The following table represents our revenue disaggregated by end market for the three and six months ended June 30, 20192020 and 2018.2019.
Contract assets consist of unbilled amounts where revenue recognized exceeds customer billings.billings, net of allowances for credit losses. Contract liabilities consist of advance payments and billings in excess of revenue recognized. The following table represents our net contract assets and liabilities as of June 30, 20192020 and December 31, 2018.2019.
result in changes in amounts attributable to the Company under its Tax Matters Agreement with Exelis Inc. and Xylem Inc. relating to the Company’s 2011 spin-off of those businesses.
The follow table displays a rollforward of the total allowance for credit losses for the six months ended June 30, 2020.
| | | | | | | | | | | |
| | | |
Total allowance for credit losses - January 1 | | $ | 12.8 | | |
Impact of adoption of ASU 2016-13 (See Note 2) | | 1.7 | | |
Charges to income | | 8.6 | | |
Write-offs | | (3.0) | | |
Foreign currency and other | | (0.1) | | |
Total allowance for credit losses - June 30 | | $ | 20.0 | | |
NOTE 89
INVENTORIES, NET
|
| | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Finished goods | | $ | 68.3 |
| | | | $ | 64.2 |
| |
Work in process | | 103.2 |
| | | | 83.1 |
| |
Raw materials | | 249.9 |
| | | | 233.2 |
| |
Inventories, net | | $ | 421.4 |
| | | | $ | 380.5 |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
Finished goods | | $ | 58.6 | | | | | $ | 80.7 | | |
Work in process | | 84.4 | | | | | 83.9 | | |
Raw materials | | 241.6 | | | | | 228.3 | | |
Inventories, net | | $ | 384.6 | | | | | $ | 392.9 | | |
Inventory related to long-term contracts of $45.7 as of December 31, 2018 has been reclassified to the respective inventory categories to conform with the current year presentation.
NOTE 910
OTHER CURRENT AND NON-CURRENT ASSETS
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
Asbestos-related assets | | $ | 85.9 | | | | | $ | 67.2 | | |
| | | | | | | |
Advance payments and other prepaid expenses | | 36.7 | | | | | 45.4 | | |
Current contract assets, net | | 18.9 | | | | | 18.0 | | |
Prepaid income taxes | | 16.4 | | | | | 20.6 | | |
Other | | 2.0 | | | | | 2.2 | | |
Other current assets | | $ | 159.9 | | | | | $ | 153.4 | | |
Other employee benefit-related assets | | $ | 134.6 | | | | | $ | 133.6 | | |
Operating lease right-of-use assets | | 84.6 | | | | | 91.7 | | |
Capitalized software costs | | 26.4 | | | | | 30.1 | | |
Environmental-related assets | | 20.4 | | | | | 22.2 | | |
Equity method investments | | 10.3 | | | | | 9.8 | | |
Other | | 25.8 | | | | | 29.1 | | |
Other non-current assets | | $ | 302.1 | | | | | $ | 316.5 | | |
|
| | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Asbestos-related assets | | $ | 67.1 |
| | | | $ | 67.1 |
| |
Advance payments and other prepaid expenses | | 37.9 |
| | | | 44.5 |
| |
Current contract assets | | 28.3 |
| | | | 21.8 |
| |
Prepaid income taxes | | 13.5 |
| | | | 19.6 |
| |
Other | | 2.3 |
| | | | 10.4 |
| |
Other current assets | | $ | 149.1 |
| | | | $ | 163.4 |
| |
Other employee benefit-related assets | | $ | 109.8 |
| | | | $ | 104.7 |
| |
Operating lease right-of-use assets (see Note 2) | | 93.6 |
| | | | — |
| |
Capitalized software costs | | 32.3 |
| | | | 35.3 |
| |
Environmental-related assets | | 23.6 |
| | | | 23.4 |
| |
Equity method investments | | 8.8 |
| | | | 7.7 |
| |
Other | | 27.3 |
| | | | 25.7 |
| |
Other non-current assets | | $ | 295.4 |
| | | | $ | 196.8 |
| |
NOTE 1011
PLANT, PROPERTY AND EQUIPMENT, NET
|
| | | | | | | | | | | | | |
| Useful life (in years) | | June 30, 2019 | | December 31, 2018 |
Machinery and equipment | 2 - 10 | | | $ | 1,096.6 |
| | | | $ | 1,056.9 |
| |
Buildings and improvements | 5 - 40 | | | 284.1 |
| | | | 265.3 |
| |
Furniture, fixtures and office equipment | 3 - 7 | | | 81.1 |
| | | | 69.1 |
| |
Construction work in progress | | | | 65.0 |
| | | | 67.9 |
| |
Land and improvements | | | | 29.7 |
| | | | 27.8 |
| |
Other | | | | 10.3 |
| | | | 10.3 |
| |
Plant, property and equipment, gross | | | | 1,566.8 |
| | | | 1,497.3 |
| |
Less: Accumulated depreciation | | | | (1,032.7 | ) | | | | (978.5 | ) | |
Plant, property and equipment, net | | | | $ | 534.1 |
| | | | $ | 518.8 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Useful life (in years) | | June 30, 2020 | | | | December 31, 2019 | | |
Machinery and equipment | 2 - 10 | | | $ | 1,126.3 | | | | | $ | 1,128.9 | | |
Buildings and improvements | 5 - 40 | | | 271.3 | | | | | 279.3 | | |
Furniture, fixtures and office equipment | 3 - 7 | | | 78.1 | | | | | 79.8 | | |
Construction work in progress | | | | 48.9 | | | | | 48.8 | | |
Land and improvements | | | | 32.3 | | | | | 33.3 | | |
Other | | | | 4.9 | | | | | 10.5 | | |
Plant, property and equipment, gross | | | | 1,561.8 | | | | | 1,580.6 | | |
Less: Accumulated depreciation | | | | (1,056.4) | | | | | (1,049.1) | | |
Plant, property and equipment, net | | | | $ | 505.4 | | | | | $ | 531.5 | | |
Depreciation expense of $20.7 and $20.5, and $21.0,$41.2 and $40.7 and $41.7 was recognized in the three and six months ended June 30, 2020 and 2019, respectively.
During the first quarter of 2020, we recorded an impairment of $4.0 for a business within IP due to challenging economic conditions in the upstream oil and 2018, respectively.gas market combined with impacts associated with the COVID-19 pandemic. Long-lived assets of the business, with a carrying value of $14.0, primarily building and improvements, machinery and equipment, were reduced to their current estimated fair value of $10.0. Our current estimate of fair value, categorized within Level 3 of the fair value hierarchy, was determined based on a market approach estimating the net proceeds that would be received for the sale of the assets. Significant additional adverse changes to the economic environment and future cash flows of other businesses could cause us to record additional impairment charges in future periods, which may be material.
NOTE 1112
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The following table provides a rollforward of the carrying amount of goodwill for the six months ended June 30, 20192020 by segment.
|
| | | | | | | | | | | | | | | | | | | | | |
| Motion Technologies | | Industrial Process | | Connect & Control Technologies | | Total |
Goodwill - December 31, 2018 | | $ | 294.5 |
| | | | $ | 315.8 |
| | | | $ | 265.6 |
| | | $ | 875.9 |
|
Acquired | | — |
| | | | 54.6 |
| | | | — |
| | | 54.6 |
|
Foreign exchange translation | | 0.1 |
| | | | 0.6 |
| | | | (0.2 | ) | | | 0.5 |
|
Goodwill - June 30, 2019 | | $ | 294.6 |
| | | | $ | 371.0 |
| | | | $ | 265.4 |
| | | $ | 931.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Motion Technologies | | | | Industrial Process | | | | Connect & Control Technologies | | | | Total |
Goodwill - December 31, 2019 | | $ | 293.6 | | | | | $ | 354.1 | | | | | $ | 279.5 | | | | $ | 927.2 | |
| | | | | | | | | | | | | |
Adjustments to purchase price allocations | | — | | | | | (2.5) | | | | | — | | | | (2.5) | |
| | | | | | | | | | | | | |
Foreign exchange translation | | (1.4) | | | | | (2.7) | | | | | (0.3) | | | | (4.4) | |
Goodwill - June 30, 2020 | | $ | 292.2 | | | | | $ | 348.9 | | | | | $ | 279.2 | | | | $ | 920.3 | |
Goodwill acquiredAdjustments to purchase price allocations is related to our 2019 acquisition of Rheinhütte Pumpen Group (Rheinhütte) in the second quarter of 2019, and represents the preliminary calculation of the excess of the purchase price over the net assets acquired, the valuation of which is pending completion. Upon completion of the valuation, goodwill acquired will be adjusted to reflect the final fair value of the net assets acquired.. Refer to Note 20, Acquisitions, for additional information.
Other Intangible Assets, Net
Information regarding our other intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | | | | | | | December 31, 2019 | | | | | | | | | | |
| Gross Carrying Amount | | | | Accumulated Amortization | | | | Net Intangibles | | | | Gross Carrying Amount | | | | Accumulated Amortization | | | | Net Intangibles | | |
Customer relationships | | $ | 162.0 | | | | | $ | (95.0) | | | | | $ | 67.0 | | | | | $ | 176.3 | | | | | $ | (99.6) | | | | | $ | 76.7 | | |
Proprietary technology | | 46.0 | | | | | (21.4) | | | | | 24.6 | | | | | 58.4 | | | | | (28.1) | | | | | 30.3 | | |
Patents and other | | 10.5 | | | | | (8.1) | | | | | 2.4 | | | | | 21.8 | | | | | (13.0) | | | | | 8.8 | | |
Finite-lived intangible total | | 218.5 | | | | | (124.5) | | | | | 94.0 | | | | | 256.5 | | | | | (140.7) | | | | | 115.8 | | |
Indefinite-lived intangibles | | 21.9 | | | | | — | | | | | 21.9 | | | | | 22.2 | | | | | — | | | | | 22.2 | | |
Other intangible assets | | $ | 240.4 | | | | | $ | (124.5) | | | | | $ | 115.9 | | | | | $ | 278.7 | | | | | $ | (140.7) | | | | | $ | 138.0 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Intangibles | | Gross Carrying Amount | | Accumulated Amortization | | Net Intangibles |
Customer relationships | | $ | 164.2 |
| | | | $ | (92.8 | ) | | | | $ | 71.4 |
| | | | $ | 164.1 |
| | | | $ | (86.2 | ) | | | | $ | 77.9 |
| |
Proprietary technology | | 53.6 |
| | | | (27.2 | ) | | | | 26.4 |
| | | | 53.7 |
| | | | (25.6 | ) | | | | 28.1 |
| |
Patents and other | | 12.8 |
| | | | (9.7 | ) | | | | 3.1 |
| | | | 12.3 |
| | | | (9.4 | ) | | | | 2.9 |
| |
Finite-lived intangible total | | 230.6 |
| | | | (129.7 | ) | | | | 100.9 |
| | | | 230.1 |
| | | | (121.2 | ) | | | | 108.9 |
| |
Indefinite-lived intangibles | | 27.2 |
| | | | — |
| | | | 27.2 |
| | | | 27.2 |
| | | | — |
| | | | 27.2 |
| |
Other intangible assets | | $ | 257.8 |
| | | | $ | (129.7 | ) | | | | $ | 128.1 |
| | | | $ | 257.3 |
| | | | $ | (121.2 | ) | | | | $ | 136.1 |
| |
As a result of the global COVID-19 pandemic combined with a decline in the upstream oil and gas market, during the first quarter of 2020, we determined that certain intangible assets within the IP segment including an indefinite-lived trademark, customer relationships and proprietary technology, would not be recoverable resulting in an impairment of $12.3. Significant additional adverse changes to the economic environment and future cash flows of other businesses could cause us to record additional impairment charges in future periods, which may be material. In addition, during the first quarter of 2020, we reclassified a trademark intangible asset with a net book value of $5, previously included within patents and other, to indefinite-lived intangibles as we have recently suspended our company re-branding project for the foreseeable future.Amortization expense related to finite-lived intangible assets was $4.2 and $4.0, and $4.3,$9.0 and $8.0 and $8.9 for the three and six months ended June 30, 2020 and 2019, and 2018, respectively. Estimated amortization expense for each of the five succeeding years is as follows:
| | | | | |
2020 | $ | 8.6 | |
2021 | 16.3 | |
2022 | 16.2 | |
2023 | 14.4 | |
2024 | 9.1 | |
Thereafter | 29.4 | |
NOTE 1213
ACCRUED LIABILITIES AND OTHER NON-CURRENT LIABILITIES
|
| | | | | | | | | | |
| June 30, 2019 | December 31, 2018 |
Compensation and other employee-related benefits | | $ | 136.3 |
| | | $ | 152.2 |
| |
Contract liabilities and other customer-related liabilities | | 76.6 |
| | | 82.2 |
| |
Asbestos-related liability | | 72.6 |
| | | 74.2 |
| |
Accrued income taxes and other tax-related liabilities | | 25.7 |
| | | 33.7 |
| |
Operating lease liabilities (see Note 2) | | 19.3 |
| | | — |
| |
Accrued warranty costs | | 16.2 |
| | | 16.2 |
| |
Environmental liabilities and other legal matters | | 15.0 |
| | | 24.0 |
| |
Other | | 33.9 |
| | | 34.2 |
| |
Accrued liabilities | | $ | 395.6 |
| | | $ | 416.7 |
| |
Environmental liabilities | | $ | 56.2 |
| | | $ | 59.5 |
| |
Operating lease liabilities (see Note 2) | | 78.5 |
| | | — |
| |
Compensation and other employee-related benefits | | 35.1 |
| | | 34.2 |
| |
Deferred income taxes and other tax-related accruals | | 23.8 |
| | | 25.0 |
| |
Other | | 50.8 |
| | | 47.8 |
| |
Other non-current liabilities | | $ | 244.4 |
| | | $ | 166.5 |
| |
| | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | December 31, 2019 | | |
Compensation and other employee-related benefits | | $ | 127.2 | | | | $ | 145.4 | | |
Asbestos-related liability | | 85.9 | | | | 86.0 | | |
Contract liabilities and other customer-related liabilities | | 74.3 | | | | 74.6 | | |
Accrued restructuring costs | | 28.7 | | | | 7.5 | | |
Accrued income taxes and other tax-related liabilities | | 28.1 | | | | 27.0 | | |
Accrued warranty costs | | 19.7 | | | | 18.5 | | |
Operating lease liabilities | | 18.7 | | | | 19.9 | | |
Environmental liabilities and other legal matters | | 16.5 | | | | 17.9 | | |
Other | | 30.0 | | | | 34.0 | | |
Accrued liabilities | | $ | 429.1 | | | | $ | 430.8 | | |
Operating lease liabilities | | $ | 70.1 | | | | $ | 76.0 | | |
Environmental liabilities | | 53.2 | | | | 55.8 | | |
Compensation and other employee-related benefits | | 29.5 | | | | 32.4 | | |
Deferred income taxes and other tax-related liabilities | | 23.1 | | | | 24.0 | | |
Other | | 42.0 | | | | 46.5 | | |
Other non-current liabilities | | $ | 217.9 | | | | $ | 234.7 | | |
NOTE 13
LEASES
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.
For the three and six months ended June 30, 2019, operating lease costs were $6.7 and $12.3, respectively. Short-term lease costs, variable lease costs, and sublease income are not considered material.
Future operating lease payments under non-cancellable operating leases with an initial term in excess of 12 months as of June 30, 2019 are shown below.
|
| | | |
2019 | $ | 11.6 |
|
2020 | 19.5 |
|
2021 | 15.3 |
|
2022 | 12.6 |
|
2023 | 10.0 |
|
2024 and thereafter | 60.7 |
|
Total lease payments | 129.7 |
|
Less: amount of lease payments representing interest | (31.9 | ) |
Present value of future lease payments | $ | 97.8 |
|
| |
Short-term lease liability | $ | 19.3 |
|
Long-term lease liability | 78.5 |
|
Present value of future lease payments | $ | 97.8 |
|
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 13.8 years, and the weighted average discount rate is 3.2%. During the six months ended June 30, 2019, we recognized non-cash right-of-use assets of $22.8 for new leases entered into during the period, primarily related to the lease renewal of a key manufacturing site in our Connect & Control segment. Operating cash outflows from operating leases during the six months ended June 30, 2019 were $10.9.
NOTE 14
DEBT
|
| | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Commercial paper | | $ | 148.0 |
| | | | $ | 114.4 |
| |
Current maturities of long-term debt and finance leases | | 1.4 |
| | | | 1.8 |
| |
Commercial paper and current maturities of long-term debt | | 149.4 |
| | | | 116.2 |
| |
Long-term debt and finance leases | | 14.3 |
| | | | 8.8 |
| |
Total debt and finance leases | | $ | 163.7 |
| | | | $ | 125.0 |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
Commercial paper | | $ | 134.1 | | | | | $ | 84.2 | | |
Short-term loans | | 112.2 | | | | | — | | |
Current maturities of long-term debt and finance leases | | 1.2 | | | | | 2.3 | | |
Short-term debt and current maturities of long-term debt | | 247.5 | | | | | 86.5 | | |
Long-term debt and finance leases | | 12.8 | | | | | 12.9 | | |
Total debt and finance leases | | $ | 260.3 | | | | | $ | 99.4 | | |
Commercial Paper
Commercial paper outstanding as of June 30, 20192020 was $134.1, consisting of $50.0 under the Company’s U.S. program and $84.1 under the Company’s Euro program. Weighted average interest rates were 0.80% and 0.36% under the U.S. and Euro programs, respectively, and had maturity terms of less than three months from the date of issuance. Commercial paper outstanding as of December 31, 20182019 was $84.2, and issued entirely through the Company’s euro program andEuro program. Commercial paper outstanding as of December 31, 2019 had an associated weighted average interest rate of 0.09%0.05% and 0.06%, respectively. The outstanding commercial paper for both periods had maturity terms less than three months from the date of issuance.
Short-term Loans
On November 25, 2014, we entered into a competitive advance and revolving credit facility agreement (the Revolving Credit Agreement) with a consortium of third party lenders including JPMorgan Chase Bank, N.A., as administrative agent, and Citibank, N.A., as syndication agent. During 2019, we extended the Revolving Credit Agreement maturity date to November 25, 2022. The Revolving Credit Agreement provides for an aggregate principal amount of up to $500 of (i) revolving extensions of credit (the revolving loans) outstanding at any time, (ii) competitive advance borrowing option which will be provided on an uncommitted competitive advance basis through an auction mechanism (the competitive advances), and (iii) letters of credit for a face amount up to $100 at any time outstanding. Subject to certain conditions, we are permitted to terminate permanently the total
commitments and reduce commitments in minimum amounts of $10. Borrowings under the credit facility are available in U.S. dollars, Euros or British pound sterling. We are permitted to request that lenders increase the commitments under the facility by up to $200 for a maximum aggregate principal amount of $700, however this is subject to certain conditions and therefore may not be available to us.
The interest rate per annum on the Revolving Credit Agreement is based on the LIBOR rate of the currency we borrow in, adjusted for statutory reserve requirements, plus a margin of 1.1%. As of June 30, 2020, we had $112.2 outstanding under the credit facility, with an associated weighted average interest rate of 1.1% that matures in two months. As of December 31, 2019, we had 0 outstanding obligations under the credit facility. There is also a 0.15% fee per annum applicable to the commitments under the Revolving Credit Agreement. The fees and margin are subject to adjustment should the Company’s credit ratings change.
The Revolving Credit Agreement contains customary affirmative and negative covenants that, among other things, will limit or restrict our ability to: incur additional debt or issue guarantees; create liens; enter into certain sale and lease-back transactions; merge or consolidate with another person; sell, transfer, lease or otherwise dispose of assets; liquidate or dissolve; and enter into restrictive covenants. Additionally, the Revolving Credit Agreement requires us not to permit the ratio of consolidated total indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (leverage ratio) to exceed 3.00 to 1.00 at any time, or the ratio of consolidated EBITDA to consolidated interest expense (interest coverage ratio) to be less than 3.00 to 1.00. In the event of certain ratings downgrades 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 credit facility.
On April 29, 2020, we entered into two 364-day term revolving credit agreements totaling $200 (the Incremental Revolving Credit Agreements) which provide the Company with additional liquidity in excess of the Revolving Credit Agreement. Borrowings are available in U.S. dollars and the interest rate per annum is based on the LIBOR rate, adjusted for statutory reserve requirements, plus a margin of up to 1.55%. The Incremental Revolving Credit Agreements are subject to fees of up to 0.35% per annum. The fees and margin are subject to adjustment should the Company’s credit ratings change. All other key provisions of the Incremental Revolving Credit Agreements mirror those of the Revolving Credit Agreement described above, including all covenants. In addition, the Incremental Revolving Credit Agreements did not violate any negative covenants associated with the existing Revolving Credit Agreement. There were no outstanding borrowings under the Incremental Revolving Credit Agreements as of June 30, 2020.
As of June 30, 2020, our interest coverage ratio and leverage ratios associated with short-term loans were within the prescribed thresholds. Additionally, we currently expect to remain within the prescribed thresholds until maturity.
Refer to the Liquidity section within “Item“Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for additional information on our overall funding and liquidity strategy. NOTE 15
POSTRETIREMENT BENEFIT PLANS
The following table provides the components of net periodic benefit cost for pension plans and other employee-related benefit plans for the three and six months ended June 30, 20192020 and 2018.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | | | | | | | | | | | 2019 | | | | | | | | | | |
For the Three Months Ended June 30 | Pension | | | | Other Benefits | | | | Total | | | | Pension | | | | Other Benefits | | | | Total | | |
Service cost | | $ | 0.3 | | | | | $ | 0.2 | | | | | $ | 0.5 | | | | | $ | 0.3 | | | | | $ | 0.1 | | | | | $ | 0.4 | | |
Interest cost | | 2.3 | | | | | 0.7 | | | | | 3.0 | | | | | 3.2 | | | | | 1.0 | | | | | 4.2 | | |
Expected return on plan assets | | (2.1) | | | | | — | | | | | (2.1) | | | | | (3.4) | | | | | — | | | | | (3.4) | | |
Amortization of prior service (benefit) cost | | — | | | | | (1.3) | | | | | (1.3) | | | | | 0.2 | | | | | (1.3) | | | | | (1.1) | | |
Amortization of net actuarial loss | | 1.7 | | | | | 0.8 | | | | | 2.5 | | | | | 1.3 | | | | | 0.5 | | | | | 1.8 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total net periodic benefit cost | | $ | 2.2 | | | | | $ | 0.4 | | | | | $ | 2.6 | | | | | $ | 1.6 | | | | | $ | 0.3 | | | | | $ | 1.9 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
For the Three Months Ended June 30 | Pension | | Other Benefits | | Total | | Pension | | Other Benefits | | Total |
Service cost | | $ | 0.3 |
| | | | $ | 0.1 |
| | | | $ | 0.4 |
| | | | $ | 0.4 |
| | | | $ | 0.2 |
| | | | $ | 0.6 |
| |
Interest cost | | 3.2 |
| | | | 1.0 |
| | | | 4.2 |
| | | | 2.8 |
| | | | 1.1 |
| | | | 3.9 |
| |
Expected return on plan assets | | (3.4 | ) | | | | — |
| | | | (3.4 | ) | | | | (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 |
| | | | 0.5 |
| | | | 1.8 |
| | | | 1.5 |
| | | | 1.1 |
| | | | 2.6 |
| |
Total net periodic benefit cost | | $ | 1.6 |
| | | | $ | 0.3 |
| | | | $ | 1.9 |
| | | | $ | 1.5 |
| | | | $ | 1.0 |
| | | | $ | 2.5 |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
For the Six Months Ended June 30 | Pension | | Other Benefits | | Total | | Pension | | Other Benefits | | Total |
Service cost | | $ | 0.7 |
| | | | $ | 0.3 |
| | | | $ | 1.0 |
| | | | $ | 0.8 |
| | | | $ | 0.4 |
| | | | $ | 1.2 |
| |
Interest cost | | 6.3 |
| | | | 2.0 |
| | | | 8.3 |
| | | | 5.6 |
| | | | 2.2 |
| | | | 7.8 |
| |
Expected return on plan assets | | (7.2 | ) | | | | — |
| | | | (7.2 | ) | | | | (6.8 | ) | | | | (0.2 | ) | | | | (7.0 | ) | |
Amortization of prior service cost (benefit) | | 0.4 |
| | | | (2.6 | ) | | | | (2.2 | ) | | | | 0.4 |
| | | | (2.6 | ) | | | | (2.2 | ) | |
Amortization of net actuarial loss | | 2.6 |
| | | | 1.1 |
| | | | 3.7 |
| | | | 3.0 |
| | | | 2.2 |
| | | | 5.2 |
| |
Total net periodic benefit cost | | $ | 2.8 |
| | | | $ | 0.8 |
| | | | $ | 3.6 |
| | | | $ | 3.0 |
| | | | $ | 2.0 |
| | | | $ | 5.0 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | | | | | | | | | | | 2019 | | | | | | | | | | |
For the Six Months Ended June 30 | Pension | | | | Other Benefits | | | | Total | | | | Pension | | | | Other Benefits | | | | Total | | |
Service cost | | $ | 0.6 | | | | | $ | 0.4 | | | | | $ | 1.0 | | | | | $ | 0.7 | | | | | $ | 0.3 | | | | | $ | 1.0 | | |
Interest cost | | 4.6 | | | | | 1.4 | | | | | 6.0 | | | | | 6.3 | | | | | 2.0 | | | | | 8.3 | | |
Expected return on plan assets | | (4.3) | | | | | — | | | | | (4.3) | | | | | (7.2) | | | | | — | | | | | (7.2) | | |
Amortization of prior service (benefit) cost | | — | | | | | (2.5) | | | | | (2.5) | | | | | 0.4 | | | | | (2.6) | | | | | (2.2) | | |
Amortization of net actuarial loss | | 3.5 | | | | | 1.4 | | | | | 4.9 | | | | | 2.6 | | | | | 1.1 | | | | | 3.7 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total net periodic benefit cost | | $ | 4.4 | | | | | $ | 0.7 | | | | | $ | 5.1 | | | | | $ | 2.8 | | | | | $ | 0.8 | | | | | $ | 3.6 | | |
We made contributions to our global postretirement plans of $7.1$4.2 and $6.8$7.1 during the six months ended June 30, 20192020 and 2018,2019, respectively. We expect to make contributions of approximately $7$8 to $9$10 during the remainder of 2019,2020, principally related to our other employee-related benefit plans.
Amortization from accumulated other comprehensive income into earnings related to prior service cost and net actuarial loss was $0.9 and $0.5, and $1.1,$1.8 and $1.1, and $2.2, net of tax, during the three and six months ended June 30, 20192020 and 2018,2019, respectively. No other reclassifications from accumulated other comprehensive income into earnings were recognized during any of the presented periods.
U.S. Qualified Pension Plan Termination
On February 19, 2020, the Company’s Board of Directors conditionally authorized the termination of our U.S. qualified pension plan by offering lump sum distributions to certain participants and transferring the plan’s remaining benefit obligations to an insurance company through one or more group annuity contracts. The current projected benefit obligation is $303.2. Ultimate plan termination is subject to certain considerations, including regulatory review, interest rates and annuity pricing. If we proceed with the termination of the plan, the transaction is expected to occur in the second half of 2020 and would be funded with plan assets, that were $326.1 as of the end of the second quarter. Any additional funding, if necessary, would be made with cash. Our investment strategy was updated in 2019 to reduce risk by increasing the asset allocation to 100% fixed income and cash. At the time such a transaction were to close, an insurance company (or companies) would assume responsibility for paying and administering pension benefits that had been an obligation of the plan to plan participants and their beneficiaries. Upon transfer of the pension obligation, we expect to recognize a non-cash pension settlement charge of approximately $130 to $140 before tax, which includes recognition of the remaining pension losses, currently recorded in accumulated other comprehensive loss, and derecognition of the net assets of the plan. As a result of the plan transfer, the amount of benefits to be received by participants will be protected by state guaranty associations.
NOTE 16
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 six months ended June 30, 20192020 and 2018.2019.
|
| | | | | | | | | | | | | | | |
| Three Months | | Six Months |
For the Periods Ended June 30 | 2019 | | 2018 | | 2019 | | 2018 |
Equity-based awards | $ | 3.9 |
| | $ | 5.7 |
| | $ | 8.4 |
| | $ | 10.2 |
|
Liability-based awards | 0.7 |
| | 0.7 |
| | 1.4 |
| | 0.8 |
|
Total share-based compensation expense | $ | 4.6 |
| | $ | 6.4 |
| | $ | 9.8 |
| | $ | 11.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months | | | | Six Months | | |
For the Periods Ended June 30 | 2020 | | 2019 | | 2020 | | 2019 |
Equity-based awards | $ | 3.3 | | | $ | 3.9 | | | $ | 5.8 | | | $ | 8.4 | |
Liability-based awards | 0.5 | | | 0.7 | | | (0.1) | | | 1.4 | |
Total share-based compensation expense | $ | 3.8 | | | $ | 4.6 | | | $ | 5.7 | | | $ | 9.8 | |
The decline in share-based compensation expense for equity-based awards was driven by performance stock units which are evaluated each quarter to determine the likelihood of achieving certain performance targets. The change in share-based compensation expense for liability-based awards is driven by the change in ITT’s stock price. At June 30, 2019,2020, there was $24.4$25.2 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 2.12.0 years. Additionally, unrecognized compensation cost related to liability-based awards was $2.5,$1.6, which is expected to be recognized ratably over a weighted-average period of 1.72.0 years.
Year-to-Date 20192020 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 six months ended June 30, 2019,2020, 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 | | $ | 58.35 |
| |
Performance stock units (PSUs) | 0.1 | | $ | 65.28 |
| |
| | | | | | | | | | | | | | |
| # of Awards Granted | Weighted Average Grant Date Fair Value Per Share | | |
| | | | |
Restricted stock units (RSUs) | 0.2 | | $ | 59.51 | | |
Performance stock units (PSUs) | 0.1 | | $ | 63.92 | | |
During the six months ended June 30, 2019 and 2018, 0.3 and 0.22020 a nominal amount of non-qualified stock options were exercised resulting in proceeds of $8.3 and $4.7, respectively.$0.1. During the six months ended June 30, 2019, 0.3 of non-qualified stock options were exercised resulting in proceeds of $8.3. During the six months ended June 30, 2020 and 2018,2019, RSUs of 0.2 vested and were issued. During the six months ended June 30, 20192020 and 2018,2019, PSUs of 0.2 and 0.1 that vested on December 31, 20182019 and 2017,2018, respectively, were issued.
NOTE 17
CAPITAL STOCK
On October 27, 2006, our Board of Directors approved a three-year, $1 billion share repurchase program (the Share Repurchase Program) was approved by2006 Plan), which it modified in 2008 to make the Board of Directors.term indefinite. On December 16, 2008, the provisions of the Share Repurchase Program were modified byOctober 30, 2019, the Board of Directors to replaceapproved a new indefinite term $500 share repurchase program (the 2019 Plan). During the original three-year term with an indefinite term.first quarter of 2020, we completed the 2006 Plan and commenced repurchases under the 2019 Plan. During the six months ended June 30, 20192020 and 2018,2019, we repurchased and retired 0.21.7 and 1.00.2 shares of common stock for $10.5$73.2 and $50.0,$10.5, respectively, under this program. To date, the Company has repurchased 22.4these programs, including 1.4 shares for $919.9and $61.9 in 2020 under the Share Repurchase Program.2006 plan.
Separate from the Share Repurchase Program,share repurchase program, the Company repurchased 0.2 and 0.1 shares during the six months ended June 30, 20192020 and 2018,2019, respectively, for an aggregate price of $9.5$10.5 and $5.4,$9.5, respectively, in settlement of employee tax withholding obligations due upon the vesting of RSUs and PSUs.
NOTE 18
ACCUMULATED OTHER COMPREHENSIVE LOSS
| | | | | | | | | | | | | | | | | | | |
| Postretirement Benefit Plans | | Cumulative Translation Adjustment | | | | Accumulated Other Comprehensive Loss |
December 31, 2019 | $ | (133.3) | | | $ | (252.0) | | | | | $ | (385.3) | |
Net change during period | 0.9 | | | (51.3) | | | | | (50.4) | |
March 31, 2020 | (132.4) | | | (303.3) | | | | | (435.7) | |
Net change during period | 0.9 | | | 2.1 | | | | | 3.0 | |
June 30, 2020 | $ | (131.5) | | | $ | (301.2) | | | | | $ | (432.7) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Postretirement Benefit Plans | | Cumulative Translation Adjustment | | | | Accumulated Other Comprehensive Loss |
December 31, 2018 | $ | (131.6) | | | $ | (243.9) | | | | | $ | (375.5) | |
Net change during period | 0.6 | | | (2.4) | | | | | (1.8) | |
March 31, 2019 | $ | (131.0) | | | $ | (246.3) | | | | | $ | (377.3) | |
Net change during period | 0.5 | | | 5.3 | | | | | 5.8 | |
June 30, 2019 | $ | (130.5) | | | $ | (241.0) | | | | | $ | (371.5) | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | |
| Postretirement Benefit Plans | | Cumulative Translation Adjustment | | Accumulated Other Comprehensive Loss |
December 31, 2018 | $ | (131.6 | ) | | $ | (243.9 | ) | | $ | (375.5 | ) |
| | | | | |
Net change during period | 0.6 |
| | (2.4 | ) | | (1.8 | ) |
March 31, 2019 | (131.0 | ) | | (246.3 | ) | | (377.3 | ) |
| | | | | |
Net change during period | 0.5 |
| | 5.3 |
| | 5.8 |
|
June 30, 2019 | $ | (130.5 | ) | | $ | (241.0 | ) | | $ | (371.5 | ) |
| | | | | |
| Postretirement Benefit Plans | | Cumulative Translation Adjustment | | Accumulated Other Comprehensive Loss |
December 31, 2017 | $ | (137.6 | ) | | $ | (210.6 | ) | | $ | (348.2 | ) |
| | | | | |
Net change during period | 1.1 |
| | 26.5 |
| | 27.6 |
|
March 31, 2018 | (136.5 | ) | | (184.1 | ) | | (320.6 | ) |
| | | | | |
Net change during period | 1.1 |
| | (47.1 | ) | | (46.0 | ) |
June 30, 2018 | $ | (135.4 | ) | | $ | (231.2 | ) | | $ | (366.6 | ) |
19
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 June 30, 2019,2020, there were approximately 24 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:
|
| | | | | | |
Pending claims – Beginning | 24 |
| | |
New claims | 2 |
| | |
Settlements | (1(1) | ) | | |
Dismissals | (1(1) | ) | | |
Pending claims – Ending | 24 |
| | |
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’s asbestos exposures, while 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’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.
Settlement Agreements
The Company periodically enters into settlement agreements with insurers to settle responsibility for insurance claims. Under the terms of the settlements, the insurers agree to a payment or specified series of payments to a Qualified Settlement Fund for past costs and/or agree to provide coverage for certain future asbestos claims on specified terms and conditions. In March 2020, we finalized a settlement agreement with a group of insurers to settle responsibility for claims under certain insurance policies for a lump sum payment of $66.4, resulting in a benefit of $52.5. During June 2020, we entered into a settlement agreement with an insurer accelerating payments previously included in a buyout agreement, resulting in a loss of $4.2.
Asbestos-Related Costs (Benefit), Net
As part of our ongoing review of our net asbestos exposure, each quarter we assess the most recent qualitative and quantitative data available for the key inputs and assumptions, comparing the data to expectations on which the most recent annual liability and asset estimates were calculated. Based on this evaluation, the Company determined that no change in the estimate was warranted for the quarter ended June 30, 20192020 other than the incremental accrual to maintain a rolling 10-year forecast period.period and the settlement agreement described above.
The following table provides a rollforward of the estimated asbestos liability and related assets for the six months ended June 30, 20192020 and 2018.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | | | | | 2019 | | | | |
For the Six Months Ended June 30 | Liability | | Asset | | Net | | Liability | | Asset | | Net |
Beginning balance | $ | 817.6 | | | $ | 386.8 | | | $ | 430.8 | | | $ | 849.3 | | | $ | 376.7 | | | $ | 472.6 | |
Asbestos provision(a) | 28.9 | | | 5.3 | | | 23.6 | | | 30.6 | | | 6.2 | | | 24.4 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Insurance settlement agreements | — | | | 48.3 | | | (48.3) | | | — | | | — | | | — | |
Net cash activity(a) | (42.7) | | | (35.1) | | | (7.6) | | | (44.1) | | | (28.3) | | | (15.8) | |
Ending balance | $ | 803.8 | | | $ | 405.3 | | | $ | 398.5 | | | $ | 835.8 | | | $ | 354.6 | | | $ | 481.2 | |
Current portion | $ | 85.9 | | | $ | 85.9 | | | | | $ | 72.6 | | | $ | 67.1 | | | |
Noncurrent portion | $ | 717.9 | | | $ | 319.4 | | | | | $ | 763.2 | | | $ | 287.5 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
For the Six Months Ended June 30 | Liability | | Asset | | Net | | Liability | | Asset | | Net |
Beginning balance | $ | 849.3 |
|
| $ | 376.7 |
|
| $ | 472.6 |
| | $ | 877.2 |
| | $ | 368.7 |
| | $ | 508.5 |
|
Asbestos provision(a) | 30.6 |
|
| 6.2 |
|
| 24.4 |
| | 32.0 |
| | 6.1 |
| | 25.9 |
|
Insurance settlement agreement | — |
| | — |
| | — |
| | — |
| | 32.1 |
| | (32.1 | ) |
Net cash activity(a) | (44.1 | ) |
| (28.3 | ) |
| (15.8 | ) | | (50.4 | ) | | (19.6 | ) | | (30.8 | ) |
Ending balance | $ | 835.8 |
|
| $ | 354.6 |
|
| $ | 481.2 |
| | $ | 858.8 |
| | $ | 387.3 |
| | $ | 471.5 |
|
Current portion | $ | 72.6 |
|
| $ | 67.1 |
|
|
| | $ | 77.2 |
| | $ | 64.7 |
| | |
Noncurrent portion | $ | 763.2 |
|
| $ | 287.5 |
|
|
|
| | $ | 781.6 |
| | $ | 322.6 |
| | |
| |
(a) | Includes certain administrative costs such as legal-related costs for insurance asset recoveries. |
(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 six months endedJune 30, 20192020 and 2018.2019.
| | | | | | | | | | | |
For the Six Months Ended June 30 | 2020 | | 2019 |
Environmental liability - beginning balance | $ | 61.9 | | | $ | 66.8 | |
Change in estimates for pre-existing accruals: | | | |
Continuing operations | 1.4 | | | 0.3 | |
Discontinued operations | (1.6) | | | — | |
| | | |
Payments | (2.3) | | | (3.6) | |
Foreign currency | (0.1) | | | — | |
Environmental liability - ending balance | $ | 59.3 | | | $ | 63.5 | |
|
| | | | | | | |
For the Six Months Ended June 30 | 2019 | | 2018 |
Environmental liability - beginning balance | $ | 66.8 |
| | $ | 73.9 |
|
Change in estimates for pre-existing accruals | 0.3 |
| | 3.3 |
|
Accruals added during the period for new matters | — |
| | 2.0 |
|
Payments (a) | (3.6 | ) | | (12.2 | ) |
Foreign currency | — |
| | 0.1 |
|
Environmental liability - ending balance | $ | 63.5 |
| | $ | 67.1 |
|
| |
(a) | Includes cash payments of $7.9 for the six months ended June 30, 2018 related to the sale of a former operating location. |
Environmental-related assets, representingincluding a qualified settlement fund (QSF) and estimated recoveries from insurance providers and other third parties, were $23.6$20.4 and $23.3$23.6 as of June 30, 20192020 and 2018,2019, respectively.
During June 2020, the environmental QSF was amended to cover remediation activities for additional sites. Prior to this amendment, there was $7.2 of deferred income representing the excess of assets in the QSF over the probable liabilities associated with the previously covered sites. As a result of the amendment, we recognized income of $7.2 during the quarter, including $1.3 related to discontinued operations.
We are currently involved with 3026 active environmental investigation and remediation sites. AtAs of June 30, 2019,2020, we have estimated the potential high-end liability range of environmental-related matters to be $110.5.$105.3.
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
In the second quarter of 2019, the Company settled a civil matter with the U.S. Department of Justice (DOJ) related to an investigation that began in 2015 involving certain connector products manufactured by the Company’s Connect & Control Technologies segment that are purchased or used by the U.S. government. The Company paid $11 to DOJ, acting on behalf of the U.S. government, to settle this matter and avoid the expense and uncertainty of litigation. The Company also received a related insurance recovery of $1.
NOTE 20
ACQUISITIONS
Rheinhütte Pumpen Group (Rheinhütte)
On April 30, 2019,, we completed the acquisition of 100% of the privately held stock of Rheinhütte for a purchase price of €81€82.5 euros, net of cash acquired. The transaction was funded from the Company’s cash and European commercial paper program. The purchase price is subject to change based on customary net working capital adjustments. Rheinhütte, with 2018 revenue of approximately €61.5 euros and approximately 430 employees, has manufacturing locations in Germany and Brazil. Rheinhütte is a designer and manufacturer of highly engineered pumps suited for harsh and corrosive environments for the industrial market. Rheinhütte is reported within the Industrial Process segment.
The purchase price for Rheinhütte was allocated to net tangible assets acquired and liabilities assumed based on their preliminary fair values as of April 30, 2019, with the excess of the purchase price of $54.6 recorded as goodwill. The primary areas of the 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, not to exceed one year from the acquisition date. Changes to the preliminary estimates of the fair value during the measurement period will be recorded as adjustments to those assets and liabilities with a corresponding adjustment to goodwill in the period they occur. The goodwill arising from this acquisition is not expected to be deductible for income tax purposes.
Preliminary Allocation of Purchase Price for Rheinhütte
|
| | | |
Cash | $ | 4.7 |
|
Receivables | 9.7 |
|
Inventory | 13.3 |
|
Plant, property and equipment | 21.5 |
|
Goodwill | 54.6 |
|
Other assets | 3.2 |
|
Accounts payable and accrued liabilities | (6.7 | ) |
Other liabilities | (5.3 | ) |
Net assets acquired | $ | 95.0 |
|
Pro forma results of operations have not been presented because the acquisition was not deemed material at the acquisition date.
Matrix Composites, Inc. (Matrix)
On July 3, 2019,, we completed the acquisition of 100% of the privately held stock of Matrix for a purchase price of $29$25.8, net of cash acquired. The transaction was funded from the Company’s cash. The purchase price includes an earn-out of $3 and is subject to change based on customary net working capital adjustments. Matrix, a manufacturer of precision composite components within the aerospace and defense market, had 2018 revenue of approximately $12 with growth expected due to a ramp up in production on several next-generation aircraft engine platforms. Matrix has approximately 115 employees and will beis reported within the Connect & Control Technologies segment.
The final purchase prices for Rheinhütte and Matrix were allocated to net assets acquired and liabilities assumed based on their fair values as of the respective acquisition date, with the excess of the purchase price of $37.6 and $14.3 recorded as goodwill, respectively. Other intangibles identified for Rheinhütte include customer relationships, proprietary technology and trade names. Other intangibles assets for Matrix consist of customer relationships. The goodwill arising from these acquisitions is not expected to be deductible for income tax purposes.
Allocations of Purchase Price
| | | | | | | | |
| Rheinhütte | Matrix |
Cash | $ | 4.7 | | $ | 0.5 | |
Receivables | 12.1 | | 1.1 | |
Inventory | 15.2 | | 1.8 | |
Plant, property and equipment | 19.9 | | 2.9 | |
Goodwill | 37.6 | | 14.3 | |
Other intangible assets | 15.2 | | 8.5 | |
Other assets | 3.8 | | 1.9 | |
Accounts payable and accrued liabilities | (6.7) | | (2.0) | |
Other liabilities | (5.3) | | (2.7) | |
Net assets acquired | $ | 96.5 | | $ | 26.3 | |
Pro forma results of operations have not been presented because the acquisitions were not deemed material as of the acquisition dates.
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. 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 centered on our engineering capabilities. Each business applies its technology and engineering expertise to solve our customers’ most pressing challenges. Our applied engineering provides a specialvaluable business fitrelationship with our customers given the critical nature of their applications. This in turn provides us with unique insight to our customers’ requirements and enables us to develop solutions to assist our customers to achieve their business goals. Our technology and customer intimacy together produce opportunities to capture recurring revenue streams, aftermarket opportunities and long-lived platforms from original equipment manufacturers (OEMs).
Our product and service offerings are organized into three segments: Motion Technologies, Industrial Process, 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 20182019 Annual Report within Part I, Item 1, “Description of Business”. All comparisons included within Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to the comparable three and six months ended June 30, 2018,2019, unless stated otherwise.
DISCUSSION OF FINANCIAL RESULTSImpact of COVID-19 on our Business
ThreeOn March 11, 2020, the World Health Organization declared the coronavirus (“COVID-19”) outbreak to be a global pandemic. In response to this declaration and Six Months Ended June 30the rapid spread of COVID-19, governments throughout the world imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness.
While most of our businesses are deemed essential, these restrictions have created many challenges for our business, and ITT has maintained cross functional global crisis management teams to respond to the changing conditions. In the face of this unprecedented challenge posed by the COVID-19 pandemic, we remain united in our focus on our three top priorities, the health of our people, the health of our business, and the health of our financials.
Health of our People
From the earliest signs of the outbreak, we have taken proactive, aggressive actions to protect the health and safety of our employees. We have created core crisis teams and enacted rigorous safety measures at all of our sites. Some of these measures include enhanced cleaning protocols, temperature checks, and distribution of personal protective equipment. We also redesigned employee workspaces to enable social distancing and required non-essential employees to work from home when appropriate. We will continue to be proactive in our response and will take all necessary actions to keep our people safe.
Health of our Business
We anticipate a difficult and uniquely challenging year in the markets we serve. While we do not yet know how long this pandemic will last or how it will impact customer demand for the remainder of the year, our ITT team continues to work closely with our customers and suppliers to support them and to minimize disruptions within our supply chain. We continue to work hard to generate value for our customers, striving to go above and beyond to be flexible and responsive to their needs.
Health of our Financials
ITT entered 2020 with a strong balance sheet and liquidity position, and as a result of COVID-19, we have taken many proactive measures in 2020 to enhance our liquidity and reduce costs to better navigate this uncertain environment and secure ITT’s future. Here are some of the liquidity and cost action highlights:
|
| | | | | | | | | | | | | | | | | |
| Three Months | | Six Months |
| 2019 | 2018 | Change | | 2019 | 2018 | Change |
Revenue | $ | 719.9 |
| $ | 696.8 |
| 3.3 | % | | $ | 1,415.4 |
| $ | 1,386.1 |
| 2.1 | % |
Gross profit | 232.0 |
| 226.0 |
| 2.7 | % | | 450.8 |
| 450.2 |
| 0.1 | % |
Gross margin | 32.2 | % | 32.4 | % | (20 | )bp | | 31.8 | % | 32.5 | % | (70 | )bp |
Operating expenses | 146.0 |
| 145.7 |
| 0.2 | % | | 274.2 |
| 259.3 |
| 5.7 | % |
Operating expense to revenue ratio | 20.3 | % | 20.9 | % | (60 | )bp | | 19.4 | % | 18.7 | % | 70 | bp |
Operating income | 86.0 |
| 80.3 |
| 7.1 | % | | 176.6 |
| 190.9 |
| (7.5 | %) |
Operating margin | 11.9 | % | 11.5 | % | 40 | bp | | 12.5 | % | 13.8 | % | (130 | )bp |
Interest and non-operating (income) expenses, net | (0.4 | ) | 1.5 |
| (126.7 | %) | | (0.9 | ) | 3.3 |
| (127.3 | %) |
Income tax expense | 19.3 |
| 8.9 |
| 116.9 | % | | 39.0 |
| 16.5 |
| 136.4 | % |
Effective tax rate | 22.3 | % | 11.3 | % | 1,100 | bp | | 22.0 | % | 8.8 | % | 1,320 | bp |
Income from continuing operations attributable to ITT Inc. | 66.9 |
| 69.7 |
| (4.0 | %) | | 138.2 |
| 170.8 |
| (19.1 | %) |
Net income attributable to ITT Inc. | 66.8 |
| 69.7 |
| (4.2 | %) | | 138.1 |
| 170.9 |
| (19.2 | %) |
•Strong available liquidity of $1.4 billion, including:
•$819 cash on hand with $286 in the U.S.;
•$388 available borrowing capacity on our $500 revolver; and
•$200 undrawn under our new 364-Day Revolving Credit Agreements.
•Implemented $160 of cost actions, reflecting a $25 increase since the first quarter. The $160 in actions include:
•$80 of expected annualized pre-tax benefit from a $55 organizational-wide restructuring plan primarily focused on structural cost reductions which include global footprint optimization;
•$35 of discretionary spending reductions and supply chain productivity;
•$35 planned reduction in 2020 capital expenditures; and
•$10 of savings from reduced compensation for Board of Directors, Chief Executive Officer and other executives, and suspension of the 401(k) match for certain U.S. employees.
We believe these actions have positioned us well to confront the pandemic. However, the ultimate 2020 impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which cannot be predicted at this time. See Part II, Item 1A, Risk Factors, for an additional discussion of risk related to COVID-19. Executive Summary
InDuring the second quarter of 2019,2020, the COVID-19 pandemic had a dramatic impact on our customers and in the end markets we serve. Today’s ITT delivered top-line growth and increased operating margin despite an increasingly challenging economic environment. Our results reflect our continuedits set of resilient businesses, as well as its focus on operational excellenceexecution enabled us to generate strong cash flow and cost reduction actions, which will help us win share incontrol margin degradation. The health of our people, business, and financials continue to be our top priorities, as we continue to work hard to satisfy our customers, support each other, and successfully navigate this challenging period. The following table provides a summary of key global end markets and combat future market uncertainty.performance indicators for the second quarter of 2020.
|
| | | | | |
Summary of Key Performance Indicators for the Second Quarter of 2019 |
Revenue | Orders | Segment Operating Income | Segment Operating Margin | EPS | Operating Cash Flow |
$720 | $693 | $108 | 14.9% | $0.75 | $101 |
3% Increase | 7% Decrease | 1% Increase | 30bp Decrease | 5% Decrease | 15% Decrease |
Organic Revenue | Organic Orders | Adjusted Segment Operating Income | Adjusted Segment Operating Margin | Adjusted EPS | Adjusted Free Cash Flow |
$735 | $706 | $116 | 16.1% | $0.93 | $82 |
5% Increase | 5% Decrease | 7% Increase | 60bp Increase | 13% Increase | 10% Decrease |
| | | | | | | | | | | |
Summary of Key Performance Indicators for the Second Quarter of 2020 | | | |
Revenue | Segment Operating Income | Segment Operating Margin | EPS |
$515 | $37 | 7.2% | $0.53 |
29% Decrease | 65% Decrease | 770bp Decrease | 29% Decrease |
Organic Revenue | Adjusted Segment Operating Income | Adjusted Segment Operating Margin | Adjusted EPS |
$521 | $65 | 12.6% | $0.57 |
28% Decrease | 44% Decrease | 350bp Decrease | 39% Decrease |
Further details related to these results are contained elsewhere in the Discussion of Financial Results section. Refer to the section titled “Key Performance Indicators and Non-GAAP Measures” for a definition and reconciliations between GAAP and non-GAAP metrics. Our second quarter 20192020 results include:
•Revenue of $719.9 increased $23.1, or 3.3%. Excluding an$514.7 decreased $205.2 including $7.5 from our 2019 acquisitions and unfavorable foreign currencyexchange of $13.7. Organic revenue decreased 27.6%, mainly as a result of the negative global impact of $22.7COVID-19 which drove declines in transportation of 37% and revenueindustrial of $7.9 from our second quarter acquisition of Rheinhütte, organic revenue increased 5.4% driven by share gains and growth across all three segments. The strength of our diversified portfolio powered our growth as oil and gas grew 29%, industrial grew 5%, and transportation grew 3%7%.
Orders of $692.8 decreased $48.9, or 6.6%. Excluding unfavorable foreign currency of $23.0, and orders of $10.2 from the Rheinhütte acquisition, organic orders decreased 4.9% driven mainly by a 27% decline in oil and gas due to project delays and a large prior year upstream oil and gas pump project. Industrial orders declined 6% on project and short-cycle demand weakness. Transportation orders were flat as 39% growth in rail was offset by global automotive.
Operating•Segment operating income of $86.0 increased $5.7, or 7.1%, driven by a reduction in corporate$37.3 declined $70.3, which included higher restructuring costs of $4.3 as well as$24.0. Adjusted segment operating income growth of $1.4, or 1.3%. The increase indeclined $51.0, and adjusted segment operating income was drivenmargin declined 350 basis points, reflecting reduced volume from weaker demand and disruption caused by sales volume leverage, continued productivity and supply chain initiatives, and cost containment actions. These wereCOVID-19, partially offset by higher commodity costssavings from restructuring, productivity and tariffs, as well as strategic investments, unfavorable product mix and $7 of foreign currency impacts. Segment operating income was additionally impacted by $6 of acquisition, restructuring, and legal costs.cost actions.
•Income from continuing operations of $0.75$0.53 per diluted share decreased $0.04, primarily$0.22, due to favorable prior year tax items,a decline in segment operating income including higher restructuring costs, partially offset by improvements in operatingan income tax benefit, and a reduction in interest and non-operating expense.corporate costs. Adjusted income from continuing operations was $0.93$0.57 per diluted share, reflecting a $0.11, or 13.4% increase$0.36 decrease from the prior year.
•Cash flow from operations for the year to date period was $203.1, an increase of 100.9% over the prior year, due to proactive working capital management which also drove favorable timing of cash collections
from customers, a decline in income tax payments, lower asbestos payments, and a reduction in incentive compensation.
In terms of capital deployment, we declared dividends of $14.6 that were paid on July 1, 2020 immediately following the close of the second quarter.
2020 Outlook
The COVID-19 pandemic has created an unprecedented downturn in Julydemand across the global end markets we completedserve. The full extent of the acquisitiondecline and the timing of Matrix Composites Inc. (Matrix),the recovery is unknown. Since the beginning of the pandemic, demand for automotive components has declined as automakers significantly reduced production of new vehicles. Similarly, demand for aerospace components has been impacted by an unprecedented reduction in commercial air traffic. As the COVID-19 pandemic persists, we expect these trends to continue. Separately, we have been further impacted by the production stoppage of the Boeing 737 MAX and the timing of the production restart is still unknown at this time. Lastly, significant declines in oil and gas prices have resulted in a manufacturerreduction of precision composites incustomer capital expenditures and maintenance spending.
Given these uncertainties, we have continued to take proactive measures to align our production with the aerospacedemand of our customers and defense market, with growthhave initiated a global restructuring plan which is expected from a ramp up in production on several next-generation aircraft engine platforms. This recent acquisitionto deliver annual savings of $80. These actions, coupled with Rheinhütteproductivity and other cost reduction strategies will help to mitigate some of these financial impacts. We also may experience negative impacts to our operating cash flows due to lower segment operating income and may experience delays in April, illustratecustomer collections of receivables. For the disciplined, close-to-core, and strategic acquisitions thatremainder of 2020, we will continueremain laser focused on our top three priorities to make going forward. Additionally, we are investing in a new plating line at CCT that will improve leadnavigate through these challenging times and reduce input costs,position us for the future.
DISCUSSION OF FINANCIAL RESULTS
Three and we continue to make progress in the development of the ITT Smart Pad.Six Months Ended June 30
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months | | | | Six Months | | |
| 2020 | 2019 | Change | | 2020 | 2019 | Change |
Revenue | $ | 514.7 | | $ | 719.9 | | (28.5) | % | | $ | 1,178.0 | | $ | 1,415.4 | | (16.8) | % |
Gross profit | 163.6 | | 232.0 | | (29.5) | % | | 373.0 | | 450.8 | | (17.3) | % |
Gross margin | 31.8 | % | 32.2 | % | (40) | bp | | 31.7 | % | 31.8 | % | (10) | bp |
Operating expenses | 143.1 | | 146.0 | | (2.0) | % | | 243.2 | | 274.2 | | (11.3) | % |
Operating expense to revenue ratio | 27.8 | % | 20.3 | % | 750 | bp | | 20.6 | % | 19.4 | % | 120 | bp |
Operating income | 20.5 | | 86.0 | | (76.2) | % | | 129.8 | | 176.6 | | (26.5) | % |
Operating margin | 4.0 | % | 11.9 | % | (790) | bp | | 11.0 | % | 12.5 | % | (150) | bp |
Interest and non-operating expenses (income), net | 2.2 | | (0.4) | | (650.0) | % | | 2.8 | | (0.9) | | (411.1) | % |
Income tax (benefit) expense | (28.1) | | 19.3 | | (245.6) | % | | (3.4) | | 39.0 | | (108.7) | % |
Effective tax rate | (153.6) | % | 22.3 | % | ** | | (2.7) | % | 22.0 | % | ** |
Income from continuing operations attributable to ITT Inc. | 46.4 | | 66.9 | | (30.6) | % | | 130.1 | | 138.2 | | (5.9) | % |
Net income attributable to ITT Inc. | 48.0 | | 66.8 | | (28.1) | % | | 132.8 | | 138.1 | | (3.8) | % |
** Resulting basis point change not considered meaningful.
REVENUE
The following tables illustrate ourthe revenue derived from each of our segments for the three and six months ended June 30, 20192020 and 2018.2019.
| | | | | | | | | | | | | | | | | | | | | | | |
For the Three Months Ended June 30 | 2020 | | 2019 | | Change | | Organic Decline(a) |
Motion Technologies | $ | 199.3 | | | $ | 317.7 | | | (37.3) | % | | (34.7) | % |
Industrial Process | 193.3 | | | 232.6 | | | (16.9) | % | | (16.6) | % |
Connect & Control Technologies | 122.9 | | | 170.2 | | | (27.8) | % | | (29.3) | % |
Eliminations | (0.8) | | | (0.6) | | | | | |
Total Revenue | $ | 514.7 | | | $ | 719.9 | | | (28.5) | % | | (27.6) | % |
For the Six Months Ended June 30 | | | | | | | |
Motion Technologies | $ | 497.2 | | | $ | 632.9 | | | (21.4) | % | | (18.9) | % |
Industrial Process | 420.6 | | | 448.3 | | | (6.2) | % | | (8.2) | % |
Connect & Control Technologies | 261.6 | | | 335.2 | | | (22.0) | % | | (23.4) | % |
Eliminations | (1.4) | | | (1.0) | | | | | |
Total Revenue | $ | 1,178.0 | | | $ | 1,415.4 | | | (16.8) | % | | (16.7) | % |
|
| | | | | | | | | | | | | |
For the Three Months Ended June 30 | 2019 | | 2018 | | Change | | Organic Growth(a) |
Motion Technologies | $ | 317.7 |
| | $ | 330.3 |
| | (3.8 | )% | | 1.3 | % |
Industrial Process | 232.6 |
| | 203.2 |
| | 14.5 | % | | 12.6 | % |
Connect & Control Technologies | 170.2 |
| | 164.1 |
| | 3.7 | % | | 4.8 | % |
Eliminations | (0.6 | ) | | (0.8 | ) | | | | |
Total Revenue | $ | 719.9 |
| | $ | 696.8 |
| | 3.3 | % | | 5.4 | % |
| | | | | | | |
| | | | | | | |
For the Six Months Ended June 30 | | | | | | | |
Motion Technologies | $ | 632.9 |
| | $ | 672.5 |
| | (5.9 | )% | | — | % |
Industrial Process | 448.3 |
| | 393.0 |
| | 14.1 | % | | 14.1 | % |
Connect & Control Technologies | 335.2 |
| | 322.0 |
| | 4.1 | % | | 5.4 | % |
Eliminations | (1.0 | ) | | (1.4 | ) | | | | |
Total Revenue | $ | 1,415.4 |
| | $ | 1,386.1 |
| | 2.1 | % | | 5.2 | % |
ORDERS
The following tables illustrate our orders derived from each(a)See the section titled “Key Performance Indicators and Non-GAAP Measures” for a definition and reconciliation of our segments for the three and six months ended June 30, 2019 and 2018. |
| | | | | | | | | | | | | |
For the Three Months Ended June 30 | 2019 | | 2018 | | Change | | Organic Growth (Decline)(a) |
Motion Technologies | $ | 311.9 |
| | $ | 327.6 |
| | (4.8 | )% | | 0.3 | % |
Industrial Process | 212.7 |
| | 237.4 |
| | (10.4 | )% | | (12.8 | )% |
Connect & Control Technologies | 169.5 |
| | 177.2 |
| | (4.3 | )% | | (3.3 | )% |
Eliminations | (1.3 | ) | | (0.5 | ) | | | | |
Total Orders | $ | 692.8 |
| | $ | 741.7 |
| | (6.6 | )% | | (4.9 | )% |
| | | | | | | |
| | | | | | | |
For the Six Months Ended June 30 | | | | | | | |
Motion Technologies | $ | 643.4 |
| | $ | 697.5 |
| | (7.8 | )% | | (1.7 | )% |
Industrial Process | 431.7 |
| | 447.5 |
| | (3.5 | )% | | (3.8 | )% |
Connect & Control Technologies | 358.6 |
| | 359.0 |
| | (0.1 | )% | | 1.2 | % |
Eliminations | (2.0 | ) | | (1.1 | ) | | | | |
Total Orders | $ | 1,431.7 |
| | $ | 1,502.9 |
| | (4.7 | )% | | (1.7 | )% |
Motion Technologies (MT)
MT revenue for the three and six months ended June 30, 20192020 decreased $12.6, or 3.8%,$118.4 and $39.6, or 5.9%,$135.7, respectively. Excluding the impact of foreign currency translation of $16.8$8.0 and $39.3$15.8 for the three and six months ended June 30, 2019, respectively,2020, organic revenue increased $4.2declined $110.4 and $119.9, respectively. Sales from Friction declined 42% and 23%, respectively, during the second quarter and was flat for the year to date period. The performance was driven by strength in global rail as well as Friction OEM share gains which significantly outpaced the global auto market, offset by a decline in our Wolverine business. KONI & Axtone sales grew 16% and 13%, for the three and six month periods respectively, on strength in rail in Europe. Frictiondriven by weak automotive sales increased 1% in both periods due to market share gains in North America, Europe and China which helped offset contractionas a result of COVID-19. In addition, weakness in the global autoautomotive market negatively impacted Wolverine as well resulting in a decline in sales of 38% and lower aftermarket activity. Wolverine21%, respectively. KONI & Axtone sales decreased 16% in both periods due to weakness in global auto markets9% and customer share loss.
Orders for2%, respectively, during the three and six months ended June 30, 2019 decreased $15.7, or 4.8%,month periods primarily driven by weakness in rail within Asia and $54.1, or 7.8%. Excluding unfavorable foreign currency translation impacts of $16.6 and $42.1, respectively, organic orders increased $0.9, or 0.3%, duringNorth America, partially offset by growth in Europe in the second quarter of 2019, but decreased $12.0, or 1.7%, during the six months ended June 30, 2019. Excluding a prior year Russian rail order of $14, MT year-to-date organic orders increased $2.0, or 0.3%. In 2019, global rail market share gains were partially offset by weakness in our Wolverine business.2020.
Industrial Process (IP)
IP revenue for the three and six months ended June 30, 2019 increased $29.4, or 14.5%,2020 decreased $39.3 and $55.3, or 14.1%,$27.7, respectively, which included incremental revenue of $7.9$4.7 and $18.6, respectively, from our second quarter2019 acquisition of Rheinhütte, and an unfavorable foreign currency translation impactimpacts of $4.2$5.4 and $8.0,$9.4, respectively. Organic revenue fordecreased $38.6 and $36.9, respectively, primarily driven by pump projects. Revenue from pump projects during the three and six months ended June 30, 2019 increased $25.7, or 12.6%,month periods declined 50% and $55.4, or 14.1%27%, respectively, driven by growth in pump projects and aftermarket parts and service.
During the three and six months ended June 30, 2019, revenue from pump projects increased 51% and 49%, respectively, driven by strengthdue to large prior year deliveries in the chemical and oil and gas markets primarily within North America and Asia. Withinmarkets. Revenue from our short-cycle business revenue from aftermarket partsdecreased 4% and service increased 11% and 10% for2%, respectively, during the three and six month periods, ended June 30, 2019, respectively,primarily due to higher demand in the Middle East within the oil and gas and chemical markets. During the second quarter of 2019, growth in aftermarket was partially offset by an 8%a 20% decline in revenueindustrial valves. Revenue from baseline pumps.
Orders for the threeaftermarket parts and six months ended June 30, 2019 decreased $24.7, or 10.4%, and $15.8, or 3.5%, which included incremental orders of $10.2 from our second quarter acquisition of Rheinhütte, and an unfavorable foreign currency translation impact of $4.5 and $9.2, respectively. Organic orders decreased $30.4, or 12.8%, and $16.8, or 3.8%, respectively, for the three and six months ended June 30, 2019 due to pump project declines of 35% and 14%, respectively, driven by project delays and difficult comparisons to the prior year in the oil and gas and petrochemical markets. Orders from our short-cycle businessservice declined 1% during the second quarter, decreased 5% due mainlybut increased 2% for the six month period compared to weakness in valves. For the year-to-date period orders from our short-cycle business were flat as softness in valve orders was offset by aftermarket parts and service in North America and the Middle East.prior year.
The level of order and shipment activity related to project pumpsat IP can vary significantly from period to period due to pump projects which may impact year-over-year comparisons. IP’s backlogare highly engineered, customized to customer needs, and have longer lead times. Total orders during the six months ended June 30, 2020 were $421.2, a decrease of 2.4%, compared to prior year. Backlog as of June 30, 20192020 was $425.3,$390.7, a decrease of $18.9,$4.7, or 4.3%1.2%, compared to December 31, 2018.2019.
Connect & Control Technologies (CCT)
CCT revenue for the three and six months ended June 30, 2019 increased $6.1, or 3.7%,2020 decreased $47.3 and $13.2, or 4.1%, respectively,$73.6, which included anrevenue of $2.8 and $5.8, respectively, from our 2019 acquisition of Matrix, and unfavorable foreign currency translation impactimpacts of $1.7$0.3 and $4.1,$0.9, respectively. Organic revenue for the threedeclined $49.8 and six months ended June 30, 2019 increased $7.8, or 4.8%, and $17.3, or 5.4%, respectively,$78.5, primarily driven by increases of 21% and 15%, respectively, in commercial aerospace from strength in components and connectors. This was partially offset by a decline in revenue from defense components due to prior year programs. In addition, revenue grew 1% in both periods in the industrial market.
Orders for the three months ended June 30, 2019, decreased $7.7, or 4.3%, which included an unfavorable foreign currency translation impact of $1.9. Organic orders decreased $5.8, or 3.3%, due to a 6% decline in orders from the industrial market on weak components and electric vehicle connectors, as well as an 18% decline in the oil and gas market due to a difficult prior year comparison reflecting lower 2019 oil prices. Aerospace and defense orders decreased 1% during the second quarter of 2019 due to timing of rotorcraft and commercial aerospace components, offset by higher environmental control systems and aftermarket.
Orders for the six months ended June 30, 2019 were relatively flat compared to the prior year, which included an unfavorable foreign currency translation impact of $4.7. Organic orders increased $4.3, or 1.2%, due to a 5% increasedeclines in the aerospace and defense market of 41% and 30%, respectively. The decrease in aerospace and defense was driven by several project winsa decline in North America forglobal commercial air traffic due to COVID-19 and reduced production levels of Boeing’s 737 MAX, as well as unfavorable timing of defense connectors and components. This growth was partially offset by order declines in industrial and oil and gas markets of 4% and 9%, respectively.
On July 11, 2017, the U.S. Defense Logistics Agency, Land and Maritime (DLA) issued a notice that it had removed certain of our military-specification connector productsprograms. Revenue from the Qualified Products List (QPL). Annualindustrial market decreased 7% during the three month period primarily due to weak component sales of these military-specification connectors were estimated to range from $8 to $10 prior toand declined 12% during the removal of these products from the QPL. The Company is making progress as the status of certain of these products has been restored on the QPLsix month period driven by temporary plant closures in Europe and we expect that the majority of these products will be restored by the end of 2019.China and distributor destocking.
GROSS PROFIT
Gross profit for the three months ended June 30, 2020 and 2019 was $163.6 and 2018 was $232.0, and $226.0,respectively, reflecting a gross margin of 32.2%31.8% and 32.4%32.2%, respectively. Gross profit for the six months ended June 30, 2020 and 2019 was $373.0 and 2018 was $450.8, and $450.2,respectively, reflecting a gross margin of 31.8%31.7% and 32.5%31.8%, respectively. The declinesdecrease in gross margin wereprofit was primarily driven by unfavorable sales volumes due to higher commodity costs and tariffs, unfavorable foreign currency and product mix. These werelower demand as a result of the COVID-19 pandemic, partially offset by sales volume leverage and price, as well as manufacturing and supply chain and productivity improvements, across all segments.restructuring benefits, and lower tariffs.
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 global 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 operations, financial position and cash flows.
OPERATING EXPENSES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months | | | | | | Six Months | | | | |
For the Periods Ended June 30 | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
General and administrative expenses | $ | 44.6 | | | $ | 62.6 | | | (28.8) | % | | $ | 101.7 | | | $ | 113.4 | | | (10.3) | % |
Sales and marketing expenses | 35.7 | | | 42.7 | | | (16.4) | % | | 77.3 | | | 82.9 | | | (6.8) | % |
Research and development expenses | 18.9 | | | 25.8 | | | (26.7) | % | | 41.6 | | | 49.3 | | | (15.6) | % |
Asbestos-related costs (benefit), net | 16.0 | | | 11.8 | | | 35.6 | % | | (24.7) | | | 24.4 | | | (201.2) | % |
Restructuring costs | 27.9 | | | 3.1 | | | 800.0 | % | | 31.0 | | | 4.2 | | | 638.1 | % |
Asset impairment charges | — | | | — | | | — | % | | 16.3 | | | — | | | ** |
Total operating expenses | $ | 143.1 | | | $ | 146.0 | | | (2.0) | % | | $ | 243.2 | | | $ | 274.2 | | | (11.3) | % |
Total Operating Expenses By Segment: | | | | | | | | | | | |
Motion Technologies | $ | 43.6 | | | $ | 44.2 | | | (1.4) | % | | $ | 79.8 | | | $ | 80.0 | | | (0.2) | % |
Industrial Process | 50.8 | | | 46.7 | | | 8.8 | % | | 113.6 | | | 86.4 | | | 31.5 | % |
Connect & Control Technologies | 31.7 | | | 33.5 | | | (5.4) | % | | 64.3 | | | 66.3 | | | (3.0) | % |
Corporate & Other | 17.0 | | | 21.6 | | | (21.3) | % | | (14.5) | | | 41.5 | | | (134.9) | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months | | Six Months |
For the Periods Ended June 30 | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
General and administrative expenses | $ | 65.7 |
| | $ | 63.0 |
| | 4.3 | % | | $ | 117.6 |
| | $ | 128.1 |
| | (8.2 | )% |
Sales and marketing expenses | 42.7 |
| | 43.4 |
| | (1.6 | )% | | 82.9 |
| | 86.9 |
| | (4.6 | )% |
Research and development expenses | 25.8 |
| | 25.8 |
| | — | % | | 49.3 |
| | 50.5 |
| | (2.4 | )% |
Asbestos-related costs (benefit), net | 11.8 |
| | 13.5 |
| | (12.6 | )% | | 24.4 |
| | (6.2 | ) | | 493.5 | % |
Total operating expenses | $ | 146.0 |
| | $ | 145.7 |
| | 0.2 | % | | $ | 274.2 |
| | $ | 259.3 |
| | 5.7 | % |
Total Operating Expenses By Segment: | | | | | | | | | | | |
Motion Technologies | $ | 44.2 |
| | $ | 45.7 |
| | (3.3 | )% | | $ | 80.0 |
| | $ | 91.3 |
| | (12.4 | )% |
Industrial Process | 46.7 |
| | 40.4 |
| | 15.6 | % | | 86.4 |
| | 83.2 |
| | 3.8 | % |
Connect & Control Technologies | 33.5 |
| | 33.6 |
| | (0.3 | )% | | 66.3 |
| | 67.6 |
| | (1.9 | )% |
Corporate & Other | 21.6 |
| | 26.0 |
| | (16.9 | )% | | 41.5 |
| | 17.2 |
| | 141.3 | % |
** Resulting percentage change not considered meaningful.General and administrative (G&A) expenses for the three months ended June 30, 2019 increased $2.7. The increase during the period was from higher restructuring costs of $2 as well as an increase in acquisition-related costs of $2.8 primarily from the acquisition of Rheinhütte which was partially offset by benefits from cost reduction actions. General and administrative expenses for the six months ended June 30, 2020 decreased $18.0 and $11.7, which includes incremental costs of $0.8 and $3.0, respectively, from our 2019 acquisitions of Rheinhütte and Matrix. Excluding these acquisitions, G&A expenses decreased $10.5.$18.8 and $14.7, respectively, due to a decline in environmental costs of $4.3 and $4.0, primarily resulting from the recognition of a benefit related to insurance recoveries. In addition, toincentive compensation costs declined $3.2 and $5.5, for the items mentioned above, thethree and six month period includes additional Europeanperiods, respectively, and the prior year included government investment incentives of $5$3.0. Furthermore, we benefited from cost actions across all segments, which included savings from professional services of $4.6 and a reduction$4.1. These items were partially offset by an increase in legalbad debt expense of $3.1 and environmental costs.$4.3, respectively, for the three and six month periods.
Sales and marketing expenses for the three and six months ended June 30, 20192020 decreased $0.7$7.0 and $4.0,$5.6, respectively, due to a reduction in marketingwhich included incremental costs of $2.3$1.1 and $4.7$4.3, respectively, from our 2019 acquisitions of Rheinhütte and favorable foreign currency impact of $0.9Matrix. Excluding these acquisitions, sales and $2.2, respectively. These items were partially offsetmarketing expenses decreased $8.1 and $9.9, respectively, primarily driven by higher commission costs.cost actions across all segments.
Research and development expenses for the three months ended June 30, 2019 were flat and decreased $1.2, during the six months ended June 30, 2019.
Asbestos-related costs decreased $1.7, and increased $30.6, during the three and six months ended June 30, 2019,2020 decreased across all segments for a total reduction of $6.9 and $7.7, respectively. The change
Asbestos-related costs increased $4.2 during the three months ended June 30, 2020 due to a settlement agreement with an insurer to accelerate payments previously included in a buyout agreement, resulting in a loss of $4.2. Asbestos-related costs for the six months ended June 30, 2019 was2020 decreased $49.1 primarily due to a $32.1 benefit from an insurance$66.4 settlement recordedagreement with a group of insurers in the first quarter of 2018.2020. See Note 19, Commitments and Contingencies, to the Consolidated Condensed Financial Statements for further information. Restructuring costs increased $24.8 and $26.8 during the three and six months ended June 30, 2020, respectively, due to actions taken under the Company’s 2020 Global Restructuring Plan. See Note 5, Restructuring Actions, to the Consolidated Condensed Financial Statements for further information.
further information. Significant additional adverse changes to the economic environment and future cash flows of other businesses could cause us to record additional impairment charges in future periods, which may be material.
OPERATING INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months | | | | | | Six Months | | | | |
For the Periods Ended June 30 | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Motion Technologies | $ | 10.4 | | | $ | 52.0 | | | (80.0) | % | | $ | 63.5 | | | $ | 112.9 | | | (43.8) | % |
Industrial Process | 18.5 | | | 26.0 | | | (28.8) | % | | 27.4 | | | 48.2 | | | (43.2) | % |
Connect & Control Technologies | 8.4 | | | 29.6 | | | (71.6) | % | | 24.3 | | | 57.0 | | | (57.4) | % |
Segment operating income | 37.3 | | | 107.6 | | | (65.3) | % | | 115.2 | | | 218.1 | | | (47.2) | % |
Asbestos-related (costs) benefit, net | (16.0) | | | (11.8) | | | (35.6) | % | | 24.7 | | | (24.4) | | | 201.2 | % |
Other corporate costs | (0.8) | | | (9.8) | | | 91.8 | % | | (10.1) | | | (17.1) | | | 40.9 | % |
Total corporate | (16.8) | | | (21.6) | | | (22.2) | % | | 14.6 | | | (41.5) | | | (135.2) | % |
Total operating income | $ | 20.5 | | | $ | 86.0 | | | (76.2) | % | | $ | 129.8 | | | $ | 176.6 | | | (26.5) | % |
Operating margin: | | | | | | | | | | | |
Motion Technologies | 5.2 | % | | 16.4 | % | | (1,120) | bp | | 12.8 | % | | 17.8 | % | | (500) | bp |
Industrial Process | 9.6 | % | | 11.2 | % | | (160) | bp | | 6.5 | % | | 10.8 | % | | (430) | bp |
Connect & Control Technologies | 6.8 | % | | 17.4 | % | | (1,060) | bp | | 9.3 | % | | 17.0 | % | | (770) | bp |
Segment operating margin | 7.2 | % | | 14.9 | % | | (770) | bp | | 9.8 | % | | 15.4 | % | | (560) | bp |
Consolidated operating margin | 4.0 | % | | 11.9 | % | | (790) | bp | | 11.0 | % | | 12.5 | % | | (150) | bp |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months | | Six Months |
For the Periods Ended June 30 | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Motion Technologies | $ | 52.0 |
| | $ | 55.5 |
| | (6.3 | )% | | $ | 112.9 |
| | $ | 117.4 |
| | (3.8 | )% |
Industrial Process | 26.0 |
| | 23.4 |
| | 11.1 | % | | 48.2 |
| | 40.3 |
| | 19.6 | % |
Connect & Control Technologies | 29.6 |
| | 27.3 |
| | 8.4 | % | | 57.0 |
| | 50.3 |
| | 13.3 | % |
Segment operating income | 107.6 |
| | 106.2 |
| | 1.3 | % | | 218.1 |
| | 208.0 |
| | 4.9 | % |
Asbestos-related (costs) benefit, net | (11.8 | ) | | (13.5 | ) | | 12.6 | % | | (24.4 | ) | | 6.2 |
| | (493.5 | )% |
Other corporate costs | (9.8 | ) | | (12.4 | ) | | 21.0 | % | | (17.1 | ) | | (23.3 | ) | | 26.6 | % |
Total corporate and asbestos-related costs | (21.6 | ) | | (25.9 | ) | | 16.6 | % | | (41.5 | ) | | (17.1 | ) | | (142.7 | )% |
Total operating income | $ | 86.0 |
| | $ | 80.3 |
| | 7.1 | % | | $ | 176.6 |
| | $ | 190.9 |
| | (7.5 | )% |
Operating margin: | | | | | | | | | | | |
Motion Technologies | 16.4 | % | | 16.8 | % | | (40 | )bp | | 17.8 | % | | 17.5 | % | | 30 | bp |
Industrial Process | 11.2 | % | | 11.5 | % | | (30 | )bp | | 10.8 | % | | 10.3 | % | | 50 | bp |
Connect & Control Technologies | 17.4 | % | | 16.6 | % | | 80 | bp | | 17.0 | % | | 15.6 | % | | 140 | bp |
Segment operating margin | 14.9 | % | | 15.2 | % | | (30 | )bp | | 15.4 | % | | 15.0 | % | | 40 | bp |
Consolidated operating margin | 11.9 | % | | 11.5 | % | | 40 | bp | | 12.5 | % | | 13.8 | % | | (130 | )bp |
** Resulting percentage change not considered meaningful.MT operating income for the three and six months ended June 30, 20192020 decreased $3.5, or 6.3%,$41.6 and $49.4, respectively, and had a margin decline of 401,120 basis points. Operating income for the six months ended June 30, 2019 decreased $4.5, or 3.8%,points and had a margin improvement of 30500 basis points.points, respectively. The decrease in operating income for both periods was primarily driven by higher commodityunfavorable sales volume of $44 and $47 due to a decline in automotive production resulting from COVID-19, an increase in restructuring costs of $10.9 and tariffs as well as$10.2 and unfavorable foreign currency impact. This was partially offset by improvementsexchange. The six month period also included investment incentives received in operatingthe prior year of $3. Partially offsetting the decline for the three and supply chainsix month periods were net savings from productivity which provided a benefitand restructuring actions of $9 and $19,$15, respectively, for the quarter and year-to-date periods. In addition, the six months ended June 30, 2019 benefited from European investment incentives of $5.a reduction in tariffs.
IP operating income for the three and six months ended June 30, 2019 increased $2.6, or 11.1%,2020 decreased $7.5 and $20.8, respectively, and had a margin decline of 30160 basis points. Operating income for the six months ended June 30, 2019 increased $7.9, or 19.6%,points and had a margin improvement of 50430 basis points.points, respectively. The increasedecline in operating income in bothduring the three and six month periods was primarily driven by lower sales volumes of $15 in both periods, an increase in restructuring costs of $7.7 and $7.5, and an incremental bad debt reserve of $4.1 recognized in the second quarter. Additionally, the six month period includes asset impairments of $16.3 related to a benefitbusiness that primarily serves the global upstream oil and gas market and unfavorable foreign currency impacts of $12 and $23, respectively, from favorable volume, benefits from productivity and supply chain actions, and pricing. This was$3. These items were partially offset by tariffs, higherfavorable pricing and mix, savings from supply chain, productivity and restructuring actions, and a reduction in acquisition costs and unfavorable sales mix.costs. The second quarter also included benefits of $3 from the CARES Act.
CCT operating income for the three months ended June 30, 2019 increased $2.3, or 8.4%, and had a margin improvement of 80 basis points. CCT operating income for the six months ended June 30, 2019 increased $6.7, or 13.3%,2020 decreased $21.2 and $32.7, respectively, and had a margin improvementdecline of 1401,060 basis points.points and 770 basis points, respectively. The increasedecline in operating income during the three and six month periods was primarily driven by lower sales volume leverage which providedvolumes of $25 and $41 mainly due to the negative impact of COVID-19 on global commercial air traffic and an increase in restructuring costs of $5.4 and $6.8, respectively. These items were partially offset by benefits from productivity, supply chain, and restructuring actions, as well as a second quarter benefit of $2 and $7, respectively, and improvements in operating and supply chain productivity. This was partially offset by unfavorable commodity costs, strategic investments and mix.from the CARES Act.
Other corporate costs for the three and six months ended June 30, 20192020 decreased $2.6, or 21.0%,$9.0 and $6.2, or 26.6%,$7.0, respectively, comparedprimarily reflecting a benefit of $5.9 from the recognition of an environmental benefit related to the prior year. The decrease was primarily driveninsurance recoveries, lower incentive compensation costs of $1.5 and $3.6, respectively, and benefits from cost actions. These items were partially offset by cost reduction actions, as well as lower legalan increase in restructuring costs of $0.8 and environmental costs.$2.3, respectively, and unfavorable foreign currency impacts of $2 in both periods.
INTEREST AND NON-OPERATING INCOME AND EXPENSES, NET
| | | Three Months | | Six Months | | Three Months | | | Six Months | |
For the Periods Ended June 30 | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | For the Periods Ended June 30 | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Interest and non-operating (income) expenses, net | $ | (0.4 | ) | | $ | 1.5 |
| | (126.7 | )% | | $ | (0.9 | ) | | $ | 3.3 |
| | (127.3 | )% | |
Interest and non-operating expenses (income), net | | Interest and non-operating expenses (income), net | $ | 2.2 | | | $ | (0.4) | | | (650.0) | % | | $ | 2.8 | | | $ | (0.9) | | | (411.1) | % |
The change during the three and six months ended June 30, 20192020 was due to favorablean increase in pension-related expense, higher interest ratesexpense from an increase in outstanding borrowings, and a decline in interest returns on commercial paper borrowings, additional interest income earned on time deposits,cash and lower pension-related expense.money market investments.
U.S. Qualified Pension Plan Termination
On February 19, 2020, the Company’s Board of Directors conditionally authorized the termination of our U.S. qualified pension plan by offering lump sum distributions to certain participants and transferring the plan’s remaining benefit obligations to an insurance company through one or more group annuity contracts. If we proceed with the termination of the plan, the transaction is expected to occur in the second half of 2020 and would result in a non-cash pension settlement charge of approximately $130 to $140 before tax, which includes recognition of the remaining pension losses currently recorded in accumulated other comprehensive loss, and derecognition of the net assets of the plan.
INCOME TAX EXPENSE
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months | | | | | | Six Months | | | | |
For the Periods Ended June 30 | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Income tax (benefit) expense | $ | (28.1) | | | $ | 19.3 | | | (245.6) | % | | $ | (3.4) | | | $ | 39.0 | | | (108.7) | % |
Effective tax rate | (153.6) | % | | 22.3 | % | | ** | | (2.7) | % | | 22.0 | % | | ** |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months | | Six Months |
For the Periods Ended June 30 | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Income tax expense | $ | 19.3 |
| | $ | 8.9 |
| | 116.9 | % | | $ | 39.0 |
| | $ | 16.5 |
| | 136.4 | % |
Effective tax rate | 22.3 | % | | 11.3 | % | | 1,100 | bp | | 22.0 | % | | 8.8 | % | | 1,320 | bp |
** Resulting basis point change not considered meaningful.The higherlower effective tax rate during the second quarter and year-to-date periods of 20192020 was primarily due to an $11.3 reduction of a deferred tax liability in 2018 associated with unremitted foreign earnings. The higher effective tax rate during the year to date period is primarily due to tax benefits of $21.6$26.7 resulting from a recently completed internal reorganization in 2018 from German valuation allowance reversals onEurope. This reorganization resulted in a refined projection of future earnings, which will result in the realization of a portion of our deferred tax assetsassets. Additionally, in the second quarter of 2020, the Company completed the U.S. income tax audit for tax year 2016 resulting in $1.1 of previously unrecognized tax benefits.
The Company’s financial condition and results of operations have been and are expected to continue to be adversely affected by the COVID-19 pandemic and the governmental and market reactions to COVID-19. The impacts on earnings have already had, and will continue to have, an impact on the Company’s overall effective tax rate throughout the year.
The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. In the second quarter of 2020, the Company recognized a $4.5 reductionbenefit of $7.2 from the CARES Act. The benefit was recorded in operating income and was related to the provisional one-time tax charge associated with the Tax Act.
The Company operates in various taxemployer portion of payroll taxes. Certain non-U.S. jurisdictions and is subjecthave enacted similar stimulus measures. We continue to examination by tax authorities in these jurisdictions. The Company is currently under examination in several jurisdictions including the 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 of these uncertainties, the ultimate resolutionmonitor any effects that 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 $14 due to changes in audit status, expiration of statutes of limitations andCARES Act or 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’s 2011 spin-off of those businesses.similar legislation globally.
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. Significant factors that affect our overall management of liquidity include our cash flow from operations, credit ratings, the availability of commercial paper, access to bank lines of credit, term loans, and the ability to attract long-term capital on satisfactory terms. We expectassess 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 funddo so.
As a result of the COVID-19 global pandemic, we continue to anticipate future unfavorable impacts to our cash flow from operations, which is the primary source of funding for our ongoing working capital capital expenditures, dividendsneeds. These negative impacts include, but are not limited to, lower revenues and financing requirements through cash flowsorders from operationscustomer delays, missed or late deliveries due to disruptions in our global supply chain, delayed supplier deliveries, or the inability to procure supplier inputs at reasonable prices or at all, and cash on hand,customer bankruptcies or by accessing the U.S. or Europeandelays in customer receivable collections. We are unable to predict how long these negative impacts will last, therefore we have taken proactive measures to provide access to additional liquidity. On April 29, 2020, we secured two 364-day revolving credit agreements totaling $200 to supplement our existing $500 Revolving Credit Agreement and commercial paper markets orprograms. As of June 30, 2020, we had $587.8 available to us under our Revolving Credit Agreement.revolving credit agreements. We also continue to take a proactive approach to preserve cash by renegotiating contracts with vendors where possible, applying aggressive cost savings measures to limit discretionary spending, and implementing actions to reduce our cost structure. The Company also continues to evaluate the various global governmental programs instituted in response to COVID-19, including the CARES Act in the U.S., to further maximize our liquidity. The CARES Act and various global programs in the jurisdictions in which we operate generally provide for deferrals of tax payments, employee retention credits, workforce incentives, as well as incentive financing programs backed by governmental agencies. As of June 30, 2020, we have not incurred any borrowings under governmental loan programs.
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. We plan to continue to transfer cash between certain international subsidiaries and the U.S. and other international subsidiaries when it is cost effective to do so. The passage of the U.S. Tax Cuts and Jobs Act providesof 2017 (Tax Act) in 2017 provided greater flexibility around our global cash management strategy related to the amount and timing of transfers, and we will continue to support growth and expansion in markets outside of the U.S. through the development of products, increased capital spending, and potential foreign acquisitions. During the year ended December 31, 2018 we had netNet cash distributions from foreign countries to the U.S. of $318.1. We did not have any distributions from foreign countries to the U.S. during the six months ended June 30, 2019.2020 was $426.8. During the year ended December 31, 2019, we had net cash distributions from foreign countries to the U.S. of $11.4. The timing and amount of any additional future distributions remains under evaluation.evaluation based on our jurisdictional cash needs.
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. ThroughIn the second quarter of 2019,2020, we declared dividends of $0.147$0.169 per share for shareholders of record on March 11, 2019 and June 10, 2019, which were paid on March 29, 2019 and June 28, 2019. The15, 2020. Dividends declared in 2020 of $29.5 was a 13.5% increase from dividends declared in 2019.
During the first and second quarter of 2019 were a 9.7% increase from2020, we completed our $1 billion share repurchase plan approved in 2006 and commenced repurchases under the first and second quarter of 2018.
$500 share repurchase plan approved in 2019. During the six months ended June 30, 20192020 and 2018,2019, we repurchased and retired 0.21.7 and 1.00.2 shares of common stock for $10.5$73.2 and $50.0,$10.5, respectively, under our $1 billion share repurchase program. To date, under the program,plans. Separate from our share repurchase plans, the Company has repurchased 22.40.2 shares during both the six months ended June 30, 2020 and 2019, respectively, for $919.9.an aggregate price of $10.5 and $9.5, respectively, in settlement of employee tax withholding obligations due upon the vesting of RSUs and PSUs. All repurchased shares are canceled immediately following the repurchases.
Significant factors that affect our overall management of liquidity include our credit ratings, the availability of commercial paper, access 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
WeWhen available and economically feasible, we have access toaccessed the commercial paper market through programs in place in the U.S. and Europe to supplement 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 commercialfunding. Commercial paper program by adjusting the level of commercial paper borrowingsoutstanding as opportunities to deploy additional capital arise and it is cost effective to do so. As of June 30, 2019, we2020 was $134.1, consisting of $50.0 under the Company’s U.S. program and $84.1 under the Company’s Euro program. Weighted average interest rates were 0.80% and 0.36% under the U.S. and euro programs, respectively, and had outstanding commercial papermaturity terms of $148.0 through our European program, a portionless than three months from the date of which was used to acquire Rheinhütte. The average outstanding commercial paper balance during the six months ended June 30, 2019 was $129.2. There have been no other material changes that have impacted our funding and liquidity capabilities since December issuance.
Revolving Credit AgreementAgreements
Our $500 revolving 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 Companyamount. These increased commitments are subject to certain conditions and with the consent of the institutions providing such increased commitments.therefore may not be available to us. 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. As of June 30, 2020, outstanding borrowings under the Revolving Credit Agreement were $112.2 as of June 30, 2020 with a weighted average interest rate of 1.1% and varying maturity dates all within six months or less. 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. Our interest coverage ratio and leverage ratio were within the prescribed thresholds as of June 30, 2019, and there were no outstanding borrowings under our Revolving Credit Agreement. In the event of a ratings downgrade 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 2021.2022.
On April 29, 2020, we entered into two 364-day revolving credit agreements totaling $200 (the Incremental Revolving Credit Agreements) which provide the Company with additional liquidity in excess of the Revolving Credit Agreement. The interest rate per annum is based on the LIBOR rate, adjusted for statutory reserve requirements, plus a margin of up to 1.55%. The provisions of the Incremental Revolving Credit Agreements mirror those of the Revolving Credit Agreement, including all covenants. In addition, the Incremental Revolving Credit Agreements did not violate any negative covenants associated with the existing Revolving Credit Agreement. There were no outstanding borrowings under the Incremental Revolving Credit Agreements as of the date of this Report.
As of June 30, 2020, our interest coverage ratio and leverage ratios associated with our revolving credit agreements were within the prescribed thresholds. Additionally, we currently expect to remain within the prescribed thresholds until maturity.
See Note 14, Debt, to the Consolidated Condensed Financial Statements for further information. 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 six months ended June 30, 20192020 and 2018.2019.
| | For the Six Months Ended June 30 | 2019 | | 2018 | For the Six Months Ended June 30 | 2020 | | 2019 |
Operating activities | $ | 101.1 |
| | $ | 119.3 |
| Operating activities | $ | 203.1 | | | $ | 101.1 | |
Investing activities | (132.3 | ) | | (45.4 | ) | Investing activities | (37.1) | | | (132.3) | |
Financing activities | 0.4 |
| | (4.1 | ) | Financing activities | 41.2 | | | 0.4 | |
Foreign exchange | 0.6 |
| | (8.6 | ) | Foreign exchange | (0.2) | | | 0.6 | |
Total net cash flow (used in) provided by continuing operations | (30.2 | ) | | 61.2 |
| |
Net cash provided by (used) in discontinued operations | 1.2 |
| | (1.4 | ) | |
Total net cash provided by (used in) continuing operations | | Total net cash provided by (used in) continuing operations | 207.0 | | | (30.2) | |
Net cash provided by discontinued operations | | Net cash provided by discontinued operations | 0.1 | | | 1.2 | |
Net change in cash and cash equivalents | $ | (29.0 | ) | | $ | 59.8 |
| Net change in cash and cash equivalents | $ | 207.1 | | | $ | (29.0) | |
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 June 30, 2019.2020.
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 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 $20$10 to $30$20 over the next five years and increase to an average of approximately $35 to $45 per year over the remainder of the projection period as certain insurance coverage is exhausted. Net cash outflows for defense and indemnity, net of tax, averaged $21$20 over the past three annual periods. Total net asbestos cash outflows also include certain administrative costs, such as legal-related costs for insurance recovery strategies not included in the defense and indemnity projections.
In light of the variables and uncertainties inherent in the long-term projection of the Company’s asbestos exposures and potential recoveries, while 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 2029.2030.
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.
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.calculated other than in accordance with accounting principles generally accepted in the United States of America (GAAP). 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 otherSome of these metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America (GAAP)GAAP and should not be considered a substitute for measures determined in accordance with GAAP.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
CRITICAL ACCOUNTING ESTIMATES
The preparation of ITT’s financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. ITT believes the most complex and sensitive judgments, because of their significance to the Consolidated Condensed Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 20182019 Annual Report describes the critical accounting estimates that are used in the preparation of the Consolidated Condensed Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes concerning ITT’s critical accounting estimates as described in our 20182019 Annual Report. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the information concerning market risk as stated in our 20182019 Annual Report. ITEM 4. CONTROLS AND PROCEDURES
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 Securities Exchange Act of 1934 (the Exchange Act) as of the end of the period covered by this report.Report. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report,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. In addition, we have not experienced any material impact to our internal controls over financial reporting despite the fact that many of our employees continue to work remotely during the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. Descriptions of certain legal proceedings to which the Company is a party are contained in Note 19, Commitments and Contingencies to the Consolidated Condensed Financial Statements included in Part I, Item 1 of this Report and are incorporated by reference herein. Such descriptions include the following recent developments: Asbestos Proceedings
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’s 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’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’s asbestos exposures and potential recoveries. As of June 30, 2019,2020, we have recorded an undiscounted asbestos-related liability for pending claims and unasserted claims estimated to be filed over the next 10 years of $835.8,$803.8, including expected legal fees, and an associated asset of $354.6$405.3 which represents estimated recoveries from insurers, resulting in a net asbestos exposure of $481.2.$398.5.
Environmental
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 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 led by the Civil Division of the U.S. Department of Justice (DOJ). The subpoena and related investigation involved certain connector products manufactured by the Company’s Connect & Control Technologies segment that are purchased or used by the U.S. government. In the second quarter of 2019, the Company settled this matter with the DOJ, acting on behalf of the U.S. government, and paid $11 to avoid the expense and uncertainty of litigation. As part of the settlement, the Company made no admission of wrongdoing. During the second quarter of 2019, the Company also received an insurance recovery of $1 related to this matter.
ITEM 1A. RISK FACTORS
Reference is made to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our 20182019 Annual Report, which are incorporated by reference herein. There have been no material changes with regard to the risk factors disclosed in such report.report, other than those noted below. Our financial condition and results of operations may be adversely affected by the COVID-19 pandemic and the governmental and market reactions to COVID-19. The pandemic outbreak of COVID-19 has surfaced in nearly all regions around the world. The COVID-19 pandemic and the resulting measures by federal, state and local governments to contain the outbreak have caused, and continue to cause, significant disruptions in our businesses and in global markets where we operate. These disruptions may have a material adverse effect on our financial condition and results of operations due to, among other potential events and circumstances, the occurrence of the following:
•partial or full closure of our offices or manufacturing facilities, either voluntarily or in response to government mandates, including as a result of an outbreak of COVID-19 that directly affects our workforce;
•lower production capacity and labor productivity due to employee illness, loss of key personnel, increased absenteeism, inability to travel, or the implementation of government mandated or voluntary preventative measures such as reductions in operating hours;
•reduced sales related to decreased customer demand and spending, order push-outs, order cancellations or unfavorable pricing dynamics;
•missed or late deliveries due to disruptions in our global supply chain, delayed supplier deliveries, or the inability to procure supplier inputs at reasonable prices or at all;
•delays in collections or an inability to collect on customer receivables;
•customer or supplier bankruptcy;
•liquidity challenges including an inability to pay suppliers and vendors;
•difficulty accessing capital markets;
•increasing indebtedness due to our need to increase borrowing to fund operations during a period of reduced revenue; and
•delays in capital investments or research and development.
At this time, we cannot predict the duration or magnitude of the COVID-19 pandemic, the various governmental containment measures or the resulting disruptions to our markets and our business. The longer the pandemic continues, the more likely that the foregoing risks will be realized and that other negative impacts on our business will occur, including some that we are not currently able to predict.
Our business is impacted by our customers’ levels of capital investment and maintenance expenditures, particularly in the oil and gas, chemical, and mining markets.
Demand for certain industrial products and services depends on the level of capital investment and planned maintenance expenditures of our customers. Our customers’ levels of capital expenditures depend, in turn, on general economic conditions, availability of credit, economic conditions within their respective industries and expectations of future market behavior. Additionally, volatility in commodity prices can negatively affect the level of these activities and can result in postponement of capital spending decisions or the delay or cancellation of existing orders. The ability of our customers to finance capital investment and maintenance may also be affected by factors independent of the conditions in their industries, such as the condition of global credit and capital markets.
The businesses of many of our customers, particularly those in the oil and gas, chemical, and mining industries, which represented approximately 10%, 9%, and 3%, respectively, of our 2019 revenue, are to varying degrees cyclical and have experienced, and may in the future experience, periodic downturns of varying severity. For example, the volatility of the oil and gas market has generally been dependent upon the prevailing view of future gas and oil prices, which are influenced by numerous supply and demand factors, including availability and cost of capital, global and domestic economic conditions, environmental regulations, policies of OPEC countries and Russia, and other factors. Actions taken by Saudi Arabia and Russia and the COVID-19 pandemic have caused a worldwide oversupply in oil and gas, resulting in significant reductions in oil and gas prices. Our customers in these industries, particularly those whose demand for our products and services is primarily profit-driven, historically have tended to delay large capital projects, including expensive maintenance and upgrades, during economic downturns. Additionally, fluctuating energy demand forecasts and commodity pricing and other macroeconomic factors may cause our customers to be more conservative in their capital planning, which could reduce demand for our products and services. Reduced demand for our products and
services could result in the delay or cancellation of existing orders or lead to excess manufacturing capacity, which unfavorably impacts our absorption of fixed manufacturing costs. This reduced demand may also erode average selling prices in our industry. These factors could have a material adverse effect on our business, results of operations and financial condition.
Additionally, some of our customers may choose to postpone capital investment and maintenance, even during favorable conditions in their industries or markets, which could lead to the delay or cancellation of orders. Despite these favorable conditions, the general health of global credit and capital markets and our customers’ ability to access such markets may significantly impact investments in large capital projects, as well as necessary maintenance and upgrades. In addition, the liquidity and financial position of our customers, which are typically directly linked to the economies in which they operate, could impact capital investment decisions and their ability to pay in full and/or on a timely basis. Any of these factors, whether individually or in the aggregate, could have a material adverse effect on our customers and, in turn, our business, results of operations and financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of equity securities by the issuer and affiliated purchasers
We did not make any open-market share repurchases of our common stock during the quarter ended June 30, 2019.2020. We routinely receive shares of our common stock as payment for the withholding of taxes due on vested restricted stock awards from stock-based compensation program participants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Disclosure pursuant to Section 219 of the Iran Threat Reduction & Syria Human Rights Act (ITRA)
This disclosure is made pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 which added subsection (r) to Section 13 of the Exchange Act (Section 13(r)). Section 13(r) requires an issuer to disclose in its annual or quarterly reports whether it or any of its affiliates have knowingly engaged in certain activities, transactions or dealings relating to Iran. Disclosure of such activities, transactions or dealings is required even when conducted outside the United States by non-U.S. persons in compliance with applicable law, and whether or not such activities are sanctionable under U.S. law.
In its 2012 Annual Report, ITT described its acquisition of all the shares of Joh. Heinr. Bornemann GmbH (Bornemann) in November 2012, as well as certain activities of Bornemann in Iran and the wind down of those activities in accordance with a General License issued on December 26, 2012 by the Office of Foreign Assets Control (the General License). As permitted by the General License, on or before March 8, 2013, Bornemann completed the wind-down activities and ceased all activities in Iran. As required to be disclosed by Section 13(r), the gross revenues and operating income to Bornemann from its Iranian activities subsequent to its acquisition by ITT were €2.2 euros and €1.5 euros, respectively. Prior to its acquisition by ITT, Bornemann issued a performance bond to its Iranian customer in the amount of €1.3 euros (the Bond). Bornemann requested that the Bond be canceled prior to March 8, 2013; however, the former customer refused this request and as a result the Bond remains outstanding. Bornemann did not receive gross revenues or operating income, or pay interest, with respect to the Bond in any subsequent periods through June 30, 2019,2020, however, Bornemann did pay fees of approximately €5 thousand euros during the six months ended June 30, 20192020 and approximately €11 thousand euros during 20182019 to the German financial institution which is maintaining the Bond.
ITEM 6. EXHIBITS
| | | | | | | | |
EXHIBIT NUMBER | | DESCRIPTION |
| | |
EXHIBIT NUMBER(31.1) | | DESCRIPTION |
| | |
(10.1)* | | |
| | |
(10.2)* | | |
| | |
(10.3)* | | |
| | |
(31.1) | | |
| | |
(31.2) | | |
| | |
(32.1) | | |
| | |
(32.2) | | |
| | |
(101) | | The following materials from ITT Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019,2020, formatted in iXBRLInline XBRL (Inline Extensible Business Reporting Language): (i) Consolidated Condensed Statements of Operations, (ii) Consolidated Condensed Statements of Comprehensive Income, (iii) Consolidated Condensed Balance Sheets, (iv) Consolidated Condensed Statements of Cash Flows, (v) Consolidated Condensed Statements of Changes in Shareholders’ Equity, and (vi) Notes to Consolidated Condensed Financial Statements, and (vii) Cover Page |
| | |
(104) | | The cover page from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL (included in Exhibit 101). |
* Management compensatory plan
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | |
| | ITT Inc. |
| | ITT Inc. |
| | (Registrant) |
| | (Registrant) |
By: | | |
By: | | /s/ John Capela |
| | John Capela |
| | Chief Accounting Officer |
| | (Principal accounting officer)Accounting Officer) |
August 2, 2019
July 31, 2020