ITT Corporation Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the quarter and nine months ended September 30, 2010, compared with the corresponding 2009 periods. ITT operated through Defense & Information Solutions, Fluid Technology, and Motion & Flow Control. The company designs, manufactures, and services engineered products for defense, water and wastewater, industrial, transportation, aerospace, automotive, and related markets.
Financial Performance and Position
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenue | $2,643 million | $2,640 million | $7,960 million | $7,865 million |
| Gross profit | $768 million | $760 million | $2,267 million | $2,189 million |
| Gross margin | 29.1% | 28.8% | 28.5% | 27.8% |
| Operating income (loss) | $(32) million | $89 million | $537 million | $610 million |
| Operating margin | (1.2)% | 3.4% | 6.7% | 7.8% |
| Income from continuing operations | $12 million | $64 million | $382 million | $448 million |
| Net income | $145 million | $59 million | $529 million | $445 million |
| Diluted EPS | $0.78 | $0.32 | $2.86 | $2.42 |
- Adjusted results: Adjusted income from continuing operations was $200 million, or $1.08 per diluted share, in Q3 2010, versus $188 million, or $1.02 per diluted share, in Q3 2009. For the nine months, adjusted income was $565 million, or $3.05 per diluted share, versus $511 million, or $2.78 per diluted share.
- Cash flow: Nine-month operating cash flow was $654 million versus $1,048 million in 2009. Capital expenditures were $174 million, producing reported free cash flow of $480 million versus $908 million.
- Liquidity and debt: Cash was $912 million at September 30, 2010, down from $1,216 million at year-end 2009. Total debt was $1,643 million, up from $1,506 million; net debt was $731 million versus $290 million. Debt-to-total-capitalization was 27.5%, and net debt-to-net-capitalization was 14.4%.
- Credit facility: ITT replaced its prior facility with a three-year $1.5 billion revolving credit agreement. Unused committed bank lines in excess of commercial paper were $1,242 million, and the company reported compliance with the 3.5 times interest-coverage requirement.
- Dividends and repurchases: The quarterly dividend was $0.25 per share. No shares were repurchased during the quarter; $569.2 million remained available under the repurchase authorization at September 30, 2010.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue was essentially flat, while nine-month revenue increased 1.2%. Organic revenue declined $51 million in the quarter and $50 million year to date, with acquisitions providing $88 million and $148 million of revenue, respectively.
- Defense revenue declined 9.5% in the quarter and 5.5% year to date, primarily due to lower CREW 2.1 and domestic SINCGARS activity. Defense operating margin declined to 13.0% from 13.3% in the quarter and to 12.0% from 12.4% year to date.
- Fluid revenue increased 11.4% in the quarter and 6.6% year to date, aided by the Nova Analytics and Godwin acquisitions. Fluid operating income increased 7.4% in the quarter and 17.0% year to date.
- Motion & Flow revenue increased 17.3% in the quarter and 20.3% year to date. Year-to-date operating income rose 41.6%, although quarterly margin declined to 12.5% from 13.0% because of product mix, bonus accruals, and inventory reserves.
- The primary driver of the quarterly operating loss was a $341 million net asbestos-related charge, compared with $223 million in Q3 2009. The after-tax asbestos charge related to continuing operations was $211 million versus $139 million.
- CAS, Inc. was sold on September 8, 2010. The transaction generated a $130 million after-tax gain, contributing to discontinued-operations income of $133 million in the quarter and $147 million for the nine months.
- ITT spent $994 million on acquisitions during the first nine months, principally $385 million for Nova and $580 million for Godwin, compared with $34 million in the prior-year period.
- Orders increased 19.9% in Q3, but nine-month orders declined 2.0%, primarily because of lower Defense orders. Defense funded backlog was $4.3 billion at September 30, 2010, down from $5.1 billion at December 31, 2009.
Guidance, Outlook, Risks, and Unusual Items
- Management projected full-year 2010 adjusted income from continuing operations per diluted share of $4.28 to $4.32. Revenue projections were approximately $6.0 billion for Defense, $3.6 billion for Fluid, and $1.4 billion for Motion & Flow.
- Management expected approximately $6 million of additional Defense restructuring costs and $3 million of additional Fluid restructuring costs in Q4 2010. Total annual savings from 2010 restructuring actions were estimated at approximately $30 million, with approximately $71 million of annual future savings beginning in 2011.
- Asbestos exposure was estimated at $618 million net of expected recoveries at September 30, 2010, compared with $267 million at year-end 2009. The recorded asbestos liability was $1,628 million and related assets were $1,010 million. Management projected net asbestos cash outflows averaging approximately $25 million annually over the next five years and $50 million to $60 million over the remainder of the projection period, subject to substantial uncertainty.
- ITT had 103,939 asserted asbestos claims outstanding at September 30, 2010. Management stated that most claims had little or no value, but acknowledged that future costs, including claims beyond the current 10-year estimation period, could materially affect results, cash flows, or financial position.
- Other principal risks included government defense-budget changes, declining Iraq and Afghanistan-related activity, municipal and European credit-market weakness, real estate and automotive cyclicality, commodity-price inflation, foreign-exchange volatility, insurance recoverability, pension and postretirement obligations, environmental matters, acquisitions, and changing regulation, including Dodd-Frank.
- Environmental liabilities were accrued at $136 million, with a reasonably possible estimated range of $123 million to $262 million. ITT also recorded an additional $17 million accrual related to a residual-value guarantee on its corporate aircraft.
- Management stated that disclosure controls and procedures were effective as of September 30, 2010 and that there were no material changes in internal control over financial reporting.
Key Facts for Investor Verification
- Reconcile GAAP continuing-operations earnings with adjusted EPS, particularly the treatment of asbestos charges and tax-related special items.
- Assess the sensitivity of the $618 million net asbestos exposure to settlement costs, claim volumes, legal costs, insurance recoveries, insurer solvency, and claims beyond 10 years.
- Verify the funding, integration, goodwill, and preliminary purchase-price allocations for the Nova and Godwin acquisitions.
- Monitor Defense backlog, government appropriations, CREW 2.1 and SINCGARS volumes, and the timing of delayed night-vision shipments.
- Evaluate cash conversion after acquisitions, increased commercial paper borrowings, capital expenditures, dividends, restructuring payments, and projected asbestos cash outflows.
- Compare management’s $4.28 to $4.32 adjusted EPS outlook with subsequent reported results and confirm the effect of discontinued CAS operations.