ITT reports solid 2015 third-quarter results
Company raises full-year GAAP EPS guidance; maintains adjusted EPS, and revenue guidance
Sees benefits from continued effective management of net asbestos liability
- Revenue down 8% to $602 million
- Segment operating margin at 14.1%
- EPS increased to $1.07
- Organic revenue down 2%
- Segment operating margin at 15%
- EPS of $0.63
WHITE PLAINS, N.Y., Oct. 30, 2015 – ITT Corporation (NYSE: ITT) today reported 2015 third-quarter financial results, including solid adjusted operating margins, that reflected strong net operating productivity and effective cost containment in a challenging macroeconomic environment.
On a GAAP basis, the company delivered revenue of $602 million in the third quarter, reflecting an 8 percent decline, primarily due to unfavorable foreign exchange. GAAP segment operating margins declined 30 basis points to 14.1 percent primarily due to unfavorable foreign exchange and negative pricing impacts, which were partially offset by strong operating productivity and benefits from proactive restructuring. Third-quarter GAAP EPS increased to $1.07, compared with $0.87 in the prior year, primarily due to the successful resolution of a federal tax audit.
On an adjusted basis, organic revenue (defined as total revenue excluding foreign exchange, acquisition and divestiture impacts) decreased 2 percent, reflecting declines in the global general industrial and the upstream and midstream oil and gas markets, as well as weakness in the global rail market, which more than offset share gains and aftermarket growth in automotive brake pads.
Adjusted segment operating income declined 9 percent, as strong net operating productivity, including restructuring benefits from proactive actions, was more than offset by unfavorable foreign exchange of $10 million, negative pricing impacts, and operational disruption costs due to the relocation of certain connectors operations within North America. Adjusted segment operating income, excluding the negative impact from foreign exchange, grew 1 percent in the quarter.
Adjusted EPS, which excludes special items, decreased 5 percent to $0.63, as solid segment operational performance, lower corporate costs, including efficiencies and lower environmental costs, and a lower share count were more than offset by unfavorable foreign exchange. Adjusted EPS, excluding the negative impact from foreign exchange, grew 8 percent in the quarter.
“Despite the persistent headwinds from foreign exchange and global oil and gas and industrial markets, we continued our track record of execution and delivered solid operating margins in the quarter,” said Denise Ramos, Chief Executive Officer and President. “We are consistently seeing the benefits from driving productivity, proactively restructuring our operations and actively controlling our costs.
“In addition, we are deploying our capital to position us for long-term success, including acquiring close-to-core businesses such as Hartzell Aerospace in the second quarter and Wolverine Advanced Materials early in the fourth quarter. And, we are also continuing to effectively manage our net asbestos liability, resulting in improved cash flow projections and a significant 15 percent reduction in the net liability in 2015.
“As we continue to manage those areas over which we have control, we remain mindful of the ongoing volatility in the global macroeconomic environment and the impact these conditions will continue to have on our businesses. As we look ahead to the remainder of the year and into 2016, we will continue our strong focus on optimizing and aligning our businesses and their respective cost structures in order to drive enhanced long-term value for shareowners.”
2015 Third-Quarter Business Segment Results
All quarterly results are compared with the respective prior-year periods
Industrial Process designs and manufactures industrial pumps and valves for the oil and gas, chemical, mining and industrial markets.
- Third-quarter GAAP revenue decreased 8 percent to $271 million. Third-quarter GAAP operating income increased 10 percent to $34 million.
- Organic revenue decreased 1 percent, reflecting strength in industrial project pumps and short-cycle baseline pumps and valves, due to solid backlog entering the year, offset by declines in aftermarket sales due to the impact of delayed customer maintenance.
- Adjusted operating income increased 10 percent to $36 million as strong net operating productivity, including restructuring benefits and cost containment actions, was partially offset by negative pricing impacts and negative mix shift.
- The business also expanded adjusted segment operating margins by 220 basis points, reflecting benefits from ongoing actions to optimize Industrial Process to better leverage previous investments, including reorganizing into three more focused verticals, which drives improved execution while lowering the structural cost base.
Motion Technologies designs and manufactures braking technologies and shock absorbers for the automotive and rail markets.
- Third-quarter GAAP revenue decreased 9 percent to $180 million. Third-quarter GAAP operating income decreased 10 percent to $33 million.
- Organic revenue increased 4 percent due to strength in global automotive brake pads, reflecting global volume growth with Original Equipment Manufacturers, partially offset by negative pricing impacts, and aftermarket growth due to an anticipated shift in an independent aftermarket customer’s order patterns. Organic revenue growth was partially offset by softness in the global rail market.
- Third-quarter adjusted operating income decreased 4 percent to $35 million, reflecting higher volume and net operating productivity, which was more than offset by $6 million of unfavorable foreign exchange and negative pricing impacts. Adjusted operating income, before the negative impact from foreign exchange, grew 13 percent in the quarter.
Interconnect Solutions designs and manufactures connectors and interconnects for the oil and gas, industrial and transportation, and aerospace and defense markets.
- Third-quarter GAAP revenue decreased 16 percent to $83 million. Third-quarter GAAP operating results decreased 68 percent to $4 million.
- Organic revenue declined 11 percent due to weakness in the general industrial and upstream oil and gas connector markets, as well as delayed shipments caused by disruption impacts due to the relocation of certain operations within North America.
- Adjusted operating income declined 68 percent to $5 million, as savings from restructuring initiatives were more than offset by impacts from operational disruptions due to the relocation of certain operations within North America and volume declines in high-margin oil and gas connectors.
Control Technologies designs and manufactures products including fuel management, actuation, and noise and energy absorption components for the aerospace and industrial markets, as well as aerospace environmental control system components.
- Third-quarter GAAP revenue decreased 1 percent to $70 million, which included revenue from the acquired Hartzell Aerospace business of $9 million. Third-quarter GAAP operating income decreased 11 percent to $14 million.
- Organic revenue decreased 11 percent, due to industrial declines driven by softness in China and a difficult prior-year comparison in North America, as well as declines in the aerospace aftermarket.
- Adjusted operating income decreased 6 percent to $15 million, as net operating productivity, lower compensation costs and the impact of the Hartzell Aerospace acquisition were more than offset by lower volume, unfavorable mix shift due to lower aerospace aftermarket, and incremental strategic investments.
Annual Asbestos Remeasurement
In the third quarter, ITT recognized a $45 million pre-tax benefit as a result of its annual remeasurement of its asbestos liability and related insurance asset. This benefit reflects lower acceptance rates and lower recent average settlement values. The benefit was recognized as a special item and was excluded from adjusted results.
The company also projects a favorable $5 million decrease in the net annual average (years 6-10) after-tax cash outflow projections versus prior projections primarily due to benefits from a single firm defense strategy implemented in the second quarter of 2015. This strategy has contributed to a 15 percent year-to-date reduction in the company’s net liability in 2015.
The company is maintaining its previously announced full-year GAAP revenue guidance and raising its GAAP EPS guidance. GAAP EPS is now expected to be in the range of $3.07 to $3.33. GAAP revenue is expected to be down 9 percent to down 7 percent year-over-year.
The previously announced adjusted full-year EPS and organic revenue guidance is being maintained. On an adjusted basis, the company continues to expect EPS to be in the range of $2.45 to $2.55 and organic revenue is expected to range from down 3 percent to down 1 percent.
Investor Call Today
ITT's senior management will host a conference call for investors today at 9 a.m. EDT to review performance and answer questions. The briefing can be monitored live via webcast at the following address on the company's Web site: www.itt.com/investors and will be available on the website from two hours after the webcast until Friday, Nov. 13, 2015, 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.