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Text: Today's call will cover ITT's financial results for the three-month period ending October 2, which were announced yesterday evening.
These statements are not a guarantee of future performance or events and are based on management's current expectations.
Actual results may vary materially due to, among other items, the factors described in our 2020 annual report on Form 10-K and other recent SEC filings.
These adjusted results exclude certain nonoperating and nonrecurring items, including, but not limited to, asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items.
I am very pleased with the results ITT delivered in the third quarter.
Once again, the resilience of our businesses and our teams has allowed ITT to execute for our customers in a tough macroeconomic environment.
As a result of the revenue growth, continued margin expansion and the effective deployment of the balance sheet, ITT delivered adjusted earnings per share of $0.99, growing 21% over the prior year.
During the quarter, it was paramount that we stay focused on execution while cultivating the significant growth opportunities ahead of us, and this is exactly what we did.
In the third quarter, I continued to work our shop floors around the world to ensure we are taking full advantage of our opportunities.
I'm encouraged by what I saw firsthand as we are not even close to being done improving our operational and business excellence.
I saw the engineering expertise and prowess on display at the Friction plant and innovation center in Barge, Italy.
The productivity and automation opportunities at our KONI plant in Oud-Beijerland, The Netherlands and the energized high-performing goods pumps team I reconnected with in Dammam, Saudi Arabia.
I was also fortunate to visit our industrial process team in Tizayuca, Mexico, where we have a good low-cost manufacturing setup poised for future growth.
And lastly, our Friction plant in Silao, Mexico is continuing to add new production lines to support the wins in EVs and share gains on conventional vehicle platforms.
There is a lot to be excited about at ITT.
Let's talk about some of the key highlights from ITT's third quarter.
We drove broad-based sales growth across all three segments and implemented strategic commercial actions to minimize the impact of rising inflation.
We drove incremental productivity in the quarter, roughly 280 basis points through a combination of shop floor and sourcing actions, and we continue to apply strict controls over our fixed costs as growth resumes.
We thought to overcome a year-over-year $0.23 or 370 basis point raw material headwind.
Our ITTers delivered 60 basis points of adjusted segment operating margin expansion, an exceptional result, considering the supply chain dynamics we see.
We generated organic orders growth of 27% with strong demand in Friction aftermarket, rail, connectors and industrial controls.
We also continued to grow nicely in IP short-cycle and projects.
Finally, we put our capital to work, repurchasing an additional $50 million of ITT shares to bring our year-to-date repurchases above $100 million, exceeding our repurchase commitment for the full year.
These accomplishments and the dedication of our ITTers drove adjusted earnings-per-share growth of over 20% compared to prior year and 2% above 2019 pre-pandemic levels.
Looking at the businesses.
Despite the supply chain disruption, the restricted auto production volumes, Friction OE continued to outperform, while also driving strong aftermarket growth.
We continue to win on both conventional OE vehicles and on new electric vehicle platforms, which will power future outperformance as they transition to hybrid and ultimately to full electric accelerate.
This quarter, we won content on six new electric vehicle platforms in China, the world's largest automotive market.
This year, we have been awarded content on 25 new EV platforms and our win rate is significantly above our current global OE share of over 25%.
Electrification will be MT's next springboard for long-term growth given our strategic focus on EV platforms.
In Connect & Control Technologies, we drove 17% organic sales growth with strong demand in North America distribution, especially in the industrial market.
This, coupled with progress on CCT's operations, generated 17% adjusted segment margin for the quarter, putting the business closer to pre-pandemic levels.
Lastly, we generated 8% organic revenue growth in industrial process, driven by short-cycle demand across parts, valves and service.
This is remarkable, given the supply chain difficulties we are experiencing.
We see positive signs in our weekly order rate.
And as you will hear shortly, continue to see sequential improvement and market share gains in the long-cycle project business, which is an encouraging sign for 2022 and beyond.
One of the most telling metrics for ITT this quarter was the 27% organic orders growth.
Our order levels again surpassed 2019, even with many of our key end markets still early in their recovery, like commercial aerospace.
In Industrial Process, we generated double-digit growth versus 2020 in short-cycle across baseline pumps, part and service.
Q3 was also the third consecutive quarter of sequential orders growth in projects with 36% organic order growth.
As a result, IP's backlog was up $28 million in the quarter.
In Connect & Control, orders grew over 40% organically, including an encouraging 70% orders growth in aerospace and the strong performance in North America distribution.
Finally, in Motion Technologies, we generated strong demand in the Friction aftermarket and in KONI/Axtone, which more than offset a slight decline in friction OE due to the chip shortage impact on our OEM customers.
Even with these challenges, MT grew over 20% organically versus 2020 and 4% above 2019.
And for the year, we now expect MT to deliver over $1.3 billion in revenue, comfortably above 2019.
As we head into the fourth quarter, we are not anticipating any improvement in the global supply chain or with raw material pricing.
With our teams executing relentlessly against these challenges, we are narrowing and raising our full year adjusted earnings per share outlook for 2021 at the midpoint to reflect the strong performance to date and our ability to execute.
We now expect adjusted earnings per share in the range of $4.01 to $4.06 at the high end, which equates to 25% to 27% growth versus prior year.
This is a $0.06 improvement at the midpoint after a $0.37 increase through the first half of the year.
This puts ITT on pace to comfortably surpass 2019 adjusted EPS.
In September, ITT released the second supplement to our 2019 sustainability report, demonstrating the company's progress on our environmental, social and governance practices.
We are continuing to integrate ESG in our business strategy and the day-to-day operations of over 10,000 ITTers.
Some highlights from the report to note: we drove a 25% reduction in greenhouse gas emissions, and a 23% reduction in waste sand to landfills, with 25% fewer workplace safety incidents.
We are expanding investments in guarantee of origin certificates throughout our European locations to increase ITT's share of electricity from renewable sources.
We are investing in more sustainable product technologies, especially in our pump business, building on the success we have achieved in MT's copper-free brake pads.
As we conduct our operating plan reviews for 2022, ESG continues to be a key element of the leadership team's mandate and there is much more for us to do.
Thus far, we have deployed capital in an amount nearly three times our year-to-date free cash flow across all our capital deployment priorities.
Our capex for the year is approximately 3% of revenue through the third quarter.
We've invested in capacity in our Friction plant to support the share gains achieved with new and existing customers as it relates to the accelerated transition to electric vehicles.
We also continue to execute value analysis, value engineering to reinvigorate our product offerings in Industrial Process and Connect & Control.
From the inception of this initiative in 2018, we have commercialized more than 100 different pump models, representing 23% of our total product portfolio.
In addition, we completed redesign for more than 30 additional pumps ahead of their commercial release.
We have only begun to scratch the surface with more than 70% of the product offerings still to be addressed.
As an example of this effort, following the success of our BB2 pumps, our year-to-date order growth for our recently redesigned magnetic drive pump is 40%.
The VA/VE announcements resulted in increased performance, better reliability and shorter lead times.
Regarding our other capital deployment priorities, we increased our dividend rate by 30% after 15% the year before.
This represents an annual dividend yield of approximately 1%.
Our share repurchases this quarter will drive a 1% reduction in our weighted average share count for the full year.
We will continue to drive repurchase activity in the future and our existing $500 million authorization.
And lastly, as we discussed last quarter, we divested our legacy asbestos liability to a portfolio company of Warburg Pincus.
This has reduced ITT's risk profile and allows us additional capital flexibility.
To accelerate our M&A activity, we're investing in our capabilities.
Bartek leads strategy development and will drive all merger and acquisition activities, including ITT's newly launched corporate venture vehicle.
On this front, we made one initial venture investment in Q3 for Connectors-related assets.
And we have a growing pipeline of leading technologies to enhance our existing product portfolio.
We have stepped up our M&A pipeline and cultivation activities and are looking forward to bringing great companies into ITT in the near future.
Emmanuel, over to you.
As you heard, Motion Technologies again delivered a solid performance, driven by strength in the Friction aftermarket.
In our OE business, Friction's market outperformance was over 1,000 basis points this quarter, significantly above our historical average despite large declines in global auto production levels.
For all of ITT, we estimate that the supply chain disruptions deducted approximately 350 basis points from our sales growth this quarter.
However, we expect to recover a majority of the pushed-out sales in the next few quarters.
We also saw double-digit organic sales growth in IP short-cycle and continued strong demand for industrial connectors.
And similar to what we saw in Q2, demand in commercial aerospace is increasing as exhibited by the 70% growth in aerospace orders.
On segment margin, CCT grew margin by 300 basis points and IP by 150 basis points, while MT declined 110 basis points, mainly due to raw material inflation.
We overcame a 470 basis point inflation headwind to drive 60 basis points of adjusted segment margin expansion.
On adjusted EPS, despite the challenges Luca highlighted in his introduction, we drove a $0.42 operational improvement year-over-year through a combination of higher sales volumes, strategic pricing actions and productivity across the enterprise.
We continue to realize benefits from prior restructuring, including our 2020 cost action plan, and we're carefully managing the unwinding of temporary cost actions taken in 2020 to ensure these costs align with the pace of ITT's recovery.
We achieved an adjusted trailing 12-month free cash flow margin of more than 11% this quarter, due to higher segment operating income.
On a year-to-date basis, excluding the asbestos payment in Q2, adjusted free cash flow declined by -- driven by strategic investments in working capital.
As I mentioned earlier, our performance this quarter was largely operationally driven.
Our year-over-year growth was significantly impacted by $0.23 headwind related to raw material inflation and a $0.09 headwind from prior year environmental settlements and temporary cost actions.
Partially offsetting these items was a roughly $0.04 benefit from foreign currency.
We also realized a slightly lower effective tax rate versus the prior year, which drove over a $0.02 benefit.
This was due to effective tax planning strategies related to our patent portfolio abroad.
We now expect our full year effective tax rate to be approximately 20.75%.
Motion Technologies Q3 organic revenue growth of 20% was primarily driven by strength in the aftermarket as the Friction OE business declined slightly given the supply chain headwinds affecting OEMs. This and the raw material inflation also impacted operating margin as we had signaled last year -- last quarter.
The Friction team is working diligently with our customers to drive equitable price recovery action, given the significant inflation we are seeing today.
We were able to pass price increases on to our customers this quarter and manage the impact of contractual price concessions.
However, there is much more to be done to compensate for the inflation we are experiencing.
Our Motion Technologies team will continue to methodically execute incremental pricing actions in Q4 and 2022.
We also experienced significant production inefficiencies resulting from large variations in customer orders patterns.
However, as with last quarter, our Friction OE business executed very well with over 99% on-time performance across all Friction plants.
In challenging economic conditions, Friction continues to be widely recognized as the quality -- as the highest quality and most reliable supplier in the market.
And in KONI, we continue to improve our quality performance and remain deeply focused on serving our customers amid supply chain disruptions.
Finally, we also continue to evaluate strategic footprint actions and announced one additional plant closure in Europe this quarter, which will drive further cost competitiveness within our rail business.
For Industrial Process, revenue was up 8% organically.
This was driven primarily by short-cycle demand across parts, valves and service.
Serving our customers this quarter require tremendous focus, coordination and effort by the IP team to overcome supply chain disruptions.
Our all-hands-on-deck approach made this happen.
As we signaled last quarter, we see the project funnel continuing to grow and IP was able to capture a significant share as evidenced by the 36% organic order growth in project this quarter.
We see this constructive momentum continuing and expect to deliver similar year-over-year growth in Q4.
IP margin expanded 150 basis points to 15.6% with an incremental margin of 33%, this was driven by higher sales volume, favorable mix, given the higher proportion of short-cycle sales, productivity and price, partially offset by labor and material inflation as well as higher freight charges given shipping delays.
Similar to MT, we're making progress on footprint optimization and have executed one plant closure during the quarter with another plant in Brazil in Q4.
In Connect & Control Technologies, we continued to drive a recovery from both the sales and margin perspective.
With incremental margin of 35%, CCT generated segment margin above 17%.
This is a 300 basis point improvement over prior year.
The margin expansion was the result of continued volume leverage and strong productivity, including restructuring savings, despite inflationary headwinds.
This margin profile is approaching pre-pandemic levels, but with approximately $20 million less in revenue.
While there is much work to be done to further solidify this performance, we are very encouraged by the work the team has done thus far and it gives us confidence in the future prospects at CCT.
As you can see, our teams have done a good job capturing the demand, leading to solid order growth in Q2 and Q3.
A few highlights to note.
It is important to note that our ability to win a majority of the EV competitions that we bid on is key to creating the long-term growth platform that Luca talked about.
Second, in Industrial Process, the strength we anticipated in short cycle is materializing.
But even more encouraging is the order growth and continuing recovery in long cycle pump projects.
Both the number and the size of orders in the funnel is increasing, and we have seen a steady sequential order increase throughout 2021.
This is the result of our relentless focus on customer centricity and operational excellence, which is increasingly recognized by our OE customers.
Third, CCT orders were up 40% organically in -- on the strength of our connector portfolio, particularly in North America.
The commercial connector performance, especially with our distribution partners is encouraging, and we're working to replicate the strong momentum across all our customers.
We also continue to see a gradual recovery in commercial aerospace, which will further bolster the sales growth in CCT over the next several years.
CCT backlog is up 17% organically or $40 million since year-end with a book-to-bill of 1.06.
This is a notable improvement for CCT since this time last quarter.
Through two quarters we had raised our organic sales outlook by 600 basis points and adjusted earnings per share by $0.37 versus the midpoint of our original guidance.
Given our strong performance, today, we are again raising the midpoint of our adjusted earnings per share range by an additional $0.06 to reflect the stronger-than-anticipated results and lower tax rate.
We're not anticipating any improvement in the market headwinds in the near term.
Nevertheless, in 2021, we expect to comfortably exceed pre-pandemic adjusted earnings per share levels.
IP will grow revenue in the low single-digit range, while CCT will drive mid-teen percent revenue growth.
Facing a tough comparison after a strong Q4 last year and the continued impact from constrained OEM demand, MT revenue will decline by mid-single digits in Q4.
However, we expect to largely outperform the global auto market.
In total, this will drive approximately flat to slightly up organic revenue growth in Q4.
From a segment margin standpoint, we expect all businesses to expand sequentially with CCT growing triple digits and IP building on its strong Q3 performance.
Year-over-year we expect segment margin to grow approximately 50 to 75 basis points.
Because of an exceptionally strong Q4 last year, Q4 adjusted earnings per share will grow in the low single-digit range year-over-year, and this will drive full year adjusted earnings per share above 2019.
With that, let me pass it back to Luca.
Let me wrap it up.
First, ITT has performed extremely well in a challenging climate.
We fought through adversity, and we're winning in the market.
Second, we have a resilient set of businesses that have demonstrated over and over again the ability to effectively manage multiple external factors while investing in long-term growth.
We delivered strong growth in revenue and margin, while not all of our markets have fully recovered yet.
Third, while we are continuing to invest for long-term growth and sustainability, our funnel of opportunities is increasing, and the growth in orders throughout 2021 will pave the way for continued outperformance.
Lastly, we have deployed over 2.8 times our year-to-date adjusted free cash flow through our asbestos divestiture, dividends and share repurchases.
And we are increasing our focus on M&A, we are in a favorable position to execute acquisitions given our balance sheet strength, and we are growing our pipeline and expanding our target cultivation activity.
As I said earlier, there is a lot to be excited about at ITT.

user
q3 adjusted earnings per share $0.99.
sees fy revenue up 11 to 13 percent.
raised its full-year 2021 guidance.
expect full-year 2021 adjusted earnings per share of $4.01 to $4.06 per share.

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