ITT Inc. 2018 Form 10-K Summary
Business context and reporting period
ITT Inc. is a diversified manufacturer of engineered components and technology solutions serving transportation, industrial, energy, oil and gas, aerospace and defense markets. Operations are organized into Motion Technologies, Industrial Process, and Connect & Control Technologies. The filing covers the fiscal year ended December 31, 2018; amounts are in millions except per-share data unless otherwise stated. ITT operated in more than 100 countries, generated 68% of sales outside the United States, and employed approximately 10,000 people.
Denise L. Ramos retired as chief executive officer and director on December 31, 2018. Luca Savi became president and chief executive officer on January 1, 2019.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $2,745.1 | $2,585.3 | 6.2% |
| Gross profit / margin | $887.2 / 32.3% | $819.9 / 31.7% | Margin +60 bps |
| Operating income / margin | $397.3 / 14.5% | $319.3 / 12.4% | 24.4%; margin +210 bps |
| Income from continuing operations attributable to ITT | $332.4 | $115.0 | 189.0% |
| Diluted EPS from continuing operations | $3.75 | $1.29 | Increase of $2.46 |
| Net income attributable to ITT | $333.7 | $113.5 | 194.0% |
| Operating cash flow | $371.8 | $247.2 | 50.4% |
| Adjusted free cash flow | $308.9 | $230.4 | 33.9% |
- Organic revenue increased 4.2% and organic orders increased 7.9%. Total orders were $2,891.9, up 10.4%, and year-end backlog was $1,021.0, up 11.1%.
- Segment operating income increased 26.8% to $411.3, with segment margin rising to 15.0% from 12.5%. Motion Technologies generated $223.4 of operating income, Industrial Process $91.4, and Connect & Control Technologies $96.5.
- Cash and cash equivalents were $561.2 at year-end, compared with $389.8 in 2017. Working capital was $542.1, down from $590.1, and the working-capital ratio declined to 2.4x from 2.7x.
- Total debt and finance leases were $125.0, including $114.4 of commercial paper. ITT had no borrowings under its $500 revolving credit facility, which could be expanded to $700 with lender consent. Long-term debt and finance leases totaled $10.6.
- Capital expenditures were $95.5. ITT paid $47.3 of dividends and repurchased $50.0 of common stock under its repurchase program. Dividends declared per share increased to $0.536 from $0.512.
- The aggregate postretirement benefit deficit was $218.5, compared with $230.4 in 2017. The company expected approximately $5 of pension contributions and $8 of other benefit contributions in 2019.
Material changes versus the prior comparable period
- Revenue growth reflected favorable foreign exchange of $45.7, approximately $5.5 of incremental Axtone revenue, and 4.2% organic growth. Growth was broad-based, led by Motion Technologies and Connect & Control Technologies.
- Gross margin improved through productivity, sourcing and supply-chain savings and volume leverage, partly offset by automotive pricing pressure, higher commodity costs and tariffs.
- Operating income benefited from stronger segment performance, lower restructuring and acquisition-related costs, and a $38.5 pre-tax gain on the sale of a former operating location. These benefits were partly offset by higher asbestos-related costs and corporate expenses.
- The effective tax rate fell to 14.8% from 62.9%. The 2017 rate included a $129.2 tax expense associated with the U.S. Tax Cuts and Jobs Act; 2018 also benefited from the lower U.S. statutory rate and a $22.9 reversal of valuation allowances.
- Operating cash flow increased primarily because of higher operating income, lower postretirement contributions, lower restructuring payments and insurance-related proceeds.
- ITT adopted the new revenue recognition standard using a modified retrospective approach. The adoption produced a $4 cumulative reduction to opening retained earnings and changed the timing and classification of certain Industrial Process contract revenue.
Guidance, outlook, commentary and unusual items
Management entered 2019 focused on operational execution, productivity, innovation, research and development, and organic growth. Expected growth drivers included automotive platform ramp-ups and market-share gains in North America, China and Europe, as well as the increased Connect & Control Technologies and Industrial Process backlog. Management also expected slowing global growth, commodity and tariff inflation, pricing pressure and foreign exchange to create challenges.
- Management planned proactive restructuring if necessary, continued R&D investment, and balanced capital deployment prioritizing organic growth.
- ITT raised its first-quarter 2019 quarterly dividend by 10% and targeted up to $50 of 2019 share repurchases, including prior authorization.
- On February 21, 2019, ITT agreed to acquire Rheinhütte Pumpen Group for €81, subject to customary conditions and regulatory approvals. The transaction was expected to close in the first half of 2019 and would be reported in Industrial Process.
- Asbestos liabilities for pending claims and claims estimated over the next 10 years were $849.3, offset by estimated insurance recoveries of $376.7, for a net exposure of $472.6. Management projected net asbestos cash outflows of approximately $20 to $30 annually over the next five years, increasing thereafter.
- Environmental liabilities were $66.8, with a reasonably possible high-end exposure of $115.9. The company estimated annual environmental spending of $6 to $8.
- ITT accrued $10 for a civil Department of Justice matter involving certain Connect & Control Technologies connector products. The DOJ Criminal Division declined to prosecute the company at that time, but the potential civil loss could exceed the accrual.
- Tariff effects remained uncertain and the company stated that it could not estimate their ultimate impact on results, financial position or cash flows. The company also continued working to restore qualified-products-list status for certain military-specification connectors.
- The filing identifies risks from cyclical end markets, international operations and currency movements, customer concentration, raw-material costs, tariffs, supply-chain disruption, product quality, government contracting, cybersecurity, environmental matters, asbestos claims, pension funding and tax examinations.
Most important facts for an investor to verify
- Whether organic revenue and order growth continue after separating volume gains from foreign exchange, tariffs and acquisition effects.
- Whether the 2018 margin improvement is sustainable after the $38.5 property-sale gain and other unusual items.
- The ultimate cash cost and insurance recovery profile of asbestos claims, including claims beyond the 10-year accrual horizon.
- Progress, purchase price and integration risks associated with the Rheinhütte acquisition.
- Exposure to Continental, which represented approximately 10.7% of 2018 consolidated revenue, and to cyclical oil and gas, chemical, mining, automotive and aerospace markets.
- The effect of tariffs, commodity prices and foreign currency changes on future margins; management estimated that a hypothetical 10% currency movement could affect pre-tax earnings by approximately $30.
- Future pension funding requirements, environmental remediation costs, tax audit outcomes and the DOJ civil matter.
- Liquidity capacity, commercial paper refinancing needs and compliance with the revolving-credit leverage and interest-coverage covenants.