ITT Corporation 2014 Q1 Form 10-Q Summary
Business Context and Reporting Period
ITT Corporation 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 unaudited three months ended March 31, 2014, compared with the three months ended March 31, 2013.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $674.5 million | $608.2 million | Up 10.9% |
| Gross profit / margin | $214.8 million / 31.8% | $190.5 million / 31.3% | Margin up 50 bps |
| Operating income / margin | $48.3 million / 7.2% | $37.2 million / 6.1% | Income up 29.8%; margin up 110 bps |
| Income from continuing operations attributable to ITT | $33.2 million; $0.36 diluted EPS | $19.1 million; $0.20 diluted EPS | EPS up $0.16 |
| Net income attributable to ITT | $32.2 million; $0.35 diluted EPS | $20.8 million; $0.22 diluted EPS | Up 54.8% |
| Operating cash flow | $(13.2) million | $(12.3) million | Use increased $0.9 million |
| Capital expenditures | $19.0 million | $16.7 million | Up $2.3 million |
| Cash and equivalents at period end | $515.1 million | $483.1 million | Up $32.0 million year over year |
Net income included a $1.0 million loss from discontinued operations in 2014 versus $1.7 million of income in 2013. The effective tax rate declined to 27.5% from 43.5%, primarily because a 2013 U.S. deferred-tax valuation allowance was not repeated and more income qualified for a Korean tax holiday. The 2014 tax expense included a $1.9 million effect from New York tax-law changes.
At March 31, 2014, total assets were $3.784 billion and total liabilities were $2.544 billion. Total debt and capital leases were $37.6 million, including $27.0 million of commercial paper. The company had no borrowings under its $500 million revolving credit agreement and remained within its interest-coverage and leverage covenants. The quarterly dividend was $0.11 per share, up 10% from the prior year.
Free cash flow was negative: reported operating cash flow less capital expenditures was approximately $(32.2) million. Management's adjusted free cash flow was $(25.1) million, compared with $(17.6) million in the prior-year quarter; this non-GAAP measure excludes selected restructuring, asbestos and other items.
Segment Results and Material Changes
- Industrial Process: Revenue increased 11.2% to $285.5 million, while operating income increased 8.0% to $24.3 million. Growth was led by chemical, oil and gas, and mining projects. The quarter included approximately $21.7 million of revenue from favorable timing of large long-term pump projects. Orders declined 5.3% year over year, and operating margin fell 30 basis points to 8.5% because of mix and project-pricing pressure.
- Motion Technologies: Revenue increased 12.7% to $217.8 million and operating income increased 21.8% to $40.2 million. Higher aftermarket demand, China growth, product mix and manufacturing improvements drove margin expansion to 18.5% from 17.1%.
- Interconnect Solutions: Revenue increased 10.1% to $100.0 million, but reported an operating loss of $3.0 million versus a $1.3 million loss. Results included $14.4 million of restructuring costs. Excluding those costs, operating income improved by $8.3 million and adjusted operating margin improved substantially.
- Control Technologies: Revenue increased 6.3% to $72.9 million and operating income increased 7.6% to $15.5 million. Growth came from commercial aerospace, aftermarket spares, energy-absorption products and natural-gas valves.
Consolidated revenue growth was supported by 15.3% emerging-market growth and 9.2% developed-market growth. Total orders increased 2.4%, with automotive brake-pad and connector strength partly offset by lower industrial-pump mining orders. Backlog in Industrial Process was $691.6 million at March 31, 2014, up 1.5% from December 31, 2013.
Outlook, Commentary, Risks and Unusual Items
- Management emphasized organic investments in automotive brake-pad capacity, an oil and gas center of excellence, Lean initiatives and aftermarket expansion. The filing does not provide a clear consolidated quantitative earnings or revenue guidance range.
- Restructuring costs were $15.3 million, primarily related to approximately 250 planned headcount reductions and production-line transfers in Interconnect Solutions. Management expects approximately $5.0 million of additional costs over the following twelve months and estimates approximately $15 million of annual net savings from actions taken during the quarter.
- Asbestos-related costs were $15.8 million. At March 31, 2014, the recorded asbestos liability was $1.270 billion, associated insurance-recovery asset was $509.4 million, and net estimated exposure was $760.2 million. Approximately 51,000 active asbestos claims were pending.
- Management estimates asbestos-related net cash outflows of $10 million to $20 million annually over the next five years, increasing to approximately $35 million to $45 million over the remainder of the projection period. Actual costs and insurance recoveries remain highly uncertain, and claims beyond the next ten years are not recorded.
- Environmental liabilities totaled $93.1 million, net of $11.7 million of related assets. The reasonably possible gross liability range was $72.0 million to $163.9 million across 56 active sites.
- Key risks include geopolitical instability in emerging markets, especially Russia and Venezuela; foreign-exchange exposure; project-cost estimates for percentage-of-completion contracts; asbestos and environmental litigation; tax examinations; and the timing and collectability of large receivables.
- ITT measured its Venezuelan subsidiary at the official exchange rate. Management estimated that a 100% devaluation from that rate would produce an approximately $2.7 million remeasurement charge.
- The company disclosed an outstanding €1.3 million performance bond related to discontinued Bornemann activities in Iran and a pending OFAC license application concerning settlement discussions.
Most Important Facts for Investors to Verify
- Whether favorable timing of approximately $21.7 million in Industrial Process project revenue reverses in subsequent quarters and how orders and backlog develop.
- Whether Interconnect Solutions achieves the expected restructuring savings and returns to sustained profitability after the $14.4 million quarterly charge.
- The sustainability of the lower 27.5% effective tax rate and the effects of tax examinations, foreign earnings and future tax-law changes.
- Operating cash-flow conversion, working-capital requirements and the effect of large project receivables on liquidity.
- Future asbestos claim activity, liability remeasurement, insurance recoveries and net cash payments, including exposure beyond the recorded ten-year forecast.
- Environmental remediation outcomes and the potential effect of geopolitical, currency and regulatory developments in emerging markets.
- Reconciliations and limitations of management's non-GAAP measures, including adjusted segment operating income, adjusted EPS and adjusted free cash flow.