- Sequential revenue, segment operating margin and earnings per share improvement in 3Q
- Executed permanent cost reductions of over $105 million, on track to $160 million for full year
- Free cash flow increased $118 million or 77%
- Announces transition to full horizon estimate for asbestos liability to continue effective management of legacy liabilities
White Plains, N.Y., October 30, 2020 – ITT Inc. (NYSE: ITT) today reported 2020 third quarter financial results that reflect the company's resilience and the proactive actions it has taken to adjust to the current economic environment. The company reported a third-quarter year-over-year sales decline of 17% reported and 18% organic, operating margin contraction of 40 basis points and segment operating margin contraction of 80 basis points to 16.2%, and adjusted earnings per share of $0.82.
"I am encouraged by ITT's performance in the third quarter in a challenging environment. This is the result of our execution and our commitment to ITT's strategic priorities of customer centricity, operational excellence and effective capital deployment. We achieved a 44 percent sequential increase in adjusted EPS compared to the second quarter and adjusted operating income margin of 15.4 percent driven by our relentless focus on productivity and cost control," said Luca Savi, Chief Executive Officer and President of ITT Inc. "Our resilience and execution produced strong financial results despite challenging market conditions, and I am proud of how the ITT teams around the globe have continued to respond to this pandemic.
"We saw sequential improvement in several businesses in the third quarter. Our friction OE business grew over 90%, significantly outpacing the market in both North America and China; demand in the project-based pumps business was up over 40%, largely in oil and gas and chemicals end markets; and, our defense portfolio grew 17% driven by demand for ITT connectors," Savi continued. "We also continued to execute on the cost reduction plan announced earlier this year, executing over $105 million of permanent cost reductions, on track to our full year target of $160 million. These actions will help to ensure that ITT is well positioned for growth and profitability in 2021."
Savi concluded, "We are firmly on the road to recovery. ITT's execution capabilities and our commitment to the customer delivered higher volumes, a sequential top-line improvement and improved margin performance through strict fixed-cost controls. We continue to drive cash generation through working capital efficiency and selective capital investments to drive growth in future years. I remain confident in the future of ITT."
Third Quarter Performance
Organic revenue (defined as total revenue excluding foreign exchange, acquisitions and divestitures) decreased 18 percent driven primarily by the impact of COVID-19 which drove declines in transportation of 19 percent and industrial of 14 percent. Sequentially, organic revenue increased 12 percent from the second quarter of 2020 driven primarily by a 92 percent sales increase in our Friction OEM business.Segment operating income of $84 million declined 22 percent, while adjusted segment operating income declined 19 percent to $96 million, with a margin of 16.2 percent. The difference between reported and adjusted segment operating income is due to restructuring costs of $[5] million. The decline in adjusted segment operating income was due to reduced volume from weaker demand and disruption caused by COVID-19, partially offset by savings from restructuring, productivity and cost reductions. Sequentially, adjusted segment operating income increased 48 percent.
Free cash flow of $271 million was up 77% versus the prior year, and up 60% versus prior quarter. This was driven by a 180 basis points improvement in working capital as a percent of revenue and 31% reduction in capital expenditures. Free cash flow margin on a trailing twelve-months basis was 15.4%. At the end of the third quarter, we had ~$1.5 billion in available liquidity.
In the third quarter, we increased the period for which we provide an estimate of our net asbestos liability by 22 years to 2052, from our previous estimate of 10 years, and as a result recognized an expense of $136 million ($1.20 per share). This transition was driven by increased stability in defense costs and settlement payments along with improved visibility and certainty regarding insurance recoveries that have enabled us to extend our projected net liability to the full horizon over which we expect claims to be filed. Our current 10-year average, net, after-tax cash projection declined to $25 million annually at the mid-point due to effective strategies implemented in recent years.
As a result of the asbestos charge mentioned above, earnings per share from continuing operations was a loss of $0.55. Adjusted EPS from continuing operations was $0.82 per diluted share, reflecting a 15 percent decrease from the prior year due to a decline in segment operating income, partially offset by reduced corporate costs. Adjusted EPS improved 44 percent compared to the second quarter of 2020.
Business Segment Results
| Revenue | Operating Income | |||||
| For the Three Months Ended September 30 | 2020 | Reported Inc (Dec) | Organic Inc (Dec) | 2020 | Reported Inc (Dec) | Adjusted Inc (Dec) |
| Motion Technologies | $272 | (11)% | (13)% | $50.4 | (11)% | (12)% |
| Industrial Process | $194 | (19)% | (19)% | $17.1 | (22)% | (12)% |
| Connect & Control Technologies | $126 | (25)% | (26)% | $16.4 | (42)% | (40)% |
| Total segment results | 592 | (17)% | (18)% | 83.9 | (22)% | (19)% |
- Motion Technologies organic revenue decreased 13 percent, reflecting a decline of 14 percent in Friction primarily in Europe, offset by strong OEM growth in North America and China. Wolverine declined 16 percent due to lower automotive production levels. KONI and Axtone revenue decreased 8 percent, primarily driven by weakness in rail. Adjusted operating income decreased 12 percent to $50 million primarily due to reduced automotive production caused by COVID-19 and unfavorable mix and price impacts, partially offset by productivity and cost reduction actions. Adjusted operating margin was 18.5%, down 30 basis points.
- Industrial Process organic revenue decreased 19 percent primarily resulting from lower chemical and oil and gas pump project deliveries. Revenue from our short-cycle business was down 13 percent due mainly to weakness in baseline pumps and aftermarket parts and service. Adjusted operating income decreased 12 percent to $27 million due to reduced sales volumes, partially offset by savings from productivity and supply chain improvements, and benefits from restructuring. These actions resulted in adjusted operating margin of 14.1 percent, an expansion of 120 basis points.
- Connect and Control Technologies organic revenue decreased 26 percent primarily driven by lower aerospace and defense demand due to a decline in global commercial air traffic and reduced production levels on key platforms, as well as unfavorable timing of defense programs. Adjusted segment operating income decreased 40 percent to $18 million primarily driven by reduced aerospace demand, partially offset by productivity and sourcing actions, as well as restructuring benefits from cost actions.
Investor Conference Call Details
ITT's senior management will host a conference call for investors today at 9:30 a.m. The briefing can be monitored live via webcast at the following address on the company's website: www.itt.com/investors. A replay of the webcast will be available for 90 days following the presentation. A replay will also be available telephonically from two hours after the webcast until Friday, November 13, 2020, at midnight. For a reconciliation of GAAP to non-GAAP results, please click here. All references to EPS are defined as diluted earnings per share from continuing operations.Investor Contact
Mark Macaluso+1 914-641-2064
mark.macaluso@itt.com
Safe Harbor Statement
This release contains "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our business, future financial results and the industry in which we operate, and other legal, regulatory and economic developments. These forward-looking statements include, but are not limited to, future strategic plans and other statements that describe the company's business strategy, outlook, objectives, plans, intentions or goals, and any discussion of future events and future operating or financial performance.We use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "target," "future," "may," "will," "could," "should," "potential," "continue," "guidance" and other similar expressions to identify such forward-looking statements. Forward-looking statements are uncertain and to some extent unpredictable, and involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such forward-looking statements.
Where in any forward-looking statement we express an expectation or belief as to future results or events, such expectation or belief is based on current plans and expectations of our management, expressed in good faith and believed to have a reasonable basis. However, there can be no assurance that the expectation or belief will occur or that anticipated results will be achieved or accomplished.
Among the factors that could cause our results to differ materially from those indicated by forward-looking statements are risks and uncertainties inherent in our business including, without limitation: impacts on our business due to the COVID-19 pandemic, including disruptions to our operations and demand for our products, increased costs, disruption of supply chain and other constraints in the availability of key commodities and other necessary services, government-mandated site closures, employee illness or loss of key personnel, the impact of travel restrictions and stay-in-place restrictions on our business and workforce, customer and supplier bankruptcies, impacts to the global economy and financial markets, and liquidity challenges in accessing capital markets; uncertain global economic and capital markets conditions, including due to COVID-19, trade disputes between the U.S. and its trading partners, and fluctuations in oil prices; uncertainties regarding our exposure to pending and future asbestos claims and related liabilities and insurance recoveries; risks due to our operations and sales outside the U.S. and in emerging markets; fluctuations in foreign currency exchange rates; fluctuations in demand or customers' levels of capital investment and maintenance expenditures, especially in the oil and gas, chemical, and mining markets, or changes in our customers' anticipated production schedules, especially in the commercial aerospace market; failure to compete successfully in our markets; the extent to which there are quality problems with respect to manufacturing processes or finished goods; failure to integrate acquired businesses or achieve expected benefits from such acquisitions; risks related to government contracting, including changes in levels of government spending and regulatory and contractual requirements applicable to sales to the U.S. government; volatility in raw material prices and our suppliers' ability to meet quality and delivery requirements; failure to manage the distribution of products and services effectively; loss of or decrease in sales from our most significant customers; fluctuations in our effective tax rate; failure to retain existing senior management, engineering and other key personnel and attract and retain new qualified personnel; failure to protect our intellectual property rights or violations of the intellectual property rights of others; the risk of material business interruptions, particularly at our manufacturing facilities; the risk of cybersecurity breaches; changes in laws relating to the use and transfer of personal and other information; failure of portfolio management strategies, including cost-saving initiatives, to meet expectations; changes in environmental laws or regulations, discovery of previously unknown or more extensive contamination, or the failure of a potentially responsible party to perform; failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation, export controls and trade sanctions, including recently announced tariffs; risk of product liability claims and litigation; and risk of liabilities from past divestitures and spin-offs. More information on factors that could cause actual results or events to differ materially from those anticipated is included in our reports filed with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2019 (particularly under the caption "Risk Factors"), our Quarterly Reports on Form 10-Q and in other documents we file from time to time with the SEC.
The forward-looking statements included in this release speak only as of the date hereof. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.