ITT Inc. 2021 Q1 Form 10-Q Summary
Business Context and Reporting Period
ITT Inc. is a diversified manufacturer of engineered components and technology solutions serving transportation, industrial, and energy markets. Its reportable segments are Motion Technologies (MT), Industrial Process (IP), and Connect & Control Technologies (CCT). The unaudited filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Key Financial Metrics
<>| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $698.4 million | $663.3 million | 5.3% increase |
| Gross profit | $229.0 million | $209.4 million | 9.4% increase |
| Gross margin | 32.8% | 31.6% | Up 120 basis points |
| Operating income | $109.9 million | $109.3 million | 0.5% increase |
| Operating margin | 15.7% | 16.5% | Down 80 basis points |
| Net income attributable to ITT | $86.2 million | $84.8 million | 1.7% increase |
| Diluted EPS | $0.99 | $0.96 | 3.1% increase |
| Adjusted diluted EPS | $1.06 | $0.80 | 33% increase |
| Cash flow from operating activities | $70.8 million | $53.5 million | 32.3% increase |
Segment revenue and operating income were $369.1 million and $76.0 million for MT, $202.3 million and $31.0 million for IP, and $127.3 million and $11.8 million for CCT. Segment operating margin was 17.0%, compared with 11.7% in the prior-year quarter.
Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $780.2 million at March 31, 2021, compared with $859.8 million at December 31, 2020.
- Total debt and finance leases were $73.7 million, including $58.8 million of commercial paper. ITT had no outstanding borrowings under its revolving credit agreements.
- Net cash used in investing activities was $17.1 million, including $17.2 million of capital expenditures.
- Net cash used in financing activities was $122.8 million, reflecting $61.0 million of share repurchases, $19.1 million of dividends paid, and $42.6 million of net commercial paper repayments.
- The company declared a quarterly dividend of $0.22 per share and repurchased 0.6 million shares for $50.0 million under its repurchase plans.
- Management stated that ITT expects sufficient liquidity to fund operations for at least the next 12 months and beyond. The $200 million incremental revolving credit agreements expired in April 2021 and were not renewed; the existing $500 million revolving credit agreement matures in November 2022.
Material Changes Versus the Prior Comparable Period
- Revenue increased 5.3%, including a $25.0 million favorable foreign-exchange impact. Organic revenue increased 1.5%.
- MT revenue increased 23.9%, driven by automotive recovery and strong Friction business performance. MT operating margin improved to 20.6% from 17.8%.
- IP revenue declined 11.0% because of lower oil and gas activity and weaker short-cycle demand, while operating income increased substantially due partly to the absence of prior-year impairment charges and restructuring and productivity benefits. IP operating margin improved to 15.3% from 3.9%.
- CCT revenue declined 8.2%, primarily because of reduced aerospace and defense demand related to lower commercial air traffic. CCT operating margin declined to 9.3% from 11.5%.
- Gross margin improved from productivity and higher volume, partly offset by increased steel, copper, and tin costs.
- Operating income benefited from the absence of $16.3 million of prior-year asset impairment charges, but the prior-year period included a $40.7 million net asbestos-related benefit, including a $52.5 million insurance settlement gain. Q1 2021 included $2.4 million of asbestos-related costs.
- Operating cash flow improved despite increased receivables and inventory to support sales growth.
Guidance, Outlook, Commentary, and Risks
The filing does not provide clear formal full-year financial guidance. Management reported that the business began recovering from the COVID-19 pandemic and that cost actions taken in 2020 improved the company’s operating position. Management expects CCT sales to improve in the second half of 2021 as commercial air travel increases.
- Automotive semiconductor shortages may temporarily reduce production at OEM customers, although ITT did not expect a material impact on its MT Friction business at the filing date.
- Commodity inflation, supply constraints, and the expiration of fixed-price supplier contracts could pressure future margins. ITT intends to mitigate some effects through pricing actions.
- COVID-19 resurgence, new variants, vaccine effectiveness and adoption, supply-chain disruption, customer demand, and operational restrictions remain material uncertainties.
- ITT expects approximately $3 million of additional restructuring charges during the remainder of 2021 to complete its 2020 Global Restructuring Plan.
- Asbestos liabilities were $909.9 million and related assets were $421.8 million at March 31, 2021. ITT estimated recovery of approximately 46% of asbestos indemnity and defense costs from insurers. Net asbestos cash outflows are projected to average $20 million to $30 million annually over the next ten years, with declines thereafter, although actual outcomes may differ materially.
- Approximately 25.6 thousand asbestos claims were pending at quarter-end. Environmental liabilities were $56.1 million, with 27 active investigation or remediation sites and an estimated high-end potential liability of $96.8 million.
- Management identified risks from global economic conditions, foreign exchange, customer concentration and capital spending, raw material prices, cybersecurity, regulatory compliance, intellectual property, product liability, environmental matters, and liabilities from prior divestitures and spin-offs.
Most Important Facts for Investors to Verify
- Whether the recovery in MT and expected aerospace improvement in CCT offset continuing weakness in IP oil and gas markets.
- The effect of commodity inflation, semiconductor shortages, supply constraints, and pricing actions on 2021 margins and cash flow.
- Actual asbestos claim activity, insurance recoveries, and cash outflows compared with current estimates.
- Liquidity after expiration of the $200 million incremental revolving facilities and continued share repurchases and dividends.
- Progress and remaining costs under the 2020 Global Restructuring Plan.
- The sustainability of reported adjusted results, given the significant asbestos benefit and impairment charges in the prior-year comparison.