ITT (US:ITT)2020-05-01 18:02markdown PART I – FINANCIAL INFORMATION [Financial Statements (unaudited)](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) For the first quarter ended March 31, 2020, ITT reported revenue of $663.3 million, a decrease from $695.5 million in the prior year period. Despite the revenue decline, net income attributable to ITT Inc. increased to $84.8 million from $71.3 million, primarily due to a significant asbestos-related benefit. The balance sheet shows increased cash and short-term debt, reflecting proactive liquidity measures. Cash flow from operations improved to $53.5 million [Consolidated Condensed Statements of Operations](index=5&type=section&id=Consolidated%20Condensed%20Statements%20of%20Operations) Revenue for Q1 2020 was $663.3 million, down 4.6% from $695.5 million in Q1 2019. Operating income rose to $109.3 million from $90.6 million, largely due to a $40.7 million asbestos-related benefit, which offset a $16.3 million asset impairment charge. Diluted EPS from continuing operations increased to $0.95 from $0.80 year-over-year Q1 2020 vs Q1 2019 Statement of Operations Highlights | Metric (in millions, except EPS) | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | **Revenue** | $663.3 | $695.5 | | Gross Profit | $209.4 | $218.8 | | Asbestos-related (benefit) costs, net | $(40.7) | $12.6 | | Asset impairment charges | $16.3 | $— | | **Operating Income** | $109.3 | $90.6 | | Net Income Attributable to ITT Inc. | $84.8 | $71.3 | | **Diluted EPS (Continuing Operations)** | $0.95 | $0.80 | [Consolidated Condensed Balance Sheets](index=7&type=section&id=Consolidated%20Condensed%20Balance%20Sheets) As of March 31, 2020, total assets were $4.28 billion, up from $4.11 billion at year-end 2019. Cash and cash equivalents significantly increased to $839.9 million from $612.1 million, while short-term debt rose to $386.8 million from $86.5 million, reflecting borrowings under the revolving credit facility. Total shareholders' equity slightly decreased to $2.02 billion Balance Sheet Highlights (in millions) | Account | March 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $839.9 | $612.1 | | Total current assets | $1,948.2 | $1,736.8 | | Goodwill | $914.4 | $927.2 | | Total Assets | $4,276.6 | $4,107.7 | | Short-term debt | $386.8 | $86.5 | | Total Liabilities | $2,261.0 | $2,029.9 | | Total Shareholders' Equity | $2,015.6 | $2,077.8 | [Consolidated Condensed Statements of Cash Flows](index=8&type=section&id=Consolidated%20Condensed%20Statements%20of%20Cash%20Flows) Net cash from operating activities increased to $53.5 million in Q1 2020 from $42.1 million in Q1 2019, driven by effective working capital management. Investing activities used $26.2 million, primarily for capital expenditures. Financing activities provided $212.0 million, mainly from $378.3 million in borrowings from short-term revolving loans, which was partially offset by $83.4 million in share repurchases and $82.7 million in commercial paper repayments Q1 2020 vs Q1 2019 Cash Flow Highlights (in millions) | Activity | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Cash – Operating activities | $53.5 | $42.1 | | Net Cash – Investing activities | $(26.2) | $(28.8) | | Net Cash – Financing activities | $212.0 | $(21.0) | | Net change in cash and cash equivalents | $227.8 | $(7.4) | [Notes to Consolidated Condensed Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Condensed%20Financial%20Statements) The notes detail the company's business segments, the initial impacts of the COVID-19 pandemic, and key accounting policies. Segment performance shows revenue declines in Motion Technologies and Connect & Control Technologies, but growth in Industrial Process. Significant events include a $16.3 million asset impairment in the IP segment, a new restructuring plan in response to COVID-19, a $66.4 million asbestos insurance settlement, and increased borrowing to bolster liquidity - ITT operates through three segments: Motion Technologies (MT), Industrial Process (IP), and Connect & Control Technologies (CCT)[23](index=23&type=chunk) Q1 2020 Segment Revenue and Operating Income (in millions) | Segment | Revenue | Operating Income | Operating Margin | | :--- | :--- | :--- | :--- | | Motion Technologies | $297.9 | $53.1 | 17.8% | | Industrial Process | $227.3 | $8.9 | 3.9% | | Connect & Control Technologies | $138.7 | $15.9 | 11.5% | - In March 2020, the company finalized an insurance settlement for asbestos claims, receiving a lump sum of **$66.4 million** and recognizing a benefit of **$52.5 million**[86](index=86&type=chunk) - The company recorded asset impairment charges of **$16.3 million** in Q1 2020 related to a business within the IP segment due to challenging conditions in the oil and gas market and the COVID-19 pandemic[55](index=55&type=chunk)[58](index=58&type=chunk) - As of March 31, 2020, the company had drawn **€350 million ($384.5 million)** under its revolving credit facility to enhance liquidity in response to economic uncertainty[64](index=64&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the significant impact of the COVID-19 pandemic on operations, financials, and markets. Q1 2020 organic revenue declined 5.3% due to weakness in transportation and industrial markets, partially offset by growth in oil and gas. Adjusted segment operating margin fell 170 basis points to 14.5%. The company has taken decisive actions to enhance liquidity, including drawing down its credit facility and implementing cost-reduction plans. The outlook for the remainder of 2020 anticipates significant headwinds across all businesses [Overview](index=25&type=section&id=Overview) The overview section highlights the company's response to the COVID-19 pandemic, focusing on three priorities: the health of its people, business, and financials. Key financial results for Q1 2020 showed a 5.3% organic revenue decline and a 12% decrease in adjusted EPS to $0.80. The company has taken significant liquidity and cost actions, including drawing down its credit facility, suspending share repurchases, and initiating a $50 million restructuring plan. The outlook for 2020 is challenging due to market uncertainty - The company's response to COVID-19 focuses on three priorities: health of people, health of business, and health of financials[105](index=105&type=chunk) - Key liquidity and cost actions taken include drawing down the **$500M** revolving credit facility, securing new credit agreements, suspending share repurchases, and implementing a new restructuring plan expected to yield **$70M** in annual savings[108](index=108&type=chunk)[113](index=113&type=chunk) Q1 2020 Key Performance Indicators | Metric | Result | Change vs. Q1 2019 | | :--- | :--- | :--- | | Revenue | $663 M | -5% | | Organic Revenue | $659 M | -5% | | Adjusted Segment Operating Income | $96 M | -14% | | Adjusted Segment Operating Margin | 14.5% | -170bp | | Adjusted EPS | $0.80 | -12% | [Discussion of Financial Results](index=28&type=section&id=Discussion%20of%20Financial%20Results) Total revenue decreased 4.6% to $663.3 million. Organic revenue fell 5.3%, with Motion Technologies down 3.0% due to COVID-19 impacts in China and Europe, and Connect & Control Technologies down 17.4% from Boeing 737 MAX delays and industrial weakness. Industrial Process grew 0.8% organically, driven by pump projects. Operating income increased to $109.3 million due to a net asbestos benefit, but adjusted segment operating income fell 14.4% on lower volumes and operational disruptions - Motion Technologies (MT) organic revenue decreased **3.0%** due to a significant reduction in demand in China and Europe from COVID-19[121](index=121&type=chunk) - Industrial Process (IP) organic revenue increased **0.8%**, driven by strength in oil and gas pump projects in the Middle East[122](index=122&type=chunk) - Connect & Control Technologies (CCT) organic revenue decreased **17.4%**, driven by Boeing 737 MAX production delays and lower demand for aerospace aftermarket components[124](index=124&type=chunk) - Operating expenses decreased **21.9%** primarily due to a **$53.3 million** year-over-year positive swing in net asbestos-related benefit/costs, which was partially offset by a **$16.3 million** asset impairment charge[126](index=126&type=chunk)[129](index=129&type=chunk)[130](index=130&type=chunk) [Liquidity](index=31&type=section&id=Liquidity) The company has taken proactive measures to enhance liquidity amid the COVID-19 pandemic. As of March 31, 2020, it had drawn $384.5 million on its revolving credit facility, and subsequently drew down the full $500 million. In April 2020, it secured two additional 364-day revolving credit agreements totaling $200 million. Share repurchase activity was suspended after repurchasing $73.2 million in Q1. The company is also evaluating governmental programs like the CARES Act to maximize liquidity - The company fully drew down its **$500M** Revolving Credit Facility and secured two new 364-Day Revolving Credit Agreements totaling **$200M** to enhance liquidity[142](index=142&type=chunk)[147](index=147&type=chunk)[148](index=148&type=chunk) - Share repurchases of **$73.2 million** were executed in Q1 2020, but further activity has been temporarily suspended[146](index=146&type=chunk) - Net cash distributions from foreign subsidiaries to the U.S. totaled **$270.2 million** in Q1 2020 to support global liquidity needs[144](index=144&type=chunk) [Key Performance Indicators and Non-GAAP Measures](index=35&type=section&id=Key%20Performance%20Indicators%20and%20Non-GAAP%20Measures) This section defines and reconciles non-GAAP measures used by management, including organic revenue, adjusted operating income, and adjusted EPS. For Q1 2020, organic revenue was $658.8 million, a 5.3% decrease. Adjusted operating income was $88.7 million with a margin of 13.4%. Adjusted income from continuing operations was $70.1 million, or $0.80 per diluted share, down from $0.91 in the prior year Reconciliation of Revenue to Organic Revenue (Q1 2020, in millions) | Description | Amount | | :--- | :--- | | 2020 Revenue | $663.3 | | Acquisitions | $(16.9) | | Foreign currency translation | $12.4 | | **2020 Organic revenue** | **$658.8** | | 2019 Revenue | $695.5 | | **Organic decline** | **$(36.7)** | Reconciliation of Income from Continuing Operations to Adjusted (Q1 2020, in millions) | Description | Amount | | :--- | :--- | | Income from continuing operations attributable to ITT Inc. | $83.7 | | Net asbestos-related benefit, net of tax | $(31.8) | | Asset impairment charges, net of tax | $16.2 | | Restructuring costs, net of tax | $2.3 | | Other adjustments | $(0.3) | | **Adjusted income from continuing operations** | **$70.1** | [Quantitative and Qualitative Disclosures about Market Risk](index=37&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) There have been no material changes to the company's market risk disclosures from the 2019 Annual Report, except for increased interest rate exposure due to new borrowings. As of March 31, 2020, the company had $384.5 million in outstanding variable rate debt. A hypothetical 100 basis point increase in interest rates would result in approximately $4 million of additional annual interest expense - As of March 31, 2020, the company had **$384.5 million** in variable rate debt. A **100 basis point** increase in interest rates would add approximately **$4 million** to annual interest expense[179](index=179&type=chunk) [Controls and Procedures](index=37&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2020. There were no material changes to internal control over financial reporting during the quarter. The company has not experienced any material impact on its internal controls despite many employees working remotely due to COVID-19 - Management concluded that disclosure controls and procedures were effective as of the end of the quarter[180](index=180&type=chunk) - No material changes in internal control over financial reporting occurred in Q1 2020, and the shift to remote work due to COVID-19 has not had a material impact on controls[181](index=181&type=chunk) PART II – OTHER INFORMATION [Legal Proceedings](index=38&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The company is involved in various legal proceedings, primarily related to asbestos and environmental matters. As of March 31, 2020, the company recorded an undiscounted asbestos-related liability of $804.8 million and an associated insurance recovery asset of $420.8 million. The company is also responsible for ongoing environmental investigation and remediation at various sites - As of March 31, 2020, the company has an undiscounted asbestos-related liability of **$804.8 million** and an associated asset for estimated insurance recoveries of **$420.8 million**, resulting in a net exposure of **$384.0 million**[185](index=185&type=chunk) - The company is responsible for ongoing environmental investigation and remediation at sites where it has been identified as a potentially responsible party[186](index=186&type=chunk) [Risk Factors](index=38&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section updates risk factors from the 2019 Annual Report, with a significant new disclosure on the adverse effects of the COVID-19 pandemic. It details potential disruptions to operations, sales, supply chain, and liquidity. It also reiterates the risk related to customer capital investment levels, particularly in the cyclical oil and gas, chemical, and mining markets, which have been exacerbated by recent price volatility and the pandemic - A significant new risk factor details the potential adverse effects of the COVID-19 pandemic, including facility closures, reduced demand, supply chain disruptions, and liquidity challenges[188](index=188&type=chunk) - The company highlights risks from customer capital expenditure cycles, especially in the oil and gas market (**10%** of 2019 revenue), which is facing an oversupply and price collapse due to actions by Saudi Arabia/Russia and COVID-19[190](index=190&type=chunk)[191](index=191&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=40&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) In Q1 2020, the company repurchased 1.7 million shares for $73.2 million under its publicly announced plans. The company completed its 2006 share repurchase plan and began repurchases under a new $500 million plan approved in October 2019. As of March 31, 2020, $488.7 million remained available for repurchase under the new plan Q1 2020 Share Repurchase Activity | Period | Total Shares Purchased (millions) | Average Price Paid Per Share | Value of Shares Remaining for Purchase (millions) | | :--- | :--- | :--- | :--- | | March 2020 | 1.9 | $44.09 | $488.7 | - The company completed its 2006 share repurchase plan and commenced repurchases under a new indefinite term $500 million program approved in October 2019[194](index=194&type=chunk) [Other Information](index=41&type=section&id=ITEM%205.%20OTHER%20INFORMATION) This section includes a disclosure related to the Iran Threat Reduction & Syria Human Rights Act (ITRA) concerning a legacy performance bond from the 2012 acquisition of Bornemann GmbH. The bond remains outstanding, and the company paid minor fees to a German financial institution in Q1 2020. Additionally, on April 29, 2020, the Board of Directors adopted amended and restated by-laws to permit shareholder meetings to be held solely by remote communication - A legacy performance bond from the 2012 Bornemann acquisition related to an Iranian customer remains outstanding, with fees of approximately **€3 thousand** paid in Q1 2020[199](index=199&type=chunk) - On April 29, 2020, the company amended its by-laws to allow for shareholder meetings to be conducted solely by remote communication[200](index=200&type=chunk)