ITT Inc. Form 10-Q Summary
Business Context and Reporting Period
ITT Inc. 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 filing covers the 13-week quarter and nine months ended October 2, 2021, compared with September 26, 2020. The financial statements are unaudited.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $689.6 million | $591.2 million | $2,079.6 million | $1,769.2 million |
| Gross profit | $222.0 million | $190.6 million | $675.6 million | $563.6 million |
| Gross margin | 32.2% | 32.2% | 32.5% | 31.9% |
| Operating income (loss) | $101.7 million | $(62.5) million | $391.2 million | $67.3 million |
| Operating margin | 14.7% | (10.6)% | 18.8% | 3.8% |
| Net income attributable to ITT | $87.5 million | $(46.8) million | $212.7 million | $86.0 million |
| Diluted EPS | $1.01 | $(0.54) | $2.46 | $0.98 |
Q3 revenue increased 16.6%, while organic revenue increased 15.6%. Segment operating income rose 32.5% to $111.2 million and segment operating margin expanded 190 basis points to 16.1%. Management reported adjusted Q3 EPS of $0.99 versus $0.82 in the prior-year period; adjusted figures are non-GAAP.
- MT revenue increased 22.3% to $332.3 million; segment margin was 16.1% versus 18.5%.
- IP revenue increased 8.6% to $210.7 million; segment margin improved to 15.4% from 8.8%.
- CCT revenue increased 16.8% to $147.1 million; segment margin improved to 17.1% from 13.0%.
Cash Flow, Balance Sheet, Debt, and Capital Allocation
- Cash used in operating activities was $127.9 million for the first nine months of 2021, compared with $318.1 million provided in the prior-year period. The decline primarily reflected the $398.0 million cash contribution associated with the InTelCo divestiture and working-capital investment supporting growth.
- Capital expenditures were $52.6 million, versus $47.6 million in the prior-year period.
- Cash and cash equivalents were $585.8 million at October 2, 2021, down from $859.8 million at December 31, 2020.
- Total debt and finance leases were $209.9 million, including $196.4 million of commercial paper, compared with $119.8 million at year-end 2020.
- ITT had no outstanding borrowings under its revolving credit facility. A new $700 million facility, maturing in August 2026, replaced the prior $500 million facility; commitments may be increased by up to $350 million subject to conditions.
- ITT repurchased $100.0 million of shares under its repurchase program during the first nine months and paid $57.0 million of dividends. The Q3 dividend was $0.22 per share.
- Management stated that available liquidity is expected to fund operations for at least the next 12 months and beyond.
Material Changes Versus the Prior Comparable Period
- Results benefited substantially from the absence of the $141.4 million net asbestos-related charge recorded in Q3 2020. In 2021, the nine-month period included a $74.4 million net asbestos-related benefit, primarily reflecting an $88.8 million pretax gain from the InTelCo divestiture.
- ITT completed the divestiture of InTelCo, which held legacy asbestos-related assets and liabilities, effective July 1, 2021. The transaction removed the related assets and liabilities from the balance sheet and transferred legacy asbestos and certain product liabilities to the buyer and InTelCo.
- The divestiture also generated a $116.9 million tax expense from reversal of deferred tax assets, producing a $28.1 million after-tax loss on the transaction.
- Nine-month operating results benefited from lower restructuring costs, no asset impairment charges, higher sales volume, productivity savings, and improved segment performance. These benefits were partly offset by higher raw material, shipping, and labor costs.
- Working capital increased, with receivables rising to $560.2 million and inventories to $413.7 million from $507.5 million and $360.5 million, respectively, at year-end 2020.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects approximately $400 million to $420 million of the $861.6 million transaction price allocated to unsatisfied or partially satisfied performance obligations to be recognized as revenue in Q4 2021; the remainder is expected in 2022 and 2023.
- ITT expects approximately $2 million of additional restructuring charges during the remainder of 2021. The related liability was $7.2 million and is expected to be substantially paid by 2022.
- Raw-material inflation, expiring fixed-price supplier contracts, shipping delays and costs, supply constraints, and skilled-labor shortages adversely affected Q3 results and are expected to continue affecting Q4 results. Management expects pricing actions and productivity savings to offset some of these pressures.
- COVID-19 remains a material uncertainty, including potential effects from variants, supply-chain disruption, customer demand, labor availability, vaccination requirements, and site or workforce restrictions.
- The global automotive semiconductor shortage may reduce OEM production and demand for MT products, although MT reported continued outperformance relative to global automotive production rates.
- CCT aerospace and defense revenue was affected by inventory levels; management did not expect significant improvement in commercial aerospace sales until 2022.
- ITT reported 27 active environmental investigation and remediation sites. Recorded environmental liabilities were $51.8 million, with an estimated potential high-end liability of $90.3 million. Management noted that actual outcomes could materially differ from estimates.
- The new revolving credit facility includes a maximum consolidated total debt-to-EBITDA leverage covenant of 3.50 to 1.00, subject to qualified-acquisition step-ups. ITT was within the prescribed threshold at quarter-end.
- Government-contractor vaccination requirements could lead to workforce attrition, labor shortages, or loss of government orders. Tax-law changes, foreign exchange, commodity prices, cybersecurity, product liability, environmental matters, and international operations are additional stated risks.
Important Facts for Investors to Verify
- Reconcile GAAP earnings with management’s adjusted EPS of $0.99 and adjusted operating income, particularly the treatment of asbestos, restructuring, tax, pension, and other special items.
- Assess the sustainability of revenue and margin gains after adjusting for the unusual InTelCo divestiture and the prior-year asbestos charge.
- Monitor cash conversion, working-capital growth, commercial-paper borrowings, and the $398.0 million divestiture-related cash contribution.
- Evaluate the effect of raw-material inflation, freight costs, supply-chain constraints, semiconductor shortages, and labor availability on Q4 and 2022 margins.
- Review the scope and enforceability of the uncapped, unlimited-duration indemnification obligations associated with the InTelCo transaction, including the Company’s indemnity for certain historical InTelCo liabilities.
- Track environmental remediation exposure, tax examinations and unrecognized tax benefits, credit-facility covenant compliance, and future capital returns.