ITT Inc. 2020 Q3 Form 10-Q Summary
Business Context and Reporting Period
ITT Inc. is a diversified manufacturer of engineered components and technology solutions serving transportation, industrial, oil and gas, aerospace and defense, and related markets. Operations are reported through Motion Technologies, Industrial Process, and Connect & Control Technologies.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Results were significantly affected by the COVID-19 pandemic, lower customer demand, commercial aerospace weakness, the Boeing 737 MAX production stoppage, and reduced oil and gas capital spending.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $591.2 million | $711.9 million | Down 17.0% |
| Gross profit / margin | $190.6 million / 32.2% | $231.3 million / 32.5% | Margin down 30 bps |
| Segment operating income / margin | $83.9 million / 14.2% | $107.1 million / 15.0% | Income down 21.7%; margin down 80 bps |
| Operating income (loss) | $(62.5) million | $152.5 million | Material deterioration |
| Net income attributable to ITT | $(46.8) million | $118.6 million | Material deterioration |
| Diluted EPS from continuing operations | $(0.55) | $1.34 | Down $1.89 |
| Adjusted diluted EPS | $0.82 | $0.97 | Down $0.15 |
| Nine-month metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $1,769.2 million | $2,127.3 million | Down 16.8% |
| Gross profit / margin | $563.6 million / 31.9% | $682.1 million / 32.1% | Margin down 20 bps |
| Segment operating income / margin | $199.1 million / 11.3% | $325.2 million / 15.3% | Income down 38.8%; margin down 400 bps |
| Operating income | $67.3 million | $329.1 million | Down 79.6% |
| Net income attributable to ITT | $86.0 million | $256.7 million | Down 66.5% |
| Diluted EPS from continuing operations | $0.94 | $2.90 | Down $1.96 |
Q3 organic revenue was $584.1 million, down 18.0% year over year but up 12% sequentially from Q2 2020. Adjusted operating income was $90.8 million, or a 15.4% margin, compared with $107.9 million and 15.2% in Q3 2019.
- Motion Technologies revenue declined 10.7% and segment operating income declined 11.1% in Q3, primarily from lower automotive and rail demand.
- Industrial Process revenue declined 19.2% and operating income declined 22.3%, driven by lower pump project activity and oil and gas weakness.
- Connect & Control Technologies revenue declined 25.0% and operating income declined 42.3%, primarily because of reduced commercial aerospace activity and lower Boeing production.
Cash Flow, Balance Sheet, Debt and Liquidity
- Nine-month operating cash flow was $318.1 million, up from $221.7 million in 2019, supported by customer collections, inventory management, lower postretirement contributions, lower asbestos payments, and lower taxes.
- Investing cash outflow was $50.4 million, including $47.6 million of capital expenditures, compared with $180.8 million in 2019. The prior-year period included $113.1 million of acquisition spending.
- Financing cash outflow was $109.9 million, including $83.9 million of share repurchases and $29.7 million of dividends paid.
- Cash and cash equivalents were $782.3 million at September 30, 2020, compared with $612.1 million at December 31, 2019.
- Total debt and finance leases were $132.2 million, consisting primarily of $116.3 million of commercial paper. No borrowings were outstanding under the $500 million revolving credit facility or the additional $200 million 364-day facilities.
- Management reported approximately $1.5 billion of available liquidity, including cash on hand, $500 million of revolver capacity, and $200 million of undrawn incremental facilities. Management expects sufficient liquidity to fund operations for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue and segment profitability declined substantially as COVID-19 reduced transportation, industrial, aerospace, and oil and gas demand.
- Q3 operating results included a $141.4 million net asbestos-related charge, compared with a $56.2 million benefit in Q3 2019. The 2020 charge primarily reflected extending the asbestos claim projection period through 2052.
- Nine-month results included $42.5 million of restructuring costs versus $10.9 million in 2019 and $16.3 million of asset impairment charges versus $1.0 million.
- The company initiated a global restructuring plan expected to generate approximately $80 million of annualized pretax savings, with expected cash restructuring costs of approximately $55 million and substantial completion in 2020.
- Allowance for credit losses increased to $18.7 million from $12.8 million at December 31, 2019, reflecting adoption of the current expected credit loss model and estimated COVID-19 and oil and gas effects.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a formal full-year revenue or EPS guidance range. Management expects continued uncertainty from COVID-19, commercial aerospace weakness, the Boeing 737 MAX stoppage, and low oil and gas prices. Automotive demand improved sequentially in Q3, but aerospace demand remained severely depressed.
- Asbestos liability was $948.0 million and the related insurance asset was $409.4 million, producing net recorded exposure of $538.6 million. Approximately 25,000 asbestos claims were pending at September 30, 2020.
- Management estimates average net asbestos cash outflows of $20 million to $30 million annually over the next 10 years, with declines thereafter, but cautions that actual costs and recoveries may differ materially.
- In October 2020, ITT terminated its U.S. qualified pension plan. The company expects a fourth-quarter non-operating settlement charge of approximately $135 million to $140 million.
- Environmental liabilities were $58.6 million, with 26 active investigation or remediation sites and an estimated high-end potential liability of $98.7 million.
- Management expects 2020 capital expenditures to be reduced by approximately $35 million from 2019 levels and has implemented broader discretionary spending, compensation, supply-chain, and restructuring actions.
- Key risks include renewed pandemic disruption, customer or supplier bankruptcies, collection delays, supply-chain interruptions, foreign exchange, commodity and raw-material volatility, cybersecurity, customer concentration, additional impairment charges, tax examinations, and asbestos insurance recoverability.
Important Facts for Investors to Verify
- Reconcile GAAP losses with management’s non-GAAP adjusted EPS and adjusted operating income, particularly the treatment of asbestos, restructuring, impairment, tax, and pension items.
- Assess the sensitivity of the $948.0 million asbestos liability and $409.4 million insurance asset to claim trends, insurer solvency, litigation outcomes, and the extended projection period through 2052.
- Monitor COVID-19 effects on automotive, aerospace, industrial, and oil and gas demand, as well as the pace of sequential recovery.
- Verify delivery of the $80 million annualized restructuring savings and the remaining cash costs under the $55 million restructuring plan.
- Evaluate the expected fourth-quarter pension settlement charge of $135 million to $140 million and its effect on reported earnings and accumulated other comprehensive loss.
- Confirm liquidity availability, commercial paper refinancing, compliance with the 3.0-to-1.0 leverage and minimum 3.0-to-1.0 interest coverage covenants, and future customer collection trends.