ITT (ITT) - 2023 Q4 - Annual Report

PART I Description of Business ITT manufactures engineered components for transportation, industrial, and energy markets through three segments, with 2023 sales of $3.3 billion Motion Technologies (MT) The Motion Technologies segment manufactures brake pads, shock absorbers, and sealing technologies for automotive and rail, with Continental as a key customer - The MT segment manufactures brake pads, shims, shock absorbers, and sealing technologies for passenger cars, commercial vehicles, buses, and trains[53] - ITT Friction Technologies is a leader in developing copper-free brake pads specifically for electric vehicles (EVs) and has won multiple EV platform awards[54] - Sales to Continental, MT's largest customer, represented 16% of the segment's 2023 revenue. This includes both direct supply agreements with automakers and a long-term agreement for aftermarket parts[63] Industrial Process (IP) The Industrial Process segment provides industrial pumps, valves, and aftermarket services to energy, chemical, mining, and pharma markets - The IP segment manufactures industrial pumps, valves, and monitoring systems for industries like energy, chemical, mining, and pharmaceuticals[64] - Aftermarket solutions, including replacement parts, services, and plant optimization, accounted for approximately 45% of IP's revenue in 2023[67] - IP utilizes a global sales channel structure, with about one-third of its revenue coming from sales to independent distributors who service end-users[68] Connect & Control Technologies (CCT) The Connect & Control Technologies segment designs and manufactures engineered connectors and specialized products for aerospace, defense, and industrial applications - CCT designs and manufactures highly-engineered connectors and specialized products for markets including aerospace, defense, industrial, transportation, medical, and energy[70] - The connector portfolio includes brands like Cannon, VEAM, and BIW Connector Systems, known for high-reliability solutions that withstand harsh environments[71] - Sales to distributors accounted for approximately 30% of CCT's revenue in 2023, reflecting long-lasting relationships with its distribution channels[76] General Developments of the Business In 2023-2024, ITT completed strategic acquisitions (Micro-Mode, Svanehøj) and a divestiture (Matrix Composites) to optimize its segment portfolio 2023-2024 Acquisitions and Divestitures | Date | Type | Segment | Business | Description | | :--- | :--- | :--- | :--- | :--- | | May 2, 2023 | Acquisition | CCT | Micro-Mode Products, Inc. | Designer of RF connectors for defense and space. | | Dec 29, 2023 | Divestiture | CCT | Matrix Composites, Inc. | Manufacturer of precision composite components. | | Jan 19, 2024 | Acquisition | IP | Svanehøj Group A/S | Supplier of pumps for the marine sector. | 2023 Company Snapshot | Metric | Value ($) | | :--- | :--- | | Sales | $3.3 billion across ~125 countries | | Global Presence | 67% of revenue outside the U.S. | | Employees | Approx. 10,600 in 37 countries | - ITT operates through three primary segments: Motion Technologies (MT), a manufacturer of brake pads and shock absorbers; Industrial Process (IP), a manufacturer of industrial pumps and valves; and Connect & Control Technologies (CCT), a designer of harsh-environment connectors and flow control components[24][25] - The company's strategy is centered on four priorities: customer centricity, operational excellence, effective capital deployment, and sustainability and innovation[27] - ITT has set a goal to reduce its global Scope 1 and 2 GHG emissions by 10% by the end of 2026, compared to a 2021 baseline[36] - As of December 31, 2023, ITT had approximately 10,600 employees in 37 countries, with about 2,850 in the U.S. Approximately 20% of U.S. employees are represented by unions[45] Risk Factors ITT faces risks from macroeconomic conditions, raw material volatility, acquisitions, labor shortages, cybersecurity, customer concentration, and regulatory compliance - Business and Operating Risks: The company is exposed to uncertain global economic conditions, raw material price volatility, risks from acquisitions, inability to hire or retain key personnel, failure to innovate, and cybersecurity breaches[91][95][98][100][101][106] - Customer Concentration Risk: Sales to Continental, ITT's largest customer, were approximately 7% of total revenue in 2023. The loss of or a reduction in business with this customer could adversely impact financial results[112] - International Operations Risk: Approximately 67% of total sales in 2023 were to customers outside the U.S., exposing the company to risks such as geopolitical instability, foreign exchange fluctuations, and tariffs[114] - Legal and Regulatory Risks: The company faces risks related to government contracting, changes in tax laws (including BEPS Pillar Two), environmental regulations, and compliance with anti-corruption laws like the FCPA[125][127][132][133] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[136] Cybersecurity ITT implements a cybersecurity risk management program based on NIST CSF, overseen by the Audit Committee, with no material incidents in 2023 - The company's cybersecurity risk management program is designed and assessed based on the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF)[138] - The Board of Directors' Audit Committee has oversight responsibility for cybersecurity and other information technology risks[141] - During 2023, there were no cybersecurity incidents that had a material effect on the Company[140] Properties As of December 31, 2023, ITT owns or leases approximately 170 properties globally, with 66 material manufacturing locations Material Properties by Business Segment (as of Dec 31, 2023) | Segment | Owned Locations | Leased Locations | Total Locations | | :--- | :--- | :--- | :--- | | Motion Technologies | 13 | 9 | 22 | | Industrial Process | 11 | 22 | 33 | | Connect & Control Technologies | 5 | 6 | 11 | | Total | 29 | 37 | 66 | Legal Proceedings ITT is involved in various legal proceedings incidental to its business, including environmental, intellectual property, and product liability matters - ITT is involved in legal proceedings incidental to its business, covering areas like environmental exposure, intellectual property, personal injury, and product liabilities[148] Information About Our Executive Officers This section lists the company's executive officers as of February 1, 2024, including their titles and professional biographies - The report provides a list and biographies of the company's executive officers as of February 1, 2024[149][150][151][153] Mine Safety Disclosures This item is not applicable to the company - Not applicable[152] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ITT's common stock trades on the NYSE, with active share repurchase programs and strong five-year total return performance - The company has a $500 million share repurchase program from 2019 with $78.8 million remaining as of December 31, 2023[157] - In October 2023, the Board approved a new $1 billion open-market share repurchase program, which will begin after the 2019 plan is completed[158] - No open-market share repurchases were made during the quarter ended December 31, 2023[158] Comparison of Cumulative Five-Year Total Return | Investment | 12/31/2018 | 12/31/2023 | | :--- | :--- | :--- | | ITT Inc. | $100.00 | $261.68 | | S&P 400 Mid-Cap | $100.00 | $180.90 | | S&P 400 Capital Goods | $100.00 | $251.41 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, ITT achieved strong financial results with revenue growth, margin expansion, and improved operating cash flow, driven by sales volume and pricing 2023 Key Performance Indicators vs. 2022 | Metric | 2023 Value ($M) | YoY Change | | :--- | :--- | :--- | | Revenue | $3,283 M | +10% | | Operating Income | $528 M | +13% | | Operating Margin | 16.1% | +40 bp | | EPS | $4.97 | +13% | | Organic Revenue | $3,229 M | +8% | | Adjusted Operating Income | $555 M | +17% | | Adjusted Operating Margin | 16.9% | +100 bp | | Adjusted EPS | $5.21 | +17% | Revenue by Segment (2023 vs 2022) | Segment | 2023 Revenue ($M) | 2022 Revenue ($M) | Change | Organic Growth | | :--- | :--- | :--- | :--- | :--- | | Motion Technologies | 1,457.8 | 1,374.0 | +6.1% | +4.9% | | Industrial Process | 1,129.6 | 971.0 | +16.3% | +14.3% | | Connect & Control Technologies | 699.4 | 645.6 | +8.3% | +5.7% | | Total Revenue | 3,283.0 | 2,987.7 | +9.9% | +8.1% | Operating Income & Margin by Segment (2023 vs 2022) | Segment | 2023 Op. Income ($M) | 2023 Op. Margin | 2022 Op. Income ($M) | 2022 Op. Margin | | :--- | :--- | :--- | :--- | :--- | | Motion Technologies | 230.8 | 15.8% | 208.5 | 15.2% | | Industrial Process | 243.6 | 21.6% | 187.6 | 19.3% | | Connect & Control Technologies | 107.5 | 15.4% | 115.8 | 17.9% | | Consolidated ITT | 528.2 | 16.1% | 468.0 | 15.7% | - Net cash from operating activities increased by $260.3 million to $538.0 million in 2023, primarily due to favorable net working capital impacts, higher operating income, and lower incentive-based compensation payments[221] Liquidity and Capital Resources ITT maintains strong liquidity through cash flow, commercial paper, and a $700 million credit facility, with recent term loan for acquisition and upgraded credit ratings - Primary funding sources include cash flow from operations, a commercial paper program, and a $700 million revolving credit agreement maturing in August 2026[205][207][211] Commercial Paper Outstanding | As of December 31 | 2023 ($M) | 2022 ($M) | | :--- | :--- | :--- | | U.S. Program | 184.9 | 299.2 | | Euro Program | — | 149.1 | | Total | 184.9 | 448.3 | - In January 2024, an indirect subsidiary entered into a €300 million term loan facility to finance the acquisition of Svanehøj Group A/S[215][216] - In December 2023, Fitch Ratings upgraded ITT's short-term ratings from F2 to F1, reflecting a conservative capital structure and good financial flexibility[217] Key Performance Indicators and Non-GAAP Measures This section defines and reconciles key non-GAAP measures, including organic revenue, adjusted operating income, and adjusted EPS, with 2023 performance details Reconciliation of Revenue to Organic Revenue (2023) | ($ in millions) | Total ITT | | :--- | :--- | | 2023 Revenue | $3,283.0 | | Acquisitions | ($30.5) | | Foreign currency translation | ($23.1) | | 2023 Organic revenue | $3,229.4 | | 2022 Revenue | $2,987.7 | | Organic revenue growth | $241.7 (8.1%) | Reconciliation of Operating Income to Adjusted Operating Income | ($ in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Operating income | $528.2 | $468.0 | | Special Items Adjustments | $26.4 | $5.8 | | Adjusted operating income | $554.6 | $473.8 | | Operating margin | 16.1% | 15.7% | | Adjusted operating margin | 16.9% | 15.9% | Reconciliation of EPS to Adjusted EPS | Per Share | 2023 | 2022 | | :--- | :--- | :--- | | Reported EPS | $4.97 | $4.40 | | Adjustments | $0.24 | $0.04 | | Adjusted EPS | $5.21 | $4.44 | Quantitative and Qualitative Disclosures About Market Risk ITT is exposed to market risks from foreign currency, interest rates, and commodity prices, with potential impacts on pre-tax earnings - A hypothetical 10% change in foreign currency exchange rates would have impacted 2023 pre-tax earnings by approximately $38 million[271] - A hypothetical 100 basis point increase in interest rates would result in approximately $1.9 million of additional annual interest expense based on current borrowing levels[274] - A hypothetical 10% change in steel prices is estimated to impact pre-tax earnings by approximately $8 to $10 million[277] Financial Statements and Supplementary Data This section refers to the Index to Consolidated Financial Statements - Refers to the Index to Consolidated Financial Statements[278] 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[279] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2023[282] - Management determined that the Company maintained effective internal control over financial reporting as of December 31, 2023. The assessment excluded Micro-Mode, acquired on May 2, 2023[287][288] - No changes occurred in internal control over financial reporting during Q4 2023 that materially affected, or are reasonably likely to materially affect, internal controls[291] Other Information This section includes disclosures on a legacy performance bond related to Bornemann GmbH and Rule 10b5-1 trading plans - A legacy performance bond of €1.3 million related to the 2012 acquisition of Bornemann remains outstanding for a former Iranian customer. Associated fees of approximately €7 thousand were paid in 2023[293] - During Q4 2023, no directors or executive officers adopted or terminated any Rule 10b5-1 trading plans[294] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the company's 2024 Proxy Statement[306] Executive Compensation Information on executive compensation is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the company's 2024 Proxy Statement[311] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and related stockholder matters is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the company's 2024 Proxy Statement[312] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the company's 2024 Proxy Statement[313] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the company's 2024 Proxy Statement[314] PART IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the report, including financial statements and various exhibits - This section provides an index to the financial statements and a list of exhibits filed with the report[317] Form 10-K Summary This item is not applicable - Not Applicable[316] Financial Statements Consolidated Statements of Operations For 2023, ITT reported increased revenue of $3,283.0 million, operating income of $528.2 million, and net income of $410.5 million, or $4.96 per diluted share Consolidated Statements of Operations Highlights (Year Ended Dec 31) | (in millions, except per share) | 2023 | 2022 | | :--- | :--- | :--- | | Revenue | $3,283.0 | $2,987.7 | | Gross profit | $1,107.3 | $922.3 | | Operating income | $528.2 | $468.0 | | Net income attributable to ITT Inc. | $410.5 | $367.0 | | Diluted EPS | $4.96 | $4.38 | Consolidated Balance Sheets As of December 31, 2023, ITT reported total assets of $3,932.6 million, total liabilities of $1,393.5 million, and total shareholders' equity of $2,539.1 million Consolidated Balance Sheet Highlights (as of Dec 31) | (in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $489.2 | $561.2 | | Total current assets | $1,857.7 | $1,836.8 | | Goodwill | $1,016.3 | $964.8 | | Total assets | $3,932.6 | $3,780.3 | | Liabilities & Equity | | | | Short-term borrowings | $187.7 | $451.0 | | Total current liabilities | $1,037.8 | $1,185.5 | | Total liabilities | $1,393.5 | $1,522.9 | | Total shareholders' equity | $2,539.1 | $2,257.4 | Consolidated Statements of Cash Flows For 2023, net cash from operating activities was $538.0 million, with $181.0 million used in investing and $432.3 million in financing activities Consolidated Statements of Cash Flows Highlights (Year Ended Dec 31) | (in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash – Operating activities | $538.0 | $277.7 | | Net Cash – Investing activities | ($181.0) | ($255.1) | | Net Cash – Financing activities | ($432.3) | ($83.3) | | Net change in cash and cash equivalents | ($72.0) | ($86.4) | | Cash and cash equivalents – end of year | $489.9 | $561.9 |