ITT Inc. Form 10-K Summary
Business context and reporting period
ITT Inc. is a diversified manufacturer of engineered components and technology solutions serving transportation, industrial and energy markets. Operations comprise Motion Technologies (MT), Industrial Process (IP), and Connect & Control Technologies (CCT). This filing covers the fiscal year ended December 31, 2022; it is an annual report rather than a quarterly filing. ITT generated approximately $3.0 billion of revenue across approximately 125 countries, with 67% of revenue outside the United States and approximately 10,300 employees.
ITT acquired Habonim Industrial Valves and Actuators Ltd. on April 4, 2022, adding valves and actuators to IP. The company also acquired a CCT energy-absorption product line and made minority investments in CRP Technology and CRP USA.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $2,987.7 million | $2,765.0 million | 8.1% increase |
| Gross profit | $922.3 million | $899.5 million | 2.5% increase |
| Gross margin | 30.9% | 32.5% | Down 160 bps |
| Operating income | $468.0 million | $504.3 million | 7.2% decrease |
| Operating margin | 15.7% | 18.2% | Down 250 bps |
| Segment operating income | $511.9 million | $466.7 million | 9.7% increase |
| Segment operating margin | 17.1% | 16.9% | Up 20 bps |
| Income from continuing operations attributable to ITT | $368.3 million | $314.8 million | 17.0% increase |
| Diluted EPS from continuing operations | $4.40 | $3.64 | 21% increase |
| Net income attributable to ITT | $367.0 million | $316.3 million | 16.0% increase |
| Cash flow from operating activities | $277.7 million | $(8.4) million | $286.1 million improvement |
Organic revenue increased 12.2%, excluding foreign-currency effects and acquisitions. Foreign-currency translation reduced reported revenue by $160.9 million, while Habonim contributed $46.5 million of revenue. Segment results reflected price recovery, productivity savings and higher volume, partly offset by inflationary input costs, labor and overhead costs, and unfavorable foreign exchange.
Revenue by segment was $1,374.0 million for MT, $971.0 million for IP and $645.6 million for CCT. MT operating income declined to $208.5 million, while IP and CCT operating income increased to $187.6 million and $115.8 million, respectively.
Cash flow, liquidity and debt
- Operating cash flow was $277.7 million, compared with an $8.4 million outflow in 2021. The improvement primarily reflected the absence of the $398.0 million asbestos-related funding payment made in 2021.
- Capital expenditures were $103.9 million, up 18% from 2021, principally supporting MT capacity for electric-vehicle growth and productivity initiatives.
- Investing cash outflow was $255.1 million, including $139.9 million for Habonim and $23.0 million for CRP investments.
- Financing cash outflow was $83.3 million. ITT repurchased $245.3 million of stock and paid $87.9 million of dividends.
- Cash and cash equivalents were $561.2 million at year-end, compared with $647.5 million in 2021.
- Total debt was $458.7 million, including $448.3 million of commercial paper and $9.9 million of long-term debt. Commercial paper increased from $195.4 million in 2021 and carried a weighted average interest rate of 4.03% at year-end.
- ITT had no revolving-credit borrowings and access to $700 million of revolving capacity under its 2021 credit agreement, potentially expandable to $1.05 billion subject to conditions. Management stated that liquidity should be sufficient for operations for at least the next 12 months.
- The $500 million share-repurchase authorization had $139 million remaining at year-end. The quarterly dividend was increased to $0.29 per share in early 2023.
Material changes versus the prior comparable period
- Reported revenue increased 8.1%, while organic revenue increased 12.2%; IP benefited from Habonim and strong short-cycle demand, and CCT benefited from aerospace, defense and industrial connector and component volume.
- Reported operating income declined because 2021 included a $74.4 million net asbestos-related benefit. Excluding special items, adjusted operating income increased to $473.8 million from $442.6 million, and adjusted EPS increased to $4.44 from $4.05.
- Gross and consolidated operating margins contracted as inflation, supply-chain disruption, labor costs, foreign exchange and Russia-related charges offset price recovery and productivity savings.
- The effective tax rate decreased to 19.7% from 37.2%, largely because 2021 included tax expense associated with the asbestos-related divestiture.
- Inventory increased to $533.9 million from $430.9 million and receivables increased to $628.8 million from $555.1 million, reflecting sales growth, supply-chain constraints and working-capital investment.
- IP backlog increased 30.5% to $580.0 million at December 31, 2022. Total unsatisfied or partially satisfied performance obligations were $1,079.4 million, of which approximately $940.0 million to $960.0 million was expected to be recognized in 2023.
Outlook, management commentary, risks and unusual items
Management described 2022 performance as strong despite supply-chain disruption, inflation, foreign-exchange headwinds, COVID-19 lockdowns, labor shortages and the Russia-Ukraine war. ITT expects supply-chain, inflation and tariff challenges to continue in 2023, but intends to pursue pricing, productivity, capacity investment, innovation and disciplined capital deployment.
- ITT recorded $7.9 million of Russia-Ukraine-related charges, primarily inventory and receivable write-downs, and is evaluating a sale, disposition or wind-down of its Russian operations. Additional costs may result.
- MT operating income was pressured by raw-material, labor and overhead costs, unfavorable foreign exchange and product mix. Continental represented approximately 8% of consolidated 2022 revenue, and its aftermarket agreement expires December 31, 2023; renewal discussions were ongoing.
- Key risks include commodity-price volatility, supplier concentration, tariffs, foreign exchange, higher interest rates, customer cyclicality, skilled-labor shortages, cybersecurity and ERP implementation, product liability, government-contracting compliance, tax examinations, environmental remediation and geopolitical disruption.
- Environmental liabilities totaled $57.1 million at year-end, with a reasonably possible high-end estimate of $93.5 million. ITT had 28 open environmental matters.
- Postretirement benefit obligations totaled $149.8 million, with a funded status deficit of $149.4 million. Estimated 2023 contributions to pension and other postretirement plans were approximately $13 million.
- Guarantees, letters of credit and similar arrangements totaled $141.7 million; management did not record material loss contingencies for these arrangements.
- The 2021 divestiture of legacy asbestos assets and liabilities relieved ITT of pending and future asbestos obligations, subject to contractual indemnities. Management does not expect future asbestos-related cash outflows.
- Management and Deloitte & Touche concluded that internal control over financial reporting was effective as of December 31, 2022. Habonim was excluded from the internal-control assessment because of the acquisition timing.
Important facts for investors to verify
- Reconcile reported operating income with adjusted operating income, particularly the effect of the 2021 asbestos-related benefit and the 2022 gain on sale of a former IP facility.
- Assess whether pricing and productivity savings can continue to offset inflation, labor costs, supply-chain disruption and foreign exchange.
- Monitor renewal terms and customer concentration related to Continental’s aftermarket agreement expiring in December 2023.
- Review the sustainability of increased commercial-paper borrowings, the 4.03% weighted average rate and sensitivity to further interest-rate increases.
- Evaluate execution and returns from the Habonim acquisition, CRP investments and electric-vehicle capacity investments.
- Review IP backlog conversion, inventory growth, receivable collections and working-capital requirements.
- Track developments involving Russia, environmental matters, tax examinations, product liability, cybersecurity and ERP implementation.
- Confirm the treatment and limitations of non-GAAP measures such as organic revenue, adjusted operating income and adjusted EPS.