ITT (ITT) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents ITT Inc.'s unaudited consolidated financial statements for the period ended June 30, 2020, accompanied by detailed notes on accounting policies, segment performance, and significant liabilities Consolidated Condensed Statements of Operations ITT Inc. reported a significant decline in Q2 2020 revenue to $514.7 million and operating income to $20.5 million, resulting in lower net income and diluted EPS compared to Q2 2019 Consolidated Condensed Statements of Operations (Q2 & H1 2020 vs 2019) | (In Millions, except per share amounts) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $514.7 | $719.9 | $1,178.0 | $1,415.4 | | Gross Profit | $163.6 | $232.0 | $373.0 | $450.8 | | Operating Income | $20.5 | $86.0 | $129.8 | $176.6 | | Net Income Attributable to ITT Inc. | $48.0 | $66.8 | $132.8 | $138.1 | | Diluted EPS (Continuing Operations) | $0.53 | $0.75 | $1.49 | $1.56 | Consolidated Condensed Balance Sheets As of June 30, 2020, ITT Inc. reported a slight increase in total assets to $4,151.3 million, driven by higher cash, while total liabilities also rose due to increased short-term debt Consolidated Condensed Balance Sheet Highlights | (In Millions) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $1,826.8 | $1,736.8 | | Cash and cash equivalents | $819.1 | $612.1 | | Total Assets | $4,151.3 | $4,107.7 | | Total Current Liabilities | $947.6 | $849.7 | | Short-term debt and current maturities | $247.5 | $86.5 | | Total Liabilities | $2,096.3 | $2,029.9 | | Total Shareholders' Equity | $2,055.0 | $2,077.8 | Consolidated Condensed Statements of Cash Flows For H1 2020, net cash from operating activities significantly improved to $203.1 million, while investing cash outflows decreased and financing cash inflows increased due to higher borrowings Consolidated Condensed Statements of Cash Flows (Six Months Ended June 30) | (In Millions) | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash – Operating activities | $203.1 | $101.1 | | Net Cash – Investing activities | $(37.1) | $(132.3) | | Net Cash – Financing activities | $41.2 | $0.4 | | Net change in cash and cash equivalents | $207.1 | $(29.0) | Notes to Consolidated Condensed Financial Statements These notes detail financial statement preparation, key accounting policies, the material impact of COVID-19, segment performance, a 2020 restructuring plan, a significant tax benefit, increased debt, and ongoing asbestos liabilities - ITT operates as a diversified manufacturer across three segments: Motion Technologies, Industrial Process, and Connect & Control Technologies[22] - The COVID-19 pandemic is anticipated to negatively impact business, operations, and financial position, though the full extent of future effects remains uncertain[23] Segment Revenue and Operating Income (Q2 2020) | Segment | Revenue (Millions) | Operating Income (Millions) | Operating Margin | | :--- | :--- | :--- | :--- | | Motion Technologies | $199.3 | $10.4 | 5.2% | | Industrial Process | $193.3 | $18.5 | 9.6% | | Connect & Control Technologies | $122.9 | $8.4 | 6.8% | - In 2020, the company initiated a global restructuring plan with $55.6 million in expected costs, primarily for severance, incurring $31.8 million by June 30, 2020, in response to reduced demand from the COVID-19 pandemic[42][44] - The effective tax rate was significantly lower in Q2 and H1 2020, primarily due to a $26.7 million tax benefit from a European internal reorganization and a $7.2 million benefit from the CARES Act[46][48] - As of June 30, 2020, the company reported an undiscounted asbestos-related liability of $803.8 million and an associated recovery asset of $405.3 million, resulting in a net exposure of $398.5 million[198] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of the COVID-19 pandemic on Q2 2020 results, detailing revenue declines, proactive cost measures, segment performance, and improved operating cash flow amidst an uncertain outlook Impact of COVID-19 on our Business ITT prioritized health, business, and financial stability during COVID-19, implementing safety measures, minimizing supply chain disruptions, enhancing liquidity to $1.4 billion, and executing $160 million in cost-saving actions, including an $80 million annualized restructuring benefit - The company has implemented proactive measures to enhance liquidity and reduce costs, navigating the uncertain environment caused by COVID-19[119] - ITT secured strong available liquidity of $1.4 billion, comprising $819 million in cash and access to undrawn revolving credit facilities[124] - The company implemented $160 million in cost actions, including an organizational-wide restructuring plan projected to yield $80 million in annualized pre-tax benefits[124] Executive Summary Q2 2020 performance was significantly impacted by COVID-19, with revenue falling 29% to $515 million and adjusted EPS decreasing 39%, though operating cash flow for H1 increased 100.9% due to working capital management Summary of Key Performance Indicators for Q2 2020 | Metric | Value | YoY Change | | :--- | :--- | :--- | | Revenue | $515M | -29% | | Organic Revenue | $521M | -28% | | Segment Operating Income | $37M | -65% | | Adjusted Segment Operating Income | $65M | -44% | | EPS | $0.53 | -29% | | Adjusted EPS | $0.57 | -39% | - Year-to-date cash flow from operations increased 100.9% to $203.1 million, driven by proactive working capital management, favorable cash collection timing, lower tax payments, and reduced asbestos and incentive compensation payments[125][126] Discussion of Financial Results Q2 2020 revenue decreased 28.5% to $514.7 million, with an organic decline of 27.6%; all segments were down, with Motion Technologies falling 37.3% due to automotive weakness; operating income plummeted 76.2% to $20.5 million, driven by lower volumes, higher restructuring costs ($27.9 million), and bad debt reserves, partially offset by cost actions; a significant tax benefit of $28.1 million, primarily from a European reorganization, helped bolster net income Q2 2020 Revenue by Segment | Segment | Revenue (Millions) | YoY Change | Organic Decline | | :--- | :--- | :--- | :--- | | Motion Technologies | $199.3 | (37.3)% | (34.7)% | | Industrial Process | $193.3 | (16.9)% | (16.6)% | | Connect & Control Technologies | $122.9 | (27.8)% | (29.3)% | | Total Revenue | $514.7 | (28.5)% | (27.6)% | - Motion Technologies' organic revenue decline was primarily driven by a 42% drop in Friction sales due to weak automotive demand stemming from COVID-19[134] - Connect & Control Technologies' organic revenue decline was driven by a 41% drop in aerospace and defense, impacted by reduced air traffic and lower Boeing 737 MAX production[137] - Restructuring costs significantly increased to $27.9 million in Q2 2020 from $3.1 million in Q2 2019, primarily due to the new 2020 Global Restructuring Plan[139][144] Liquidity ITT is managing liquidity during the COVID-19 crisis by supplementing operating cash flow with commercial paper and revolving credit facilities, securing $200 million in new agreements, and increasing H1 2020 operating cash flow to $203.1 million through working capital management and deferred tax payments - To enhance liquidity during the pandemic, the company secured two new 364-day revolving credit agreements totaling $200 million in April 2020[159] - Net cash provided by operating activities increased to $203.1 million in H1 2020 from $101.1 million in H1 2019, primarily due to proactive working capital management, favorable customer collection timing, and a $23.0 million decline in income taxes paid[167][169] - During H1 2020, the company repurchased 1.7 million shares for $73.2 million under its share repurchase plans[162] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company reports no material changes in market risk disclosures from its 2019 Annual Report on Form 10-K - There has been no material change in the information concerning market risk from the 2019 Annual Report[193] Item 4. Controls and Procedures The CEO and CFO concluded the company's disclosure controls were effective, with no material changes to internal controls over financial reporting, despite the shift to remote work due to COVID-19 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[194] - No material changes occurred in internal control over financial reporting during the quarter that have affected or are reasonably likely to affect the company's internal controls[195] PART II – OTHER INFORMATION Item 1. Legal Proceedings ITT is involved in various legal proceedings, primarily related to asbestos, with a net liability of $398.5 million, and environmental matters requiring investigation and remediation at several sites - As of June 30, 2020, ITT recorded an undiscounted asbestos-related liability of $803.8 million and an associated asset of $405.3 million, resulting in a net asbestos exposure of $398.5 million[198] - The company is engaged in ongoing environmental investigation and remediation at multiple sites where it has been identified as a potentially responsible party[199] Item 1A. Risk Factors This section highlights key business risks, focusing on the adverse effects of the COVID-19 pandemic, including operational disruptions and liquidity challenges, and the company's dependence on cyclical customer capital expenditures - The COVID-19 pandemic presents significant risks, including potential facility closures, reduced customer demand, supply chain disruptions, and liquidity challenges, which may materially adversely affect financial condition[202] - The business is impacted by customer capital investment levels, particularly in the oil and gas, chemical, and mining markets, where recent oil price volatility and the COVID-19 pandemic have significantly reduced customer spending[204][205] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ITT did not conduct open-market share repurchases of its common stock during Q2 2020 but received shares for tax withholding on vested employee stock awards - The company conducted no open-market share repurchases of its common stock during the quarter ended June 30, 2020[208] Item 5. Other Information This section includes a disclosure under the Iran Threat Reduction & Syria Human Rights Act, noting an outstanding €1.3 million performance bond related to Bornemann's former Iranian activities, with €5 thousand in associated fees paid in H1 2020 - A performance bond of €1.3 million related to a former Iranian customer of the Bornemann subsidiary remains outstanding, with Bornemann paying approximately €5 thousand in associated fees during H1 2020[212]