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ITT Reports Strong 2019 Fourth-Quarter and Full-Year Results

Provides 2020 Guidance

ITT Inc. (NYSE: ITT) today reported 2019 fourth-quarter and full-year financial results that reflected continued strong operational execution and share gain strategies in key global markets. The company also provided 2020 guidance.

 

2019 FOURTH-QUARTER PERFORMANCE

 

 

 

 

 

Revenue

 

Segment OI Margin

 

EPS

+6%

 

+90 bps

 

+32%

Organic Revenue

 

Adj Segment OI Margin

 

Adj EPS

+4%

 

+130 bps

 

+21%

2019 FULL-YEAR PERFORMANCE

 

 

 

 

 

 

 

Revenue

 

Segment OI Margin

 

EPS

 

Operating Cash Flow

+4%

 

+20 bps

 

-3%

 

-4%

Organic Revenue

 

Adj Segment OI Margin

 

Adj EPS

 

Adj Free Cash Flow

+4.5%

 

+90 bps

 

+18%

 

+3%

*Performance relative to comparable three and twelve months ended December 31, 2018.

For reconciliations of GAAP to Non-GAAP measures, refer to the section of this release titled Key Performance Indicators and Non-GAAP Measures.

Q4 HIGHLIGHTS

  • Total Revenue $719M; Segment OI Margins 14.9%; EPS $0.75
  • Organic Revenue $705M; Adj Segment OI Margins 15.4%; Adj EPS $0.99
    • Friction OEM Outperforms1 Global Auto by 1,600 bps in Q4 & 1,100 bps in 2019
    • Margin Expansion of +70 bps or Better at Each Segment

2019 HIGHLIGHTS

  • Total Revenue $2.85B; Segment OI Margins 15.2%; EPS $3.65
  • Organic Revenue $2.87M; Adj Segment OI Margins 16.0%; Adj EPS $3.81
    • 95% Adj Free Cash Flow Conversion
    • $118 Million in Strategic Acquisitions & $94 Million Returned to Shareholders

"I am very proud of the hard work that ITTers delivered each and every day, that produced record 2019 revenue of $2.85 billion and record adjusted EPS of $3.81. By focusing on creating value for our customers, implementing productivity improvements, and making accretive organic and inorganic investments, we delivered strong results across multiple performance metrics in an increasingly challenging global environment. Additionally, in 2019 we returned $94 million to our valued shareholders," said ITT Chief Executive Officer and President, Luca Savi. "Now we must carry this positive momentum into a more uncertain 2020 by focusing on the needs of our customers, seizing opportunities for growth, and continuing to drive operational improvements everywhere."

1 Based on recognized auto industry data as of February 14, 2020

Fourth-Quarter 2019 Results

Revenue and Orders

The company delivered fourth-quarter revenue of $719 million, a 6 percent increase that included $24 million from the strategic acquisitions of Rheinhütte Pumpen (Rheinhütte) and Matrix Composites (Matrix) and unfavorable foreign exchange of $10 million. Organic revenue (defined as total revenue excluding foreign exchange, acquisitions and divestitures) improved 4 percent, driven by 5 percent growth in transportation, 4 percent growth in industrial, and 1 percent growth in oil and gas. Organic orders, which exclude a 3-point benefit from acquisitions and a 1-point unfavorable impact from foreign exchange, were flat as strength in transportation and pump project awards, was offset by a decline in short-cycle industrial demand.

Segment Operating Income

Segment operating income increased 13 percent to $107 million and generated a margin of 14.9 percent, which included higher acquisition-related costs. Adjusted segment operating income grew 16 percent to $111 million and delivered a 130 basis point improvement in margin to 15.4 percent. The operating income growth was driven by volume leverage and favorable mix, significant benefits from manufacturing and supply chain productivity, cost containment actions and our strategic acquisitions. These gains were partially offset by higher commodity costs, strategic investments, and unfavorable foreign exchange.

Earnings Per Share

Fourth-quarter EPS and Adjusted EPS grew 32 and 21 percent, respectively, primarily due to strong segment operating income growth, a reduction in corporate costs, and lower non-operating expenses. Adjusted EPS of $0.99 cents expanded 26 percent on a constant currency basis.

Full-Year 2019 Results

Revenue

The company delivered 2019 revenue of $2.85 billion, a 4 percent increase that included $54 million of revenue from our strategic acquisitions of Rheinhütte and Matrix and an unfavorable foreign exchange impact of $76 million. Organic revenue increased 4.5 percent, driven by the strength of our diversified portfolio as our industrial businesses grew 8 percent, oil and gas grew 7 percent, and transportation grew 3 percent.

Segment Operating Income

Segment operating income increased 5 percent to $432 million and generated a margin of 15.2 percent, despite higher acquisition-related costs and restructuring charges. Adjusted segment operating income grew 10 percent to $457 million, and adjusted margins expanded 90 basis points to 16.0 percent. The operating income growth was driven by increased volume from strength in pump projects, Friction OEM share gains, and growth in rail, as well as continued manufacturing and supply chain productivity, cost containment actions, and strategic acquisitions. These gains were partially offset by higher commodity costs and tariffs, strategic investments, and unfavorable foreign exchange.

Earnings Per Share

Full-year EPS declined to $3.65, compared to $3.75 in 2018, driven by a prior year gain of $38 million on the sale of a former operating location and a prior year favorable deferred tax valuation adjustment, partially offset by a favorable year-over-year net asbestos benefit of $25 million due to our effective insurance recovery strategies. Adjusted EPS grew 18 percent to $3.81, reflecting strong adjusted segment operating income growth, a reduction in corporate costs, lower interest and non-operating expenses, and a favorable tax rate.

Fourth-Quarter 2019 Business Segment Results

Motion Technologies

  • Total revenue increased 4 percent to $304 million, including a 3-point unfavorable impact from foreign exchange. Organic revenue increased 7 percent, resulting from Friction OEM growth that outpaced the global market by 1,600 basis points2 with significant outperformance in China, Europe, and North America, as well as growth in rail with particular strength in Europe. These improvements were partially offset by weakness in the Wolverine business.
  • Operating income decreased 2 percent to $47 million due to a prior year favorable legal settlement. Adjusted operating income increased 12 percent to $47 million, primarily reflecting volume leverage and favorable mix as well as productivity and supply chain improvements, and savings from restructuring actions, partially offset by higher commodity costs, strategic investments, and unfavorable foreign exchange.

Industrial Process

  • Total revenue increased 11 percent to $255 million, including an 8-point benefit from our strategic acquisition of Rheinhütte and a 1-point unfavorable impact from foreign exchange. Organic revenue increased 4 percent reflecting strong pump project growth of 13 percent, driven by chemical and industrial activity. The short-cycle portion of our business grew 1 percent due to an increase in service activity and baseline pump strength that was partially offset by a decline in industrial valves.
  • Operating income increased 26 percent to $34 million and adjusted operating income increased 32 percent to $36 million, driven by volume, improved project execution, manufacturing and supply chain productivity, savings from restructuring actions, and our Rheinhütte acquisition, which was partially offset by higher commodity costs, strategic investments, and unfavorable foreign exchange.

Connect and Control Technologies

  • Total revenue increased 1 percent to $161 million, including a 3-point benefit from our strategic acquisition of Matrix. Organic revenue decreased 2 percent driven by a 3 percent decline in aerospace and defense due to strong prior year program activity in rotorcraft and defense components, as well as a 3 percent decline in industrial due to weakness in connectors, partially offset by 17 percent growth in oil and gas.
  • Operating income increased 29 percent to $26 million, which included a benefit from a prior year legal accrual of $5 million. Adjusted segment operating income increased 6 percent to $28 million, driven by benefits from manufacturing and supply chain productivity, savings from restructuring actions, and our strategic acquisition of Matrix, partially offset by lower volume and an increase in commodity costs.

2 Based on recognized auto industry data as of February 14, 2020

2020 Guidance

The company’s 2020 operational guidance, excluding the potential first-quarter impacts of the novel coronavirus, is as follows: Flat total revenue with a range of down 2 percent to up 2 percent; Adjusted segment margin expansion of 110 bps with a range of up 70 bps to up 150 bps; and Adjusted EPS of $4.00 per share, with a range of $3.90 to $4.10 per share, representing midpoint growth of 5%.

However, the company’s 2020 guidance, including our current estimate of the potential first-quarter impacts of the novel coronavirus, is now projected as: Total revenue down 1 percent with a range of down 3 percent to up 1 percent; Adjusted segment margin expansion of 80 bps with a range of up 50 bps to up 110 bps; and Adjusted EPS of $3.87 per share, with a wider range of $3.72 to $4.02 per share to reflect the increasing uncertainty from the novel coronavirus.

In addition, the company plans to continue to return capital to shareholders in 2020 by increasing its quarterly dividend, for an eighth straight year, by 15 percent to $0.169 per share.

Investor Call Today

ITT's senior management will host a conference call for investors today at 9 a.m. ET to review performance and answer questions. 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, March 6, 2020, at midnight. For a reconciliation of GAAP to non-GAAP results, please refer to www.itt.com/investors or click here. All references to EPS are defined as diluted earnings per share from continuing operations.

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:

  • uncertainties regarding our exposure to pending and future asbestos claims and related liabilities and insurance recoveries;
  • uncertain global economic and capital markets conditions, including trade disputes between the U.S. and its trading partners;
  • risks due to our operations and sales outside the U.S. and in emerging markets;
  • fluctuations in foreign currency exchange rates;
  • uncertainty surrounding the impact of the recent 2019 novel coronavirus outbreak;
  • fluctuations in 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, such as the shifts in production of Boeing’s 737 Max;
  • 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 customer;
  • 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 revenue growth and 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.

 

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

Three Months

 

Twelve Months

For the Periods Ended December 31

2019

 

2018

 

2019

 

2018

Revenue

$

719.1

 

 

$

678.4

 

 

$

2,846.4

 

 

$

2,745.1

 

Costs of revenue

491.1

 

 

467.9

 

 

1,936.3

 

 

1,857.9

 

Gross profit

228.0

 

 

210.5

 

 

910.1

 

 

887.2

 

General and administrative expenses

66.6

 

 

62.5

 

 

254.1

 

 

259.1

 

Sales and marketing expenses

41.4

 

 

40.5

 

 

165.9

 

 

168.2

 

Research and development expenses

24.8

 

 

23.7

 

 

97.9

 

 

98.4

 

Loss (gain) on sale or disposal of long-lived assets

1.3

 

 

(0.2

)

 

1.0

 

 

(40.7

)

Asbestos-related cost (benefit), net

11.6

 

 

15.4

 

 

(20.2

)

 

4.9

 

Operating income

82.3

 

 

68.6

 

 

411.4

 

 

397.3

 

Interest and non-operating (income) expenses, net

(1.7

)

 

2.3

 

 

(3.0

)

 

6.3

 

Income from continuing operations before income tax expense

84.0

 

 

66.3

 

 

414.4

 

 

391.0

 

Income tax expense

16.8

 

 

15.3

 

 

89.9

 

 

57.7

 

Income from continuing operations

67.2

 

 

51.0

 

 

324.5

 

 

333.3

 

Income from discontinued operations, net of tax

1.9

 

 

1.3

 

 

1.7

 

 

1.3

 

Net income

69.1

 

 

52.3

 

 

326.2

 

 

334.6

 

Less: Income attributable to noncontrolling interests

0.7

 

 

0.4

 

 

1.1

 

 

0.9

 

Net income attributable to ITT Inc.

$

68.4

 

 

$

51.9

 

 

$

325.1

 

 

$

333.7

 

Amounts attributable to ITT Inc.:

 

 

 

 

 

 

 

Income from continuing operations, net of tax

$

66.5

 

 

$

50.6

 

 

$

323.4

 

 

$

332.4

 

Income from discontinued operations, net of tax

1.9

 

 

1.3

 

 

1.7

 

 

1.3

 

Net income attributable to ITT Inc.

$

68.4

 

 

$

51.9

 

 

$

325.1

 

 

$

333.7

 

Earnings per share attributable to ITT Inc.:

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

Continuing operations

$

0.76

 

 

$

0.58

 

 

$

3.69

 

 

$

3.79

 

Net income

$

0.78

 

 

$

0.59

 

 

$

3.71

 

 

$

3.81

 

Diluted:

 

 

 

 

 

 

 

Continuing operations

$

0.75

 

 

$

0.57

 

 

$

3.65

 

 

$

3.75

 

Net income

$

0.77

 

 

$

0.58

 

 

$

3.67

 

 

$

3.76

 

 

 

 

 

 

 

 

 

Weighted average common shares – basic

87.7

 

 

87.6

 

 

87.7

 

 

87.7

 

Weighted average common shares – diluted

88.6

88.7

88.6

88.7

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

December 31,
2019

 

December 31,
2018

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

612.1

 

 

$

561.2

 

Receivables, net

578.4

 

 

540.0

 

Inventories, net

392.9

 

 

380.5

 

Other current assets

153.4

 

 

163.4

 

Total current assets

1,736.8

 

 

1,645.1

 

Plant, property and equipment, net

531.5

 

 

518.8

 

Goodwill

927.2

 

 

875.9

 

Other intangible assets, net

138.0

 

 

136.1

 

Asbestos-related assets

319.6

 

 

309.6

 

Deferred income taxes

138.1

 

 

164.5

 

Other non-current assets

316.5

 

 

196.8

 

Total non-current assets

2,370.9

 

 

2,201.7

 

Total assets

$

4,107.7

 

 

$

3,846.8

 

Liabilities and Shareholders’ Equity

 

 

 

Current liabilities:

 

 

 

Commercial paper and current maturities of long-term debt

$

86.5

 

 

$

116.2

 

Accounts payable

332.4

 

 

339.2

 

Accrued liabilities

430.8

 

 

416.7

 

Total current liabilities

849.7

 

 

872.1

 

Asbestos-related liabilities

731.6

 

 

775.1

 

Postretirement benefits

213.9

 

 

208.2

 

Other non-current liabilities

234.7

 

 

166.5

 

Total non-current liabilities

1,180.2

 

 

1,149.8

 

Total liabilities

2,029.9

 

 

2,021.9

 

Shareholders’ equity:

 

 

 

Common stock:

 

 

 

Authorized – 250.0 shares, $1 par value per share

 

 

 

Issued and outstanding – 87.8 shares and 87.6 shares, respectively

87.8

 

 

87.6

 

Retained earnings

2,372.4

 

 

2,110.3

 

Total accumulated other comprehensive loss

(385.3

)

 

(375.5

)

Total ITT Inc. shareholders’ equity

2,074.9

 

 

1,822.4

 

Noncontrolling interests

2.9

 

 

2.5

 

Total shareholders’ equity

2,077.8

 

 

1,824.9

 

Total liabilities and shareholders’ equity

$

4,107.7

 

 

$

3,846.8

 

 

...
 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN MILLIONS)

For the Twelve Months Ended December 31

2019

 

2018

Operating Activities

 

 

 

Income from continuing operations attributable to ITT Inc.

$

323.4

 

 

$

332.4

 

Adjustments to income from continuing operations:

 

 

 

Depreciation and amortization

113.4

 

 

109.4

 

Equity-based compensation

15.7

 

 

21.6

 

Loss (gain) on sale of long-lived assets

1.0

 

 

(40.7

)

Asbestos-related (benefit) expense, net

(20.2

)

 

4.9

 

Deferred income tax expense (benefit)

30.9

 

 

(14.7

)

Other non-cash charges, net

38.8

 

 

13.8

 

Asbestos-related payments, net

(21.6

)

 

(40.8

)

Contributions to postretirement plans

(22.9

)

 

(11.2

)

Changes in assets and liabilities:

 

 

 

Change in receivables

(40.6

)

 

(2.7

)

Change in inventories

(0.6

)

 

(13.3

)

Change in contract assets

2.7

 

 

19.1

 

Change in contract liabilities

(5.1

)

 

0.1

 

Change in accounts payable

(1.9

)

 

(4.2

)

Change in accrued expenses

(14.7

)

 

5.7

 

Change in income taxes

(9.6

)

 

14.4

 

Other, net

(31.0

)

 

(22.0

)

Net Cash – Operating activities

357.7

 

 

371.8

 

Investing Activities

 

 

 

Capital expenditures

(91.4

)

 

(95.5

)

Proceeds from sale of long-lived assets

0.9

 

 

43.2

 

Acquisitions, net of cash acquired

(113.1

)

 

 

Other, net

0.2

 

 

 

Net Cash – Investing activities

(203.4

)

 

(52.3

)

Financing Activities

 

 

 

Commercial paper, net repayments

(27.2

)

 

(44.5

)

Short-term revolving loans, borrowings

 

 

246.5

 

Short-term revolving loans, repayments

 

 

(233.8

)

Long-term debt, issued

8.1

 

 

3.2

 

Long-term debt, repayments

(3.2

)

 

(2.7

)

Repurchase of common stock

(41.4

)

 

(56.1

)

Dividends paid

(52.1

)

 

(47.3

)

Proceeds from issuance of common stock

14.9

 

 

5.8

 

Other, net

(0.6

)

 

0.1

 

Net Cash – Financing activities

(101.5

)

 

(128.8

)

Exchange rate effects on cash and cash equivalents

(3.0

)

 

(15.3

)

Net Cash – Operating activities of discontinued operations

0.9

 

 

(4.2

)

Net change in cash and cash equivalents

50.7

 

 

171.2

 

Cash and cash equivalents – beginning of year (includes restricted cash of $1.0 and $1.2, respectively)

562.2