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 other markets. Reported segments are Motion Technologies, Industrial Process, and Connect & Control Technologies. This unaudited filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $663.3 million | $695.5 million | Down 4.6% |
| Gross profit | $209.4 million | $218.8 million | Down 4.3% |
| Gross margin | 31.6% | 31.5% | Up 10 bps |
| Operating income | $109.3 million | $90.6 million | Up 20.6% |
| Operating margin | 16.5% | 13.0% | Up 350 bps |
| Net income attributable to ITT | $84.8 million | $71.3 million | Up 18.9% |
| Diluted EPS | $0.96 | $0.80 | Up $0.16 |
| Adjusted diluted EPS | $0.80 | $0.91 | Down 12% |
| Cash flow from operating activities | $53.5 million | $42.1 million | Up 27% |
| Capital expenditures | $22.2 million | $29.2 million | Down $7.0 million |
Reported operating income and EPS benefited materially from a $52.5 million asbestos insurance settlement benefit, included in a net asbestos-related benefit of $40.7 million. Excluding special items, adjusted operating income was $88.7 million versus $104.8 million, and adjusted operating margin was 13.4% versus 15.1%.
Segment revenue and operating income were: Motion Technologies revenue of $297.9 million and operating income of $53.1 million; Industrial Process revenue of $227.3 million and operating income of $8.9 million; and Connect & Control Technologies revenue of $138.7 million and operating income of $15.9 million. Total segment operating margin declined to 11.7% from 15.9%.
At March 31, 2020, cash and cash equivalents were $839.9 million, total debt was $399.4 million, and total current assets were $1.95 billion versus current liabilities of $1.11 billion. Short-term debt increased to $386.8 million from $86.5 million at December 31, 2019, primarily reflecting borrowings under the revolving credit facility. The company had no commercial paper outstanding.
Material changes versus the prior comparable period
- Organic revenue declined 5.3%, with transportation revenue down 7% and industrial revenue down 9%; oil and gas revenue increased 20% in the quarter.
- Motion Technologies revenue declined 5.5% and operating margin fell to 17.8% from 19.3%, reflecting weaker automotive demand, COVID-19 effects, foreign exchange and unfavorable mix.
- Industrial Process revenue increased 5.4%, including the Rheinhütte acquisition, but operating income fell 59.9% and margin declined to 3.9% from 10.3%, primarily due to $16.3 million of asset impairment charges and foreign exchange.
- Connect & Control Technologies revenue declined 15.9% and operating margin fell to 11.5% from 16.6%, driven by Boeing 737 MAX production delays, lower commercial aerospace activity, plant closures and distributor destocking.
- COVID-19 and the oil and gas downturn resulted in $4.0 million of property and equipment impairment and $12.3 million of intangible asset impairment, primarily within Industrial Process.
- Foreign currency translation generated a $51.3 million other comprehensive loss, compared with a $2.4 million loss in the prior-year quarter.
- ITT repurchased $73.2 million of shares under its repurchase programs and separately repurchased $10.2 million for employee tax withholding. Further discretionary repurchases were subsequently suspended.
- The company adopted the current expected credit loss standard, reducing retained earnings by $1.2 million at January 1, 2020. The allowance for credit losses increased to $15.8 million from $12.8 million at year-end 2019.
Outlook, liquidity, risks and unusual items
Management withdrew or did not provide quantitative full-year guidance because of significant uncertainty surrounding COVID-19, customer demand, operating restrictions, supply chains and capital markets. First-quarter orders declined 10% year over year. Management expects substantial headwinds for the remainder of 2020 from lower automotive production, reduced aerospace activity, Boeing 737 MAX delays, lower oil and gas capital spending, temporary facility closures and potential collection delays.
- As of May 1, 2020, management reported approximately $1.2 billion of liquidity, including roughly $500 million drawn under the existing revolving credit facility and an additional $200 million of 364-day revolving facilities entered into on April 29, 2020. No borrowings were outstanding under the new facilities as of the filing date.
- Management expects approximately $45 million to $55 million of pre-tax cash restructuring costs, substantially in 2020, with expected annualized pre-tax savings of approximately $70 million.
- Capital expenditures are expected to be reduced by approximately $35 million in 2020. The company stated that it had no planned change to its dividend strategy at the filing date.
- The U.S. qualified pension plan termination was conditionally authorized. If completed, it is expected to produce a non-cash pre-tax settlement charge of approximately $130 million to $140 million in the second half of 2020.
- Asbestos liabilities were $804.8 million, with related assets of $420.8 million and net exposure of $384.0 million. Approximately 24,000 asbestos claims were pending at March 31, 2020. Management cannot estimate exposure for claims beyond the next 10 years.
- Environmental liabilities were $58.5 million, with 28 active investigation or remediation sites and an estimated potential high-end liability of $105.3 million.
- Additional risks include customer and supplier bankruptcies, supply-chain interruptions, foreign exchange volatility, oil and gas and aerospace cyclicality, impairment charges, cybersecurity, litigation, tax examinations and covenant compliance.
Investor verification points
- Separate recurring operating performance from the $40.7 million net asbestos-related benefit and the $16.3 million impairment charges.
- Monitor COVID-19 effects on orders, backlog, plant utilization, receivable collections and operating cash flow.
- Verify the timing, funding and covenant impact of the $500 million existing revolver borrowings and the additional $200 million facilities.
- Assess whether the planned restructuring delivers approximately $70 million of annualized savings relative to its $45 million to $55 million cash cost.
- Evaluate potential future pension settlement charges and the uncertainty surrounding asbestos and environmental obligations.
- Review segment trends, particularly Industrial Process and Connect & Control Technologies, and the effect of oil and gas weakness and Boeing 737 MAX production delays.