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Text: This is Alex Sherk.
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 Q3 GAAP results compared to prior year.
Q3 total revenue decreased 17% to $591 million.
Segment operating income decreased 22% to $84 million.
Regarding EPS, we took our net asbestos liability to a full-horizon estimate, resulting in a noncash expense equivalent to $1.20, the main driver of the $0.55 earnings per share loss.
Free cash flow increased 77% to $271 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 other risks and uncertainties that affect our business, including those disclosed in our SEC filings.
I truly hope that everyone stays safe.
And to make sure we continue to operate safely, we're implementing our ready, safe, go program across ITT based on the successful containment strategy first developed by our Asia Pacific team.
Today, we will present the results of ITT'ers' relentless efforts to drive our performance and fortify our resilience.
During the last few years, we at ITT have elevated the strategic standing of execution.
Q3's outstanding results are the proof of this and also a testament to our strengthening momentum toward full recovery.
Last quarter, we highlighted our focus on protecting our employees and supporting our communities while providing superior service to our customers with flawless execution.
We also committed to delight our shareholders with record cash flow generation and timely cost actions while playing offense for the future.
This is exactly what we continue to do in Q3.
We delivered record ITT operating income margin of 15.4%.
We grew 92% sequentially in Friction OE sales.
We delivered 19% segment decremental margin and 40% segment incremental margins sequential to Q2.
Lastly, we generated record free cash flow of $271 million.
We are firmly on the road to recovery.
ITT's execution capabilities and our unprecedented granularity delivered higher volume than expected, increased top line sequentially, and through strict fixed cost controls, produced an ITT record quarterly margin performance.
We achieved our highest-ever quarterly operating income margin and our highest-ever year-to-date free cash flow.
This is even more remarkable given the current macro environment.
We will also provide our perspective on the markets we serve.
Before going into Q3 performance, I'd like to highlight our safety record.
Safety is, without a doubt, my top priority.
We have made tremendous progress in all our businesses.
Year-to-date, we reduced the number of incidents by 30%.
Our injury frequency rate is 0.8%, and 50% of our sites have been incident-free for more than a year.
I'm grateful to our teams for their accomplishments and for keeping our people safe.
Now let's turn to our Q3 results.
On the road to recovery, we focus on what we control and broke some records along the way.
We delivered solid earnings per share of $0.82, up 44% sequentially, strong segment operating income margin of 16.2%, up 360 basis points sequentially; record operating income margin of 15.4%; and record free cash flow of $271 million, representing a growth of 77% or $118 million versus prior year.
From an operational excellence standpoint, we continued our journey of betterment.
Our productivity and cost actions helped to offset the impact of materially lower volumes.
In the third quarter, I was very fortunate, I was able to visit many of our sites in Europe and the U.S. Let me tell you, we have many opportunities, and we will go after them.
I also experienced the progress made firsthand, progress that helped us to deliver 14.1% operating margin at IP.
This is the highest Industrial Process Q3 margin ever, and we continue to confidently progress toward our long-term 15% plus margin target.
The breadth of the operational improvements delivered by George and his team is impressive, not only because of the quality of execution, but also because of the care they put into structurally resetting IP for the long term.
We are actively shaping our manufacturing footprint and redesigning our product portfolio to establish a lasting competitive mode and superior margin performance for IP in the years to come.
This 14.1% margin performance represented 120 basis point expansion versus prior year, and 40 basis points higher than Q2 this year.
Our progress was also evident when I was with the MT team in Barge.
Motion Technologies delivered a strong operating margin at 18.5%, up 630 basis points versus Q2 and only 30 basis points below prior year.
We continue to drive productivities through our factories, and China and Mexico, in particular, keep on impressing with margins near all-time highs.
At CCT, I was encouraged by the many Kaizen events running in our Valencia site.
And all across ITT, we drove high levels of productivity that produce significant segment margin expansion compared to Q2.
These operational excellence, combined with our speed and execution, enabled us to accelerate working capital reduction and post a year-over-year 180 basis points improvement.
On the customer front, our teams continue to focus on serving our customers with utmost dedication, showing through their actions that our customer-centric approach is a way of life at today's ITT.
Our Friction OE sales grew 92% sequentially, and the momentum in shared gains continued with each one of our main regions outperforming global production year-to-date, including over 1,000 basis points of outperformance in North America and China.
While we still experience inventory adjustment issues in Europe with certain customers in the first half of Q3, we saw encouraging signs in auto OE production, particularly in September and October.
We now expect Friction OE outperformance for the full year at the lower end of our expectations based on the timing of new platform ramps in the fourth quarter.
IP grew organic short-cycle pump orders by 14% sequentially on the back of strong part, which improved gradually during the quarter and showed year-over-year growth in September.
IP delivered a book-to-bill of 1.
And as a result, our backlog at the end of Q3 was up 6%, excluding foreign exchange compared to the beginning of 2020.
IP continues to lead in on-time delivery performance.
Today, our customers know they can rely on us to deliver top-quality Goulds Pumps on time at a competitive price and consistently.
This is a key differentiator.
We've been talking a lot about Seneca Falls' 95% plus baseline pumps delivery performance for the last 12 months.
And I want you to know that today, the rest of our facilities have been performing at an industry-leading level as well.
Finally, at CCT, we have been busy playing offense and finding new ways to partner with our customers.
Our elastomeric rotorcraft business has been nominated on the next U.S. military reconnaissance helicopter code named FARA.
This is a major recognition for our rotorcraft business, which we created organically just a few years ago.
And our composites business is finalizing a strategic partnership with a large aircraft engine manufacturer that we propel our Matrix business to new top line heights.
The team at CCT has been working hard to adjust our cost structure to the new aero market conditions, and at the same time, looking for growth opportunities by showcasing our engineering prowess.
I was at our Valencia facility last week, and I was impressed by our new state-of-the-art sound chamber capabilities as well as our new product pipeline.
Lastly, on capital deployment.
We continue to drive cash generation through working capital efficiency and strict capital expenditure focus, further strengthening our liquidity.
As a result, we are raising our free cash flow margin target to a range of 13% to 15% for the full year.
Today, we have $1.5 billion of available liquidity, and we have ample capital to fund all of our operational needs and investment, and position us to take advantage of other strategic opportunities.
Our strong liquidity position prepares us well for what's ahead, whether it is facing headwind or surfing tailwinds.
Finally, in October, we successfully terminated and transferred our U.S. pension plan.
This will not only provide our pension eligible employees great service but also reduce ITT's administrative costs and eliminate any future funding requirements.
Let's now look at our Q3 financial results provided on slide four.
We produced 16.2% segment operating income margin.
We delivered these margins through productivity and aggressive cost actions that produced segment incremental margin of 19%.
We continued to drive down corporate costs and delivered an approximately 20% structural run rate reduction versus prior year.
EPS of $0.82 per share declined 15% and was ahead of our expectations.
And on cash, we generated $271 million of free cash flow year-to-date, up 77% versus prior year.
Our trailing 12-month free cash flow margin now stands at a record 15.4%, a sequential improvement of 80 basis points.
ITT'ers delivered strong Q3 results versus 2019, and these results are even stronger when we look sequentially.
Switching to our sequential performance on slide five.
Our segment operating income jumped 48%, an impressive growth compared to an organic revenue increase of 12%.
This is the result of our business stepping up efficiency and cost actions as we continue to focus on what we control and benefit from operational leverage from a permanently lower fixed cost base.
Our revenue growth was driven by a 92% increase in friction sales OE, mainly coming from outperformance in China and North America.
Similarly, earnings per share grew 44% sequentially despite a onetime environmental benefit realized last quarter.
Whilst recovery remains uneven across market, whichever way you choose to look at our financials, ITT's businesses delivered outstanding third quarter results.
Let's start with Motion Technologies on slide six.
Organic revenue declined 13% on lower order production rates and slower activity in the rail segment due to reduced passenger traffic.
In the quarter, Friction OE sales were nearly flat to the prior year.
This is a strong showing with China and North America growing 11% and 14%, respectively, which was offset by Europe, where we experienced destocking with some Tier one customers.
Sequentially, Friction OE sales skyrocketed 92%, gradually accelerating during the quarter to show mid-single-digit year-over-year growth in September.
Segment operating income declined 12% to $50 million.
MT successfully improved decremental margins to 21%.
And sequentially, operating income increased 107% with 36% incremental margin performance.
We drove operating income recovery through productivity and restructuring actions.
Motion Technologies delivered outstanding Q3 margins of 18.5%, 30 basis points lower than the prior year, but increased 630 basis points sequentially.
These results were fueled by strong performance in Friction China, which produced its highest margin since Q1 2018, and Friction Mexico is now approaching pre-pandemic margin levels.
The MT team delivered above our expectations given the revenue decline versus prior year.
In Q4, we expect to deliver margin expansion versus prior year on the back of continuing restructuring actions and productivity as well as low single-digit organic revenue declines.
These structural cost actions add to MT's many competitive advantages, material science leadership, best-in-class quality and fastest lead times, all of these together form the foundation for continued outperformance.
And lastly, from an award perspective, both Friction and Wolverine continued to gain share with Conquer wins and new platform wins like the 15 new electric vehicle platform awards in the quarter.
Moving on to Industrial Process on slide seven.
IP clearly demonstrated the resilience of its business model considering the challenging environment.
With 14.1% operating margin, IP expanded 120 basis points compared to the prior year despite an organic revenue decline of 19%.
Sequentially, the growth was 40 basis points on flat revenue.
The IP year-over-year revenue decline was driven by short-cycle bookings during the height of the pandemic last quarter.
Lower project revenue is mainly due to large prior year chemical shipments related to the expansion of plastic production capacity in North America.
Organic orders for the quarter declined 17% coming from 33% lower project bookings and 12% short-cycle decline versus prior year.
Parts orders recovered gradually during the quarter and posted year-over-year growth in September.
IP's book-to-bill of one in Q3 and year-to-date backlog growth of 6%, excluding foreign exchange, provides solid revenue visibility into next quarter.
Operating income declined only 12% to $27 million despite significant revenue declines.
Our proactive cost actions, shop floor and sourcing productivity resulted in best-in-class decremental margin of 8%.
IP will continue to benefit from our footprint optimization strategy.
And in October, we completed step one of our European footprint project and announced a new facility closure.
Industrial Process segment operating margin of 14.1% was driven by productivity and cost control, sourcing and restructuring actions amid a decline in revenue.
IP continued to fund innovation such as the new diagnostic capabilities added to our i-Alert remote monitoring platform and our product portfolio redesign projects.
Let me expand on our BB2 pump redesign project as it demonstrates our strategy of playing offense.
As you know, we have been hard at work improving our large chemical pump design to reduce materials content, improve manufacturability and source components from best cost regions while improving hydraulic performance.
This design has generated so much interest from our customers that we booked 43% higher orders year-to-date than for the entire 2019.
To date, we generated large sourcing savings, and the team has established a long-term supplier strategy that will put IP on a path to supply chain excellence for years to come.
Finally, IP improved working capital by 800 basis points as we reduced AR past dues by more than 20% and inventory by 14%.
We continue to see more opportunities to further reduce inventory as we consolidate footprint and optimize materials management -- materials planning management.
IP finished the quarter with 19% working capital as a percent of sales.
IP's outstanding performance reflects the multiyear strategy that we outlined back in 2017 and that we are faithfully executing as we advance toward our long-term margin target of 15% plus.
We expect to produce a similar margin in Q4 as sequential volume increase is driven by large project shipments.
Let's complete the overview of our segments with CCT on slide eight.
CCT organic revenue declined 26% on weakness across our major end markets.
The steep reduction in passenger traffic lowered commercial aero demand and continues to cause a major slowdown in OE build rates.
We are also impacted by the specific challenges related to the 737 MAX requalification process.
Our CCT industrial business experienced only a 2% decline as our distribution partners reduced excess inventory and adjust to lower levels of activity.
Our BIW, oil and gas connector business, was impacted by reduced North American shale production and lingering difficulties with customer site access and service deliveries in the Middle East.
However, we were able to gain share in that region on the back of better quality and delivery performance, and our year-to-date orders are up 30% year-over-year.
Operating income declined 40% on the volume drop, and margin of 14% showed an improvement of 300 basis points over Q2.
The primary driver of the decline versus prior year was volume impacts from aero weakness.
These impacts were partially offset by shop floor productivity, especially out of the Nogales and Valencia sites, restructuring actions and benefits from product line transfers.
In Q3, we continue to see aero debookings, albeit at slightly reduced levels compared to Q2, and significant disruptions coming from customers' ordering and receiving patterns.
We expect weak OE build rates to persist.
Additionally, lower aircraft utilization and weakened airline profitability result in a slow aftermarket recovery as less maintenance is required or gets deferred.
CCT decremental margins of 28% improved sequentially from Q2 and reflect the aggressive restructuring actions executed by the business.
Finally, in October, Ryan Flynn was appointed CCT President.
Ryan had previously served as the President of our Asia Pacific region, where he drove critical growth initiatives.
Davide Barbon, who is head of our KONI Axtone business, will now lead the Asia Pacific region, one of ITT's growth platforms.
Davide returns to China, where he previously led the expansion of MT in Wuxi.
As you know, last quarter, we raised our cost action target to $160 million.
Let me now give you an update on our plan on slide nine.
Our capex reduction plan is progressing well.
We are hard at work on the remaining $125 million of cost reduction, a large portion of which is structural.
To date, we have completed more than 90% of the full year headcount reduction plan.
On the spending front, we are exceeding our saving expectations driven by strong cost controls and sourcing performance.
We are driving footprint optimization at both IP and CCT with several new actions progressing through granular planning and internal approval stages.
Overall, we expect these actions will generate more than $90 million savings of benefits -- $90 million of benefits in 2020 and additional carryover benefits in 2021, partially offset by temporary compensation actions that have been rolled back in Q1 -- in Q4.
As a result, we are improving our decremental margin target, and we now expect total segment decremental margin for 2020 to range from 21% to 24%.
Now I'd like to discuss the results on our net annual asbestos remeasurement on slide 10, which is excluded from our Q3 adjusted results.
These events, coupled with stability in our underlying claim data, enabled us to extend the period for which we provide an estimate through 2052 from our previous rolling 10-year estimate.
Since then, excluding the full horizon transition, our net liability declined 44%, and when accounting for these quarters, noncash $136 million full horizon impact, the net liability dropped 25%.
This reflects our effective claims management and one firm defense strategy as well as aggressive insurance recovery actions that have improved the value of our insurance portfolio.
Importantly, we now expect that our projected annual average net after-tax defense and indemnity outflows for the next 10 years will decrease to $20 million to $30 million, a reduction of 24% from the midpoint.
Before Luca provides his closing remarks, let me share some perspective on how we see Q4 playing out.
We expect continued sequential improvement in Q4 but still anticipate year-over-year revenue declines to range between high single digits and the low teens.
We expect MT to deliver on low single-digits revenue decline as Friction revenue growth will more than offset -- will be more than offset by lower Wolverine and KONI Axtone volumes.
We expect auto production rates to improve sequentially, reflecting a market decline of approximately 20% for the full year.
Friction OE outperformance is now expected to be at the lower end of our range.
We also expect IP revenue to show sequential growth in Q4 and year-over-year declines to a low double-digit range.
Most of our expected Q4 revenue is already in backlog at the end of Q3.
Despite slowly improving passenger air traffic in Q3, we do not see commercial aero production rates materially improving sequentially.
As a result, we expect flattish CCT revenue from Q3 to Q4.
From a segment margin standpoint, we expect to produce strong Q4 margins, well over the 15.4% generated last year driven by benefits from productivity and cost actions.
With outstanding margin performance to date, we expect IP to deliver healthy full year margin expansion compared to 2019.
Consequently, IP's Q4 margin will be similar to Q3 and prior year, while CCT may show a sequential reduction driven by unfavorable connector mix.
We expect corporate expenses for the full year to be down approximately 40%.
We also expect Q4 earnings per share to show low double-digit sequential improvement, and we are now targeting segment decremental margins of 21% to 24% for the full year.
On free cash flow, we are raising our margin target to 13% to 15% for the full year as we rebuild some working capital to support our business and customers.
ITT's performance is the outcome of a sound and actionable strategy, one with clear priorities and a strong focus on execution driven by unprecedented level of granularity.
As a result, we generated strong levels of profitability and record free cash flow.
We are managing through the storm, and ITT will emerge stronger and bolder than ever before.
I look forward to continuing to share the progress we will make in our journey.

user
itt q3 loss per share $0.55 from continuing operations.
q3 revenue fell 17 percent to $591.2 million .
q3 adjusted earnings per share $0.82 from continuing operations.
q3 loss per share $0.55 from continuing operations.
sequentially, organic revenue increased 12 percent from q2 of 2020.
compname reports q3 adjusted earnings per share $0.82 from continuing operations.
q3 revenue fell 11 percent to $272 million.

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