ITT (ITT) - 2020 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated condensed financial statements for Q3 and nine months ended September 30, 2020, including operations, balance sheets, cash flows, and notes on segment performance, restructuring, and asbestos liability Consolidated Condensed Statements of Operations Q3 & Nine Months 2020 vs 2019 Performance | Metric | Q3 2020 (in millions) | Q3 2019 (in millions) | YTD 2020 (in millions) | YTD 2019 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $591.2 | $711.9 | $1,769.2 | $2,127.3 | | Gross Profit | $190.6 | $231.3 | $563.6 | $682.1 | | Operating (Loss) Income | $(62.5) | $152.5 | $67.3 | $329.1 | | Net (Loss) Income Attributable to ITT Inc. | $(46.8) | $118.6 | $86.0 | $256.7 | | Diluted EPS (Continuing Operations) | $(0.55) | $1.34 | $0.94 | $2.90 | Consolidated Condensed Balance Sheets Balance Sheet Summary (as of Sept 30, 2020 vs Dec 31, 2019) | Account | Sep 30, 2020 (in millions) | Dec 31, 2019 (in millions) | | :--- | :--- | :--- | | Total Current Assets | $1,822.8 | $1,736.8 | | Cash and cash equivalents | $782.3 | $612.1 | | Total Assets | $4,176.4 | $4,107.7 | | Total Current Liabilities | $866.0 | $849.7 | | Asbestos-related liabilities | $856.7 | $731.6 | | Total Liabilities | $2,151.9 | $2,029.9 | | Total Shareholders' Equity | $2,024.5 | $2,077.8 | Consolidated Condensed Statements of Cash Flows Cash Flow Summary (Nine Months Ended Sep 30) | Activity | 2020 (in millions) | 2019 (in millions) | | :--- | :--- | :--- | | Net Cash – Operating activities | $318.1 | $221.7 | | Net Cash – Investing activities | $(50.4) | $(180.8) | | Net Cash – Financing activities | $(109.9) | $(36.9) | | Net change in cash and cash equivalents | $170.2 | $(5.5) | Note 3. Segment Information - The company operates through three reportable segments: Motion Technologies (brake components, shock absorbers), Industrial Process (engineered fluid process equipment), and Connect & Control Technologies (connectors, flow control components)[30][31] Segment Revenue and Operating Income (Nine Months Ended Sep 30) | Segment | Revenue 2020 (in millions) | Revenue 2019 (in millions) | Operating Income 2020 (in millions) | Operating Income 2019 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Motion Technologies | $769.0 | $937.4 | $113.9 | $169.6 | | Industrial Process | $614.7 | $688.6 | $44.5 | $70.2 | | Connect & Control Technologies | $387.5 | $503.1 | $40.7 | $85.4 | | Total Segments | $1,771.2 | $2,129.1 | $199.1 | $325.2 | Note 5. Restructuring Actions - In 2020, the company initiated a global restructuring plan to reduce its cost structure, primarily in response to anticipated demand reduction from the COVID-19 pandemic[42] 2020 Global Restructuring Plan Costs | Metric | Amount (in millions) | | :--- | :--- | | Total Expected Costs | $55.0 | | Costs Incurred to Date | $43.3 | | Ending Accrual Balance (Sep 30, 2020) | $23.9 | Note 19. Commitments and Contingencies - In Q3 2020, the company extended its asbestos liability projection to include claims expected to be filed through 2052, a significant change from the previous 10-year forecast period. This was due to increased stability in claims data and certainty regarding insurance recoveries[91][92] Asbestos Liability Remeasurement Impact (Q3 2020) | Item | Amount (in millions) | | :--- | :--- | | Increase in Estimated Asbestos Liability | $155.7 | | Increase in Asbestos-Related Asset (Insurance Recoveries) | $19.8 | | Net Remeasurement Cost | $135.9 | Total Asbestos Liability and Asset (as of Sep 30, 2020) | Account | Amount (in millions) | | :--- | :--- | | Total Asbestos Liability | $948.0 | | Total Asbestos-Related Asset | $409.4 | | Net Asbestos Liability | $538.6 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2020 financial results, highlighting the COVID-19 pandemic's impact on revenue and operating income, proactive cost-saving measures, and the significant asbestos liability remeasurement, alongside strong operating cash flow Overview - The COVID-19 pandemic continued to impact customers and end markets in Q3 2020. The company's priorities are the health of its people, business, and financials[125] - Proactive measures taken in 2020 to enhance liquidity and reduce costs include implementing $160 million in cost actions, securing additional credit facilities, and reducing capital expenditures[123][127] Q3 2020 Key Performance Indicators (vs Q3 2019) | Metric | Value | Change | | :--- | :--- | :--- | | Revenue | $591M | -17% | | Organic Revenue | $584M | -18% | | Segment Operating Income | $84M | -22% | | Adjusted Segment Operating Income | $96M | -19% | | EPS | ($0.55) | -141% | | Adjusted EPS | $0.82 | -15% | Discussion of Financial Results - Total revenue for Q3 2020 decreased 17.0% to $591.2 million, with an organic revenue decline of 18.0%, driven by weakness across all segments due to COVID-19[136] - Segment performance declines in Q3 2020: * Motion Technologies (MT): Organic revenue down 13.3% due to weakness in automotive demand * Industrial Process (IP): Organic revenue down 18.6% driven by declines in pump projects * Connect & Control Technologies (CCT): Organic revenue down 25.6% due to declines in commercial aerospace and defense[137][138][141] - Operating expenses increased significantly to $253.1 million in Q3 2020 from $78.8 million in Q3 2019, primarily due to a $141.4 million asbestos-related charge from the liability remeasurement[143][147] Liquidity - The company expects to have sufficient liquidity to fund operations for at least the next 12 months, supported by cash flow, commercial paper access, and bank credit lines[161] - To bolster liquidity amid COVID-19 uncertainty, the company secured two new 364-day revolving credit agreements totaling $200 million, supplementing its existing $500 million facility. No borrowings were outstanding under these agreements as of September 30, 2020[162][168] - Net cash from operating activities for the first nine months of 2020 increased to $318.1 million from $221.7 million in the prior year, driven by proactive working capital management and lower cash payments for asbestos, postretirement contributions, and taxes[171][172] Critical Accounting Estimates - The most significant change to critical accounting estimates relates to Asbestos Matters. In Q3 2020, the company extended the forecast period for its asbestos liability to 2052, reflecting the full time horizon of expected claims[194][200] - The ability to extend the forecast horizon was driven by increased stability in claims data following the implementation of a one-firm defense strategy and greater certainty regarding insurance recoveries from recent settlements and litigation developments[201][206] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company reports no material changes in market risk disclosures since its 2019 Annual Report on Form 10-K - There has been no material change in the company's market risk disclosures since its 2019 Annual Report[207] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[208] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[209] PART II – OTHER INFORMATION Item 1. Legal Proceedings This section details the company's primary legal proceedings, focusing on asbestos and environmental liabilities, including a net asbestos liability of $538.6 million as of September 30, 2020 - The company's primary legal proceedings relate to asbestos and environmental exposures[211] - As of September 30, 2020, the company recorded an undiscounted asbestos-related liability of $948.0 million and an associated insurance recovery asset of $409.4 million, resulting in a net exposure of $538.6 million[213] Item 1A. Risk Factors This section updates the company's risk factors, emphasizing the adverse effects of the COVID-19 pandemic, cyclical customer capital investment, and significant uncertainties regarding asbestos-related liabilities and insurance recoveries - The COVID-19 pandemic is identified as a significant risk factor, with potential adverse effects including facility closures, reduced customer demand, supply chain disruptions, and liquidity challenges[217][218] - The company's business is impacted by cyclical customer capital investment, especially in the oil and gas, chemical, and mining industries, which are subject to commodity price volatility and economic downturns[219][220] - Significant uncertainties remain regarding the ultimate cost of resolving pending and future asbestos claims and the amount of probable insurance recoveries[223][224][225]