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Text: All such statements should be evaluated together with the safe harbor disclosures and the risks and other uncertainties that affect our business, including those discussed in our Form 10-K and other SEC filings.
Actual results may vary materially from the assumptions presented today.
These results exclude certain non-operating and non-recurring items, including, but not limited to, asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items.
All adjustments in the quarter and expected for the full year 2021 are detailed in the reconciliations in the appendix.
Before we begin, I'd like to provide a brief overview of our first quarter GAAP results compared to prior year.
Q1 revenue increased 5.3% to $698 million.
Segment operating income increased 52.5% to $119 million, and reported earnings per share increased 4.2% to $0.99.
I continue to be extremely proud of the way our teams have responded to the crisis.
Your hard work is the reason why ITT has been able to effectively serve our customers throughout the pandemic.
Earlier this week, I spoke to our colleagues in India.
Before we discuss our quarterly results, let's spend a minute recapping how we got where we are today.
This is important as it sets the foundation on which Q1 results are based.
The health of our people has been our top priority from day 1.
Early in the pandemic, we implemented Ready, Safe, Go across ITT.
This allowed us to safely and effectively serve and support our customers faster than our competitors.
We further strengthened our balance sheet through smart cash management.
Today, we have nearly $1.5 billion of liquidity at our disposal.
Moody's recognized our cash performance with an upgrade to our credit rating in the third quarter.
Early on, we executed a plan to significantly lower our fixed costs.
This resulted in structural reductions in 2020 of nearly $65 million.
Our productivity and cost actions helped to offset the impact of materially lower volumes in 2020.
Today, we continue to drive footprint optimization and sourcing excellence at both Industrial Process and Connect and Control Technologies, while remaining diligent on cost controls.
This has resulted in a step-up in profitability above 2019 levels.
All the actions taken over the past year, combined with ITTers collective commitment and grit, have positioned us well to win in the recovery.
We will continue to invest in innovation and growth, including important green projects to become a more sustainable ITT.
We are aggressively and diligently pursuing acquisitions in our core markets to put our cash to work effectively and build on our strong businesses.
I am invigorated by the progress across our businesses and the momentum, which is accelerating.
Now moving to Q1.
We delivered a strong quarter and an encouraging start to 2021.
Let's get into it.
ITT's first quarter sales were higher than 2019.
Organic sales in Motion Technologies were up 17% after 10% organic sales growth in the fourth quarter of 2020.
The new auto platforms that we won and Friction's ability to deliver for our customers drove 1,500 basis points of outperformance versus global auto production.
And we secured positions on 9 new platforms with EV content during the quarter, 8 of which are in China, the largest automotive market in the world.
This is building on the 42 EV platforms wins in 2020.
Connectors grew sales in all regions, and orders were up 20% organically with strength primarily in the distribution channel.
This is encouraging for Connect and Control Technologies heading into Q2.
From a profitability perspective, ITT generated adjusted segment operating income growth of 27% and margin expansion of 300 basis points on 2% organic sales growth.
Incremental margin was above 70% for the quarter.
IP's margin was nearly 16%, driven by net productivity as we continue to drive supply chain improvements and better manufacturing performance.
This follows a 15%-plus margin performance in Q4 of 2020.
As a result of the revenue growth and margin expansion, ITT delivered adjusted earnings per share of $1.06, a sequential and year-over-year increase.
Even more telling is the fact that earnings per share was $0.15 above the first quarter of 2019.
Free cash flow was up 70%, representing a margin of nearly 16%.
On capital deployment, we repurchased ITT shares totaling $50 million early in Q1, executing on our repurchase plan and achieving half of our full year plan of $100 million.
As a result of our strong Q1 performance and our confidence in ITT's ability to outperform, we are raising our outlook for 2021 across all facets of our guidance.
On organic sales, we now anticipate growth of 5% to 7%, a 300 basis point increase on both the low and high end of our original guidance.
This is driven by continued share gains in Motion Technologies amid the broader auto market recovery, stronger growth in Connectors and demand in the Industrial Process short cycle.
On adjusted earnings per share, the increased sales volume and the strong productivity expected in 2021, combined with the carryover impact of our 2020 cost actions, will generate earnings per share in the range of $3.80 to $4 at the high end, which equates to 19% to 25% growth versus prior year.
This is a $0.30 improvement at the midpoint from our prior guidance and puts ITT on pace to surpass 2019 EPS.
From a top line perspective, Motion Technologies delivered a solid performance driven by strong auto growth and continued share gains in our 3 main regions.
Our Friction OE business grew nearly 30% organically with impressive 42% growth in North America.
We drove high single-digit organic growth in Connectors, mainly through distribution.
Together with Ryan Flynn, our CCT President, in April, I visited our U.S. distributors and sales representative in the Northeast and on the West Coast to work on our ongoing initiatives.
We saw clearly that we have many opportunities to grow this business from a product and customer service standpoint.
And while some of the Q1 growth may have been due to pent-up demand, especially in North America, our dedicated teams continue to work on the optimal commercial actions to gain market share.
Our focus on operational excellence produced 280 basis points of net productivity in Q1.
These included $50 million of savings from our 2020 cost actions.
Industrial Process grew margin 450 basis points to 15.8% despite a 12% organic sales decline.
And Motion Technologies expanded margin nearly 300 basis points to 20.6%.
This included triple-digit margin expansion at both KONI and Wolverine.
This quarter, I was fortunate to visit our world-class Friction plant in Barge, Italy.
I saw firsthand the continuous improvement in plant productivity.
Our team there has improved its processes to increase machine utilization and to respond more quickly to ever-changing order patterns from customers impacted by supply chain challenges.
The strong MT and IP performances offset Connect and Control Technologies' margin decline driven by the pandemic's impact on aerospace.
Rising raw material costs partially offset the strong productivity.
The impact was 100 basis points this quarter, substantially higher than what we were expecting.
We believe this trend will continue to affect our results for the remainder of 2021.
Emmanuel will speak further about this in a moment.
We continue to reinvest in our businesses to drive future organic growth.
We are funding the most promising growth initiatives in key markets, including EVs, to ensure we keep winning in the marketplace.
When I was in Barge, I also saw the expansion of our state-of-the-art Friction R&D center, including the testing and fast prototyping capabilities, which will be powered by solar panels later this year.
This smart growth investment drove roughly 50 basis point impact this quarter.
Rounding out the story of the quarter with free cash flow, we saw a substantial improvement in Q1.
This was mainly driven by higher operating income generation in the segment and slightly lower capex.
Our plan for the year still assumes approximately $100 million of capex, an increase of over 50% relative to 2020.
In summary, ITTers around the world delivered a strong performance.
We drove positive organic growth at an incremental margin of over 70%.
We generated nearly 300 basis points of productivity and invested in ITT's future.
We repurchased ITT shares worth $50 million and raised our dividend 30%, the ninth consecutive dividend increase.
And we surpassed 2019 first quarter results in revenue, segment margin, earnings per share and free cash flow.
Let me begin with Motion Technologies.
Q1 organic revenue growth of 17% was primarily driven by strength in auto.
Our strong momentum from last year carried forward as Q1 grew 5% sequentially over Q4 2020.
Friction OE grew 29% organically, and we outperformed global auto production by 1,500 basis points.
Segment margin expanded 280 basis points versus prior year and 110 basis points versus Q4 2020.
This was mainly due to higher volumes and productivity benefits, partially offset by higher commodity costs.
We are very pleased with the performance at KONI and Wolverine.
Both delivered triple-digit margin expansion from operational efficiencies and higher volumes, and we continue to see more room to grow these margins.
For Industrial Process, revenue was down 12% organically, driven by short-cycle declines, primarily in oil and gas and chemical markets.
However, we continue to see steady sequential progress in short-cycle orders with 9% sequential growth from Q4 and a strong book-to-bill of 1.1.
We continue to see healthy customer quoting activity, especially in the Middle East and North America.
In fact, we have seen sequential strength versus the lower Q4 bookings.
However, this quarter, we saw sales and order declines as large project spend continues to be slow.
IP margin expanded 450 basis points to a segment record of 15.8%.
This represents $6 million of operating income growth on $25 million of lower sales.
Margin expansion was driven mainly by productivity benefits, including our global sourcing performance, significant cost actions taken in 2020 and favorable nonrecurring items, which collectively more than offset the decline in volume.
As an example of our progress in IP, when we visited our Seneca Falls site last month, we were really pleased to see the strategies deployed by the manufacturing and engineering teams to reduce machining bottlenecks and accelerate output.
We continue to drive further footprint optimization.
And this quarter, we announced a third consolidation project in IP.
Lastly, in Connect and Control Technologies, we generated sustained orders progress.
Our Connector business was up 20% versus prior year and up 3% sequentially, driven by continued North American distribution strength.
As expected, sales in aerospace continued to be weak on lower OE production and commercial passenger traffic.
We expect that aero demand will remain low in Q2, but will begin to pick up in the second half of 2021.
CCT margin decline was the result of lower volumes, partially offset by the benefits of our aggressive cost structure reset in 2020.
As Luca mentioned, we are seeing early signs of performance improvement in CCT as we deploy MT's operational excellence playbook from shop floor productivity and improved on-time delivery to customer intimacy.
And we delivered a much improved 29% decremental margin in Q1.
As a reminder, for both our CCT and IP businesses, the impact of the COVID-19 pandemic was minimal until early Q2 2020.
We expect favorable compares to peak in Q2.
Just a few additional comments on earnings per share for the quarter.
In addition to lower corporate costs, we also saw a benefit from both the CARES Act and foreign currency.
Partially offsetting the share count benefit was a roughly $0.01 headwind from a higher-than-planned effective tax rate of 22%.
Our end markets are continuing to show signs of recovery.
Global auto production is increasing, albeit constrained by the global semiconductor shortage causing inventory levels to remain relatively low.
We expect that demand will continue to be strong in the next few quarters, especially in North America and Europe despite headwinds related to supply chain challenges and rising raw material costs.
Weekly run rates in our short-cycle businesses, primarily in Industrial Process and Connectors, showed encouraging signs of recovery in Q1, and April orders are in line with expectations.
We believe that there is some pent-up demand from 2020 that has carried over into 2021.
Given our Q1 performance and momentum in certain end markets, our outlook is more favorable than we anticipated in February.
We expect that Connectors growth as well as the stronger growth in Friction stemming from continued share gains in auto will be partially offset by declines in pump project activity and commercial aerospace.
Our assumption is that commercial aerospace may begin to recover in the second half of the year as passenger air traffic continues to increase.
We are not anticipating a recovery in oil and gas in 2021, consistent with our initial outlook.
The increase in adjusted segment margin expansion by 40 basis points across our range reflects our expectations for higher volumes and continued productivity generation in addition to the stronger-than-planned margin expansion from Q1.
We expect this will be partially offset by inflation and higher raw material costs, driven by steel, copper and to a lesser extent, tin.
As you will see on Slide 7, our revised guidance assumes the incremental impact from this global trend will be $0.25 to $0.30 for the remainder of 2021.
However, we remain optimistic in our team's ability to continue to mitigate this impact through strategic pricing and demand generation.
We will continue to monitor this closely throughout the year.
Our revised earnings per share guide reflects a $0.30 improvement at the midpoint of our range to $3.90, which would put us $0.09 above 2019.
Some other items to note.
Given the strengthening of the U.S. dollar, the foreign currency benefit contemplated in our guidance is less than originally planned.
Our 4-year effective tax rate is now expected to be approximately 22%.
This will likely be partially offset by a slightly higher benefit from share repurchases given the execution in Q1.
Our guidance also continues to assume a reduction of approximately 1% in our 4-year weighted average share count.
We are raising our free cash flow guidance by $25 million at the midpoint to reflect the impact of higher operating income, and we now expect free cash flow margin of 11% to 12%.
Our higher growth outlook will require further working capital investment.
However, we expect working capital to continuously decline as a percent of sales during the year and over the long term.
On Slide 7, let's look at the components of our revised 2021 adjusted earnings per share guidance.
As you can see, the majority of our earnings growth will be generated by stronger volumes and net productivity, partially offset by the incremental headwinds from rising raw material costs and our continued investment for growth.
The deltas in the second quarter will likely look incredibly strong given the pandemic impact in Q2 of 2020.
Organic sales growth is expected to be above 20%, driven by MT's strong performance and an easy 2020 compare.
This will be partially impacted by the global semiconductor chip shortage.
The other segments are each expected to grow mid-single digits with anticipated strength in IP's short cycle.
Our outlook for CCT has improved, given the strong organic sales and orders growth in Connectors in Q1.
The margin expansion is expected to be several hundred basis points, driven by MT and to a lesser extent, CCT.
From a total ITT perspective, adjusted segment margin should be equal or slightly above second quarter of 2019 of 16.1%, which we believe is a more representative comparison.
The combined impact of higher sales and strong productivity will drive significant adjusted earnings-per-share growth.
On a dollar basis, we expect Q2 will be slightly below the second quarter of 2019, and the second half of the year may look very similar to 2019.
As a reminder, Q4 of 2020 was especially strong, therefore, we will have a tough comparison in the fourth quarter.
With that, let me pass it back to Luca for closing remarks.
I am very pleased with ITT's results in the first quarter.
We see signs of a recovery in our end market, and our people continue to differentiate ITT from the competition.
We are leveraging and building upon the cost actions we executed in 2020 to drive solid incremental margins as sales volumes increase.
And we are investing our capital effectively.
As we said before, Friction continues to win in the marketplace and will be the springboard for growth in 2021.
This performance should continue throughout the year, notwithstanding some of the macro headwinds related to supply chain and rising raw material costs that we will need to manage effectively.
From an operational standpoint, we made further progress in our transformations at both Industrial Process and Connect and Control Technologies.
I'm encouraged by what I saw during my visits over the past few months and what I heard in my conversations with employees, customers and shareholders about the strength of ITT.
We also appreciate the partnership with our distributors and sales reps, working as a team with ITT to deliver these results.
We are laser-focused on growing ITT through acquisitions while funding high-return growth investments, and the momentum is accelerating.
Our financial health is as strong as ever, and this will allow ITT to effectively deploy our capital on all fronts.
We continue to deliver on our commitments, and Q1 has positioned us to surpass 2019.
With that, Stephanie, please open the line for Q&A.

user
q1 adjusted earnings per share $1.06.
q1 earnings per share $0.99.
qtrly organic revenue up 2%.
now expect revenue growth of 8% to 10%, or up 5% to 7% on an organic basis for 2021.
sees adjusted earnings per share of $3.80 to $4.00 per share for 2021.

assistant