NOTE 12
ACCRUED LIABILITIES AND OTHER NON-CURRENT LIABILITIES
|
| | | | | | | | | | |
| March 31, 2019 | December 31, 2018 |
Compensation and other employee-related benefits | | $ | 123.5 |
| | | $ | 152.2 |
| |
Contract liabilities and other customer-related liabilities | | 80.8 |
| | | 82.2 |
| |
Asbestos-related liability | | 73.5 |
| | | 74.2 |
| |
Accrued income taxes and other tax-related liabilities | | 34.0 |
| | | 33.7 |
| |
Environmental liabilities and other legal matters | | 24.4 |
| | | 24.0 |
| |
Operating lease liabilities (see Note 2) | | 18.3 |
| | | — |
| |
Accrued warranty costs | | 16.4 |
| | | 16.2 |
| |
Other accrued liabilities | | 30.8 |
| | | 34.2 |
| |
Accrued liabilities | | $ | 401.7 |
| | | $ | 416.7 |
| |
Environmental liabilities | | $ | 56.8 |
| | | $ | 59.5 |
| |
Operating lease liabilities (see Note 2) | | 62.1 |
| | | — |
| |
Compensation and other employee-related benefits | | 33.7 |
| | | 34.2 |
| |
Deferred income taxes and other tax-related accruals | | 24.8 |
| | | 25.0 |
| |
Other | | 50.8 |
| | | 47.8 |
| |
Other non-current liabilities | | $ | 228.2 |
| | | $ | 166.5 |
| |
|
| | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Compensation and other employee-related benefits | | $ | 142.8 |
| | | | $ | 120.5 |
| |
Asbestos-related liabilities | | 77.4 |
| | | | 76.8 |
| |
Customer-related liabilities | | 49.2 |
| | | | 39.9 |
| |
Accrued income taxes and other tax-related liabilities | | 44.5 |
| | | | 31.0 |
| |
Environmental liabilities and other legal matters | | 30.3 |
| | | | 25.1 |
| |
Accrued warranty costs | | 16.1 |
| | | | 17.4 |
| |
Other accrued liabilities | | 39.3 |
| | | | 39.5 |
| |
Accrued liabilities | | $ | 399.6 |
| | | | $ | 350.2 |
| |
Environmental liabilities | | $ | 58.4 |
| | | | $ | 63.2 |
| |
Compensation and other employee-related benefits | | 35.1 |
| | | | 33.0 |
| |
Deferred income taxes and other tax-related accruals | | 21.8 |
| | | | 24.9 |
| |
Other | | 56.8 |
| | | | 59.9 |
| |
Other non-current liabilities | | $ | 172.1 |
| | | | $ | 181.0 |
| |
NOTE 13
DEBTLEASES
The Company’s lease portfolio primarily relates to real estate, which may be used for manufacturing or non-manufacturing purposes, and contains lease terms generally ranging between one and 18 years. Our lease portfolio also includes vehicles and other equipment such as forklifts. Substantially all of our leases are classified as operating leases. For leases with terms greater than 12 months, we record a right-of-use asset and lease liability equal to the present value of the lease payments. In determining the discount rate used to measure the right-of-use asset and lease liability, we utilize the Company’s incremental borrowing rate and consider the term of the lease, as well as the geographic location of the leased asset.
Where options to renew a lease are available, they are included in the lease term and capitalized on the balance sheet to the extent there would be a significant economic penalty not to elect the option. Certain real estate leases are subject to periodic changes in an index or market rate. While lease liabilities are not remeasured as a result of changes to an index or rate, these changes are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. Variable lease expense also includes property tax and property insurance costs. Sublease income is not considered material.
The table below summarizes the operating lease costs during the three months ended March 31, 2019.
|
| | | |
Operating lease cost | $ | 5.6 |
|
Short-term lease cost | 0.4 |
|
Variable lease cost | 0.3 |
|
Total lease costs | $ | 6.3 |
|
|
| | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Commercial paper | | $ | 130.9 |
| | | | $ | 113.5 |
| |
Short-term loans | | 59.1 |
| | | | 100.0 |
| |
Current maturities of long-term debt and capital leases | | 1.1 |
| | | | 0.8 |
| |
Short-term loans and current maturities of long-term debt | | 191.1 |
| | | | 214.3 |
| |
Long-term debt and capital leases | | 5.6 |
| | | | 2.0 |
| |
Total debt and capital leases | | $ | 196.7 |
| | | | $ | 216.3 |
| |
Future operating lease payments under non-cancellable operating leases with an initial term in excess of 12 months as of March 31, 2019 are shown below. |
| | | |
2019 | $ | 16.1 |
|
2020 | 16.5 |
|
2021 | 12.5 |
|
2022 | 10.2 |
|
2023 | 8.1 |
|
2024 and thereafter | 47.1 |
|
Total lease payments | 110.5 |
|
Less: amount of lease payments representing interest | (30.1 | ) |
Present value of future lease payments | $ | 80.4 |
|
| |
Short-term lease liability | $ | 18.3 |
|
Long-term lease liability | 62.1 |
|
Present value of future lease payments | $ | 80.4 |
|
Future minimum operating lease payments under non-cancellable operating leases with an initial term in excess of 12 months as of December 31, 2018 are shown below.
|
| | | |
2019 | $ | 22.2 |
|
2020 | 16.8 |
|
2021 | 12.6 |
|
2022 | 10.2 |
|
2023 | 8.1 |
|
2024 and thereafter | 46.4 |
|
Total minimum lease payments | 116.3 |
|
Our lease portfolio has a weighted average remaining lease term of 14.9 years, and the weighted average discount rate is 3.1%. During the three months ended March 31, 2019, we recognized non-cash right-of-use assets of $1.7 for new leases entered into during the period. Operating cash outflows from operating leases during the three months ended March 31, 2019 were $5.2.
NOTE 14
DEBT
|
| | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Commercial paper | | $ | 112.3 |
| | | | $ | 114.4 |
| |
Current maturities of long-term debt and finance leases | | 2.1 |
| | | | 1.8 |
| |
Commercial paper and current maturities of long-term debt | | 114.4 |
| | | | 116.2 |
| |
Long-term debt and finance leases | | 15.2 |
| | | | 8.8 |
| |
Total debt and finance leases | | $ | 129.6 |
| | | | $ | 125.0 |
| |
Commercial Paper
Commercial paper outstanding as of March 31, 2019 and December 31, 2018 was issued entirely through the Company’s euro program and had an associated weighted average interest rate of 1.61%0.08% and 1.14% and0.06%, respectively. The outstanding commercial paper for both periods had maturity terms less than one month from the date of issuance as of September 30, 2017 and December 31, 2016, respectively.issuance.
Short-term Loans
Short-term loans consist of outstanding borrowings under our $500 Revolving Credit Agreement. Outstanding borrowings were denominated in Euros with an associated weighted average interest rate of 1.1% as of September 30, 2017 and were denominated in U.S. dollars with an associated weighted average interest rate of 1.87% as of December 31, 2016. Refer to the Liquidity section within "Item“Item 2. Management'sManagement’s Discussion and Analysis,"” for additional information on the revolving credit facility as well as our overall funding and liquidity strategy.
NOTE 1415
POSTRETIREMENT BENEFIT PLANS
The following tables providetable provides the components of net periodic benefit cost for pension plans and other employee-related benefit plans for the three and nine months ended September 30, 2017March 31, 2019 and 2016.2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
For the Three Months Ended March 31 | Pension | | Other Benefits | | Total | | Pension | | Other Benefits | | Total |
Service cost | | $ | 0.4 |
| | | | $ | 0.2 |
| | | | $ | 0.6 |
| | | | $ | 0.4 |
| | | | $ | 0.2 |
| | | | $ | 0.6 |
| |
Interest cost | | 3.1 |
| | | | 1.0 |
| | | | 4.1 |
| | | | 2.8 |
| | | | 1.1 |
| | | | 3.9 |
| |
Expected return on plan assets | | (3.8 | ) | | | | — |
| | | | (3.8 | ) | | | | (3.4 | ) | | | | (0.1 | ) | | | | (3.5 | ) | |
Amortization of prior service cost (benefit) | | 0.2 |
| | | | (1.3 | ) | | | | (1.1 | ) | | | | 0.2 |
| | | | (1.3 | ) | | | | (1.1 | ) | |
Amortization of net actuarial loss | | 1.3 |
| | | | 0.6 |
| | | | 1.9 |
| | | | 1.5 |
| | | | 1.1 |
| | | | 2.6 |
| |
Total net periodic benefit cost | | $ | 1.2 |
| | | | $ | 0.5 |
| | | | $ | 1.7 |
| | | | $ | 1.5 |
| | | | $ | 1.0 |
| | | | $ | 2.5 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 |
For the Three Months Ended September 30 | Pension | | Other Benefits | | Total | | Pension | | Other Benefits | | Total |
Service cost | | $ | 1.5 |
| | | | $ | 0.2 |
| | | | $ | 1.7 |
| | | | $ | 1.5 |
| | | | $ | 0.2 |
| | | | $ | 1.7 |
| |
Interest cost | | 3.0 |
| | | | 1.1 |
| | | | 4.1 |
| | | | 3.3 |
| | | | 1.2 |
| | | | 4.5 |
| |
Expected return on plan assets | | (4.6 | ) | | | | (0.1 | ) | | | | (4.7 | ) | | | | (5.0 | ) | | | | (0.1 | ) | | | | (5.1 | ) | |
Amortization of prior service cost (benefit) | | 0.2 |
| | | | (1.4 | ) | | | | (1.2 | ) | | | | 0.2 |
| | | | (1.6 | ) | | | | (1.4 | ) | |
Amortization of net actuarial loss | | 2.1 |
| | | | 1.1 |
| | | | 3.2 |
| | | | 2.0 |
| | | | 1.2 |
| | | | 3.2 |
| |
Net periodic benefit cost | | 2.2 |
| | | | 0.9 |
| | | | 3.1 |
| | | | 2.0 |
| | | | 0.9 |
| | | | 2.9 |
| |
Loss from curtailment | | 3.7 |
| | | | — |
| | | | 3.7 |
| | | | — |
| | | | — |
| | | | — |
| |
Total net periodic benefit cost | | $ | 5.9 |
| | | | $ | 0.9 |
| | | | $ | 6.8 |
| | | | $ | 2.0 |
| | | | $ | 0.9 |
| | | | $ | 2.9 |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 |
For the Nine Months Ended September 30 | Pension | | Other Benefits | | Total | | Pension | | Other Benefits | | Total |
Service cost | | $ | 4.3 |
| | | | $ | 0.6 |
| | | | $ | 4.9 |
| | | | $ | 4.0 |
| | | | $ | 0.6 |
| | | | $ | 4.6 |
| |
Interest cost | | 9.0 |
| | | | 3.4 |
| | | | 12.4 |
| | | | 10.2 |
| | | | 3.6 |
| | | | 13.8 |
| |
Expected return on plan assets | | (13.7 | ) | | | | (0.3 | ) | | | | (14.0 | ) | | | | (15.1 | ) | | | | (0.4 | ) | | | | (15.5 | ) | |
Amortization of prior service cost (benefit) | | 0.7 |
| | | | (4.3 | ) | | | | (3.6 | ) | | | | 0.7 |
| | | | (4.9 | ) | | | | (4.2 | ) | |
Amortization of net actuarial loss | | 5.6 |
| | | | 3.2 |
| | | | 8.8 |
| | | | 5.7 |
| | | | 3.6 |
| | | | 9.3 |
| |
Net periodic benefit cost | | 5.9 |
| | | | 2.6 |
| | | | 8.5 |
| | | | 5.5 |
| | | | 2.5 |
| | | | 8.0 |
| |
Loss from curtailment | | 3.7 |
| | | | — |
| | | | 3.7 |
| | | | — |
| | | | — |
| | | | — |
| |
Total net periodic benefit cost | | $ | 9.6 |
| | | | $ | 2.6 |
| | | | $ | 12.2 |
| | | | $ | 5.5 |
| | | | $ | 2.5 |
| | | | $ | 8.0 |
| |
In the third quarter of 2017 we recorded curtailment loss of $3.7 related to a freeze of benefit accruals for certain current employees at our Industrial Process segment.
We made contributions to our global postretirement plans of $14.3$3.0 and $11.9$3.5 during the ninethree months ended September 30, 2017March 31, 2019 and 2016, respectively, which included a discretionary contribution of $5 to our U.S. pension plan during 2017.2018, respectively. We expect to make contributions of approximately $2$8 to $4$12 during the remainder of 2017,2019, principally related to our other postretirement employee benefit plans.
Amortization from accumulated other comprehensive income into earnings related to prior service cost and net actuarial loss was $3.6$0.6 and $5.9, and $1.2 and $3.5,$1.1, net of tax, forduring the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. No other reclassifications from accumulated other comprehensive income into earnings were recognized during any of the presented periods.
NOTE 1516
LONG-TERM INCENTIVE EMPLOYEE COMPENSATION
Our long-term incentive plan (LTIP) costs are primarily recorded within general and administrative expenses. The following table provides the components of LTIP costs for the three and nine months ended September 30, 2017March 31, 2019 and 20162018.
|
| | | | | | | |
For the Three Months Ended March 31 | 2019 | | 2018 |
Equity-based awards | $ | 4.5 |
| | $ | 4.5 |
|
Liability-based awards | 0.7 |
| | 0.1 |
|
Total share-based compensation expense | $ | 5.2 |
| | $ | 4.6 |
|
|
| | | | | | | | | | | | | | | |
| Three Months | | Nine Months |
For the Periods Ended September 30 | 2017 | | 2016 | | 2017 | | 2016 |
Equity based awards | $ | 5.2 |
| | $ | 3.2 |
| | $ | 12.5 |
| | $ | 9.1 |
|
Liability-based awards | 0.8 |
| | 0.4 |
| | 1.7 |
| | 1.2 |
|
Total share-based compensation expense | $ | 6.0 |
| | $ | 3.6 |
| | $ | 14.2 |
| | $ | 10.3 |
|
At September 30, 2017,March 31, 2019, there was $21.3$27.7 of total unrecognized compensation cost related to non-vested equity awards. This cost is expected to be recognized ratably over a weighted-average period of 1.92.3 years. Additionally, unrecognized compensation cost related to liability-based awards was $3.0,$2.7, which is expected to be recognized ratably over a weighted-average period of 1.9 years.
Year-to-Date 20172019 LTIP Activity
The majority of our LTIP awards are granted during the first quarter of each year and vest on the completion of a three-year service period. During the ninethree months ended September 30, 2017,March 31, 2019, we granted the following LTIP awards as provided in the table below:
|
| | | | | | |
| # of Awards Granted | Weighted Average Grant Date Fair Value Per Share |
Restricted stock units (RSUs) | 0.2 | | $ | 58.19 |
| |
Performance stock units (PSUs) | 0.1 | | $ | 65.28 |
| |
|
| | | | | | |
| # of Awards Granted | Weighted Average Grant Date Fair Value Per Share |
Restricted stock units (RSUs) | 0.4 | | $ | 41.86 |
| |
Performance stock units (PSUs) | 0.1 | | $ | 44.87 |
| |
During the ninethree months ended September 30, 2017March 31, 2019 and 2016, 0.32018, 0.2 and 0.40.1 non-qualified stock options were exercised resulting in proceeds of $6.7$5.1 and $8.8,$0.6, respectively. During the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, RSUs of 0.2 and 0.30.1 vested and were issued, respectively. There were noDuring the three months ended March 31, 2019 and 2018, PSUs of 0.2 and 0.1 that vested on December 31, 2016 because the minimum performance requirements2018 and 2017, respectively, were not met. PSUs of 0.2 were issued during the nine months ended September 30, 2016 that vested on December 31, 2015.issued.
NOTE 1617
CAPITAL STOCK
On October 27, 2006, a three-year $1 billion share repurchase program (the Share Repurchase Program) was approved by the Board of Directors (Share Repurchase Program).Directors. On December 16, 2008, the provisions of the Share Repurchase Program were modified by the Board of Directors to replace the original three-year term with an indefinite term. During the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, we repurchased and retired 0.80.2 and 1.91.0 shares of common stock for $30.0$10.5 and $66.6,$50.0, respectively, under this program.program. To date, the Company has repurchased 21.222.4 shares for $859.4$919.9 under the Share Repurchase Program.
Separate from the Share Repurchase Program, the Company repurchased 0.2 and 0.1 shares during the three months ended March 31, 2019 and 0.2 shares2018, respectively, for an aggregate price of $2.9$9.4 and $7.8, during the nine months ended September 30, 2017 and 2016,$5.3, respectively, in settlement of employee tax withholding obligations due upon the vesting of RSUs and PSUs.
NOTE 1718
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
| | | | | | | | | | | |
| Postretirement Benefit Plans | | Cumulative Translation Adjustment | | Accumulated Other Comprehensive Loss |
As of December 31, 2017 | $ | (137.6 | ) | | $ | (210.6 | ) | | $ | (348.2 | ) |
Net change during period | 1.1 |
| | 26.5 |
| | 27.6 |
|
As of March 31, 2018 | $ | (136.5 | ) | | $ | (184.1 | ) | | $ | (320.6 | ) |
| | | | | |
As of December 31, 2018 | $ | (131.6 | ) | | $ | (243.9 | ) | | $ | (375.5 | ) |
Net change during period | 0.6 |
| | (2.4 | ) | | (1.8 | ) |
As of March 31, 2019 | $ | (131.0 | ) | | $ | (246.3 | ) | | $ | (377.3 | ) |
NOTE 19
COMMITMENTS AND CONTINGENCIES
From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses. Some of these proceedings allege damages relating to asbestos and environmental exposures, intellectual property matters, copyright infringement, personal injury claims, employment and employee benefit matters, government contract issues and commercial or contractual disputes and acquisitions or divestitures. We will continue to defend vigorously against all claims. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information including our assessment of the merits of the particular claim, as well as our current reserves and insurance coverage, we do not expect that such legal proceedings will have a material adverse impact on our financial statements, unless otherwise noted below.
Asbestos Matters
Subsidiaries of ITT, including ITT LLC and Goulds Pumps LLC, have been sued, along with many other companies in product liability lawsuits alleging personal injury due to asbestos exposure. These claims generally allege that certain products sold by our subsidiaries prior to 1985 contained a part manufactured by a third party (e.g., a gasket) which contained asbestos. To the extent these third-party parts may have contained asbestos, it was encapsulated in the gasket (or other) material and was non-friable. As of September 30, 2017,March 31, 2019, there were approximately 2724 thousand pending claims against ITT subsidiaries, including Goulds Pumps LLC, filed in various state and federal courts alleging injury as a result of exposure to asbestos. Activity related to these asserted asbestos claims during the period was as follows:
|
| | |
For the Nine Months Ended September 30 (in thousands) | 2017 |
Pending claims – Beginning | 3024 |
|
New claims | 31 |
|
Settlements | (1— | )
|
Dismissals | (51 | ) |
Pending claims – Ending | 2724 |
|
Frequently, plaintiffs are unable to identify any ITT LLC or Goulds Pumps LLC products as a source of asbestos exposure. Our experience to date is that a majority of resolved claims are dismissed without any payment from ITT subsidiaries. Management believes that a large majority of the pending claims have little or no value. In addition, because claims are sometimes dismissed in large groups, the average cost per resolved claim can fluctuate significantly from period to period. ITT expects more asbestos-related suits will be filed in the future, and ITT will continue to aggressively defend or seek a reasonable resolution, as appropriate.
Asbestos litigation is a unique form of litigation. Frequently, the plaintiff sues a large number of defendants and does not state a specific claim amount. After filing a complaint, the plaintiff engages defendants in settlement negotiations to establish a settlement value based on certain criteria, including the number of defendants in the case. Rarely do the plaintiffs seek to collect all damages from one defendant. Rather, they seek to spread the liability, and thus the payments, among many defendants. As a result of this and other factors, the Company is unable to estimate the maximum potential exposure to pending claims and claims estimated to be filed over the next 10 years.
Estimating our exposure to pending asbestos claims and those that may be filed in the future is subject to significant uncertainty and risk as there are multiple variables that can affect the timing, severity, quality, quantity and resolution of claims. Any predictions with respect to the variables impacting the estimate of the asbestos liability and related asset are subject to even greater uncertainty as the projection period lengthens. In light of the variables and uncertainties inherent in the long-term projection of the Company'sCompany’s asbestos exposures, althoughwhile it is probable that the Company will incur additional costs for asbestos claims filed beyond the next 10 years, which additional costs may be material, we do not believe there is a reasonable basis for estimating those costs at this time.
The asbestos liability and related receivables reflect management'smanagement’s best estimate of future events. However, future events affecting the key factors and other variables for either the asbestos liability or the related receivables could cause actual costs or recoveries to be materially higher or lower than currently estimated. Due to these uncertainties, as well as our inability to reasonably estimate any additional asbestos liability for claims which may be filed beyond the next 10 years, it is difficult to predict the ultimate cost of resolving all pending and unasserted asbestos claims. We believe it is possible that future events affecting the key factors and other variables within
the next 10 years, as well as the cost of asbestos claims filed beyond the next 10 years, net of expected recoveries, could have a material adverse effect on our financial statements.
Income Statement Costs/BenefitAsbestos-Related Costs, Net
InAs part of our ongoing review of our net asbestos exposure, each quarter we assess the third quarter of each year, we conduct ourmost recent qualitative and quantitative data available for the key inputs and assumptions, comparing the data to expectations on which the most recent annual remeasurement with the assistance of outside consultants in order to review and update the underlying assumptions used in our asbestos liability and related asset estimates. In each remeasurement, the underlying assumptions are updated based on our actual experience since our previous annual remeasurement, and we reassess the appropriate reference period used in determining each assumption and our expectations regarding future conditions, including inflation.
estimates were calculated. Based on this evaluation, the results of this study,Company determined that no change in the thirdestimate was warranted for the quarter of 2017, we decreased our estimated undiscounted asbestos liability, including legal fees, by $66.4, reflecting a decrease in costsended March 31, 2019 other than the company estimates will be incurred to resolve all pending claims, as well as unasserted claims estimated to be filed over the next 10 years. The decrease in our estimated liability is a result of several developments, primarily favorable experience in settlement values and a decrease in the number of cases expected to be adjudicated. Further, in the third quarter of 2017, the Company increased its estimated asbestos-related assets by $10.0, primarily due to favorable developments in insurance litigation.
In addition to the charges associated with our annual remeasurement, we record a net asbestos charge each quarterincremental accrual to maintain a rolling 10-year forecast period. The table below summarizes the total net asbestos charges for the three and nine months ended September 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | |
| Three Months | | Nine Months |
For the Periods Ended September 30 | 2017 | | 2016 | | 2017 | | 2016 |
Asbestos provision | $ | 13.6 |
| | $ | 13.7 |
| | $ | 43.4 |
| | $ | 44.3 |
|
Net asbestos remeasurement benefit | (76.4 | ) | | (81.8 | ) | | (76.4 | ) | | (81.8 | ) |
Defense cost adjustment | — |
| | — |
| | — |
| | (4.9 | ) |
Settlement agreements | — |
| | — |
| | — |
| | 2.1 |
|
Asbestos-related benefit, net | $ | (62.8 | ) | | $ | (68.1 | ) | | $ | (33.0 | ) | | $ | (40.3 | ) |
Changes in Financial Position
The Company's estimated asbestos exposure, net of expected recoveries for the resolution of all pending claims and claims estimated to be filed in the next 10 years was $501.2 and $573.7 as of September 30, 2017 and December 31, 2016. The following table provides a rollforward of the estimated asbestos liability and related assets for the ninethree months ended September 30, 2017March 31, 2019 and 2016.2018.
| | | 2017 | | 2016 | 2019 | | 2018 |
For the Nine Months Ended September 30 | Liability | | Asset | | Net | | Liability | | Asset | | Net | |
For the Three Months Ended March 31 | | Liability | | Asset | | Net | | Liability | | Asset | | Net |
Beginning balance | $ | 954.3 |
|
| $ | 380.6 |
|
| $ | 573.7 |
| | $ | 1,042.8 |
| | $ | 412.0 |
| | $ | 630.8 |
| $ | 849.3 |
|
| $ | 376.7 |
|
| $ | 472.6 |
| | $ | 877.2 |
| | $ | 368.7 |
| | $ | 508.5 |
|
Asbestos provision(a) | 51.1 |
|
| 7.7 |
|
| 43.4 |
| | 51.6 |
| | 7.3 |
| | 44.3 |
| 15.7 |
|
| 3.1 |
|
| 12.6 |
| | 15.3 |
| | 2.9 |
| | 12.4 |
|
Asbestos remeasurement | (66.4 | ) | | 10.0 |
| | (76.4 | ) | | (75.9 | ) | | 5.9 |
| | (81.8 | ) | |
Defense costs adjustment | — |
| | — |
| | — |
| | (4.9 | ) | | — |
| | (4.9 | ) | |
Insurance settlement agreements | — |
| | — |
| | — |
| | — |
| | (2.1 | ) | | 2.1 |
| |
Net cash activity | (63.5 | ) |
| (24.0 | ) |
| (39.5 | ) | | (61.8 | ) | | (37.3 | ) | | (24.5 | ) | |
Insurance settlement agreement | | — |
| | — |
| | — |
| | — |
| | 32.1 |
| | (32.1 | ) |
Net cash activity(a) | | (20.1 | ) |
| (10.2 | ) |
| (9.9 | ) | | (22.2 | ) | | (9.4 | ) | | (12.8 | ) |
Ending balance | $ | 875.5 |
|
| $ | 374.3 |
|
| $ | 501.2 |
| | $ | 951.8 |
| | $ | 385.8 |
| | $ | 566.0 |
| $ | 844.9 |
|
| $ | 369.6 |
|
| $ | 475.3 |
| | $ | 870.3 |
| | $ | 394.3 |
| | $ | 476.0 |
|
Current portion | $ | 77.4 |
|
| $ | 64.7 |
|
|
| | $ | 76.1 |
| | $ | 66.0 |
| | | $ | 73.5 |
|
| $ | 67.1 |
|
|
| | $ | 77.4 |
| | $ | 64.7 |
| | |
Noncurrent portion | $ | 798.1 |
|
| $ | 309.6 |
|
|
|
| | $ | 875.7 |
| | $ | 319.8 |
| | | $ | 771.4 |
|
| $ | 302.5 |
|
|
|
| | $ | 792.9 |
| | $ | 329.6 |
| | |
| |
(a) | Includes certain administrative costs such as legal-related costs for insurance asset recoveries. |
Environmental Matters
In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and site remediation. These sites are in various stages of investigation or remediation and in many of these proceedings our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites formerly or currently owned or operated by ITT, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation or remediation. These sites include instances where we have been identified as a potentially responsible party under federal and state environmental laws and regulations.
The following table provides a rollforward of the estimated environmental liability for the ninethree months endedSeptember 30, 2017March 31, 2019 and 2016.2018.
|
| | | | | | | |
For the Three Months Ended March 31 | 2019 | | 2018 |
Environmental liability - beginning balance | $ | 66.8 |
| | $ | 73.9 |
|
Change in estimates for pre-existing accruals | (0.1 | ) | | 2.6 |
|
Accruals added during the period for new matters | — |
| | 2.0 |
|
Payments (a) | (2.6 | ) | | (10.0 | ) |
Foreign currency | (0.1 | ) | | — |
|
Environmental liability - ending balance | $ | 64.0 |
| | $ | 68.5 |
|
| |
(a) | Includes cash payments for the three months ended March 31, 2018 of $6.6 related to the sale of a former operating location. |
|
| | | | | | | |
For the Nine Months Ended September 30 | 2017 | | 2016 |
Environmental liability - beginning balance | $ | 76.6 |
| | $ | 82.6 |
|
Change in estimates for pre-existing accruals | | | |
Continuing operations | 2.4 |
| | 2.4 |
|
Discontinued operations | — |
| | 0.7 |
|
Net cash activity | (7.4 | ) | | (10.2 | ) |
Foreign currency | 0.1 |
| | — |
|
Environmental liability - ending balance | $ | 71.7 |
| | $ | 75.5 |
|
During the first quarter of 2017, ITT entered into a settlement agreement with a former subsidiary to settle all claims covered by the environmental Qualified Settlement Fund (QSF) established in the first quarter of 2016. The former subsidiary no longer has rights to the funds in the QSF. The settlement resulted in a reduction to both our environmental-related assetEnvironmental-related assets represent estimated recoveries from insurance providers and the corresponding deferred income liability balance of $5.2. During the second quarter of 2017, the QSF was amended resulting in income of $3.8. The total environmental-related assetother third parties. Environmental-related assets as of September 30, 2017March 31, 2019 and December 31, 2016 was $24.3 and $33.4, respectively.2018 were $23.4 in both periods.
We are currently involved with 3530 active environmental investigation and remediation sites. At September 30, 2017,March 31, 2019, we have estimated the potential high-end liability range of environmental-related matters to be $119.6.$114.2.
As actual costs incurred at identified sites in future periods may vary from our current estimates given the inherent uncertainties in evaluating environmental exposures, management believes it is possible that the outcome of these uncertainties may have a material adverse effect on our financial statements.
Other Matters
The Company received a civil subpoena from the Department of Defense, Office of the Inspector General, in the second quarter of 2015 as part of an investigation being led by the Civil Division of the U.S. Department of Justice (DOJ). The subpoena and related investigation involve certain connector products manufactured by the Company’s Connect & Control Technologies segment that are purchased or used by the U.S. government. In addition, in the thirdfirst quarter of 2017,2019, the Company learned that the Criminal Division of DOJ is also investigating this matter. The Company is cooperating with the government and has produced documents responsive to the subpoena to the Civil Division. Based on its current analysis following discussionsreached an agreement-in-principle with DOJ to resolve the civil matter, the Company has accrued $5 as its current best estimate of the minimum amount of probable loss. It is reasonably possible that any actual loss related tosettle this matter may be higher than this amount, but at this time managementfor $11 to avoid the expense and uncertainty of litigation. The agreement-in-principle is unable to estimate a rangefully accrued in the Company’s financial results for the first quarter of potential loss in excess2019.
NOTE 20
ACQUISITIONS
On April 30, 2019, we completed the acquisition of the amount accrued.
NOTE 18
ACQUISITIONS
Axtone Railway Components
On January 26, 2017, we acquired 100% of the privately held stock of Axtone Railway Components (Axtone)Rheinhütte Pumpen Group (Rheinhütte) for a purchase price of $123.1,€81 euros, net of cash acquired. The transaction was funded from ITT’s cash and European commercial paper program. The purchase price allocation is subject to change during the measurement period (up to one year from the acquisition date). Axtone, which had 2016based on customary net working capital adjustments. Rheinhütte, with 2018 revenue of approximately $72,€61.5 euros and approximately 430 employees operates in three main manufacturing locations. Rheinhütte is a designer and manufacturer of highly engineered pumps suited for harsh and customized energy absorption solutions, including springs, buffers, and coupler componentscorrosive environments for the railway and industrial markets.
The purchase price for Axtone was allocated to net tangible assets acquired and liabilities assumed based on their preliminary fair values as of January 26, 2017, with the excess of the purchase price of $79.5 recorded as goodwill. The primary areas of purchase price allocation that are not yet finalized relate to the valuation of certain tangible and intangible assets, liabilities, income tax, and residual goodwill. We expect to obtain the information necessary to finalize the fair value of the net assets and liabilities during the measurement period. Changes to the preliminary estimates of the fair value during the measurement periodmarket. Rheinhütte will be recorded as adjustments to those assets and liabilities with a corresponding adjustment to goodwill inreported within the period they occur. The goodwill arising from this acquisition, which is not expected to be deductible for income tax purposes, has been assigned to the Motion TechnologiesIndustrial Process segment.
Preliminary Allocation of Purchase Price for Axtone |
| | | |
Cash | $ | 9.4 |
|
Receivables | 11.5 |
|
Inventory | 13.6 |
|
Plant, property and equipment | 14.1 |
|
Goodwill | 79.5 |
|
Other intangible assets | 9.7 |
|
Other assets | 6.0 |
|
Accounts payable and accrued liabilities | (14.8 | ) |
Postretirement liabilities | (3.8 | ) |
Other liabilities | (2.1 | ) |
Net assets acquired | $ | 123.1 |
|
Pro forma results of operations have not been presented because the acquisition was not deemed material at the acquisition date.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share amounts, unless otherwise stated)
OVERVIEW
ITT Inc. is a diversified manufacturer of highly engineered critical components and customized technology solutions for the transportation, industrial, and oil and gas markets. Building on our heritage of engineering, we partner with our customers to deliver enduring solutions to the key industries that underpin our modern way of life. We manufacture components that are integral to the operation of equipment systems and manufacturing processes in our key markets. Our products provide enabling functionality for applications where reliability and performance are critically important to our customers and the users of their products.
Our businesses share a common, repeatable operating model.model centered on our engineering capabilities. Each business applies its technology and engineering expertise to solve our customers'customers’ most pressing challenges. Our applied engineering aptitude enablesprovides a tightspecial business fit with our customers given the critical nature of their applications. This in turn provides us with unique insight to our customer’s requirements and enables us to develop solutions to assist our customers in achievingto achieve their business goals. Our technology and customer intimacy work in tandem totogether produce opportunities to capture recurring revenue streams, aftermarket opportunities and long-lived platforms from original equipment manufacturer (OEM) platforms.manufacturers (OEMs).
Our product and service offerings are organized into three segments: Motion Technologies, Industrial Process, Motion Technologies, and Connect & Control Technologies. See Note 3, Segment Information, in this Report for a summary description of each segment. Additional information is also available in our 20162018 Annual Report within Part I, Item 1, "Description“Description of Business"Business”. DISCUSSION OF FINANCIAL RESULTS
Three and Nine Months Ended September 30
|
| | | | | | | | | | | | | | | | | |
| Three Months | | Nine Months |
For the Periods Ended September 30 | 2017 | 2016 | Change | | 2017 | 2016 | Change |
Revenue | $ | 645.0 |
| $ | 581.7 |
| 10.9 | % | | $ | 1,901.7 |
| $ | 1,817.0 |
| 4.7 | % |
Gross profit | 203.1 |
| 183.9 |
| 10.4 | % | | 609.8 |
| 584.8 |
| 4.3 | % |
Gross margin | 31.5 | % | 31.6 | % | (10 | )bp | | 32.1 | % | 32.2 | % | (10 | )bp |
Operating expenses | 75.3 |
| 49.1 |
| 53.4 | % | | 368.7 |
| 349.5 |
| 5.5 | % |
Expense to revenue ratio | 11.7 | % | 8.4 | % | 330 | bp | | 19.4 | % | 19.2 | % | 20 | bp |
Operating income | 127.8 |
| 134.8 |
| (5.2 | %) | | 241.1 |
| 235.3 |
| 2.5 | % |
Operating margin | 19.8 | % | 23.2 | % | (340 | )bp | | 12.7 | % | 12.9 | % | (20 | )bp |
Interest and non-operating expenses, net | 0.2 |
| 0.3 |
| (33.3 | %) | | 0.1 |
| 1.5 |
| (93.3 | %) |
Income tax expense | 40.6 |
| 46.1 |
| (11.9 | %) | | 60.3 |
| 75.3 |
| (19.9 | %) |
Effective tax rate | 31.8 | % | 34.3 | % | (250 | )bp | | 25.0 | % | 32.2 | % | (720 | )bp |
Income from continuing operations attributable to ITT Inc. | 87.0 |
| 88.3 |
| (1.5 | %) | | 181.0 |
| 158.3 |
| 14.3 | % |
(Loss) income from discontinued operations, net of tax | (0.1 | ) | 1.8 |
| (105.6 | %) | | (0.3 | ) | 2.0 |
| (115.0 | %) |
Net income attributable to ITT Inc. | 86.9 |
| 90.1 |
| (3.6 | %) | | 180.7 |
| 160.3 |
| 12.7 | % |
All comparisons included within Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations refer to the comparable three and nine months ended September 30, 2016,March 31, 2018, unless stated otherwise.
DISCUSSION OF FINANCIAL RESULTS
Three Months Ended March 31
|
| | | | | | | | |
| 2019 | 2018 | Change |
Revenue | $ | 695.5 |
| $ | 689.3 |
| 0.9 | % |
Gross profit | 218.8 |
| 224.2 |
| (2.4 | %) |
Gross margin | 31.5 | % | 32.5 | % | (100 | )bp |
Operating expenses | 128.2 |
| 113.6 |
| 12.9 | % |
Operating expense to revenue ratio | 18.4 | % | 16.5 | % | 190 | bp |
Operating income | 90.6 |
| 110.6 |
| (18.1 | %) |
Operating margin | 13.0 | % | 16.0 | % | (300 | )bp |
Interest and non-operating (income) expenses, net | (0.5 | ) | 1.8 |
| (127.8 | %) |
Income tax expense | 19.7 |
| 7.6 |
| 159.2 | % |
Effective tax rate | 21.6 | % | 7.0 | % | 1,460 | bp |
Income from continuing operations attributable to ITT Inc. | 71.3 |
| 101.1 |
| (29.5 | %) |
Net income attributable to ITT Inc. | 71.3 |
| 101.2 |
| (29.5 | %) |
Executive Summary
In the thirdfirst quarter of 2017, we continued to optimize execution across the enterprise while driving growth and share gains in stabilizing key end-markets. We strengthened project performance within the Industrial Process segment, drove productivity improvements at our Connect and Control Technologies facilities, and continued to leverage the benefits of proactive restructuring in both businesses. In addition, productivity gains at our Motion Technologies segment helped offset much of the commodity cost headwinds we've experienced throughout the year.
We continued to grow in our key end-markets, including automotive, rail, and general industrial. In automotive we won positions on a significant number of new platforms in China and with electric and hybrid vehicles for both braking and charging components. In addition, we had key multi-year wins during the third quarter2019, ITT delivered strong operational results, which included a large award for KONI shock absorbers which will be used in the defense market, as well as an award on a new multi-year rotorcraft platform.
During the third quarter we expanded innovation and testing capabilities for braking components in China to support market trends for electric vehicles and our new North American brake pad facility delivered their first pads. In addition, we continued to successfully integrate the operations of our first quarter 2017 acquisition of Axtone Railway Group (Axtone).
Our third quarter 2017 results include:
Revenue of $645.0, reflecting a year-over-year increase of $63.3, or 10.9%, driven by growth in the transportation end-markets due to the automotive and rail market, partially offset by lower revenues from the aerospace market. Industrial end-market revenues provided a modest gain during the quarter and revenues from the oil and gas end-market were flat to the prior year. Our acquisition of Axtone provided incremental revenue of $19.6. Organic revenue, which excludes the impacts from foreign exchange, acquisitions, and divestitures, increased 4.8% compared to the prior year.
Orders of $658.6, reflecting year-over-year growth of $85.2 or 14.9% driven by continued share gains in the global automotive brake pad markets and growth in industrial connectors and components partially offset by lower pump project activity. We also received incremental orders from our newly acquired Axtone business of $21.5. Organic orders, which excludes the impacts from foreign exchange, acquisitions, and divestitures, increased 8.4% compared to the prior year.
Operating income of $127.8, decreased $7.0, or 5.2%, reflecting a 340 basis point decline to operating margin, due to higher corporate costs, primarily related to incentive compensation and prior year insurance favorability, as well as a lower asbestos remeasurement benefit. These items more than offset the growth insignificant segment operating income of $9.6 or 14.3% dueand margin growth. These results were driven by our continued focus on operational excellence and strategies to higher sales volumes, improvementswin share in productivitykey global end markets. This year, we are also implementing many important initiatives that will enable us to continue to drive top-line growth, margin expansion and project performance, restructuring benefits, and favorable foreign currency impacts, partially offset by rising commodity costs and expenses related to the build-out of our new North American friction facility. Adjusted segment operating income which excludes the impacts of restructuring and realignment costs, certain asset impairment charges, acquisition-related expenses, and unusual or infrequent operating items increased $17.2, or 23.6%.strong cash generation.
Income from continuing operations of $0.98 per diluted share was flat compared to the prior year. Adjusted income from continuing operations was $0.66 per diluted share, reflecting a $0.08, or 13.8%, increase compared to the prior year. |
| | | | | |
Summary of Key Performance Indicators for the First Quarter of 2019 |
Revenue | Orders | Segment Operating Income | Segment Operating Margin | EPS | Operating Cash Flow |
$696 | $739 | $111 | 15.9% | $0.80 | $42 |
1% Increase | 3% Decrease | 9% Increase | 110bp Increase | 30% Decrease | 1% Decrease |
Organic Revenue | Organic Orders | Adjusted Segment Operating Income | Adjusted Segment Operating Margin | Adjusted EPS | Adjusted Free Cash Flow |
$724 | $772 | $112 | 16.2% | $0.91 | $25 |
5% Increase | 1% Increase | 9% Increase | 120bp Increase | 18% Increase | 154% Increase |
Our first quarter 2019 results include:
Revenue of $695.5 increased $6.2, or 0.9%. Excluding an unfavorable foreign currency impact of $28.6, organic revenue increased 5.0% driven by our IP and CCT segments, partially offset by softness in MT. The IP segment benefited from growth across all end markets due to a strong performance from pump projects and the short-cycle business. CCT’s revenue increase was most notable in aerospace and defense connectors along with commercial aerospace aftermarket and components. This was partially offset by MT due to weakness in the global auto market.
Orders of $738.9 decreased $22.3, or 2.9%. Excluding unfavorable foreign currency of $33.0, organic orders increased 1.4% driven by strong IP demand in the oil and gas and industrial markets. In addition, CCT orders increased on significant connector and component platform wins in the defense market. Excluding a $14 prior year Russian rail order, ITT organic orders increased 3% led by major wins in the global rail market.
Operating income of $90.6 decreased $20.0, or 18.1%, due to a prior year asbestos-related insurance settlement of $32.1, which was partially offset by segment operating income growth of $8.7, or 8.5%, and a reduction in corporate costs. The increase in segment operating income was driven by sales volume leverage along with manufacturing and supply chain improvements, partially offset by higher commodity costs and tariffs, as well as unfavorable product mix and foreign currency impacts. As a result, we were able to deliver a segment operating margin of 15.9%, which represented a 110 basis point improvement.
Income from continuing operations of $0.80 per diluted share decreased $0.34, primarily due to a prior year asbestos-related insurance settlement ($0.36 per share) and favorable prior year tax items ($0.20 per share), which included the reversal of certain valuation allowances. These prior year items more than offset the EPS benefits from higher segment operating income, a reduction in corporate costs, lower interest expense, and the benefit attributable to a favorable tax rate, partially offset by an unfavorable foreign currency impact of $0.03. Adjusted income from continuing operations was $0.91 per diluted share, reflecting a $0.14, or 18.2%, increase compared to the prior year.
In terms of capital deployment, we continued to make strategic investments to accelerate global expansion of our Industrial Process segment, including the acquisition of Rheinhütte Pumpen Group (Rheinhütte), which closed in the second quarter of 2019, as well as investments in i-Alert data analytics technology. In our CCT business we are making investments that will allow us to in-source portions of our supply chain. In addition, within our MT business we continue to ramp up production at our global facilities. During the quarter we returned $24 to shareholders through dividends and share repurchases.
REVENUE AND ORDERS
The following tables illustrate our revenue and orders derived from each of our segments for the three months ended March 31, 2019 and 2018.
| | For the Three Months Ended September 30 | 2017 | | 2016 | | Change | | Organic Revenue Growth(a) | |
Revenue: | | 2019 | | 2018 | | Change | | Organic Growth(a) |
Motion Technologies | | $ | 315.2 |
| | $ | 342.2 |
| | (7.9 | )% | | (1.3 | )% |
Industrial Process | $ | 196.2 |
| | $ | 195.0 |
| | 0.6 | % | | (0.1 | )% | 215.7 |
| | 189.8 |
| | 13.6 | % | | 15.6 | % |
Motion Technologies | 300.1 |
| | 238.7 |
| | 25.7 | % | | 11.9 | % | |
Connect & Control Technologies | 149.4 |
| | 149.0 |
| | 0.3 | % | | (0.2 | )% | 165.0 |
| | 157.9 |
| | 4.5 | % | | 6.0 | % |
Eliminations | (0.7 | ) | | (1.0 | ) | | (30.0 | )% | | — |
| (0.4 | ) | | (0.6 | ) | | (33.3 | )% | | — |
|
Revenue | $ | 645.0 |
| | $ | 581.7 |
| | 10.9 | % | | 4.8 | % | |
| | | | | | | | |
For the Nine Months Ended September 30 | 2017 | | 2016 | | Change | | Organic Revenue Growth(a) | |
Industrial Process | $ | 574.6 |
| | $ | 618.0 |
| | (7.0 | )% | | (7.2 | )% | |
Motion Technologies | 877.5 |
| | 755.3 |
| | 16.2 | % | | 8.8 | % | |
Connect & Control Technologies | 452.3 |
| | 446.8 |
| | 1.2 | % | | 1.4 | % | |
Eliminations | (2.7 | ) | | (3.1 | ) | | (12.9 | )% | | — |
| |
Revenue | $ | 1,901.7 |
| | $ | 1,817.0 |
| | 4.7 | % | | 1.6 | % | |
Total Revenue | | $ | 695.5 |
| | $ | 689.3 |
| | 0.9 | % | | 5.0 | % |
|
| | | | | | | | | | | | | |
Orders: | 2019 | | 2018 | | Change | | Organic Growth(a) |
Motion Technologies | $ | 331.5 |
| | $ | 369.9 |
| | (10.4 | )% | | (3.5 | )% |
Industrial Process | 219.0 |
| | 210.1 |
| | 4.2 | % | | 6.5 | % |
Connect & Control Technologies | 189.1 |
| | 181.8 |
| | 4.0 | % | | 5.6 | % |
Eliminations | (0.7 | ) | | (0.6 | ) | | (16.7 | )% | | — |
|
Total Orders | $ | 738.9 |
| | $ | 761.2 |
| | (2.9 | )% | | 1.4 | % |
Industrial ProcessMotion Technologies (MT)
RevenueMT revenue for the three months ended September 30, 2017 increased $1.2March 31, 2019 was $315.2, a decrease of $27.0, or 0.6%7.9%, which includes favorableincluded an unfavorable foreign currency impactstranslation impact of $1.4.$22.5. Organic revenue duringdecreased $4.5, or 1.3%, primarily due to global auto market weakness, that was partially offset by strength in rail. Friction organic revenue declined 1%, but outpaced the global auto market by approximately 500 basis points on share gains in North America. KONI sales grew 17% primarily from rail market share gains in Europe and Asia, offset by a decline at Wolverine.
Orders for the three months ended September 30, 2017 was flat comparedMarch 31, 2019 were $331.5, a decrease of $38.4, or 10.4%, including an unfavorable foreign currency translation impact of $25.5. Organic orders declined $12.9, or 3.5% due to a $14 prior year Russian rail order. Excluding the prior year rail order, MT organic orders were flat as increasesmajor wins in aftermarket parts and service revenues of approximately 10% andthe global rail market offset weakness in our Wolverine business.
Industrial Process (IP)
IP revenue for the three months ended March 31, 2019 was $215.7, an increase of $25.9, or 13.6%, which included an unfavorable foreign currency translation impact of $3.8. Organic revenue increased $29.7, or 15.6% driven by solid growth across major end markets, products and geographies. This included a 47% increase in baseline pumps of approximately 6%revenue from projects and a 9% increase in revenue from our short-cycle businesses. The increase in revenue from pump projects was offsetdriven by lower project pump revenue of approximately 14%, stemming fromstrength in the mid-streamchemical, mining, and oil and gas and mining markets, and reduced valves sales primarily within the BioPharm market.
Revenue for the nine months ended September 30, 2017 decreased $43.4 or 7.0%, which includes favorable foreign currency impacts of $1.2. Organicmarkets. Within our short-cycle businesses, organic revenue during the nine months ended September 30, 2017 decreased $44.6, or 7.2%. The decrease was driven by a decline in project pump revenue of approximately 26%, mostly due to lower North American oil and gas projects in backlog entering the year. Revenue from valves decreased approximately 12%. Revenues from aftermarket parts and service activity increased approximately 1%.8% due to solid demand in the oil and gas, chemical, and industrial markets. In addition, revenue from valves and baseline pumps increased 12% and 9%, respectively.
Orders decreased $5.6, or 2.8%, duringfor the three months ended September 30, 2017, which includes favorableMarch 31, 2019 were $219.0, an increase of $8.9, or 4.2%, including an unfavorable foreign currency impactstranslation impact of $1.5.$4.7. Organic orders increased $13.6, or 6.5%, due to a 10% increase in aftermarket and a 15% increase in pump project orders. The decreaseincrease in aftermarket orders was due to strong demand for both parts and service, primarily in North America and Latin America within the oil and gas and general industrial markets. The increase in project orders was driven by lower project pump orders which declined approximately 10% due to stronger prior yearfavorable market conditions in North American petrochemical market orders, partially offset by higher order activityAmerica in the oil and gas and general industrial markets. Short-cycle orders declined approximately 2% as unfavorable timing related to parts activityThis was partially offset by growtha 3% decline in baseline pumps.
During the nine months ended September 30, 2017pump orders increased $18.1, or 3.1%, which includes favorable foreign currency impacts of $1.2. The increase in orders reflects stronger aftermarket activity as orders for service and parts increased approximately 13% and 2%, respectively, and growth in short-cycle baseline pumps of approximately 4% due to stronger general industrial orders. Order activity for 2017 also included a $26 downstream oilweakness in the mining and gas order in Africa received during the first quarter of 2017. Growth was partially offset by lower project pump orders in North America and Asia.chemical markets.
The level of order and shipment activity related to project pumps can vary significantly from period to period, which may impact year-over-year comparisons. BacklogIP’s backlog as of September 30, 2017March 31, 2019 was $375.5, reflecting an increase of $28.3, or 8.2%, from the$444.1, flat compared to December 31, 2016 level.2018.
MotionConnect & Control Technologies (CCT)
Revenue of $300.1CCT revenue for the three months ended September 30, 2017 increased $61.4,March 31, 2019 was $165.0, an increase of $7.1, or 25.7%4.5%, which includes incremental revenue of $19.6 from our 2017 acquisition of Axtone and favorableincluded an unfavorable foreign currency translation impactsimpact of $13.5. Revenue for the nine months ended September 30, 2017 increased $122.2, or 16.2%, which includes incremental revenue of $55.6 from our 2017 acquisition of Axtone and favorable foreign currency translation impacts of $0.4. During the three and nine months ended September 30, 2017, organic$2.4. Organic revenue increased $28.3,$9.5, or 11.9%6.0%, and $66.2, or 8.8%, respectively. The growth in organic revenue for both periods was primarily driven by our friction materials business from our continuedan 18% increase in defense on connector strength and a 12% increase in commercial aerospace on strength in the automotive OEM sales channel primarily due to market growth and share gainsaftermarket connectors and components. This was partially offset by a 4% decline in China and Europe in both periods and North America in third quarter, as well as strength in the aftermarket brake pad sales channel. In addition, Wolverine contributed organic revenue growth of approximately 3% and 5% during the three and nine month periods, respectively, driven by global share gains in sealing solutions. Revenue from our KONI business increased by 16% during the third quarter reflecting growth in the European rail markets and higher demand in the high speed rail market in China. During the nine months ended September 30, 2017, KONI revenues grew 3% primarily stemming from activity on a U.S. defense program.industrial markets.
Orders for the three months ended September 30, 2017 increased $86.9,March 31, 2019 were $189.1, an increase of $7.3, or 36.7%4.0%, including incremental orders of $21.5 from our 2017 acquisition of Axtone and favorable foreign currency translation impacts of $13.7. Orders for the nine months ended September 30, 2017 increased $136.5, or 17.9%, including incremental orders of $54.0 from our 2017 acquisition of Axtone andwhich included an unfavorable foreign currency translation impactsimpact of $0.2. During the three and nine months ended September 30, 2017 organic$2.8. Organic orders grew $51.7,increased $10.1, or 21.8%5.6%, and $82.3, or 10.8%, respectively. The organic order increase in both periods reflects continued strength in OEM auto brake pads in our friction materials business as well as KONI, which grew approximately 95% and 21% in the three and nine months ended September 30, 2017, respectively, due to a large multi-year14% increase in the aerospace and defense ordermarket, partially offset by an 8% decline in the industrial market. The increase in orders within the aerospace and defense market was driven by strength in North America and share capture from new products in the China high speed rail market. In addition, Wolverine orders grew 2% and 5% due to strength in sealing solutions.
Connect & Control Technologies
GAAP revenue and organic revenueprogram wins for the three months ended September 30, 2017 was flat compared to the prior year. Revenue for the nine months ended September 30, 2017 increased $5.5, or 1.2%, including unfavorable foreign currency translation impacts of $0.8. Revenue from the general industrial market was flat during the third quarter as higher revenue fromdefense connectors and actuation components, waspartially offset by lower energy absorption projects. Revenue from the generalrotorcraft orders. The decline in industrial market grew 4% during the nine months ended September 30, 2017 due to higher revenues from heavy vehicle and electric vehicleorders was driven by weakness in connectors. Revenue from the oil and gas connectors increased 28% and 34%, respectively, during the three and nine months ended September 30, 2017 due to stronger demand in the Middle East and continuing positive market trends. Aerospace and defense market revenues declined 2% and 3% during the three and nine months ended September 30, 2017, respectively, as weak commercial aerospace demand and impacts from restrictions on the sales of certain military-specification connectors were partially offset by rotorcraft share gains and defense component strength.
Orders for the three months ended September 30, 2017 increased $3.4, or 2.4%, including favorable foreign currency translation impacts of $0.6. Orders for the nine months ended September 30, 2017 decreased $2.8, or 0.6% versus the prior year, including unfavorable foreign currency translation impacts of $1.0. During the three and nine months ended September 30, 2017, orders from the general industrial markets increased 8% and 6%, respectively, due to increased activity for energy absorption and actuation components and electric vehicle connectors in North America. In addition, increased order activity from heavy vehicle connectors in China favorably impacted both periods. Aerospace and defense market order activity decreased 3% and 6%, respectively, due to weak commercial aerospace components and connectors, and impacts from restrictions on the sales of certain military-specification connectors. Orders for connectors associated with the oil and gas market grew approximately 21% and 36% during the three and nine month periods, respectively.
On July 11, 2017, the U.S. Defense Logistics Agency, Land and Maritime (DLA) issued a notice that it hashad removed our connectors business from the Qualified Products List (QPL) with respect to six military-specification connector products. At the time of this notice, these products had been subject to a previously-disclosed stop shipment/stop production order issued by DLA earlier this year.in the first quarter of 2017. Annual sales of these military-specification connectors arewere estimated to range from $8 to $10.$10 prior to the removal of these products from the QPL. The Company will seekis making progress and expects to restore its status of certain products on the QPL as expeditiously as possible but is unable to estimate how long this process will take.beginning in the first half of 2019. At this time, there is uncertainty whether there will be any further negative impacts to our revenue and results of operations related to the QPL removal.
GROSS PROFIT
Gross profit for the three months ended September 30, 2017 and 2016March 31, 2019 was $203.1 and $183.9,$218.8, reflecting a gross margin of 31.5% and 31.6%, respectively.. Gross profit for the ninethree months ended September 30, 2017 and 2016March 31, 2018 was $609.8 and $584.8,$224.2 reflecting a gross margin of 32.1% and 32.2%, respectively. Unfavorable automotive and aerospace pricing and sales mix impacts, increased direct material costs32.5%. The decline in gross profit was primarily due to higher commodity prices impacting our Motion Technologies segment,costs and tariffs, unfavorable foreign currency translation, and unfavorable impacts from certain military-specification connectors were almost fullyproduct mix. This was partially offset by improved project performance atsales volume leverage and manufacturing and supply chain productivity improvements across all segments.
OTHER
Tariffs
In 2018, the U.S. government announced tariffs on certain imported goods, and began renegotiating existing trade terms with China, Europe and other countries. These tariffs have negatively impacted the price of certain parts and materials we utilize to manufacture finished products we sell. Since announced, we have been managing the impacts of these tariffs and will attempt to mitigate the impact of higher input costs through pricing and supply chain actions, efficient utilization of our Industrial Process segment, lower labor costs as a resultglobal manufacturing footprint, and supplier negotiations and diversification strategies. Tariffs and related impacts remain highly uncertain due to the current dynamic landscape and ongoing negotiations. Therefore, we are unable to estimate the ultimate outcome tariffs will have on our results of restructuring benefits from our structural cost reset at our Industrial Process segmentoperations, financial position and operational improvements at our Connect & Control Technologies segment.cash flows.
OPERATING EXPENSES
| | | Three Months | | Nine Months | |
For the Periods Ended September 30 | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | |
For the Three Months Ended March 31 | | 2019 | | 2018 | | Change |
General and administrative expenses | $ | 73.7 |
| | $ | 59.2 |
| | 24.5 | % | | $ | 205.2 |
| | $ | 202.2 |
| | 1.5 | % | $ | 51.9 |
| | $ | 65.1 |
| | (20.3 | )% |
Sales and marketing expenses | 41.3 |
| | 39.4 |
| | 4.8 | % | | 128.3 |
| | 128.7 |
| | (0.3 | )% | 40.2 |
| | 43.5 |
| | (7.6 | )% |
Research and development expenses | 23.1 |
| | 18.6 |
| | 24.2 | % | | 68.2 |
| | 58.9 |
| | 15.8 | % | 23.5 |
| | 24.7 |
| | (4.9 | )% |
Asbestos-related benefit, net | (62.8 | ) | | (68.1 | ) | | (7.8 | )% | | (33.0 | ) | | (40.3 | ) | | (18.1 | )% | |
Asbestos-related costs (benefit), net | | 12.6 |
| | (19.7 | ) | | 164.0 | % |
Total operating expenses | $ | 75.3 |
| | $ | 49.1 |
| | 53.4 | % | | $ | 368.7 |
| | $ | 349.5 |
| | 5.5 | % | $ | 128.2 |
| | $ | 113.6 |
| | 12.9 | % |
Total Operating Expenses By Segment: | | | | | | | | | | | | | | | | |
Motion Technologies | | $ | 35.8 |
| | $ | 45.6 |
| | (21.5 | )% |
Industrial Process | $ | 47.5 |
| | $ | 51.2 |
| | (7.2 | )% | | $ | 134.8 |
| | $ | 167.9 |
| | (19.7 | )% | 39.7 |
| | 42.8 |
| | (7.2 | )% |
Motion Technologies | 43.9 |
| | 33.3 |
| | 31.8 | % | | 125.7 |
| | 102.1 |
| | 23.1 | % | |
Connect & Control Technologies | 35.1 |
| | 32.5 |
| | 8.0 | % | | 113.6 |
| | 103.7 |
| | 9.5 | % | 32.8 |
| | 34.0 |
| | (3.5 | )% |
Corporate & Other | (51.2 | ) | | (67.9 | ) | | (24.6 | )% | | (5.4 | ) | | (24.2 | ) | | (77.7 | )% | 19.9 |
| | (8.8 | ) | | 326.1 | % |
General and administrative (G&A) expenses for the three and nine months ended September 30, 2017 increased $14.5,March 31, 2019 decreased $13.2, or 24.5% and $3.0, or 1.5%20.3%, respectively. The increase in G&A expenses was primarily due to higher incentive compensationEuropean investment incentives of $5.7 and $13.7, respectively,$4.6, a pension curtailmentfavorable foreign currency impact of $3.7 in the third quarter of 2017, and higher$2.8, lower legal expenses. Incremental costs related to our recently acquired Axtone business were $2.6 and $6.4, respectively. Savings from our past restructuring actions during both periods and lower restructuring costs of $14.8 during the nine-month period partially offset these costs in the third quarter$2, and almost fully offset these costs during the nine months ended September 30, 2017. In addition, the nine-month period included unfavorable foreign currency impacts of $5.1 and a $5.0 legal accrual recorded during the second quarter of 2017, which were partially offset by a prior year trade name impairment of $4.1 and income of $3.8 related to an amendment to our environmental QSF in the second quarter of 2017.benefits from cost reduction actions.
Sales and marketing expenses for the three and nine months ended September 30, 2017 increased $1.9,March 31, 2019 decreased $3.3, or 4.8%7.6%, and decreased $0.4, or 0.3%, respectively,due to a reduction in marketing costs of $2 as incremental costs related to Axtonewell as a favorable foreign currency impact of $1.4 and $2.9, respectively, and higher overall selling costs at Motion Technologies were only partially offset by lower personnel costs at Industrial Process. During the nine months ended September 30, 2017, commissions to sales personnel at Industrial Process were favorable compared to the prior year, which contributed to the decline during the period.$1.2.
Research and development expenses for the three and nine months ended September 30, 2017 increased $4.5,March 31, 2019 decreased $1.2, or 24.2%4.9%, and $9.3, or 15.8%, respectively, primarily due to increased product development activities at our Motion Technologies and Connect and Control Technologies segments. Incremental costs related to our acquisitiona favorable foreign currency impact of Axtone were $0.3 and $0.9 during$1.
During the three and nine months ended September 30, 2017.
Asbestos-relatedMarch 31, 2019, we recorded asbestos-related costs of $12.6 compared to an asbestos-related benefit net, decreased $5.3, or 7.8% and $7.3, or 18.1%, respectively, duringof $19.7 for the three and nine months ended September 30, 2017March 31, 2018. The change was primarily due to a lower current year$32.1 benefit from our annual remeasurement.an insurance settlement recorded in the first quarter of 2018. See Note 17, 19, Commitments and Contingencies, to the Consolidated Condensed Financial Statements for further information.
OPERATING INCOME
| | | Three Months | | Nine Months | |
For the Periods Ended September 30 | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | |
For the Three Months Ended March 31 | | 2019 | | 2018 | | Change |
Motion Technologies | | $ | 60.9 |
| | $ | 61.9 |
| | (1.6 | )% |
Industrial Process | $ | 9.9 |
| | $ | 4.3 |
| | 130.2 | % | | $ | 32.0 |
| | $ | 19.6 |
| | 63.3 | % | 22.2 |
| | 16.9 |
| | 31.4 | % |
Motion Technologies | 49.1 |
| | 45.2 |
| | 8.6 | % | | 156.1 |
| | 144.8 |
| | 7.8 | % | |
Connect & Control Technologies | 17.5 |
| | 17.4 |
| | 0.6 | % | | 47.5 |
| | 46.6 |
| | 1.9 | % | 27.4 |
| | 23.0 |
| | 19.1 | % |
Segment operating income | 76.5 |
| | 66.9 |
| | 14.3 | % | | 235.6 |
| | 211.0 |
| | 11.7 | % | 110.5 |
| | 101.8 |
| | 8.5 | % |
Asbestos-related benefit, net | 62.8 |
| | 68.1 |
| | (7.8 | )% | | 33.0 |
| | 40.3 |
| | (18.1 | )% | |
Asbestos-related (costs) benefit, net | | (12.6 | ) | | 19.7 |
| | (164.0 | )% |
Other corporate costs | (11.5 | ) | | (0.2 | ) | | ** | | (27.5 | ) | | (16.0 | ) | | (71.9 | )% | (7.3 | ) | | (10.9 | ) | | 33.0 | % |
Total corporate and other benefit | 51.3 |
| | 67.9 |
| | (24.4 | )% | | 5.5 |
| | 24.3 |
| | 77.4 | % | |
Total corporate and asbestos-related (costs) benefit | | (19.9 | ) | | 8.8 |
| | (326.1 | )% |
Total operating income | $ | 127.8 |
| | $ | 134.8 |
| | (5.2 | )% | | $ | 241.1 |
| | $ | 235.3 |
| | 2.5 | % | $ | 90.6 |
| | $ | 110.6 |
| | (18.1 | )% |
Operating margin: | | | | | | | | | | | | | | | | |
Motion Technologies | | 19.3 | % | | 18.1 | % | | 120 | bp |
Industrial Process | 5.0 | % | | 2.2 | % | | 280 | bp | | 5.6 | % | | 3.2 | % | | 240 | bp | 10.3 | % | | 8.9 | % | | 140 | bp |
Motion Technologies | 16.4 | % | | 18.9 | % | | (250 | )bp | | 17.8 | % | | 19.2 | % | | (140 | )bp | |
Connect & Control Technologies | 11.7 | % | | 11.7 | % | | — |
| | 10.5 | % | | 10.4 | % | | 10 | bp | 16.6 | % | | 14.6 | % | | 200 | bp |
Segment operating margin | 11.9 | % | | 11.5 | % | | 40 | bp | | 12.4 | % | | 11.6 | % | | 80 | bp | 15.9 | % | | 14.8 | % | | 110 | bp |
Consolidated operating margin | 19.8 | % | | 23.2 | % | | (340 | )bp | | 12.7 | % | | 12.9 | % | | (20 | )bp | 13.0 | % | | 16.0 | % | | (300 | )bp |
** Resulting percentage not considered meaningful.
Industrial ProcessMT operating income increased $5.6, or 130.2%, and operating margin increased 280 basis points to 5.0% for the three months ended September 30, 2017.March 31, 2019 decreased $1.0, or 1.6%, to $60.9, but margin improved 120 basis points. The increasedecrease in operating income in the third quarter wasis primarily driven by improved project performance, favorablehigher commodity costs and tariffs, unfavorable contract pricing, and lower sales mix and pricing of approximately $3, and favorable foreign currency of $1.7. These items werevolumes. This was partially offset by improvements in operating and supply chain productivity which provided a pension curtailmentbenefit of $3.7 recorded in the third quarter$8. In addition, unfavorable foreign currency impacts of 2017. Operating$5 were offset by European investment incentives.
IP operating income increased $12.4, or 63.3%, and operating margin increased 240 basis points to 5.6% for the ninethree months ended September 30, 2017.March 31, 2019 increased $5.3, or 31.4%, to $22.2, a margin improvement 140 basis points. The increase was primarily driven by improved project performance as well as net savingsa benefit of approximately $20 due to restructuring benefits, productivity,$12 from favorable volume and sourcing initiatives, a decrease in restructuring costs of $15 and a trade name impairment of $4.1 recorded in the second quarter of 2016. These items werepricing, partially offset by an unfavorable impactsales mix of approximately $20 from lower sales volume$6 and a pension curtailment of $3.7 recorded in the third quarter of 2017.tariffs.
Motion TechnologiesCCT operating income for the three and nine months ended September 30, 2017March 31, 2019 increased $3.9,$4.4, or 8.6%19.1%, and $11.3, or 7.8%. Operatingto $27.4, a margin for the three and nine months ended September 30, 2017 decreased 250improvement 200 basis points to 16.4% and 140 basis points to 17.8%, respectively.points. The increase in operating income was primarily driven by higher sales volume which provided a benefit of approximately $14leverage and $31, respectively andnet productivity improvements at our brake component facilities. These items were partially offset by unfavorable pricing and sales mix, higher material costs, and incremental investments to support recent long-term global automotive platform wins. Foreign currency fluctuations provided a favorable impact of $1.4 during the third quarter and an unfavorable impact of $5 during the nine months ended September 30, 2017. In addition, our acquisition of Axtone produced an operating loss of $1.4 due to acquisition related costs of $2.6 during the third quarter of 2017 and provided an incremental increase to operating income of $2.2 during the nine months ended September 30, 2017.
Connect & Control Technologies operating income and margin for the three and nine months ended September 30, 2017 were flat in both periods. Operating income was favorably impacted by net savings of approximately $6 and $14, respectively, due to restructuring benefits, productivity, and sourcing initiatives, primarily at our North American Connector facility. These items were offset by unfavorable sales mix and pricing of approximately $3 and $7 for the three and nine months ended September 30, 2017, respectively, as well as unfavorable foreign currency impacts of $0.7 and $2.1, respectively. In addition, both periods include unfavorable impacts related to certain military-specification connectors and the nine-month period ended September 30, 2017 is impacted by a $5 legal accrual that was recorded in the second quarter of 2017.actions.
Other corporate costs for the three and nine months ended September 30, 2017 increased $11.3 and $11.5, respectively, primarily reflecting higher incentive compensation costs of $8 and $10, respectively, and insurance-related benefits recorded in 2016. During the nine-month period ended September 30, 2017, disposal costs associated with a pending sale of property was partially offset by income of $3.8 related to an amendmentMarch 31, 2019 decreased $3.6, or 33.0% compared to the prior year. The decrease was primarily driven by lower legal and environmental Qualified Settlement Fund (QSF) in the second quarter of 2017.costs, as well as favorable returns on corporate owned life insurance policies.
INTEREST AND NON-OPERATING INCOME AND EXPENSES, NET During the three months ended September 30, 2017 and 2016, we recognized interest and non-operating expenses, net of $0.2 and $0.3, respectively. During the nine months ended September 30, 2017 and 2016, we recognized interest and non-operating expenses, net of $0.1 and $1.5, respectively. |
| | | | | | | | | | |
For the Three Months Ended March 31 | 2019 | | 2018 | | Change |
Interest and non-operating (income) expenses, net | $ | (0.5 | ) | | $ | 1.8 |
| | (127.8 | )% |
The change duringcompared to the nine-month periodprior year was driven by an increasedue to a reduction in interest expense of $1 due to favorable interest rates on commercial paper borrowings, additional interest income fromearned on time deposits, in the current year.and lower pension-related expense.
INCOME TAX EXPENSE
For the three months ended September 30, 2017 and 2016, the Company recognized income tax expense of $40.6 and $46.1 and had an effective tax rate of 31.8% and 34.3%, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized income tax expense of $60.3 and $75.3 and had an effective tax rate of 25.0% and 32.2%, respectively. The lower year-to-date effective tax rate in 2017 is primarily due to a tax rate change on Korea deferred tax assets and an excess share-based compensation deduction due to the adoption of ASU 2016-09. |
| | | | | | | | | | |
For the Three Months Ended March 31 | 2019 | | 2018 | | Change |
Income tax expense | $ | 19.7 |
| | $ | 7.6 |
| | 159.2 | % |
Effective tax rate | 21.6 | % | | 7.0 | % | | 1,460 | bp |
The higher effective tax rate in 2016 was2019, is primarily driven by an increase indue to 2018 tax benefits of $21.6 from the reversal of valuation allowances on German deferred tax liability on foreign earnings which are not considered indefinitely reinvested. Referassets and a $4.5 reduction to Note 2, Recent Accounting Pronouncements, for further information on ASU 2016-09. In addition, the Company continues to benefit from a larger mixprovisional one-time tax charge associated with the U.S. Tax Cuts and Jobs Act of earnings in non-U.S. jurisdictions with favorable tax rates.2017 (the Tax Act).
The Company operates in various tax jurisdictions and is subject to examination by tax authorities in these jurisdictions. The Company is currently under examination in several jurisdictions including Canada, Czech Republic, Germany, Hong Kong, India, Italy, Japan, Mexico, the U.S. and Venezuela. The estimated tax liability calculation for unrecognized tax benefits considers uncertainties in the application of complex tax laws and regulations in various tax jurisdictions. Due to the complexity of some uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the unrecognized tax benefit. Over the next 12 months, the net amount of the tax liability for unrecognized tax benefits in foreign and domestic jurisdictions could change by approximately $17$15 due to changes in audit status, expiration of statutes of limitations and other events. In addition, the settlement of any future examinations relating to the 2011 and prior tax years could result in changes in amounts attributable to the Company under its Tax Matters Agreement with Exelis Inc. and Xylem Inc. relating to the Company'sCompany’s 2011 spin-off of those businesses.
LIQUIDITY
Funding and Liquidity Strategy
We monitor our funding needs and design and execute strategies to meet overall liquidity requirements, including the management of our capital structure, on both a short- and long-term basis. We expect to fund our ongoing working capital, capital expenditures, dividends and financing requirements through cash flows from operations and cash on hand, or by accessing the U.S. or European commercial paper market. If our access to the commercial paper market were adversely affected, we believe that alternative sources of liquidity, includingmarkets or our Revolving Credit Agreement, described below, would be sufficient to meet our short-term funding requirements.Agreement.
We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We have identified and continue to look for opportunities to access cash balances in excess of local operating requirements to meet our global liquidity needs in a cost-efficient manner. A majority of our cash and cash equivalents is held by our international subsidiaries. We have transferred, and plan to continue to transfer cash between certain international subsidiaries and the U.S. and between our other international subsidiaries when it is cost effective to do so. Our intent is generally to indefinitely reinvest these funds outsideThe passage of the U.S. consistent withTax Act provides greater flexibility around our overall intentionglobal cash management strategy related to the amount and timing of transfers, and we will continue to support growth and expandexpansion in markets outside of the U.S. through the development of products, increased non-U.S. capital spending, and potentially the acquisition ofpotential foreign businesses. However, we have determined that certain undistributed foreign earnings generated in Luxembourg, Netherlands, Japan, Hong Kong, and South Korea should not be considered permanently reinvested outside of the U.S. Cash distributions from foreign countries amounted to $111.8 for the nine months ended September 30, 2017. Cash distributions from foreign countries amounted to $100.0 foracquisitions. During the year ended December 31, 2016.2018 we had net cash distributions from foreign countries to the U.S. of $318.1. We did not have any distributions during the first quarter of 2019. The timing and amount of any additional future distributions if any, remains under evaluation.
The amount and timing of dividends payable on our common stock are within the sole discretion of our Board of Directors and will be based on, and affected by, a number of factors, including our financial position and results of operations, available cash, expected capital spending plans, prevailing business conditions and other factors the Board of Directors deems relevant. Therefore, there can be no assurance as to what level of dividends, if any, will be paid in the future. In the thirdfirst quarter of 2017,2019, we declared a dividend of $0.128$0.147 per share for shareholders
of record on SeptemberMarch 11, 2017,2019, which was paid on October 2, 2017.March 29, 2019. The dividend declared in the thirdfirst quarter of 20172019 is a 3.2%9.7% increase from the thirdfirst quarter of 2016.2018.
During the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, we repurchased 0.8 and 1.9retired 0.2 and 1.0 shares of common stock for $30.0$10.5 and $66.6,$50.0, respectively, under our $1 billion share repurchase program. To date, under the program, the Company has repurchased 21.222.4 shares for $859.4.$919.9.
Significant factors that affect our overall management of liquidity include our credit ratings, the adequacyavailability of commercial paper, and supportingaccess to bank lines of credit, and the ability to attract long-term capital on satisfactory terms. We assess these factors along with current market conditions on a continuous basis, and as a result, may alter the mix of our short- and long-term financing when it is advantageous to do so.
Commercial Paper
We have access to the commercial paper market through programs in place in the U.S. and Europe to supplement the cash flows generated internally and to provide additional short-term funding for strategic investments and other funding requirements. We manage our short-term liquidity through the use of our commercial paper program by adjusting the level of commercial paper borrowings as opportunities to deploy additional capital arise and it is cost effective to do so. As of September 30, 2017,March 31, 2019, we had an outstanding commercial paper balance of $130.9.$112.3 through our European program. The average outstanding commercial paper balance during the ninethree months ended September 30, 2017March 31, 2019 was $131.6.$113.0. In connection with completing of our acquisition of Rheinhütte on April 29, 2019, we borrowed European commercial paper of €50. There have been no other material changes that have impacted our funding and liquidity capabilities since December 31, 2016.2018.
Revolving Credit FacilitiesAgreement
Our $500 revolving $500 credit agreement (the Revolving Credit Agreement) provides for increases of up to $200 for a possible maximum total of $700 in aggregate principal amount, at the request of the Company and with the consent of the institutions providing such increased commitments. The Revolving Credit Agreement is intended to provide access to additional liquidity and be a source of alternate funding to the commercial paper program, if needed. Our policy is to maintain unused committed bank lines of credit in an amount greater than outstanding commercial paper balances. The provisions of the Revolving Credit Agreement require that we maintain an interest coverage ratio, as defined therein, of at least 3.0 and a leverage ratio, as defined therein, of not more than 3.0. At September 30, 2017, we had $59.1 outstanding under the Revolving Credit Agreement and ourOur interest coverage ratio and leverage ratio were within the prescribed thresholds.thresholds as of March 31, 2019, and there were no outstanding borrowings under our Revolving Credit Agreement. In the event of certaina ratings downgradesdowngrade of the Company to a level below investment grade, the direct and indirect significant U.S. subsidiaries of the Company would be required to guarantee the obligations under the Revolving Credit Agreement. The Revolving Credit Agreement matures in November 2021.
Sources and Uses of Liquidity
Our principal source of liquidity is our cash flow generated from operating activities, which provides us with the ability to meet the majority of our short-term funding requirements. The following table summarizes net cash derived from operating, investing, and financing activities from continuing operations, as well as net cash from discontinued operations, for the ninethree months ended September 30, 2017March 31, 2019 and 2016.2018.
| | For the Nine Months Ended September 30 | 2017 | | 2016 | |
For the Three Months Ended March 31 | | 2019 | | 2018 |
Operating activities | $ | 178.4 |
| | $ | 146.7 |
| $ | 42.1 |
| | $ | 42.4 |
|
Investing activities | (189.3 | ) | | (22.5 | ) | (28.8 | ) | | (28.2 | ) |
Financing activities | (75.3 | ) | | (78.4 | ) | (21.0 | ) | | 27.7 |
|
Foreign exchange | 22.3 |
| | 9.0 |
| 0.7 |
| | 8.2 |
|
Total net cash flow (used in) provided by continuing operations | (63.9 | ) | | 54.8 |
| (7.0 | ) | | 50.1 |
|
Net cash (used in) provided by discontinued operations | (1.2 | ) | | 5.3 |
| |
Net cash used in discontinued operations | | (0.4 | ) | | (1.2 | ) |
Net change in cash and cash equivalents | $ | (65.1 | ) | | $ | 60.1 |
| $ | (7.4 | ) | | $ | 48.9 |
|
Net cash provided by operating activities was $178.4 for the nine months ended September 30, 2017 compared to $146.7 for the nine months ended September 30, 2016. Operating Activities
The change in net cash provided by operating activities primarily reflects an increase inimprovement of segment operating income of approximately $14,$10, after adjustments for non-cash charges, such as depreciation and amortization as well as higher incentive compensationamortization. In addition, during the first quarter of 2019, we received $9 related to an intellectual property settlement, and had lower environmental and asbestos payments in the prior year.of $7.4 and $2.9, respectively. These items were partially offset by net proceeds of $19.0 in 2018 from an insurance-related settlement and timing of trade receivable collections.
Investing Activities
The change in net cash used in investing activities was driven by a $0.5 increase in asbestos-related payments of $15.0 due to the timing of insurance recoveries and higher postretirement contributions due to a voluntary contributioncapital expenditures.
Financing Activities
The change in the third quarter of $5. Unfavorable changes in working capital were almost fully offsetnet cash from financing activities was driven by a decrease in restructuring paymentsnet borrowings of $75.7 and a $13 increase in the current year.
Net cash used by investing activities was $189.3 for the nine months ended September 30, 2017, compared to $22.5 of cash used by investing activities during the same prior year period. The year-over-year increase reflects the purchase of Axtone for $113.7 (net of cash acquired), as well as higher capital expenditures which increased $11.1 primarilydividends paid due to capacity expansion projects in supporttiming. This was partially offset by a decline of global automotive friction growth. In addition, the 2016 result included $53.0 of cash provided by the maturity of investments (net of purchases).
Net cash used by financing activities was $75.3 reflecting a decrease of $3.1 for the nine months ended September 30, 2017 primarily due to a decrease of $38.0$35.4 in repurchases of ITT common stock as partand an increase of our Share Repurchase Plan partially offset by a $31.4 decrease in net borrowings and lower proceeds of $2.1$4.5 from employee stock option exercises.
Net
Discontinued Operations
The decrease in net cash used byin discontinued operations was $1.2 for the nine months ended September 30, 2017 compared to net cash provided by discontinued operation for the nine months ended September 30, 2016 of $5.3. The change of $6.5 is primarily driven by a cash payment in the prior year from Xylem Inc. related to the Tax Matters Agreement.lower payments for environmental remediation activities.
Asbestos
Based on the estimated undiscounted asbestos liability as of September 30, 2017March 31, 2019 for claims filed or estimated to be filed over the next 10 years, we have estimated that we will be able to recover approximately 43%44% of the asbestos indemnity and defense costs from our insurers. Actual insurance reimbursements may vary significantly from period to period and the anticipated recovery rate is expected to decline over time due to gaps in our insurance coverage, reflecting uninsured periods, the insolvency of certain insurers, prior settlements with our insurers and our expectation that certain insurance policies will exhaust within the next 10 years. In the 10th year of our estimate, our insurance recoveries are currently projected to be approximately 18%21%. Additionally, future recovery rates may be impacted by other factors, such as future insurance settlements, insolvencies and judicial determinations relevant to our coverage program, which are difficult to predict and subject to a high degree of uncertainty.
While there are overall limits on the aggregate amount of insurance available to the Company with respect to asbestos claims, with respect to certain coverage, those overall limits were not reached by the estimated liability recorded by the Company at September 30, 2017.March 31, 2019.
Further, there is uncertainty in estimating when cash payments related to the recorded asbestos liability will be fully expended and such cash payments will continue for a number of years beyond the next 10 years due to the significant proportion of future claims included in the estimated asbestos liability and the delay between the date a claim is filed and when it is resolved. Subject to these inherent uncertainties, it is expected that cash payments related to pending claims and claims to be filed in the next 10 years will extend through approximately 2031.2032.
Although asbestos cash outflows can vary significantly from year to year, our current net cash outflows for defense and indemnity, net of tax benefits, are projected to average $15$20 to $25$30 over the next five years and increase to an average of approximately $30$35 to $40$45 per year over the remainder of the projection period. Total netperiod as certain insurance coverage exhausts. Net cash outflows for defense and indemnity, net of tax, averaged $13, including$21 over the past three annual periods. Total net asbestos cash outflows also include certain administrative costs, such as legal relatedlegal-related costs for insurance asset recoveries, overrecovery strategies not included in the past three annual periods.defense and indemnity projections.
In light of the variables and uncertainties inherent in the long-term projection of the Company'sCompany’s asbestos exposures and potential recoveries, althoughwhile it is probable that the Company will incur additional costs for asbestos claims filed beyond the next 10 years, we do not believe that there is a reasonable basis for estimating the number of future claims, the nature of future claims, or the cost to resolve future claims for years beyond the next 10 years at this time. Accordingly, no liability or related asset has been recorded for any costs that may be incurred for claims asserted subsequent to 2027.2029.
Due to these uncertainties, as well as our inability to reasonably estimate any additional asbestos liability for claims that may be filed beyond the next 10 years, it is difficult to predict the ultimate outcome of the cost of resolving the pending and estimated unasserted asbestos claims. We believe it is possible that the future events affecting the key factors and other variables within the next 10 years, as well as the cost of asbestos claims filed beyond the next 10 years, net of expected recoveries, could have a material adverse effect on our financial statements.
KEY PERFORMANCE INDICATORS AND NON-GAAP MEASURES
Management reviews a variety of key performance indicators including revenue, segment operating income and margins, earnings per share, order growth, and backlog, some of which are non-GAAP financial measures. In addition, we consider certain other measures to be useful to management and investors when evaluating our operating performance for the periods presented. These measures provide a tool for evaluating our ongoing operations and management of assets from period to period. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, acquisitions, dividends, and share repurchases. These other metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America (GAAP) and should not be considered a substitute for measures determined in accordance with GAAP.
We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:
| |
n | "organic revenue" and "organic orders"“Organic revenue” and “organic orders” are defined as revenue and orders, excluding the impacts of foreign currency fluctuations, acquisitions, and divestitures. Divestitures include sales of portions of our business that did not meet the criteria for presentation as a discontinued operation. The period-over-period change resulting from foreign currency fluctuations is estimated using a fixed exchange rate for both the current and prior periods. Management believes that reporting organic revenue and organic orders provides useful information to investors by helping identify underlying trends in our business and facilitating easier comparisons of our revenue performance with prior and future periods and to our peers. Reconciliations of organic revenue and organic orders provides useful information to investors by helping identify underlying trends in our business and facilitating easier comparisons of our revenue performance with prior and future periods and to our peers. Reconciliations of organic revenue for the three and nine months ended September 30, 2017 are provided below. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30 | Industrial Process | Motion Technologies | Connect & Control Technologies | Eliminations | Total ITT |
2017 Revenue | | $ | 196.2 |
| | | $ | 300.1 |
| | | $ | 149.4 |
| | | $ | (0.7 | ) | | | $ | 645.0 |
|
(Acquisitions)/divestitures, net | | — |
| | | (19.6 | ) | | | — |
| | | — |
| | | (19.6 | ) |
Foreign currency translation | | (1.4 | ) | | | (13.5 | ) | | | (0.7 | ) | | | — |
| | | (15.6 | ) |
2017 Organic revenue | | $ | 194.8 |
| | | $ | 267.0 |
| | | $ | 148.7 |
| | | $ | (0.7 | ) | | | $ | 609.8 |
|
| | | | | | | | | | | | | | |
2016 Revenue | | $ | 195.0 |
| | | $ | 238.7 |
| | | $ | 149.0 |
| | | $ | (1.0 | ) | | | $ | 581.7 |
|
Organic (decline) growth | | (0.1 | )% | | | 11.9 | % | | | (0.2 | )% | | | | | | 4.8 | % |
|
Nine Months Ended September 30 | |
2017 Revenue | | $ | 574.6 |
| | | $ | 877.5 |
| | | $ | 452.3 |
| | | $ | (2.7 | ) | | | $ | 1,901.7 |
|
(Acquisitions)/divestitures, net | | — |
| | | (55.6 | ) | | | — |
| | | — |
| | | (55.6 | ) |
Foreign currency translation | | (1.2 | ) | | | (0.4 | ) | | | 0.8 |
| | | — |
| | | (0.8 | ) |
2017 Organic revenue | | $ | 573.4 |
| | | $ | 821.5 |
| | | $ | 453.1 |
| | | $ | (2.7 | ) | | | $ | 1,845.3 |
|
| | | | | | | | | | | | | | |
2016 Revenue | | $ | 618.0 |
| | | $ | 755.3 |
| | | $ | 446.8 |
| | | $ | (3.1 | ) | | | $ | 1,817.0 |
|
Organic (decline) growth | | (7.2 | )% | | | 8.8 | % | | | 1.4 | % | | | | | | 1.6 | % |
Reconciliations of organic orders for the three and nine months ended September 30, 2017March 31, 2019 are provided below:below.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30 | Industrial Process | Motion Technologies | Connect & Control Technologies | Eliminations | Total ITT |
2017 Orders | | $ | 193.3 |
| | | $ | 323.7 |
| | | $ | 142.5 |
| | | $ | (0.9 | ) | | | $ | 658.6 |
|
(Acquisitions)/divestitures, net | | — |
| | | (21.5 | ) | | | — |
| | | — |
| | | (21.5 | ) |
Foreign currency translation | | (1.5 | ) | | | (13.7 | ) | | | (0.6 | ) | | | — |
| | | (15.8 | ) |
2017 Organic orders | | $ | 191.8 |
| | | $ | 288.5 |
| | | $ | 141.9 |
| | | $ | (0.9 | ) | | | $ | 621.3 |
|
| | | | | | | | | | | | | | |
2016 Orders | | $ | 198.9 |
| | | $ | 236.8 |
| | | $ | 139.1 |
| | | $ | (1.4 | ) | | | $ | 573.4 |
|
Organic (decline) growth | | (3.6 | )% | | | 21.8 | % | | | 2.0 | % | | | | | | 8.4 | % |
|
Nine Months Ended September 30 | |
2017 Orders | | $ | 605.5 |
| | | $ | 899.9 |
| | | $ | 452.7 |
| | | $ | (2.6 | ) | | | $ | 1,955.5 |
|
(Acquisitions)/divestitures, net | | — |
| | | (54.0 | ) | | | — |
| | | — |
| | | (54.0 | ) |
Foreign currency translation | | (1.2 | ) | | | (0.2 | ) | | | 1.0 |
| | | 0.1 |
| | | (0.3 | ) |
2017 Organic orders | | $ | 604.3 |
| | | $ | 845.7 |
| | | $ | 453.7 |
| | | $ | (2.5 | ) | | | $ | 1,901.2 |
|
| | | | | | | | | | | | | | |
2016 Orders | | $ | 587.4 |
| | | $ | 763.4 |
| | | $ | 455.5 |
| | | $ | (3.5 | ) | | | $ | 1,802.8 |
|
Organic growth (decline) | | 2.9 | % | | | 10.8 | % | | | (0.4 | )% | | | | | | 5.5 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Motion Technologies | Industrial Process | Connect & Control Technologies | Eliminations | Total ITT |
2019 Revenue | | $ | 315.2 |
| | | $ | 215.7 |
| | | $ | 165.0 |
| | | $ | (0.4 | ) | | | $ | 695.5 |
|
Foreign currency translation | | 22.5 |
| | | 3.8 |
| | | 2.4 |
| | | (0.1 | ) | | | 28.6 |
|
2019 Organic revenue | | $ | 337.7 |
| | | $ | 219.5 |
| | | $ | 167.4 |
| | | $ | (0.5 | ) | | | $ | 724.1 |
|
2018 Revenue | | $ | 342.2 |
| | | $ | 189.8 |
| | | $ | 157.9 |
| | | $ | (0.6 | ) | | | $ | 689.3 |
|
Organic growth | | (4.5 | ) | | | 29.7 |
| | | 9.5 |
| | | 0.1 |
| | | 34.8 |
|
Percentage change | | (1.3 | )% | | | 15.6 | % | | | 6.0 | % | | | | | | 5.0 | % |
| |
n | "adjusted segment operating income" is defined as operating income, adjusted to exclude special items that include, but are not limited to, restructuring costs, realignment costs, certain asset impairment charges, certain acquisition-related expenses, and unusual or infrequent operating items. Special items represent significant charges or credits that impact current results, which management views as unrelated to the Company's ongoing operations and performance. We believe that adjusted segment operating income is useful to investors and other users of our financial statements in evaluating ongoing operating profitability, as well as in evaluating operating performance in relation to our competitors. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Motion Technologies | Industrial Process | Connect & Control Technologies | Eliminations | Total ITT |
2019 Orders | | $ | 331.5 |
| | | $ | 219.0 |
| | | $ | 189.1 |
| | | $ | (0.7 | ) | | | $ | 738.9 |
|
Foreign currency translation | | 25.5 |
| | | 4.7 |
| | | 2.8 |
| | | — |
| | | 33.0 |
|
2019 Organic orders | | $ | 357.0 |
| | | $ | 223.7 |
| | | $ | 191.9 |
| | | $ | (0.7 | ) | | | $ | 771.9 |
|
2018 Orders | | $ | 369.9 |
| | | $ | 210.1 |
| | | $ | 181.8 |
| | | $ | (0.6 | ) | | | $ | 761.2 |
|
Organic growth | | (12.9 | ) | | | 13.6 |
| | | 10.1 |
| | | (0.1 | ) | | | 10.7 |
|
Percentage change | | (3.5 | )% | | | 6.5 | % | | | 5.6 | % | | | | | | 1.4 | % |
“Adjusted segment operating income” is defined as operating income, adjusted to exclude special items that include, but are not limited to, restructuring costs, realignment costs, certain asset impairment charges, certain acquisition-related expenses, and unusual or infrequent operating items. Special items represent significant charges or credits that impact current results, which management views as unrelated to the Company’s ongoing operations and performance. We believe that adjusted segment operating income is useful to investors and other users of our financial statements in evaluating ongoing operating profitability, as well as in evaluating operating performance in relation to our competitors.
“Adjusted segment operating margin” is defined as adjusted segment operating income divided by revenue.
Reconciliations of segment operating income to adjusted segment operating income for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 are provided below.
| | Three Months Ended September 30, 2017 | Industrial Process | Motion Technologies | Connect & Control Technologies | Total Segment | |
Three Months Ended March 31, 2019 | | Motion Technologies | Industrial Process | Connect & Control Technologies | Total Segment |
Segment operating income |
| $ | 9.9 |
|
| $ | 49.1 |
|
| $ | 17.5 |
|
| $ | 76.5 |
| | $ | 60.9 |
| | $ | 22.2 |
| | $ | 27.4 |
| | $ | 110.5 |
|
Restructuring costs |
| 3.2 |
| | 0.5 |
| | 1.6 |
|
| 5.3 |
| | 0.7 |
| | 0.3 |
| | 0.1 |
| | 1.1 |
|
Acquisition-related expenses | | — |
| | 2.9 |
| | 0.4 |
| | 3.3 |
| |
Realignment costs and other(a) | | 3.7 |
| | — |
| | 1.2 |
| | 4.9 |
| | — |
| | 0.5 |
| | 0.3 |
| | 0.8 |
|
Adjusted segment operating income |
| $ | 16.8 |
|
| $ | 52.5 |
|
| $ | 20.7 |
|
| $ | 90.0 |
| | $ | 61.6 |
| | $ | 23.0 |
| | $ | 27.8 |
| | $ | 112.4 |
|
Nine Months Ended September 30, 2017 | | |
Segment operating income | | $ | 32.0 |
| | $ | 156.1 |
| | $ | 47.5 |
| | $ | 235.6 |
| |
Restructuring costs | | 4.9 |
| | 1.3 |
| | 2.8 |
| | 9.0 |
| |
Acquisition-related expenses | | — |
| | 3.7 |
| | 0.4 |
| | 4.1 |
| |
Realignment costs and other(a) | | 4.8 |
| | — |
| | 8.5 |
| | 13.3 |
| |
Adjusted segment operating income | | $ | 41.7 |
| | $ | 161.1 |
| | $ | 59.2 |
| | $ | 262.0 |
| |
Adjusted segment operating margin | | | 19.5 | % | | 10.7 | % | | 16.8 | % | | 16.2 | % |
| | Three Months Ended September 30, 2016 | Industrial Process | Motion Technologies | Connect & Control Technologies | Total Segment | |
Three Months Ended March 31, 2018 | | Motion Technologies | Industrial Process | Connect & Control Technologies | Total Segment |
Segment operating income | | $ | 4.3 |
| | $ | 45.2 |
| | $ | 17.4 |
| | $ | 66.9 |
| | $ | 61.9 |
| | $ | 16.9 |
| | $ | 23.0 |
| | $ | 101.8 |
|
Restructuring costs | | 2.9 |
| | 1.1 |
| | — |
| | 4.0 |
| | 0.4 |
| | 0.1 |
| | 0.4 |
| | 0.9 |
|
Acquisition-related expenses | | — |
| | 0.6 |
| | — |
| | 0.6 |
| | 0.6 |
| | — |
| | — |
| | 0.6 |
|
Realignment costs and other(a) | | — |
| | — |
| | 1.3 |
| | 1.3 |
| |
Adjusted segment operating income | | $ | 7.2 |
| | $ | 46.9 |
| | $ | 18.7 |
| | $ | 72.8 |
| | $ | 62.9 |
| | $ | 17.0 |
| | $ | 23.4 |
| | $ | 103.3 |
|
Nine Months Ended September 30, 2016 | | |
Segment operating income | | $ | 19.6 |
| | $ | 144.8 |
| | $ | 46.6 |
| | $ | 211.0 |
| |
Restructuring costs | | 19.9 |
| | 2.5 |
| | 0.9 |
| | 23.3 |
| |
Acquisition-related expenses | | — |
| | 2.8 |
| | 1.5 |
| | 4.3 |
| |
Realignment costs and other(a) | | 4.1 |
| | (0.1 | ) | | 3.4 |
| | 7.4 |
| |
Adjusted segment operating income | | $ | 43.6 |
| | $ | 150.0 |
| | $ | 52.4 |
| | $ | 246.0 |
| |
Adjusted segment operating margin | | | 18.4 | % | | 9.0 | % | | 14.8 | % | | 15.0 | % |
| |
(a) | Primarily reflects realignmentRealignment costs associated with an action to move certain production lines in our Connect & Control Technologies segment in 2017 and 2016, a legal accrual of $5.0 in 2017 in our Connect & Control Technologies segment in the second quarter of 2017, a $3.7 pension curtailment in the third quarter of 2017 at our Industrial Process segment, andother includes costs associated with a management reorganization at our Industrial Process segment during the first quarter of 2017. In the second quarter of 2016, an impairment of $4.1 was recorded at our Industrial Process segment for trade names as a result of the downturn in the upstream oil and gas market. |
| |
n | "adjusted income from continuing operations" and "adjusted income from continuing operations per diluted share" are defined as income from continuing operations attributable to ITT Inc. and income from continuing operations attributable to ITT Inc. per diluted share, adjusted to exclude special items that include, but are not limited to, asbestos-related costs, restructuring costs, realignment costs, certain asset impairment charges, certain acquisition-related expenses, income tax settlements or adjustments, and unusual or infrequent non-operating items. Special items represent significant charges or credits, on an after-tax basis, that impact current results, which management views as unrelated to the Company's ongoing operations and performance. We believe that adjusted income from continuing operations is useful to investors and other users of our financial statements in evaluating ongoing operating profitability,IP, as well as in evaluating operating performance in relation to our competitors.costs associated with a Department of Justice (DOJ) civil matter. |
“Adjusted income from continuing operations” is defined as income from continuing operations attributable to ITT Inc. adjusted to exclude special items that include, but are not limited to, asbestos-related costs, restructuring costs, realignment costs, certain asset impairment charges, certain acquisition-related expenses, income tax settlements or adjustments, and unusual or infrequent non-operating items. Special items represent significant charges or credits, on an after-tax basis, that impact current results, which management views as unrelated to the Company’s ongoing operations and performance. The after-tax basis of each special item is determined using the jurisdictional tax rate of where the expense or benefit occurred. We believe that adjusted income from continuing operations is useful to investors and other users of our financial statements in evaluating ongoing operating profitability, as well as in evaluating operating performance in relation to our competitors.
“Adjusted income from continuing operations per diluted share” is defined as adjusted income from continuing operations divided by diluted weighted average common shares outstanding.
A reconciliation of adjusted income from continuing operations, including adjusted income from continuing operations per diluted share, for the three months ended March 31, 2019 and 2018 is provided below.
|
| | | | | | | | | | | | | | | |
| Three Months | | Nine Months |
For the Periods Ended September 30 | 2017 | | 2016 | | 2017 | | 2016 |
Income from continuing operations attributable to ITT Inc. | $ | 87.0 |
| | $ | 88.3 |
| | $ | 181.0 |
| | $ | 158.3 |
|
Net asbestos-related benefit, net of tax expense of $23.2, $25.2, $12.2 and $14.9, respectively | (39.6 | ) | | (42.9 | ) | | (20.8 | ) | | (25.4 | ) |
Restructuring costs, net of tax benefit of $1.3, $3.3, $2.6 and $6.3, respectively | 3.4 |
| | 0.7 |
| | 6.4 |
| | 17.5 |
|
Realignment costs, net of tax benefit of $0.7, $0.7, $3.4 and $1.4, respectively(a) | 0.8 |
| | 1.3 |
| | 5.6 |
| | 2.8 |
|
Tax-related special items(b) | 1.3 |
| | 5.1 |
| | (5.0 | ) | | 8.6 |
|
Acquisition-related costs, net of tax benefit of $0.6, $0.4, $0.9, and $1.7, respectively | 2.9 |
| | 0.2 |
| | 3.4 |
| | 2.6 |
|
Other unusual or infrequent items, net of tax benefit of $1.4, $0.2, $0.0 and $0.1, respectively(c) | 2.3 |
| | (0.7 | ) | | 2.8 |
| | 1.1 |
|
Adjusted income from continuing operations attributable to ITT Inc. | $ | 58.1 |
| | $ | 52.0 |
| | $ | 173.4 |
| | $ | 165.5 |
|
Income from continuing operations attributable to ITT Inc. per diluted share | $ | 0.98 |
| | $ | 0.98 |
| | $ | 2.03 |
| | $ | 1.76 |
|
Adjusted income from continuing operations attributable to ITT Inc. per diluted share | $ | 0.66 |
| | $ | 0.58 |
| | $ | 1.95 |
| | $ | 1.84 |
|
|
| | | | | | | |
For the Three Months Ended March 31 | 2019 | | 2018 |
Income from continuing operations attributable to ITT Inc. | $ | 71.3 |
| | $ | 101.1 |
|
Net asbestos-related costs (benefit) net of tax (benefit) expense of ($3.0) and $4.6, respectively | 9.6 |
| | (15.1 | ) |
Tax-related special items(a) | (1.1 | ) | | (18.2 | ) |
Restructuring costs, net of tax benefit of $0.3 and $0.2, respectively | 0.8 |
| | 0.7 |
|
Realignment costs, net of tax benefit of $0.1 and $0.0, respectively | 0.5 |
| | — |
|
Income related to sale of a former operating location, net of tax expense of $0.0 and $0.0, respectively | (0.4 | ) | | (0.2 | ) |
Acquisition-related costs, net of tax expense of $0.0 and $0.1, respectively | — |
| | 0.5 |
|
Other unusual or infrequent items, net of tax (benefit) expense of $0.0 and $0.0, respectively(b) | 0.3 |
| | — |
|
Adjusted income from continuing operations | $ | 81.0 |
| | $ | 68.8 |
|
Income from continuing operations attributable to ITT Inc. per diluted share | $ | 0.80 |
| | $ | 1.14 |
|
Adjusted income from continuing operations per diluted share | $ | 0.91 |
| | $ | 0.77 |
|
| |
(a) | Realignment costs include 2017 costs associated with the pending sale of excess property, costs associated with a management reorganization at our Industrial Process segment inTax-related special items during the first quarter of 20172019 primarily relate to the release of a valuation allowance and costs associated with an actionexcess tax benefits related to move certain production linesstock compensation, partially offset by tax expense on undistributed foreign earnings. Tax-related special items during the first quarter of 2018 primarily relate to the release of a valuation allowance on deferred tax assets in our Connect & Control Technologies segment in both 2017Germany and 2016.adjustments to our |
provisional tax estimate associated with the Tax Act. These items were partially offset by tax expense on undistributed foreign earnings.
| |
(b) | Tax-related special items for the three and nine months ended September 30, 2017 primarily relate to tax expense due to the distribution of foreign earnings offset by a tax benefit on undistributed foreign earnings and tax benefits on uncertain tax positions. Tax-related special items for the three and nine months ended September 30, 2016 primarily relate to tax expense due to distributions of foreign earnings offset by a benefit for previously unrecognized tax positions. |
| |
(c) | Other unusual or infrequent items in 2017 primarily consist of a pension curtailment, as well as second quarter items which include a legal accrual of $5, income of $3.8 related to an amendment to the environmental QSF and interest income from the reversal of uncertain tax positions taken in prior years. Other unusual or infrequent items in 2016 primarily consist of an impairment of $4.1 recorded in the second quarter of 2016 at our Industrial Process segment for trade names as a result of the downturn in the upstream oil and gas market offset by interest income from the reversal of uncertain tax positions taken in prior years.Costs associated with DOJ civil matter. |
“Adjusted free cash flow” is defined as net cash provided by operating activities less capital expenditures, adjusted for cash payments for restructuring costs, realignment actions, net asbestos cash flows and other significant items that impact current results which management views as unrelated to the Company’s ongoing operations and performance. Due to other financial obligations and commitments, including asbestos expenses, the entire free cash flow may not be available for discretionary purposes. We believe that adjusted free cash flow provides useful information to investors as it provides insight into the cash flow metric used by management to monitor and evaluate cash flows generated by our operations.
| |
n | "adjusted free cash flow" is defined as net cash provided by operating activities less capital expenditures, adjusted for cash payments for restructuring costs, realignment actions, net asbestos cash flows and other significant items that impact current results which management views as unrelated to the Company's ongoing operations and performance. Due to other financial obligations and commitments, including asbestos expenses, the entire free cash flow may not be available for discretionary purposes. We believe that adjusted free cash flow provides useful information to investors as it provides insight into the primary cash flow metric used by management to monitor and evaluate cash flows generated by our operations. A reconciliation of adjusted free cash flow is provided below. |
“Adjusted free cash flow conversion” is defined as adjusted free cash flow divided by adjusted income from continuing operations.
A reconciliation of adjusted free cash flow, including adjusted free cash flow conversion for the three months ended March 31, 2019 and 2018 is provided below.
| | For the Nine Months Ended September 30 | 2017 | | 2016 | |
For the Three Months Ended March 31 | | 2019 | | 2018 |
Net cash provided by operating activities | $ | 178.4 |
| | $ | 146.7 |
| $ | 42.1 |
| | $ | 42.4 |
|
Capital expenditures | (79.2 | ) | | (68.1 | ) | (29.2 | ) | | (28.7 | ) |
Net asbestos cash flows | | 9.9 |
| | 12.8 |
|
Restructuring cash payments | 13.8 |
| | 22.7 |
| 1.8 |
| | 2.4 |
|
Net asbestos cash flows | 39.5 |
| | 24.5 |
| |
Realignment and discretionary pension payments | 12.2 |
| | 4.2 |
| |
Insurance settlement agreement | | — |
| | (19.0 | ) |
Payments related to the sale of a former operating location | | — |
| | (0.2 | ) |
Adjusted free cash flow | $ | 164.7 |
| | $ | 130.0 |
| $ | 24.6 |
| | $ | 9.7 |
|
Adjusted free cash flow conversion | | 30.4 | % | | 14.1 | % |
See Note 2 to the Consolidated Condensed Financial Statements for information on recent accounting pronouncements.
The Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting during the last fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Subsidiaries of ITT, ITT LLC and Goulds Pumps LLC, are joined as a defendant with numerous other companies in product liability lawsuits alleging personal injury due to asbestos exposure. These claims allege that certain of their products sold prior to 1985 contained a part manufactured by a third party (e.g., a gasket) which contained asbestos. To the extent these third-party parts may have contained asbestos, it was encapsulated in the gasket (or other) material and was non-friable. Frequently, the plaintiffs are unable to identify any ITT LLC or Goulds Pumps LLC products as a source of asbestos exposure. In addition, a large majority of claims pending against the Company subsidiaries have been placed on inactive dockets because the plaintiff cannot demonstrate a significant compensable loss. Our experience to date is that a substantial portion of resolved claims have been dismissed without payment by the Company'sCompany’s subsidiaries.
We record a liability for pending asbestos claims and asbestos claims estimated to be filed over the next 10 years. While it is probable that we will incur additional costs for future claims to be filed against the Company, a liability for potential future claims beyond the next 10 years is not reasonably estimable due to the variables and uncertainties inherent in the long-term projection of the Company'sCompany’s asbestos exposures and potential recoveries. As of September 30, 2017,March 31, 2019, we have recorded an undiscounted asbestos-related liability for pending claims and unasserted claims estimated to be filed over the next 10 years of $875.5,$844.9, including expected legal fees, and an associated asset of $374.3$369.6 which represents estimated recoveries from insurers, resulting in a net asbestos exposure of $501.2.$475.3.
In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and site remediation. These sites are in various stages of investigation or remediation and in many of these proceedings our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites formerly or currently owned or operated by ITT, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation or remediation. These sites include instances where we have been identified as a potentially responsible party under federal and state environmental laws and regulations.