ITT Corporation Form 10-Q Summary
Business Context and Reporting Period
ITT Corporation is a global engineering and manufacturing company operating through Defense & Information Solutions, Fluid Technology, and Motion & Flow Control. This unaudited Form 10-Q covers the three and six months ended June 30, 2010, compared with the corresponding 2009 periods.
Financial Results and Key Metrics
| Metric | Q2 2010 | Q2 2009 | Change | Six Months 2010 | Six Months 2009 |
|---|---|---|---|---|---|
| Total revenue | $2,739 million | $2,719 million | 0.7% | $5,317 million | $5,225 million |
| Gross profit | $781 million | $769 million | 1.6% | $1,499 million | $1,429 million |
| Gross margin | 28.5% | 28.3% | +20 bps | 28.2% | 27.3% |
| Operating income | $324 million | $303 million | 6.9% | $569 million | $521 million |
| Operating margin | 11.8% | 11.1% | +70 bps | 10.7% | 10.0% |
| Income from continuing operations | $226 million | $200 million | 13.0% | $370 million | $384 million |
| Diluted EPS from continuing operations | $1.22 | $1.09 | 13.0% | $2.00 | $2.09 |
| Net income | $238 million | $201 million | 18.4% | $384 million | $385 million |
Adjusted income from continuing operations was $211 million, or $1.14 per diluted share, in the second quarter, versus $193 million, or $1.05 per diluted share, in the prior-year quarter. Six-month adjusted income was $365 million, or $1.97 per diluted share, versus $323 million, or $1.76 per diluted share.
- Q2 revenue growth reflected $47 million of net acquisition and divestiture effects, offset by an $8 million organic decline and a $19 million foreign-currency headwind.
- Six-month organic revenue was essentially flat; acquisitions contributed $60 million and foreign currency contributed $31 million.
- Operating improvement was driven by productivity, sourcing, restructuring, and mix benefits. R&D expense increased to $60 million in Q2 and $123 million year to date.
- Orders declined 21.0% in Q2 and 12.1% year to date, mainly because the 2009 periods included unusually large Defense awards.
- Cash flow from operating activities was $356 million in the first six months, down from $546 million in 2009. Free cash flow, defined by management as operating cash flow less capital expenditures, was approximately $250 million.
- Investing cash flow was negative $504 million, including $401 million for acquisitions and $106 million of capital expenditures.
- Cash and cash equivalents declined to $844 million at June 30, 2010 from $1.216 billion at December 31, 2009.
- Total debt was $1.469 billion, comprising $106 million of short-term debt and current maturities and $1.363 billion of long-term debt. Debt-to-total-capitalization was 26.8%; net debt was $625 million.
- ITT had a $1.75 billion revolving credit facility and stated that available cash, committed credit, commercial paper access, and public debt-market access were adequate for liquidity needs. The company was in compliance with applicable financial covenants.
- The quarterly dividend declared was $0.25 per common share, compared with $0.2125 in Q2 2009.
Segment Performance and Material Changes
| Segment | Q2 2010 Revenue | Q2 Operating Income | Q2 Margin | Six-Month Revenue | Six-Month Operating Income |
|---|---|---|---|---|---|
| Defense | $1,503 million | $194 million | 12.9% | $2,896 million | $335 million |
| Fluid | $878 million | $130 million | 14.8% | $1,679 million | $221 million |
| Motion & Flow | $361 million | $42 million | 11.6% | $748 million | $97 million |
- Defense revenue declined 2.7% in Q2 and 3.5% year to date, primarily due to lower CREW 2.1 and SINCGARS activity. Six-month operating income declined 6.4%. Funded backlog was $4.1 billion at June 30, 2010, versus $5.2 billion at December 31, 2009.
- Fluid revenue increased 1.0% in Q2 and 4.1% year to date, including acquisition contributions. Operating income increased 16.1% in Q2 and 22.8% year to date. Backlog increased to $960 million from $824 million at year-end.
- Motion & Flow revenue increased 17.2% in Q2 and 21.8% year to date, supported by automotive, rail, connectors, and industrial recovery. Operating income increased 27.3% in Q2 and 59.0% year to date. Backlog was $347 million versus $381 million at year-end.
- ITT acquired Nova Analytics for a preliminary $385 million, primarily within Fluid Technology. The acquisition added $238 million of goodwill and was not material to Q2 or year-to-date results.
- ITT agreed to acquire Godwin Pumps for $585 million. Closing was expected in the third quarter of 2010, subject to customary regulatory approvals, with funding expected primarily through commercial paper.
- CAS, Inc., a Defense component, was classified as held for sale and reported as discontinued operations. It generated Q2 revenue of $57 million and operating income of $5 million.
- Q2 restructuring charges were $10 million; first-half charges were $27 million. Approximately 342 planned position reductions remained at June 30, with most expected to be completed by year-end.
Guidance, Outlook, Risks, and Unusual Items
- Management projected 2010 adjusted income from continuing operations of $4.08 to $4.18 per diluted share.
- Management projected full-year 2010 organic revenue of approximately $6.0 billion for Defense, $3.6 billion for Fluid, and $1.4 billion for Motion & Flow.
- Management expected approximately $10 million of additional restructuring costs during the remainder of 2010 and estimated approximately $65 million of annual savings from first-half restructuring actions.
- The Q2 tax rate was 25.9%, aided by a $15 million reversal of previously unrecognized tax benefits following completion of a tax audit. The six-month tax rate was 29.4%, including a $12 million first-quarter charge related to the Healthcare Reform Act and favorable 2009 comparison effects from a $58 million tax benefit.
- Asbestos-related costs were $12 million in Q2 and $27 million year to date. At June 30, the asbestos liability was $931 million and the related asset was $641 million, producing a $290 million net amount.
- ITT had 104,865 open asserted asbestos claims at June 30, 2010. Management warned that the planned third-quarter reassessment of asbestos assumptions could materially increase or decrease the recorded liability and related asset.
- Environmental liabilities totaled $138 million; the filing disclosed a reasonably possible liability range of $120 million to $259 million across 99 active sites.
- Key risks include changes in Defense budgets and program funding, declining Iraq and Afghanistan-related activity, economic weakness in Europe and municipal markets, commodity and labor costs, foreign exchange, acquisition execution, liquidity and refinancing conditions, pension and postretirement obligations, asbestos exposure, environmental matters, and government-contract compliance.
- Management stated that no material changes occurred in market-risk disclosures, risk factors, critical accounting estimates, or internal control effectiveness during the quarter.
Important Facts for Investors to Verify
- Whether the Godwin acquisition closed on expected terms and how its financing affected debt and cash flow.
- The results of the third-quarter 2010 asbestos liability reassessment and any resulting charges or changes in insurance recoveries.
- Defense backlog conversion, new awards, and exposure to reductions in government and overseas contingency spending.
- Whether the reported cash-flow decline was temporary working-capital timing or a persistent deterioration in cash generation.
- Progress on the Defense realignment, facility closures, planned headcount reductions, and realization of projected savings.
- Completion and valuation of the CAS divestiture and the effect of discontinued operations on future revenue and earnings comparisons.
- Compliance with debt covenants and the effect of commercial-paper funding for acquisitions on leverage and liquidity.