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Text: This is Emmanuel Caprais.
Our adjusted non-GAAP results exclude certain nonoperating and nonrecurring items, including, but not limited to, asbestos, restructuring, asset impairment, acquisition-related items, and certain tax items.
All adjustments in the quarter are detailed in the reconciliations.
Before we begin, I'd like to provide a brief overview of our Q2 GAAP results compared to prior year.
Q2 total revenue decreased 29% to $515 million.
Segment operating income decreased 65% to $37 million and earnings per share of $0.53 decreased 29%.
Free cash flow increased 205% to $169 million.
Please note that our remaining discussion will primarily focus on non-GAAP or adjusted measures unless otherwise indicated.
Actual results may vary materially.
All such statements should be evaluated together with the safe harbor disclosures and the other risks and uncertainties that affect our business, including those disclosed in our SEC filings.
I truly hope that everyone stays safe as we continue to adjust to the widespread repercussions of the COVID-19 pandemic.
I'm also very grateful to our shareholders for their support.
On our Q1 call, we highlighted our 2020 focus to strengthen ITT's resilience and to drive aggressive cost actions while playing offense for the future.
And this is exactly what we did in Q2.
We delivered a 25% segment decremental margin.
We accelerated and increased our cost and spend reduction actions to $160 million.
We generated record free cash flow of $169 million.
We bolstered our liquidity to $1.4 billion, and we signed an LOI to acquire a niche European rail company.
Building on this strong foundation, we will continue to drive operational execution that further reduces decremental margins while fueling future growth opportunities.
We can only truly demonstrate our resilience through actions and results.
Today, we will also give our understanding of the markets that we serve and our expectations for the balance of 2020.
Before going into Q2 highlights, a word on safety.
Safety is my top priority.
And when I talk weekly with our facilities across the world, I'm energized by the accomplishments of our teams who diligently and effectively execute our health protocol.
This enabled us to contain the global number of infections to fewer than 70.
Now let's turn to our Q2 results.
We focus on what we control and produce better results than expected.
During the second quarter, ITT's resilience, the resolve of our teams and our pivot to play offense were on full display.
From a financial perspective, we delivered solid earnings per share of $0.57, exceptional segment decremental margin of 25%, record free cash flow of $169 million representing a significant growth of 205% or $114 million.
And segment working capital reduction of 210 basis points compared to prior year and 100 basis points compared to the first quarter.
Operational excellence is a fundamental pillar of ITT's long-term success.
And during the month of June, I was able to experience it first-hand over and over again when visiting our Seneca Falls plant and seven facilities in Europe.
SFO operational improvement enabled industrial process to deliver a 13.7% adjusted operating margin.
This is 120 basis point expansion versus prior year despite a revenue decline of 17%.
The 13.7% margin also represents an improvement of 240 basis points over Q1.
We moved quickly to take out costs and we are progressing nicely toward our long-term 15% plus margin target.
IP continues to impress with strong operational execution, and as an example, the NC line at Seneca Falls achieved above 90% on-time delivery for the tenth consecutive month.
Whilst in Europe, I was also pleased to see all the Kaizen projects we have under way to improve our operations.
Being an assembly line efficiency workshop in KONI Oud-Beijerland or boosting output in Axtone, Stalowa Wola in Poland.
Last but not least, in Barge, our Friction teams continue to improve our manufacturing processes by repurposing and driving the utilization of existing equipment.
All across ITT, we drove high levels of operating efficiency at our manufacturing plants in Asia, Europe, Middle East and the Americas.
And lastly, this operational excellence combined with our speed in execution enabled us to accelerate and boost our cost reduction plan, adding $25 million of new actions that increase our target to $160 million.
All of the operational excellence was possible because all our leaders get our people safe through the adoption of rigorous health protocols.
On customer centricity, our teams passionately serve our customers, and we're creative in satisfying increasingly demanding requirements, showing in actions, once again, that our customers are our priority.
Momentum in Friction OEM share gain continued.
In the first half of 2020, we outperformed the global market and each of our main regions.
And based on platforms ramping in the second half, we continue to expect to outperform global markets by 700 to 1,000 basis points this year.
Our end ordering unit grew new business awards by 94% in the quarter.
The improvement that Logan and his team executed have put this business back on a growth trajectory.
IP grew organic pump project orders by 22%.
Project orders were consistent with the level reached in the first quarter.
As a result, our backlog at the end of Q2 was up 3%, excluding foreign exchange compared to the beginning of 2020.
The the project order performance is an emerging sign of customers' recognition of IP's operational improvement and the innovation in our products.
IP customers were also delighted by Seneca Falls' 95% plus baseline pumps delivery performance during Q2.
This outstanding delivery performance pairs nicely with the rest of our U.S. facilities and our Korean and Saudi plants.
This level of execution mirrors the Motion Technologies' playbook where our friction business maintained 99% on-time delivery performance despite operating in areas hit hard by COVID-19.
Lastly, on capital deployment.
Our effective capital deployment strategies consolidated and protected our outstanding liquidity position.
This will enable us to continue to invest in future growth opportunities as we pivot to play more often.
Today, we have $1.4 billion of available liquidity, and we have ample capital to fund all our operational needs and investments and position us to take advantage of other strategic opportunities.
And we continue to protect our cash position through daily and weekly cash reviews, and we added a record $169 million cash flow year-to-date.
While we play offense for the future, we will continue to strictly control our capital expenditures.
In Q2, we reduced capex by 25% compared to prior year, and our tracking to our $35 million reduction target for the full year.
Our strong liquidity position enabled us to weather the present storm while we sow the seeds of future growth.
We will continue to invest in smart and energy-efficient applications that will drive revenue growth in the long term.
In 2020, the ITT Smart Pad is making new inroads in both aftermarket and OE customers.
And at IP, we are currently testing a revolutionary energy-efficient power source for our pumps.
Lastly, on capital deployment, we signed an LOI for a new niche rail acquisition as we continue to build out this long-term growth platform.
All of these actions executed with speed, helped us deliver the Q2 results provided on slide four.
Segment operating income margin of 12.6% despite the revenue decline.
We delivered this margin through strong operational execution and fast and decisive trust actions that produce segment decremental margin of 25% and an EBIT decremental margin of 20%.
We achieved 52% corporate spend reduction versus prior year.
EPS of $0.57 per share was ahead of our expectations and declined 35%, excluding unfavorable FX of $0.03.
And lastly, we generated $169 million of free cash flow year-to-date, representing a 205% improvement over the prior year.
In summary, we delivered a solid second quarter in a difficult environment by executing decisive action early and with speed.
Let's start on slide five with Motion Technologies.
MT organic revenue declined 35% due to wide-ranging auto production shutdowns impacting our Friction and Wolverine businesses.
In the quarter, Friction declined 42%.
However, for the first half of 2020, Friction outperformed each of our major OEM auto markets.
In North America, we outperformed by 1,000 basis points.
In Europe, we outperformed by 400 basis points.
And in China, we outperformed by 1,600 basis points.
As discussed during our Q1 call, we expected Q2 top line results to be impacted by unfavorable customer order phasing.
Nonetheless, we continue to project 700 to 1,000 basis points of global OE outperformance for the full year as new platform awards enter the production phase in the second half.
Wolverine declined 38% in the quarter, but was able to deliver 800 basis points of outperformance for the first half.
And finally, KONI and Axtone revenue decreased 9% as solid Europe OE rail growth, partially offset lower aftermarket revenue in North America and Asia.
MT's adjusted segment operating income declined 57% to $24 million due to volume declines and unfavorable FX of $2 million.
However, MT successfully contained decrement margins to 27% due to increased manufacturing efficiency, proactive plant shutdowns, restructuring benefits and aggressive discretionary cost actions.
The 27% decremental margin improved sequentially and is also much lower than the decremental margins during the 2008, 2009 recession, reflecting the true resilience of today's MT. MT delivered solid Q2 margin of 12.2%, mainly reflecting the volume decrease.
Axtone continued to expand margins both compared to the prior year and to the first quarter, and Friction China almost returned to pre-COVID-19 margin levels.
Continuing restructuring actions in the second half will further bolster MT's structural competitive advantages, which are the foundation for our continued market outperformance.
And these reductions will also help to improve decremental margins in the second half.
It is also worthy to note that MT improved working capital by 120 basis points and produced record operating cash flow.
And lastly, from an award perspective, both Friction and Wolverine continued to gain share with key conquer wins and new platform wins, both on conventional and electric vehicles.
These awards continue the share gain momentum that will power MT's significant outperformance in the global markets we serve well into the future.
Let's now turn to industrial process on slide six.
IP delivered outstanding results considering the challenging environment.
Organic revenue was down 17%.
However, margins expanded 120 basis points compared to the prior year and 240 basis points sequentially.
The IP revenue decline was driven by lower project revenue due to large project shipments in the prior year.
Short-cycle revenue was up 4%, mostly driven by lower industrial valve activity, more than offset relatively flat aftermarket and baseline activity.
Organic orders for the quarter declined 9% as 22% growth driven by general Industrial market share gains was partially offset by reduced capital investments across major markets due to COVID-19.
IP's backlog at the end of Q2 was up 3% excluding foreign exchange versus the beginning of 2020, providing solid visibility into the second half of 2020.
Operating income declined 9% to $26 million, as George and the IP team confined decremental margins to a near 6%.
This was a major accomplishment driven by proactive measures taken in late Q3 of last year and rapid restructuring actions implemented in 2020.
And as a result, IP segment operating margin grew 120 basis points to 13.7%.
This operating margin performance was driven by mix, restructuring and sourcing benefits, continued strong project execution, price and government incentives, more than offsetting the impacts of volume declines and increased customer payment risks.
Working capital improved 760 basis points as the IP and shared services teams were hard at work securing payments from customers and deleveraging the balance sheet.
IP's resilience reflects the Motion Technologies business approach as global on-time performance and product portfolio redesign accentuate differentiation with customers.
IP will continue to reduce costs in the second half as we implement new restructuring actions and execute on footprint optimization projects.
Now let's turn to CCT on slide seven.
CCT organic revenue declined 29% and weakness across all major end markets.
The steep reduction in air traffic lowered commercial aero demand and caused a major slowdown in OE build rates that was further compounded by the specific challenges related to the 737 MAX requalification.
Our Industrial Process business experienced a 7% decline and distribution inventory adjusted to lower levels of activity and medical connector surge in demand to accommodate COVID-19 patient care.
Operating income declined 55% on the volume drop and margins declined to 11.1%.
The primary drivers of the declines were volume impacts in COVID-19 and OE production weakness.
These impacts were partially offset by strong productivity, restructuring actions, government incentives and lower materials inflation.
We expect volatile market conditions to persist for the balance of the year affecting OE build rates at airframes.
CCT's decremental margins of 35% improved sequentially from Q1 and reflected aggressive restructuring actions executed by the business.
CCT executed a footprint move in Q2 and will continue to drive product line transfers to lower cost regions and additional restructuring for the balance of 2020 as a part of the comprehensive operational reset designed to better align with current demand expectations.
So now I'll turn it to Emmanuel, our future ITT CFO.
For an update of our cost actions, liquidity and balance of the year expectations, starting on slide eight.
As you can see here, in 2020, we are laser-focused on what we can control.
And we implemented aggressive and large restructural cost actions in all of our businesses as well as our corporate at the onset of the pandemic to protect margins and to produce strong free cash flow performance.
In Q2, as a result of this focus, we increased our savings target of $260 million, exceeding the original guidance that we communicated during Q1.
We have already executed a large portion of our restructuring plan, and the remaining actions will mostly take place in international regions in the second half.
We are also detailing incremental actions across ITT as part of our increased cost target of $160 million.
Specifically, we added annualized savings coming from our global industrial footprint optimization, mainly dealing with IP production facility.
We already announced one closure and the relocation into a larger production site is scheduled for Q4 this year.
We continue to prepare plans for additional consolidations.
And our discretionary spending cuts were very impactful in Q2, and we will exceed our original target for the year.
Finally, we reduced capex by 25% in Q2 and continue to track to our overall target of $35 million reduction.
We remain flexible on our capex strategy and continue to focus the reduced capital allocation toward productivity and targeted growth projects.
Overall, as a result of the great progress made to date and the decisive incremental actions we took, our 25% decremental margin in Q2 has significantly improved from Q1, and we now expect total segment decremental margin in 2020 to range between 22% and 28%.
Now on slide nine.
We ended the quarter with liquidity of $1.4 billion, which was significantly strengthened compared to Q1.
Our balance sheet and liquidity position are key strength of ITT, and this provides us the ability to effectively deploy capital when opportunity materialize and value creation targets are achievable.
From a cash flow perspective, we continue our strict routines to monitor collections and other working capital improvements on a daily basis.
We scored some good wins with customers and our collections in Q2 helped generate a record $169 million of free cash flow year-to-date.
This represents an increase of 205% versus the prior year.
We also collected significant past due receivables early in July with key customers to continue our successful receivable harvesting actions.
We optimized segment working capital by 210 basis points year-over-year, and we have more opportunities to further improve in the second half, especially regarding inventory at MT and CCT.
However, we also expect demand to increase sequentially at MT and IP which will start to weigh on our second half receivables.
Based on this, we are now targeting a free cash flow margin of more than 11% on for the full year, which is 160 basis points better than prior year.
The next few quarters will continue to be unpredictable, even though the visibility has improved compared to 90 days ago.
As a result, we will continue to suspend formal guidance until demand certainty improves.
But let me provide some perspectives on how we see the year playing out for the balance of 2020.
We expect gradual sequential improvement in the second half, but still expect high-teen revenue year-over-year declines, mainly driven by CCT.
Despite improving passenger air traffic in Q3, we do not see commercial aero production rates materially improving sequentially.
However, we expect defense revenue to pick up compared to the first half on the back of improved project order intake.
We expect auto production rates to improve sequentially, reflecting a market decline of approximately 25% for the full year.
We also reaffirm that our Friction OE business will outperform this global market decline by 700 to 1,000 basis points for the full year.
Sequentially, in Q3, we expect MT revenue to improve more than 20% versus Q2 with further improvement expected in Q4.
This MT revenue growth, combined with our aggressive cost actions will fuel solid sequential margin expansion in Q3 and Q4.
We expect IP revenue to be consistent with Q2 levels in Q3 and show modest sequential growth in Q4.
Finally, we expect corporate expenses in Q3 and Q4 to be similar to Q1.
Overall, we have not integrated in our forecast another global lockdown like we experienced in Q2.
Even though we have seen improvements in June and July from certain end markets, we expect the sequential recovery to be erratic because of COVID-19.
We expect Q3 earnings per share to show mid-teens sequential improvement.
The gradual improvement will come from cost actions combined with gradual market recoveries.
We are now targeting segment decremental margins of 22% to 28% for the full year.
And finally, from a free cash flow standpoint, we're targeting more than 11% of free cash flow margin.
Q2 has been a very demanding quarter.
And I'm very proud of ITTiers' achievement when it comes to our customers.
We serve them even better than before by assisting them in navigating this crisis and delivering our products safely and on time, day after day.
For our ITTiers, we kept our people safe by rigorous respecting health protocols.
For our communities, the civil right movements have been an inspiration to us all.
At ITT, we reject racism.
Racism has no place at ITT, full stop.
We at ITT, are upstanders and live by the principles of diversity, equity and inclusion.
And we're taking concrete actions to make ITT a better workplace.
And for our shareholders, we delivered record free cash flow and aggressively reduced costs to limit the impact of lower demand.
We're already playing offense and using our strong competitive position to our advantage.
We will continue to focus on what we control and drive of operational excellence, customer centricity and effective capital deployment.
These are our value-creation drivers.
As you are aware, Tom will be stepping down as ITT's Chief Financial Officer as of October.
At this time, he and Emmanuel Caprais, who will be succeeding him as ITT's next CFO, are working closely on the transition.
You should know that it was Tom and I who recruited Emmanuel in 2012.
This is when our partnership started.
I want to express my deepest appreciation to Tom for all he's done for ITT, for our customers, our ITTiers, and of course, our investors.
Tom has been with ITT since 2006 and was named CFO in 2011 as we navigated the spin-off.
Since that time, under Tom's leadership, among many others accomplishments, ITT's market value tripled.
I'm sure that many of you have gotten to know Tom professionally during his time with ITT.
He has spent a lot of time with many of you in all of his roles here.
By my calculations, Tom has made more than 50 quarterly earnings calls.
Also between conferences and other meetings, he has been part of more than 1,700 investor and analyst meetings during his tenure as CFO.
That number is even higher when you consider all the interactions he had with many of you up until he became CFO.
But for those of you lucky enough to have gotten to know Tom personally, you also know that he is not only a special finance leader, but a truly special person who cares about people and who always bring a fresh perspective.
And he does it with a great sense of humor.
I found his counsel and partnership during our time working together to be invaluable.
When I was getting ready to start into my new role as CEO, ITT provided some provided me some coaching on the IR side.
Still, I can tell you today that the best coaching was in working day in and day out with Tom.
And listening to his perspective and absorb from his experience.

user
compname reports q2 adjusted earnings per share $0.57 from continuing operations.
q2 adjusted earnings per share $0.57 from continuing operations.
q2 earnings per share $0.53 from continuing operations.
q2 revenue fell 37 percent to $199 million.
qtrly earnings per share $0.53.
qtrly organic revenue decreased 28% mainly as a result of negative global impact of covid-19.
strong available liquidity of $1.4 billion as of june 30, 2020.
targeting full-year 2020 adjusted decremental margins in range of 22% to 28%.

assistant