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, oil and gas, aerospace and defense, and related markets. Operations are organized into Motion Technologies, Industrial Process, and Connect & Control Technologies. This unaudited filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $695.5 million | $689.3 million | 0.9% |
| Gross profit | $218.8 million | $224.2 million | (2.4%) |
| Gross margin | 31.5% | 32.5% | (100) bps |
| Operating income | $90.6 million | $110.6 million | (18.1%) |
| Operating margin | 13.0% | 16.0% | (300) bps |
| Net income attributable to ITT | $71.3 million | $101.2 million | (29.5%) |
| Diluted EPS | $0.80 | $1.14 | (29.8%) |
| Operating cash flow | $42.1 million | $42.4 million | $(0.3) million |
| Capital expenditures | $29.2 million | $28.7 million | Increase of $0.5 million |
| Adjusted free cash flow | $24.6 million | $9.7 million | 153.6% |
Segment operating income increased 8.5% to $110.5 million, and segment operating margin expanded to 15.9% from 14.8%. Adjusted segment operating income was $112.4 million, with adjusted margin of 16.2%, compared with $103.3 million and 15.0% in the prior-year quarter. Adjusted diluted EPS was $0.91 versus $0.77.
Revenue growth was led by Industrial Process revenue of $215.7 million, up 13.6%, and Connect & Control Technologies revenue of $165.0 million, up 4.5%. Motion Technologies revenue declined 7.9% to $315.2 million, primarily due to foreign exchange and global automotive weakness. Organic revenue increased 5.0% overall, excluding a $28.6 million unfavorable foreign-currency impact.
Liquidity, Balance Sheet and Capital Allocation
- Cash and cash equivalents were $554.0 million at March 31, 2019, compared with $561.2 million at December 31, 2018.
- Total debt and finance leases were $129.6 million, including $112.3 million of commercial paper, compared with $125.0 million at year-end.
- The company had no borrowings under its $500 million revolving credit agreement and remained within its required interest-coverage and leverage thresholds. The agreement permits potential commitments of up to $700 million and matures in November 2021.
- Net cash used by operating, investing and financing activities was $7.0 million for continuing operations, resulting in a $7.4 million decrease in total cash after discontinued operations and foreign-exchange effects.
- ITT paid $13.2 million of dividends and repurchased $19.9 million of common stock during the quarter. The quarterly dividend was $0.147 per share, a 9.7% increase from the prior-year quarter.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing an $80.0 million operating lease right-of-use asset and an $83.4 million lease liability at adoption.
Material Changes Versus the Prior Comparable Period
- Reported operating income and EPS declined primarily because Q1 2018 included a $32.1 million asbestos-related insurance settlement benefit. Q1 2019 included $12.6 million of net asbestos-related expense.
- Segment profitability improved despite reported consolidated pressure: Industrial Process operating income rose 31.4%, Connect & Control Technologies rose 19.1%, and Motion Technologies declined 1.6%.
- Gross margin declined due to higher commodity costs and tariffs, unfavorable foreign exchange and product mix, partly offset by volume leverage and productivity improvements.
- The effective tax rate increased to 21.6% from 7.0%. The prior-year rate benefited from a $21.6 million reversal of German deferred-tax valuation allowances and a $4.5 million reduction in the provisional Tax Act charge.
- Orders declined 2.9% on a reported basis to $738.9 million but increased 1.4% organically. Industrial Process backlog was $444.1 million at March 31, 2019, essentially flat from year-end.
Guidance, Outlook, Commentary and Risks
Management emphasized operational excellence, market-share gains, margin expansion and cash generation. The filing does not provide a clear formal full-year revenue or earnings guidance range. Management reported ongoing investments in Industrial Process expansion, i-Alert data analytics, Connect & Control supply-chain insourcing and Motion Technologies production capacity.
- Tariffs, commodity costs, foreign exchange, product mix and global automotive weakness may pressure margins and demand. The ultimate effect of tariffs cannot presently be estimated.
- Connect & Control Technologies continued working to restore certain military connector products to the Defense Logistics Agency Qualified Products List; the filing states that further revenue and operating impacts remain uncertain.
- ITT accrued an $11 million agreement-in-principle settlement with the Department of Justice concerning certain connector products purchased or used by the U.S. government.
- Asbestos liabilities were $844.9 million, offset by estimated insurance recoveries of $369.6 million, for a net exposure of $475.3 million. Approximately 24,000 asbestos claims were pending at quarter-end. Management cannot reasonably estimate costs for claims filed beyond 2029.
- Management estimates environmental liabilities of $64.0 million and identifies 30 active environmental investigation or remediation sites; the potential high-end liability range was $114.2 million.
- Tax examinations are ongoing in multiple jurisdictions. Unrecognized tax benefits could change by approximately $15 million over the next 12 months, according to the filing.
- On April 30, 2019, after quarter-end, ITT completed the acquisition of Rheinhütte Pumpen Group for €81 million net of cash acquired, funded with cash and European commercial paper. Rheinhütte reported approximately €61.5 million of 2018 revenue and will be included in Industrial Process.
Important Facts for Investors to Verify
- Reconcile reported earnings trends with adjusted measures, particularly the effect of the prior-year asbestos insurance settlement and tax benefits.
- Monitor whether Industrial Process and Connect & Control Technologies growth offsets continued weakness in automotive-related Motion Technologies demand.
- Assess the sustainability of margin expansion amid tariffs, commodity inflation, foreign exchange and mix pressures.
- Track cash conversion, working-capital investment, capital expenditures, dividends, repurchases and acquisition-related commercial-paper borrowings.
- Review asbestos insurance recoverability, projected cash outflows and the unestimated exposure from claims beyond the ten-year projection period.
- Follow the DOJ settlement, environmental matters, tax examinations and the status of the military connector products on the Qualified Products List.