ITT Inc. 2022 Second-Quarter Form 10-Q Summary
Business context and reporting period
ITT is a diversified manufacturer of engineered components and technology solutions for transportation, industrial, and energy markets. Its reportable segments are Motion Technologies (MT), Industrial Process (IP), and Connect & Control Technologies (CCT). The unaudited quarter ended July 2, 2022 is compared primarily with the quarter ended July 3, 2021; year-to-date results cover six months.
During the quarter, ITT acquired Habonim Industrial Valves and Actuators Ltd. for $139.9 million. Habonim operates within IP and reported 2021 annual sales of approximately $44 million.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $733.3 million | $691.6 million | $1,459.5 million | $1,390.0 million |
| Gross profit | $222.2 million | $224.6 million | $440.6 million | $453.6 million |
| Gross margin | 30.3% | 32.5% | 30.2% | 32.6% |
| Operating income | $100.5 million | $179.6 million | $195.1 million | $289.5 million |
| Operating margin | 13.7% | 26.0% | 13.4% | 20.8% |
| Net income attributable to ITT | $74.6 million | $39.0 million | $149.4 million | $125.2 million |
| Diluted EPS | $0.89 | $0.45 | $1.77 | $1.44 |
Continuing-operations diluted EPS was $0.91 in the quarter and $1.79 year to date. Adjusted diluted EPS was $0.98 in the quarter and $1.95 year to date, versus $0.94 and $2.00, respectively, in the prior-year periods.
- Q2 revenue increased 6.0%; organic revenue increased 9.6%, excluding acquisitions and foreign exchange. Six-month revenue increased 5.0%, with organic growth of 8.2%.
- Segment operating income was $114.3 million in Q2, essentially flat year over year, while segment operating margin declined to 15.6% from 16.5%.
- Q2 segment revenue was $331.3 million for MT, $239.6 million for IP, and $163.2 million for CCT. CCT revenue increased 21.3%, IP increased 12.0%, and MT declined 3.6% on a reported basis.
- Q2 operating results were affected by higher raw material, shipping, labor, and overhead costs. Pricing actions, productivity savings, favorable volume, and mix partially offset these pressures.
- Cash and cash equivalents were $525.7 million at July 2, 2022, down from $647.5 million at December 31, 2021.
- Operating cash flow was $54.2 million for the first six months, compared with an outflow of $231.6 million in the prior-year period. Investing cash flow was an outflow of $218.4 million, including the Habonim acquisition, a $23.0 million CRP investment, and $47.5 million of capital expenditures.
- Total debt and finance leases were $560.1 million, including $544.9 million of commercial paper, compared with $207.5 million at year-end 2021. ITT had no borrowings under its $700 million revolving credit facility, which matures in August 2026.
- Liquidity management expects sufficient funding for operations for at least the next 12 months and beyond. The company was in compliance with its revolving-credit financial covenants at quarter-end.
Material changes versus the prior comparable period
- Revenue growth was led by CCT connectors and components, IP short-cycle activity, and MT friction products. Foreign exchange reduced Q2 revenue by $40.5 million, while Habonim contributed 2.2% growth.
- MT operating income declined 27.4% in Q2, primarily because of higher raw material costs and automotive supply-chain disruptions. IP operating income increased 24.1% in Q2, and CCT operating income increased 57.5%.
- Consolidated operating income declined because the 2021 period included a $76.8 million net asbestos-related benefit, including an $88.8 million pre-tax gain from the divestiture of the asbestos-liability entity. ITT reported no asbestos-related benefit in 2022.
- The effective tax rate decreased to 24.0% from 78.6% in Q2 and to 22.3% from 57.3% year to date, primarily because of the 2021 asbestos-divestiture tax impact and higher 2022 research-and-development tax benefits.
- Inventory increased to $535.2 million from $430.9 million at year-end, primarily to support growth and mitigate supply-chain disruptions. Receivables increased to $605.7 million from $555.1 million.
- ITT repurchased $240.9 million of common stock under its repurchase program during the first six months, compared with $50.0 million in the prior-year period, and declared a quarterly dividend of $0.264 per share, 20% above the prior-year $0.22 dividend.
- Backlog at IP was $576.4 million, 30% above the prior-year level; Q2 IP orders were $298.8 million, up 29%.
Outlook, risks, contingencies, and unusual items
- Management expects raw-material inflation, shipping constraints, labor shortages, and supply-chain disruptions to continue affecting margins and fulfillment during the remainder of 2022. Pricing and productivity actions are expected to offset part, but not necessarily all, of the pressure.
- Russia’s invasion of Ukraine led ITT to suspend Russian operations and record $8.0 million of charges, primarily inventory and accounts-receivable reserves. Management identified potential 2022 exposure of approximately $60 million to $85 million from direct, indirect, and supply-chain effects and is evaluating a sale, disposition, wind-down, or combination of alternatives for its Russian operations.
- COVID-19 variants, including restrictions in China, could continue to affect demand, absenteeism, production, and global supply chains.
- ITT reported 27 active environmental investigation and remediation sites. Environmental liabilities were $56.6 million, with an estimated potential high-end liability of $100 million. Management stated that outcomes could materially affect the financial statements because of inherent uncertainties.
- IP’s unsatisfied or partially satisfied performance obligations totaled $1,055.5 million at quarter-end, of which approximately $740 million to $760 million was expected to be recognized as revenue during the remainder of 2022.
- Foreign-currency derivative contracts had a notional value of $107.1 million and fair value of $7.8 million at quarter-end.
- Management stated that no material changes occurred in market-risk disclosures or critical accounting estimates, and disclosure controls were effective.
Important facts for investors to verify
- Assess whether pricing and productivity actions are sufficient to offset persistent inflation, labor, freight, and supply-chain costs.
- Monitor automotive production and semiconductor constraints affecting MT, as well as the timing and conversion of IP backlog.
- Evaluate the impact of foreign exchange, Ukraine-related disruption, and the outcome of ITT’s Russian-operations alternatives.
- Reconcile GAAP results with adjusted EPS and adjusted operating income, particularly the nonrecurring 2021 asbestos benefit and 2022 special items.
- Monitor increased commercial-paper borrowings, working-capital investment, acquisition integration, and compliance with credit-facility covenants.
- Review environmental exposures, tax examinations, and the potential high-end environmental liability estimate.