ITT Corporation Form 10-K Summary
Business context and reporting period
ITT Corporation filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2015. ITT is a diversified manufacturer of engineered components and technology solutions serving energy, transportation and industrial markets through four segments: Industrial Process, Motion Technologies, Interconnect Solutions and Control Technologies. The company had approximately 9,700 employees, generated sales in more than 100 countries, and derived 62% of 2015 sales from outside the United States.
The filing provides full-year 2015 results and unaudited quarterly information, including fourth-quarter revenue of $666.8 million and fourth-quarter income from continuing operations attributable to ITT of $36.6 million.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $2,485.6 million | $2,654.6 million | Down 6.4% |
| Gross profit | $809.1 million | $866.4 million | Down 6.6% |
| Gross margin | 32.6% | 32.6% | Flat |
| Operating income | $380.1 million | $266.4 million | Up 42.7% |
| Operating margin | 15.3% | 10.0% | Up 530 basis points |
| Income from continuing operations attributable to ITT | $312.4 million | $188.4 million | Up 65.8% |
| Adjusted diluted EPS | $2.55 | $2.47 | Up 3.2% |
| Reported diluted EPS from continuing operations | $3.44 | $2.03 | Up 69.5% |
| Net income attributable to ITT | $351.8 million | $184.5 million | Up 90.7% |
| Operating cash flow | $229.7 million | $244.7 million | Down 6.1% |
| Adjusted free cash flow | $199.6 million | $173.0 million | Up 15.4% |
| Adjusted free cash flow conversion | 86.1% | 75.6% | Up 10.5 points |
Cash and cash equivalents were $415.7 million at December 31, 2015, compared with $584.0 million a year earlier. Total debt and capital leases increased to $248.5 million from $8.5 million, principally reflecting $94.5 million of commercial paper and $150.0 million outstanding under the revolving credit facility. ITT reported $350 million of unused committed credit lines and remained within its debt covenant thresholds.
Capital expenditures were $86.7 million. ITT paid $42.8 million in dividends and repurchased approximately $80.0 million of common stock under its repurchase program. The quarterly dividend increased to $0.1183 per share from $0.11 in 2014.
Material changes versus the prior comparable period
- Revenue declined primarily because of a $193.8 million unfavorable foreign-currency translation impact, lower oil and gas spending, weaker general industrial markets and lower orders in several businesses.
- Organic revenue declined 1.2%. Motion Technologies delivered 9.1% organic growth, while Industrial Process, Interconnect Solutions and Control Technologies declined 2.4%, 11.3% and 10.4%, respectively.
- Operating income benefited substantially from a $100.7 million asbestos defense-cost adjustment and a total net asbestos-related benefit of $91.4 million, compared with a $3.9 million cost in 2014.
- Segment operating income declined 5.4% to $322.2 million before corporate items and asbestos adjustments. Industrial Process improved, while Motion Technologies, Interconnect Solutions and Control Technologies declined.
- Industrial Process orders fell 22.9%, and year-end backlog declined 16.0% to $860.5 million. Industrial Process backlog decreased 31.9% to $410.9 million.
- ITT acquired Hartzell Aerospace for $52.9 million in March 2015 and Wolverine Automotive Holdings for $298.1 million in October 2015. The acquisitions added goodwill and intangible assets and were funded partly with debt.
- Investing cash outflows increased to $485.5 million, primarily due to the acquisitions and purchases of short-term investments.
- Income from discontinued operations was $39.4 million, principally from the settlement of the U.S. income tax audit, compared with a $3.9 million loss in 2014.
Guidance, outlook, commentary and unusual items
Management targets long-term average annual organic revenue growth of approximately 5% to 7%, operating margin expansion of 50 to 70 basis points, adjusted free cash flow conversion above 105%, adjusted EPS growth of 10% to 15% annually, and return on invested capital in line with proxy peers. These are long-term aspirations rather than specific 2016 guidance.
Management expects additional restructuring and realignment actions in 2016, principally within Industrial Process, in response to lower oil and gas spending. ITT also plans to expand its automotive brake-pad footprint with a new Mexico facility, with production expected to begin by the end of 2017.
Key unusual items included the $100.7 million asbestos defense-cost benefit, tax benefits from audit settlements and previously unrecognized tax positions, acquisition-related costs, restructuring charges of $24.0 million, and a $1.8 million impairment charge related to Control Technologies. The company’s adjusted results exclude several of these items.
Asbestos liabilities were recorded at $1,042.8 million, with estimated insurance recoveries of $412.0 million and net exposure of $630.8 million. ITT expects net asbestos cash outflows of approximately $15 million to $25 million annually over the next five years, rising to approximately $35 million to $45 million annually over the remainder of the projection period. Claims beyond 2025 are not accrued because they cannot be reasonably estimated.
Other material risks include prolonged weakness in oil and gas and industrial markets, foreign-exchange volatility, customer concentration, commodity and supply-chain costs, government-contracting exposure, environmental obligations, pension funding requirements, tax examinations, product liability, cybersecurity and integration risks from acquisitions. ITT also disclosed a Department of Defense Inspector General subpoena relating to certain Interconnect Solutions products; the timing and outcome were not estimable.
Important facts investors should verify
- How much of the 2015 operating-income increase was attributable to the nonrecurring asbestos benefit and other special items.
- Whether Industrial Process orders and backlog stabilize after the sharp decline associated with oil and gas and industrial-market weakness.
- The operating performance, integration progress and final purchase-price accounting for Wolverine and Hartzell Aerospace.
- Debt repayment plans, commercial-paper access and liquidity after the 2015 acquisitions.
- The assumptions supporting the $1,042.8 million asbestos liability and $412.0 million insurance-recovery asset, including insurer solvency and coverage exhaustion.
- The potential effects of tax examinations, uncertain tax positions and the company’s intent to reinvest $809.7 million of foreign earnings outside the United States.
- Execution of planned 2016 restructuring actions and the Mexico brake-pad facility.
- The outcome of the Department of Defense subpoena and any related government-contracting or compliance consequences.