ITT Inc. Form 10-Q Summary
Business context and reporting period
ITT Inc. is a diversified manufacturer of engineered components and technology solutions serving transportation, industrial, aerospace and defense, and oil and gas markets. Reported segments are Motion Technologies, Industrial Process, and Connect & Control Technologies. This unaudited filing covers the quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods. Results were materially affected by the COVID-19 pandemic, customer shutdowns, lower automotive and aerospace demand, the Boeing 737 MAX production stoppage, and weakness in oil and gas markets.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $514.7 million | $719.9 million | $1,178.0 million | $1,415.4 million |
| Gross profit | $163.6 million | $232.0 million | $373.0 million | $450.8 million |
| Gross margin | 31.8% | 32.2% | 31.7% | 31.8% |
| Operating income | $20.5 million | $86.0 million | $129.8 million | $176.6 million |
| Operating margin | 4.0% | 11.9% | 11.0% | 12.5% |
| Net income attributable to ITT | $48.0 million | $66.8 million | $132.8 million | $138.1 million |
| Diluted EPS from continuing operations | $0.53 | $0.75 | $1.49 | $1.56 |
| Operating cash flow | Not separately provided | Not separately provided | $203.1 million | $101.1 million |
- Q2 revenue declined 28.5%; organic revenue declined 27.6%. Six-month revenue declined 16.8%; organic revenue declined 16.7%.
- Q2 segment operating income was $37.3 million, down 65.3%, with a 7.2% segment margin versus 14.9% in the prior year. Adjusted segment operating income was $64.6 million and adjusted segment margin was 12.6%, down from 16.1%.
- Adjusted diluted EPS was $0.57 in Q2 and $1.37 for the six months, versus $0.93 and $1.85, respectively, in the prior-year periods.
- Cash and cash equivalents were $819.1 million at June 30, 2020, up from $612.1 million at December 31, 2019. Net cash increased $207.1 million during the six months.
- Capital expenditures were $34.3 million versus $45.8 million in the prior-year period. Investing cash outflow was $37.1 million, compared with $132.3 million, largely because 2019 included the Rheinhütte acquisition.
- Total debt and finance leases were $260.3 million, including $134.1 million of commercial paper and $112.2 million of short-term revolving loans, versus $99.4 million at December 31, 2019.
- Management reported approximately $1.4 billion of available liquidity, including cash, $388 million of availability under the existing revolver, and $200 million under newly established 364-day revolving credit agreements. No amounts were drawn under the new agreements at June 30.
Material changes versus the prior comparable period
- Motion Technologies revenue fell 37.3% in Q2 and its operating margin declined to 5.2% from 16.4%, primarily due to lower automotive production and COVID-19-related transportation weakness.
- Industrial Process revenue declined 16.9% in Q2 and operating margin declined to 9.6% from 11.2%. Results reflected weaker pump projects, oil and gas conditions, higher bad-debt reserves, and impairment charges during the first quarter.
- Connect & Control Technologies revenue declined 27.8% in Q2 and operating margin declined to 6.8% from 17.4%, mainly due to reduced commercial air traffic, lower Boeing 737 MAX production, and weaker industrial demand.
- Restructuring costs increased to $27.9 million in Q2 and $31.0 million year to date, versus $3.1 million and $4.2 million, respectively. The 2020 Global Restructuring Plan is expected to generate $80 million of annualized savings and incur approximately $55.6 million of cash costs, substantially in 2020.
- Year-to-date operating results included $16.3 million of asset impairment charges related to an upstream oil and gas business.
- The effective tax rate was negative 153.6% in Q2 and negative 2.7% year to date, compared with 22.3% and 22.0% in 2019. The change primarily reflected a $26.7 million benefit from a European internal reorganization, a $1.1 million tax audit benefit, and a $7.2 million CARES Act benefit.
- Year-to-date asbestos-related expense was a net benefit of $24.7 million, compared with $24.4 million of expense in 2019. A March insurer settlement generated a $52.5 million benefit, while a June agreement generated a $4.2 million loss.
- The allowance for credit losses increased to $20.0 million from $12.8 million at the start of 2020, reflecting expected effects of COVID-19 and the oil and gas downturn.
Guidance, outlook, risks, contingencies and unusual items
- Management did not provide a conventional numerical full-year revenue or earnings forecast. It stated that the duration and severity of COVID-19 impacts and the timing of market recovery remain uncertain.
- Management expects continued pressure in automotive, aerospace, and oil and gas markets, including uncertainty regarding the Boeing 737 MAX restart and customer capital spending.
- Cost actions totaled approximately $160 million, including restructuring, discretionary spending reductions, supply-chain productivity, lower capital expenditures, and compensation reductions. Planned 2020 capital expenditures were reduced by $35 million from prior expectations.
- ITT conditionally authorized termination of its U.S. qualified pension plan. If completed, management expects a non-cash pretax pension settlement charge of approximately $130 million to $140 million in the second half of 2020. Completion remains subject to regulatory review, interest rates, and annuity pricing.
- As of June 30, approximately 24,000 asbestos claims were pending. Recorded asbestos liabilities were $803.8 million and related assets were $405.3 million, producing net recorded exposure of $398.5 million. Management cannot reasonably estimate exposure for claims beyond the next 10 years and states that future costs could materially affect results.
- Environmental liabilities were $59.3 million, with a reported high-end potential liability range of $105.3 million across 26 active sites. Environmental-related assets were $20.4 million.
- Unfilled or partially satisfied performance obligations totaled $814.2 million at June 30, 2020; management expected to recognize approximately $540 million to $560 million during 2020 and the remainder in 2021 and 2022.
- Key risks include prolonged COVID-19 disruption, customer and supplier bankruptcies, supply-chain interruptions, delayed collections, foreign exchange, commodity prices, cybersecurity, product liability, environmental matters, asbestos claims, and covenant or capital-market constraints.
Facts investors should verify
- Whether automotive, aerospace, industrial, and oil and gas demand stabilizes and whether the Boeing 737 MAX production restart occurs as anticipated.
- Progress, cash costs, and realized savings from the $55.6 million restructuring plan and the broader $160 million cost-action program.
- Whether the U.S. pension plan termination proceeds and the resulting $130 million to $140 million pretax settlement charge is recorded.
- Cash conversion and working-capital trends, particularly customer collections and credit-loss allowances, after favorable first-half timing effects.
- Commercial paper and revolving-loan maturities, continued compliance with the 3.0 leverage and 3.0 interest-coverage covenants, and available liquidity.
- Changes in asbestos claims, insurance recoveries, environmental liabilities, and related cash outflows beyond the recorded estimates.
- Whether tax benefits recorded in 2020 recur; the filing indicates that the unusually low effective tax rate was driven substantially by discrete items.