigma initiatives, continued technology investment, acquisitions and improvement of the Interconnect Solutions cost structure.
- Industrial Process expected continued support from North American oil and gas production, although management expected growth to be weighted toward the second half of 2013.
- Motion Technologies expected further automotive platform penetration in North America and Asia, but anticipated a low-single-digit decline in first-quarter orders amid European automotive weakness.
- Interconnect Solutions expected revenue initiatives and recovery efforts to produce growth weighted toward the second half of 2013.
- Control Technologies expected commercial aviation and industrial strength to be offset by declines in defense and the Opto actuator retrofit program.
- Management expected approximately $20 million to $30 million of additional repositioning costs in 2013, with related cash outflows of approximately $30 million to $40 million.
Key risks include asbestos litigation and uncertain insurance recoveries, environmental liabilities, global economic and industry cyclicality, foreign currency movements, commodity costs, supply-chain disruptions, customer and distributor concentration, tax examinations and deferred-tax valuation allowances, pension underfunding, goodwill and intangible-asset impairment, product liability, regulatory compliance, cybersecurity and the ability to realize acquisition and restructuring benefits.
At December 31, 2012, the recorded asbestos liability was $1,347.4 million and the related recovery asset was $607.9 million, resulting in net exposure of $739.5 million. ITT estimated net asbestos cash outflows of $10 million to $20 million annually over the next five years, increasing to approximately $35 million to $45 million annually thereafter. The filing states that potential claims beyond the next ten years are probable but not reasonably estimable.
Environmental liabilities were $96.1 million, with a reasonably possible range of $76.9 million to $167.1 million. Global postretirement plans were underfunded by $343.0 million. The company also disclosed $385.7 million of contractual obligations, excluding asbestos liabilities, uncertain tax positions and future postretirement contributions.
Most important facts to verify
- Whether Interconnect Solutions can reverse its 2012 market-share and profitability decline.
- The sustainability of 2012 operating cash flow and the company’s 172% adjusted free cash flow conversion.
- Actual integration results, final purchase-price allocation and future performance of Bornemann.
- Future asbestos claim activity, insurance recoveries, policy exhaustion and net cash outflows.
- The scale and timing of 2013 repositioning and restructuring costs and expected savings.
- The realizability of deferred tax assets, given the $493.9 million valuation allowance and continuing cumulative loss position.
- Funding requirements for the $343.0 million postretirement-plan deficit.
- Customer and distributor concentration, including two distributors representing approximately 60% of Motion Technologies revenue and 16% of consolidated ITT revenue.
- The effect of discontinued operations and the 2011 spin-off when comparing reported historical results.