ITT (ITT) - 2019 Q4 - Annual Report

Part I Item 1. Description of Business ITT is a diversified manufacturer of engineered components and technology solutions across transportation, industrial, and oil & gas markets, generating $2.85 billion revenue in 2019 with 65% from outside the U.S. - ITT is a diversified manufacturer with three main segments: Motion Technologies (MT), Industrial Process (IP), and Connect & Control Technologies (CCT)[20][23] 2019 Company Snapshot | Metric | Value | | :--- | :--- | | 2019 Revenue | $2.85 Billion | | Employees | Approx. 10,500 in 35 Countries | | Revenue Outside U.S. | 65% | | Sales Presence | Approx. 125 Countries | - The company's strategy is centered on expanding in global markets, investing in new products leveraging engineering capabilities, and operational improvements[27][28] - In 2019, ITT acquired Matrix Composites (CCT segment) and Rheinhütte Pumpen Group (IP segment) to expand its portfolio[75] Total Backlog by Segment (as of Dec 31) | Segment | 2019 ($M) | 2018 ($M) | | :--- | :--- | :--- | | Motion Technologies | 167.4 | 152.4 | | Industrial Process | 395.4 | 444.2 | | Connect & Control Technologies | 290.8 | 273.7 | | ITT Inc. Total | 853.6 | 870.3 | Motion Technologies (MT) The Motion Technologies segment manufactures brake pads, shock absorbers, and energy absorption components for the transportation industry, with Continental accounting for 22% of its 2019 revenue. - MT manufactures brake pads, shims, shock absorbers, and sealing technologies for the transportation industry, including passenger cars, commercial vehicles, and rail[31] - Sales to Continental, MT's largest customer, represented 22% of the segment's 2019 revenue, covering both OEM and aftermarket sales[34] - The KONI & Axtone business serves railway, automotive (performance and racing), and commercial vehicle markets with customized damping and energy absorption solutions[36][42] Industrial Process (IP) The Industrial Process segment provides industrial pumps, valves, and optimization systems for diverse markets, with aftermarket solutions comprising approximately 40% of its revenue. - IP manufactures industrial pumps, valves, and provides aftermarket services for markets including oil & gas, chemical, mining, and power generation[41] - Aftermarket solutions, including replacement parts, services, and optimization technologies like i-ALERT, represent approximately 40% of IP's revenue[44] - IP utilizes a diversified sales channel, with about one-third of its revenue coming from a network of independent distributors, complemented by direct sales and support for EPC firms[45] Connect & Control Technologies (CCT) The Connect & Control Technologies segment manufactures highly engineered connectors and specialized control products for critical applications, with distributors accounting for approximately 30% of its 2019 revenue. - CCT designs and manufactures highly engineered connectors and specialized products for critical applications in markets like aerospace, defense, industrial, and medical[47] - Connector products (Cannon, VEAM, BIW) are known for high-reliability solutions in harsh environments, while Control products (Aerospace Controls, Enidine) provide actuation, fuel management, and energy absorption systems[48][52][53] - CCT utilizes a mix of direct sales and distributor channels, with distributors accounting for about 30% of its 2019 revenue[55] Item 1A. Risk Factors The company faces significant risks from asbestos claims, international operations (68% of 2019 sales), foreign currency fluctuations, cyclical customer spending, and reliance on Continental (10% of 2019 revenue). - Significant uncertainty exists regarding exposure to pending and future asbestos claims. The net asbestos liability is subject to changes in claim trends, settlement costs, and insurance recoveries, which could materially affect financial results[77][79][80] - The company is exposed to risks from international operations, which accounted for 68% of total sales in 2019. These risks include unfavorable laws, currency fluctuations, tariffs, and political instability in emerging markets[84][87] - The business is impacted by cyclical capital investment from customers in the oil and gas, chemical, and mining industries, which represented approximately 10%, 9%, and 3% of 2019 revenue, respectively[91] - Sales to Continental, ITT's largest customer, were approximately 10% of total revenue in 2019. The loss of this customer could have a material adverse effect on the business[104] - A material business interruption, such as from the 2019 novel coronavirus outbreak, could negatively impact operations, especially at manufacturing facilities[110][112] - Past divestitures and spin-offs, such as the 2011 separation of Xylem and Exelis, expose the company to potential liabilities through contractual indemnification agreements, including for asbestos claims[126] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC. - None[128] Item 2. Properties As of December 31, 2019, ITT owns or leases over 100 global properties, totaling approximately 8.0 million square feet, with the largest footprints in North America and Europe. Material Properties Summary (as of Dec 31, 2019) | Region | Owned Area (sq. ft. '000) | Leased Area (sq. ft. '000) | Total Area (sq. ft. '000) | | :--- | :--- | :--- | :--- | | North America | 2,527 | 818 | 3,345 | | Europe | 2,239 | 685 | 2,924 | | Asia | 705 | 865 | 1,570 | | South America | 43 | 110 | 153 | | Total | 5,514 | 2,478 | 7,992 | Item 3. Legal Proceedings ITT is involved in significant legal proceedings, primarily asbestos-related, with a net liability of $430.8 million as of December 31, 2019, and ongoing environmental remediation responsibilities. - As of December 31, 2019, ITT recorded an undiscounted asbestos-related liability of $817.6 million and an associated insurance recovery asset of $386.8 million, for a net exposure of $430.8 million[134] - The liability covers pending claims and claims estimated to be filed over the next 10 years. The ultimate cost beyond this period is not reasonably estimable[134] - The company is also responsible for ongoing environmental investigation and remediation at various sites under federal, state, and foreign laws[135] Item 4. Mine Safety Disclosures This item is not applicable to the company. - Not applicable[136] Executive Officers of the Registrant The report lists the company's executive officers as of February 1, 2020, including Luca Savi as CEO and President, and Thomas M. Scalera as EVP and CFO. Key Executive Officers (as of Feb 1, 2020) | Name | Age | Title | | :--- | :--- | :--- | | Luca Savi | 54 | Chief Executive Officer and President | | Thomas M. Scalera | 48 | Executive Vice President and Chief Financial Officer | | Farrokh Batliwala | 44 | Senior Vice President and President, Connect & Control Technologies | | Carlo Ghirardo | 49 | Senior Vice President and President, Motion Technologies | | George Hanna | 68 | Senior Vice President and President, Industrial Process | Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ITT's common stock trades on the NYSE, significantly outperforming S&P 400 indices with a 93.6% cumulative return from 2014-2019, with no open-market share repurchases in Q4 2019. - ITT's common stock is traded on the NYSE under the symbol 'ITT'[143] Cumulative Total Return (2014-2019) | Index | 12/31/2014 | 12/31/2019 | % Change | | :--- | :--- | :--- | :--- | | ITT Inc. | $100.00 | $193.63 | +93.6% | | S&P 400 Mid-Cap | $100.00 | $153.87 | +53.9% | | S&P 400 Capital Goods | $100.00 | $177.92 | +77.9% | - No open-market share repurchases were made in the fourth quarter of 2019[146] Item 6. Selected Financial Data This section provides a five-year summary of ITT's financial data (2015-2019), showing revenue growth to $2.85 billion in 2019 and diluted EPS of $3.65. Selected Financial Data (2015-2019) | (In Millions, except per share) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $2,846.4 | $2,745.1 | $2,585.3 | $2,405.4 | $2,485.6 | | Operating income | $411.4 | $397.3 | $319.3 | $276.6 | $376.5 | | Income from continuing ops. | $323.4 | $332.4 | $115.0 | $181.9 | $312.4 | | Diluted EPS from cont. ops. | $3.65 | $3.75 | $1.29 | $2.02 | $3.44 | | Total assets | $4,107.7 | $3,846.8 | $3,700.2 | $3,601.7 | $3,723.6 | | Total debt and finance leases | $99.4 | $125.0 | $171.9 | $216.3 | $248.5 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, ITT's revenue grew 3.7% to $2.85 billion with 4.5% organic growth, driven by market strength, while facing 2020 challenges from the Boeing 737 MAX and coronavirus outbreak. 2019 vs 2018 Performance Summary | Metric | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $2,846.4 M | $2,745.1 M | 3.7% | | Organic Revenue | $2,868.3 M | $2,745.1 M | 4.5% | | Operating Income | $411.4 M | $397.3 M | 3.5% | | Adjusted Segment Operating Income | $456.7 M | $414.2 M | 10.3% | | Diluted EPS | $3.65 | $3.75 | (2.7)% | | Adjusted EPS | $3.81 | $3.23 | 18.0% | | Operating Cash Flow | $357.7 M | $371.8 M | (3.8)% | - Strategic actions in 2019 included completing acquisitions of Rheinhütte and Matrix for $118M, funding organic investments, and returning $94M to shareholders via dividends and repurchases[164] - The company faces uncertainty in 2020 from the Boeing 737 MAX production halt and the 2019 novel coronavirus outbreak in China[164] Results of Operations In 2019, total revenue grew 3.7% to $2.85 billion (4.5% organic), with Industrial Process leading segment growth at 10.3% organically, while operating income increased 3.5% to $411.4 million. 2019 Revenue and Organic Growth by Segment | Segment | Revenue ($M) | Change | Organic Growth | | :--- | :--- | :--- | :--- | | Motion Technologies | 1,241.8 | (2.5)% | 2.0% | | Industrial Process | 943.8 | 14.1% | 10.3% | | Connect & Control Technologies | 663.9 | 2.7% | 2.1% | | Total Revenue | 2,846.4 | 3.7% | 4.5% | 2019 Operating Income and Margin by Segment | Segment | Operating Income ($M) | Change | Operating Margin | | :--- | :--- | :--- | :--- | | Motion Technologies | 216.1 | (3.3)% | 17.4% | | Industrial Process | 104.7 | 14.6% | 11.1% | | Connect & Control Technologies | 111.5 | 15.5% | 16.8% | | Total Segment Operating Income | 432.3 | 5.1% | 15.2% | - Gross margin declined 30 basis points to 32.0% due to higher commodity costs, tariffs, and unfavorable product mix, partially offset by productivity improvements[177] - The company recognized a net asbestos-related benefit of $20.2 million in 2019, compared to a cost of $4.9 million in 2018, primarily due to a favorable remeasurement benefit[183] Liquidity and Capital Resources ITT maintains liquidity through cash flow and a $500 million credit facility, with 2019 operating cash flow at $357.7 million, and projects $20-$30 million annual asbestos cash outflows over the next five years. Summary of Cash Flows (2019 vs 2018) | (In Millions) | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash – Operating activities | $357.7 | $371.8 | | Net Cash – Investing activities | $(203.4) | $(52.3) | | Net Cash – Financing activities | $(101.5) | $(128.8) | - The company maintains a $500 million revolving credit facility, extendable to $700 million, which was unused as of year-end 2019[201][224] - In February 2020, the Board of Directors authorized the termination of the U.S. qualified pension plan, which is expected to result in a non-cash settlement charge of approximately $130-$140 million before tax[221][222] - The company projects average annual net cash outflows for asbestos of $20-$30 million over the next five years, increasing to $35-$45 million thereafter within the 10-year projection period[213] Critical Accounting Estimates Management identifies critical accounting estimates including asbestos liabilities (10-year forecast), revenue recognition for long-term contracts, income taxes, goodwill impairment, and environmental liabilities, all requiring significant judgment. - Asbestos Matters: Estimating the liability for pending and future claims over a 10-year horizon and the related insurance asset involves significant uncertainty and key assumptions about claim rates, settlement values, and insurer solvency[251][255] - Revenue Recognition: For certain long-term, customized projects, revenue is recognized over time using a cost-to-total-cost method, which requires significant judgment in estimating total contract revenues and costs[262] - Goodwill Impairment: Goodwill is tested annually for impairment by comparing the fair value of each reporting unit, estimated using a discounted cash flow model, to its carrying value. This process involves significant estimates about future operating results and discount rates[274][276] - Income Taxes: Judgment is required in assessing the realizability of deferred tax assets and establishing valuation allowances, as well as in determining liabilities for uncertain tax positions across multiple jurisdictions[267][271] Item 7A. Quantitative and Qualitative Disclosures About Market Risk ITT is exposed to market risks from foreign currency, interest rates, and commodity prices, with a 10% adverse FX change impacting pre-tax earnings by $27 million, and a 10% steel price change by $6-$8 million. - A hypothetical 10% adverse change in foreign currency exchange rates would result in a translation impact to pre-tax earnings of approximately $27 million[283] - A hypothetical 100 basis point increase in interest rates would result in approximately $1 million of additional annual interest expense on its $84.2 million of variable rate debt[284] - A hypothetical 10% change in steel prices would impact pre-tax earnings by approximately $6 to $8 million[285] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure. - None[287] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, excluding recent acquisitions (3.5% of assets, 1.9% of revenue). - Management concluded that disclosure controls and procedures were effective as of December 31, 2019[290] - Management determined that internal control over financial reporting was effective as of December 31, 2019[294] - The 2019 acquisitions of Rheinhütte and Matrix were excluded from the scope of management's assessment of internal control over financial reporting[295] Item 9B. Other Information The company discloses an outstanding pre-acquisition performance bond of €1.3 million related to an Iranian customer, with annual fees of €11,000 paid in 2019. - A disclosure is made regarding a pre-acquisition performance bond of €1.3 million issued by its subsidiary Bornemann to an Iranian customer, which remains outstanding[300] - Bornemann paid annual fees of approximately €11,000 in 2019 related to this bond but received no revenue or income from it[300] Part III Items 10-14 Information for Items 10-14, covering governance, compensation, and ownership, is incorporated by reference from the company's 2020 Definitive Proxy Statement. - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2020 Proxy Statement[310][315][316] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Form 10-K report, with schedules omitted as information is included elsewhere. - Refers to the Index to Consolidated Financial Statements and the Exhibit Index for lists of documents filed with the report[321] Item 16. Form 10-K Summary This item is not applicable. - Not Applicable[320] Financial Statements and Notes Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued unqualified opinions on ITT's 2019 financial statements and internal control over financial reporting, identifying asbestos-related liabilities and insurance recovery assets as Critical Audit Matters. - The auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[303][325] - The audit of internal controls excluded the 2019 acquisitions of Rheinhütte and Matrix[305] - The auditor identified two Critical Audit Matters (CAMs): the valuation of asbestos-related liabilities and the valuation of asbestos-related insurance recovery assets, due to the high degree of management judgment and subjectivity[330][333] Consolidated Financial Statements The consolidated financial statements for 2019 show ITT's revenue at $2.85 billion, net income of $325.1 million, and total assets of $4.11 billion. Consolidated Statement of Operations Highlights (2019) | (In Millions) | Amount | | :--- | :--- | | Revenue | $2,846.4 | | Gross Profit | $910.1 | | Operating Income | $411.4 | | Net Income Attributable to ITT Inc. | $325.1 | Consolidated Balance Sheet Highlights (Dec 31, 2019) | (In Millions) | Amount | | :--- | :--- | | Total Current Assets | $1,736.8 | | Total Assets | $4,107.7 | | Total Current Liabilities | $849.7 | | Total Liabilities | $2,029.9 | | Total Shareholders' Equity | $2,077.8 | Notes to the Consolidated Financial Statements The notes detail ITT's accounting policies and financial results, including asbestos liabilities ($817.6 million), 2019 acquisitions, and the 2020 authorization to terminate the U.S. qualified pension plan. - Note 20 (Asbestos): As of Dec 31, 2019, the asbestos liability was $817.6M and the related insurance asset was $386.8M. The net asbestos benefit for 2019 was $20.2M, driven by a favorable remeasurement[544][546] - Note 22 (Acquisitions): In 2019, ITT acquired Rheinhütte for €82.5M (IP segment) and Matrix for $25.8M (CCT segment), adding a preliminary $54.4M in goodwill[558][559][560] - Note 16 (Pensions): In Feb 2020, the board authorized termination of the U.S. qualified pension plan. The plan had a projected benefit obligation of $310.4M and assets of $319.9M at year-end 2019[471][476] - Note 4 (Revenue): A single customer, Continental, accounted for 9.8% of consolidated revenue in 2019, primarily within the Motion Technologies segment[418] - Note 18 (Capital Stock): The company has a new indefinite term $500M share repurchase program approved in Oct 2019, after nearly completing its previous $1B program[523]