ITT 10-K - 12.31.2014
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT
(Mark One)
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þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition period from to
Commission File No. 001-05672
ITT CORPORATION
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Incorporated in the State of Indiana | | 13-5158950 |
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1133 Westchester Avenue, White Plains, NY 10604
(Principal Executive Office)
Telephone Number: (914) 641-2000
Securities registered pursuant to Section 12(b) of the Act, all of which are registered on The New York Stock Exchange, Inc.:
COMMON STOCK, $1 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ | | Accelerated filer ¨ | | Non-accelerated filer ¨ | | Smaller reporting company ¨ |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant on June 30, 2014 was approximately $4.4 billion. As of February 16, 2015, there were outstanding 91.0 million shares of common stock, $1 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for its 2015 Annual Meeting of Shareholders are incorporated by reference in Part II and Part III of this Form 10-K.
TABLE OF CONTENTS
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ITEM | PAGE |
PART I |
1 | | |
1A | | |
1B | | |
2 | | |
3 | | |
4 | | |
* | | |
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PART II |
5 | | |
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6 | | |
7 | | |
7A | | |
8 | | |
9 | | |
9A | | |
9B | | |
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PART III |
10 | | |
11 | | |
12 | | |
13 | | |
14 | | |
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PART IV |
15 | | |
| II-1 |
| II-3 |
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* | Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K. | |
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Some of the information included herein includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about the business and future financial results of the industry in which we operate, and other legal, regulatory and economic developments. These forward-looking statements include, but are not limited to, future strategic plans and other statements that describe the company’s business strategy, outlook, objectives, plans, intentions or goals, and any discussion of future operating or financial performance.
We use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "target,“ “future,” “may,” “will,” “could,” “should,” “potential,” “continue,” “guidance” and other similar expressions to identify such forward-looking statements. Forward-looking statements are uncertain and to some extent unpredictable, and involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such forward-looking statements.
Where, in any forward-looking statement we express an expectation or belief as to future results or events, such expectation or belief is based on current plans and expectations of our management, expressed in good faith and believed to have a reasonable basis. However, there can be no assurance that the expectation or belief will occur or that anticipated results will be achieved or accomplished. More information on factors that could cause actual results or events to differ materially from those anticipated is included in this Annual Report on Form 10-K under the caption “Risk Factors,” and in other documents filed from time to time with the U.S. Securities and Exchange Commission (SEC).
The forward-looking statements included in this report speak only as of the date of this report. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You can inspect, read and copy these reports, proxy statements and other information at the SEC's Public Reference Room, which is located at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information regarding the operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov on which you may access electronic copies of our SEC filings.
We make available free of charge at www.itt.com/investors copies of materials we file with, or furnish to, the SEC. ITT uses the Investor Relations page of its Internet site at www.itt.com/investors to disclose important information to the public. Information contained on ITT's Internet site, or that can be accessed through its Internet site, does not constitute a part of this Annual Report on Form 10-K. ITT has included its Internet site address only as an inactive textual reference and does not intend it to be an active link to its Internet site.
Our corporate headquarters are located at 1133 Westchester Avenue, White Plains, NY 10604 and the telephone number of this location is (914) 641-2000.
PART I
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ITEM 1. | DESCRIPTION OF BUSINESS |
(In millions, except per share amounts, unless otherwise stated)COMPANY OVERVIEW
ITT Corporation is a diversified manufacturer of highly engineered critical components and customized technology solutions for the energy, transportation and industrial markets. Building on its heritage of engineering, ITT partners with its customers to deliver enduring solutions to the key industries that underpin our modern way of life. With approximately 9,400 employees in more than 35 countries and sales in over 100 countries, we are committed to creating long-term sustainable value for all of our stakeholders. That goal is reflected in our organizational philosophy, which we refer to as The ITT Way and discuss in detail below.
ITT is a global company with a balanced and diversified portfolio, positioned to capitalize on enduring macro trends such as energy creation and efficiency, resource scarcity, large-scale urbanization, and the growing middle class in emerging economies. In 2014, 65% of our sales were outside the U.S., including 32% from emerging growth markets. Further, approximately 30% of our revenue is derived from aftermarket products and services where we capture repeatable revenues from our large installed base of specialized products. Additionally, approximately 35% of our revenue is derived from positions our products hold on long-lived customer platforms. Similar to the aftermarket, these are also long-term recurring revenues.
We manufacture components that are integral to the operation of 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. For example, our industrial pumps serve the critical function of transporting fluids throughout chemical processes at petrochemical plants. The pumps are critical to the production requirements of our customers' plants and their reliability helps our customers meet the delivery time and quality expectations of the users of the products they produce.
Our product and service offerings are organized in four segments: Industrial Process, Motion Technologies, Interconnect Solutions, and Control Technologies. These businesses generally operate within niche positions in large, attractive markets where specialized engineered solutions are required to support the needs of our industrial, transportation, and energy customers.
Industrial Process manufactures engineered fluid process equipment serving a diversified mix of customers in global infrastructure industries such as chemical, oil and gas, mining, and other industrial process markets and is a provider of plant optimization and efficiency solutions and aftermarket services and parts.
Motion Technologies manufactures brake components, shock absorbers and damping technologies for the global automotive, truck and trailer, public bus and rail transportation markets.
Interconnect Solutions manufactures and designs a wide range of highly engineered harsh environment connector solutions that make it possible to transfer signal and power between electronic devices which service global customers for the aerospace and defense, industrial and transportation, oil and gas, and medical markets.
Control Technologies manufactures specialized equipment, including actuation, valves, and noise and energy absorption components for the aerospace and defense, and industrial markets.
The table below provides revenue by segment for each of the last three years. See section titled “Segment Information” in Company Overview and Note 3, “Segment Information” to the Consolidated Financial Statements for further information about each of our segments.
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(In Millions) | 2014 |
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Industrial Process | $ | 1,208.3 |
| | $ | 1,107.4 |
| | $ | 955.8 |
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Motion Technologies | 769.4 |
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Interconnect Solutions | 392.8 |
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Control Technologies | 290.5 |
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Eliminations | (6.4 | ) | | (6.0 | ) | | (7.0 | ) |
Revenue | $ | 2,654.6 |
| | $ | 2,496.9 |
| | $ | 2,227.8 |
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Unless the context otherwise indicates, references herein to “ITT,” “the Company,” and such words as “we,” “us,” and “our” include ITT Corporation and its subsidiaries. ITT Corporation was incorporated as ITT Industries, Inc. on September 5, 1995 in the State of Indiana. On July 1, 2006, ITT Industries, Inc. changed its name to ITT Corporation.
On October 31, 2011 (the Distribution Date), ITT completed the tax-free spin-off (referred to herein as the Distribution) of its Defense and Information Solutions business, Exelis Inc. (Exelis), and its water-related businesses, Xylem Inc. (Xylem) by way of a distribution of all of the issued and outstanding shares of Exelis common stock and Xylem common stock, on a pro rata basis, to ITT shareholders of record on October 17, 2011. Exelis and Xylem are now independent companies trading on the New York Stock Exchange under the symbols “XLS” and “XYL,” respectively. The Distribution was made pursuant to a Distribution Agreement, dated October 25, 2011, among ITT, Exelis and Xylem (the Distribution Agreement). Following the Distribution, ITT did not own any shares of common stock of Exelis or Xylem.
Business Strengths and Strategies
Management believes that the Company has several competitive advantages that allow it to sustain and grow its market positions. ITT is a diversified industrial technology company with established businesses that share six unifying characteristics, referred to as The ITT Way:
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1. | The design and manufacture of highly engineered products for critical applications |
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2. | Leaders in attractive and defensible niches |
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3. | Globally concentrated footprint and highly diversified markets |
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4. | Longstanding brands and operating history |
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5. | Proven management system and leadership |
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6. | Our Values: Respect, Responsibility, Integrity |
Application of The ITT Way focuses on the principles that guide us as a company, namely leading with technology, differentiating with customers and optimizing our work. The concepts of The ITT Way enable us to create an enduring impact, sustainable growth and premier performance, through customer success, engaged employees, proud partners, enhanced communities, and shareholder value. At the center of The ITT Way are our people, who strive to create an enduring impact every day. Our employees think strategically, aim for flawless execution, and are proud of their work. We build an inspiring work environment that is based on our values of respect, responsibility, and integrity. We believe in the power of rewarding, and recognizing and developing our people as they make their own impact at our Company. We focus on attracting the right talent, in the right places, to deliver on our customer's complex global needs.
As a result, a significant strength for ITT is that our businesses share a common, repeatable operating model. Each business is a leader in applying its technology and engineering expertise to solve some of the most pressing challenges of our customers. Our applied engineering aptitude provides a special business fit 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 better assist our customers 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). ITT possesses a core competency operating this unified model across businesses in order to create value. These businesses also tend to operate in varying business cycles, which reduces exposures to any one economic cycle.
The oil and gas business in our Industrial Process segment is representative of the capability that many of ITT’s businesses have to generate profitable growth from our common operating model. In 2007, Industrial Process began to pursue growth in the oil and gas market because of its long-term attractiveness, our existing engineering capabilities and brand strength, and the aftermarket potential. We have been actively investing in our technology through product line extensions and we continue to aggressively build on our portfolio, upgrading and expanding our global capabilities to accommodate highly complex pumps that are used in the oil and gas market. We have expanded our strategic footprint and increased proximity to our customers through new facilities in India in 2008, Saudi Arabia in 2009, and expanded capabilities in Korea and the U.S. in 2013 and 2014. To supplement these organic growth drivers, the acquisitions of Canberra Pumps in Brazil during 2010, Blakers Pump Engineers in Australia during 2011, and Joh. Heinr. Bornemann GmbH (Bornemann) in 2012 provide us with a global leadership position. These actions have led to a compound annual growth rate for oil and gas market revenues in our Industrial Process business of 18.7% from 2007 to 2014. However, due to the decline in oil prices during 2014 and into 2015, the historical compound annual growth rate likely will not be achieved during 2015. Revenue stemming from the oil and gas market was approximately 20% of total revenue during 2014.
The Company also possesses strong leading brands, such as Goulds Pumps, Bornemann, Cannon, VEAM, BIW Connector Systems, KONI, Enidine and ITT, in many of its niche markets. These brands are associated with quality, reliability, durability, and engineering excellence. The Company’s brands extend internationally and is performs strongly in emerging growth markets including China, India, Brazil, Saudi Arabia, and Russia.
In addition to branding efforts, another strength is our collective utilization of our well-established ITT Management System (IMS), which is a data-driven, world-class capability-based framework we use to manage our businesses for superior performance. IMS also serves as a guide for the decisions and actions of our employees. We deploy IMS in each of our businesses and we have implemented a system of enterprise councils comprised of leaders from each business in the areas of: 1) Technology and Innovation; 2) Commercial Excellence; and 3) Operational Excellence. We have also implemented the ITT Risk Center of Excellence which strengthens ITT’s risk management process through proactive cross functional risk assessments. We have also established a Global Indirect Sourcing (GIS) team that coordinates certain sourcing and procurement initiatives. While our activities may vary between our businesses, our subject matter leaders in these collaborative, cross-business formal structures provide us with the opportunity to intelligently leverage best practices, bold thinking, and our collective know-how in areas such as customer relationship management, product development, coordinated sourcing initiatives, innovation, technology sharing, and risk management.
These strengths support a balanced operating strategy designed to increase the Company's earnings and financial returns. The elements of this strategy are disciplined organic growth through global market expansion and new product development, combined with operational improvements through the IMS that focus on reducing costs and cycle times and improving productivity, quality, and safety on a continuing basis. We believe we can drive growth by helping our existing customers grow, while cultivating new customers through geographic and product expansion. While the IMS is principally deployed internally, IMS benefits our customers through our continuous improvement efforts which are centered on exceeding our customer’s requirements.
We aspire to drive long-term average annual organic revenue growth of approximately 5%-7%, with corresponding operating margin expansion of 50-70 basis points, achieve an adjusted free cash flow conversion rate of greater than 105%, and deliver adjusted earnings per share growth of 10%-15% per year. Our long-term incentive plan includes a return on invested capital (ROIC) metric that reinforces management's focus on driving increased shareholder value. ITT’s strategy to achieve our profitable growth goals consists of the following key areas:
Differentiated Customer Experience
ITT places significant focus on managing the relationships it has with its customers through a formalized end-to-end process, referred to as Commercial Excellence, used to strategically price our products and services, develop our value propositions, and assist our customers to solve their toughest business challenges through a robust voice of customer process. ITT is able to accomplish this by providing an efficient and productive customer experience through advanced order configuration, on-time delivery, and reliable products and services. In addition, ITT has key strategic account relationships throughout the industries we serve. Strategic accounts are customer partnerships, often global in scale, which promote the shared benefits of improved business processes between ITT and its customers. Our strategic account agreements promote customer intimacy, optimized service and delivery performance, and provide growth and profit improvement opportunities. In some instances we are able to leverage these relationships across segments. For example, both Industrial Process and Interconnect Solutions supply products and services to certain oil and gas customers through Industrial Process’s strategic account relationships.
The Company views its customer relationships as its primary vehicle for growth and technological advancement. Understanding our customer’s growth plans and challenges allows ITT’s businesses to tailor and deliver reliable and timely products and services. For instance, collaboration between the Interconnect Solutions medical technologies' team, our customer’s U.S.-based design team, and our customer's China-based manufacturing team resulted in securing new business for a new global patient monitoring platform. The benefits from our differentiated customer experience often cross geographic regions, as evidenced by U.S. automotive platform wins by Motion Technologies with Japanese OEMs, relationships that began with the customer experience delivered by our operations team in China. These are the types of relationships that we continue to enhance and grow.
The Company has a core competency in application engineering because a majority of our products feature leading technologies that operate in harsh environments. Our products are designed to function reliably and consistently in these harsh conditions, such as the high pressure and extreme temperatures experienced on the ocean floor or the extreme vibration and corrosion experienced by high-speed rail cars. For example, Interconnect Solutions has developed a patented kPaC Technology, which responds to harsh oil well conditions by balancing the pressure of the electrically conductive well-fluid outside the device with a benign viscous dielectric medium inside the device. New designs have passed environmental testing, demonstrating that they can perform in 6,500 psi environments at 500 degrees Fahrenheit and higher while being subjected to rapid decompressions.
In addition, to further satisfy the company's customer base, ITT has differentiated itself in the critical arena of technology and research & development (R&D). ITT has a proven track record in new product development and introduction. ITT’s approach to technology is to work with its customers in tailoring the right approach to a particular customer need or problem. In our Industrial Process business, our engineers work with our customers in a number of highly challenging environments to improve the way our pumps are installed and operated. This allows our customers to run their processes more reliably and cost effectively by using less energy, which is the largest operating cost in a pump’s life cycle.
Focused Geographic and Aftermarket Market Expansion
ITT is a global company with 65% of its 2014 revenue derived from markets outside of the U.S., including 32% from emerging growth markets. Accordingly, ITT has located approximately half of its manufacturing facilities outside of the U.S. in order to lower costs, achieve strategic proximity to customers and further increase international sales and market share. For example, ICS has had a long-term presence at its Shenzhen, Guangdong Province, China facility which produces products for both domestic consumption in China and for global customers. Shenzhen is a low-cost manufacturing site that also possesses component fabrication capabilities such as metal stamping, plating, machining and injection molding. The Shenzhen site is staffed with engineers who design specific products for the Asia Pacific and China and the broader Asia Pacific region.
Because of the global nature of our businesses, ITT benefits from opportunities in emerging growth markets and in developed markets. For example, Motion Technologies is the leading manufacturer of automotive brake pads in Europe. One of the largest growth opportunities for this European-based business is the emerging market in China. In 2012, Motion Technologies opened a R&D center and production facility in Wuxi, China, focused on expanding and enhancing braking technologies for the local transportation market. We are now in the process of expanding the production capacity of the Wuxi facility to meet the increasing demand and market share growth that we are experiencing in the region.
In addition, we have and expect to continue to expand our R&D capabilities to make products that are relevant to local markets. Our focus is on products where reliability and engineered solutions are valued. We have established R&D technology centers in key markets such as India and China. In 2013, Industrial Process opened its state-of-the-art Korea-engineered pump Center of Excellence in order to continue to better serve and expand its market presence in the Eastern Hemisphere for engineered pumps. Industrial Process also expanded its R&D capabilities and testing in North America to serve a growing customer base by opening a new facility in Seneca Falls, New York during 2014.
In addition to geographic expansion opportunities, expanding our base of recurring revenue streams in the aftermarket is a key source of our growth. Aftermarket sources account for approximately 30% of our 2014 annual revenue. Our Industrial Process, Motion Technologies, and Control Technologies segments benefit from repeat sales of original products, consumable spare parts, and services as a result of our large, global, and growing installed base of products. Aftermarket business generally carries higher margins than original product sales and tends to be a more stable, recurring revenue stream than project-based businesses. The key drivers of aftermarket demand are the wear and tear on critical components in harsh environment applications. We develop our aftermarket business through our end-user sales channels and dedicated service personnel. The Company views this as a valuable source of future earnings and is actively marketing its capabilities while investing in technologies that reduce the customer’s total life-cycle cost. For example, our Industrial Process business has an established international service center network with eight Pump Repair and Overhaul shops (PRO shops) in the U.S. and facilities in Argentina, Australia, Brazil, Canada, Chile, China, Columbia, England, Saudi Arabia, Singapore, Thailand, and Venezuela. In addition, during 2014, Industrial Process established an engineering center in Glasgow, Scotland to support global aftermarket service growth.
Control Technologies provides aftermarket spares and repair services for commercial and military aircraft platforms. Our up-front investments to gain positions on aircraft platforms generate long-term repeatable aftermarket revenue. Control Technologies provides aftermarket services through our FAR 145 certified repair station located in our Valencia, California facility. Our dedicated sales channels have strong relationships with global airlines and we have a partnership agreement with a large maintenance, repair, and overview (MRO) facility that has regional presence and certifications in China.
Motion Technologies also has recurring revenue streams from automotive and rail platform content. Its products generally serve on long-term platforms whereby once the original equipment products are sold, aftermarket parts are needed to replace and extend the life of a vehicle. Our up-front investments to gain positions on automotive platforms generate long-term repeatable original equipment (OE) revenue, while also providing replacement pad opportunities in certain markets. Another example of a recurring revenue stream is on various aerospace platforms where ICS has been supplying content for many decades, such as with our rectangular and circular connectors which have been used in commercial aviation and military aerospace applications for over 50 years.
Operational Excellence
The Company strives to increase its profit margins and improve its competitive position in all of its businesses through its operational excellence strategy focused on integrated execution and continuous improvement processes to drive customer loyalty, and productivity through alignment, engagement and empowerment of our employees. The core elements of this strategy are Lean Six Sigma, enterprise-wide councils (Commercial Excellence, Operational Excellence, and Technology), and shared services deployment in the areas of Global Sourcing, Finance, Human Resources, Information Technology, and Legal Services. Certain operations, including shared services, are leveraged among the Company’s segments resulting in additional cost savings and synergies through the consolidation of operations and reduced general and administrative expenses. These strategies enable the Company to realize operating efficiencies, increase customer satisfaction, and increase free cash flow while lowering operating costs, streamlining processes, eliminating waste and improving cycle times.
The ITT culture has long embraced Lean Six Sigma as its central operating tenet, encompassing lean manufacturing, as well as continuous process improvement in other critical areas such as customer service and order entry and fulfillment. Our intent is to drive ever-increasing levels of quality, speed, and efficiency throughout the organization. In 2012, we launched an enterprise-wide lean transformation initiative with the goal of improving all elements of a lean enterprise. This initiative encompasses not only core lean, problem solving and continuous improvement principles but also leadership, talent and cultural aspects. Our lean transformation is on track and we are seeing results: physical transformation is evident in our sites through meaningful changes in factory flow, pull and visual management supported by cultural transformation with high employee engagement, leader standard work and self-managed teams. Many of our core metrics around safety, quality, delivery, inventory and productivity have been improving year-over-year and we are seeing inventory management improvements and structurally lower breakeven points. We are also moving beyond the factory floor to improve the efficiency of other critical processes of the value chain to become a truly lean enterprise.
Effective Capital Deployment
Effective capital deployment, including resource optimization and a disciplined focus on liquidity and cash management is a major part of how we achieve our financial performance goals. ITT’s businesses operate in growing and highly fragmented niche markets, which provide opportunities for increasing market share. Our resource optimization processes, including integrated decision-making and resource deployment processes provide insight to our efficient capital allocation across a portfolio of strategic options and effective deployment of critical resources and assets across our integrated supply chain that aligns and connects our commercial front-end and business strategies to our sourcing, manufacturing and footprint strategies.
ITT estimates the sum of its served addressable markets to be approximately $42 billion worldwide. Given these dynamics and ITT’s technology investments, global reach and vibrant brands, the Company believes it has the opportunity to continue to expand geographically, broaden its product lines, improve its market position, and increase earnings through organic revenue growth and operational efficiencies and through targeted acquisitions. ITT continues to prioritize deploying capital for organic growth and then acquisitive growth. ITT’s acquisition strategy generally targets firms in similar businesses and end-markets that have unique and differentiated products, services, and technologies.
Targeted Leverage of Our Capabilities
In addition to the key elements of the Company’s growth strategy described above, ITT leverages its diverse set of resources and capabilities across its businesses in order to maximize the Company’s value creation potential. By working cohesively across our businesses, we are enhancing products and performance and making strong progress in driving long-term profitable growth. The Company is continually evaluating cross-business revenue synergies, cost saving and value creating opportunities and views the following assets and capabilities as core to this objective:
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• | ITT Brand – The ITT brand is well regarded and widely recognized by most key stakeholders and markets, particularly in emerging growth markets. This provides our segments with brand recognition for new products in key emerging growth markets such as Brazil, China, India, and Russia. |
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• | Enterprise Councils – Cross-business councils in the areas of operational excellence, commercial excellence, technology and innovation, and risk management. While our activities may vary across our segments, our subject matter leaders in these collaborative cross-business formal structures provide us with the opportunity to intelligently leverage best practices, bold thinking and our collective know-how in areas such as customer relationship management, product development, coordinated sourcing initiatives, innovation, technology sharing, and risk management. |
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• | Strategic Accounts – Further development and expansion of our global strategic account program to bring the combined technical capabilities of multiple ITT businesses to address incremental customer opportunities. |
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• | Sourcing – Indirect sourcing activities across ITT's businesses are managed centrally to better leverage our third-party contracts and pricing and to evaluate vendor performance. |
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• | Shared Functional Excellence – Centralizing our processes and services so that all four of our businesses can have access to the best resources and better utilize these systems to create additional value, including shared service locations in North America, China, and Europe to reduce overhead costs and improve effectiveness. In information technology, we are focused on utilizing global templates and standard processes to drive value across ITT. Similarly, we are enhancing the way we approach our most valuable asset, our people. We are continuing to develop a comprehensive talent and human resource capability that will unite and strengthen our collective ability to attract talent, and consolidate and streamline policies and procedures through globally integrated systems. |
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• | Our Culture – Our people are at the center of all we do, and our values of respect, responsibility and integrity are central to who we are as a company. They are the standards to which we hold ourselves and they guide our words and actions every day. Our values are also the foundation of The ITT Way, which is how we differentiate ourselves, operate to grow and create value. It is our model for how we create enduring impact for all of our stakeholders. |
Segment Information
Industrial Process
The Industrial Process segment is a global manufacturer of industrial pumps, valves and related equipment, and is a provider of plant optimization and efficiency solutions and aftermarket services and parts. Headquartered in Seneca Falls, New York, its operations include five primary product categories:
Goulds Pumps
Goulds Pumps is the largest product category in the Industrial Process segment and is a market leader with over 160 years of product design history. Goulds Pumps is focused on customer needs primarily in the oil and gas, chemical, mining, general industrial, pulp & paper, and power markets. The Goulds Pumps brand is among the most widely recognized brands in the global pump industry. Goulds has a broad portfolio of centrifugal pumps including ANSI (American National Standard Institute) and ISO (International Standards Organization) chemical pumps, API (American Petroleum Institute) pumps for the petrochemical and oil and gas industry, slurry and process pumps for the mining industry and paper stock pumps for the pulp & paper industry. Our portfolio also includes vertical, axial flow, multi-stage and other pumps that are used in a multitude of industries.
Industrial Process has transformed its Goulds Pumps business considerably over the past five years. Investments have been made in this business to expand our portfolio of products, augment our testing and global R&D capabilities, automate the order entry processes, and strengthen our global manufacturing, service and aftermarket capabilities. Industrial Process has been successful in penetrating target markets, like oil and gas, mining, and petrochemical by upgrading existing products and infrastructure, increasing global engineering resources, enhancing global product and project management and driving operational excellence.
Bornemann
Bornemann, acquired during the fourth quarter of 2012, is a manufacturer of pumps and systems utilized in the oil and gas, marine, food and pharmaceutical industries with over a 150 year history. The Bornemann acquisition provided the Industrial Process business with leading edge technologies and multiphase application expertise that strategically aligned with other aspects of the Industrial Process business and further expanded ITT’s presence in global oil and gas markets. Bornemann technologies include twin screw pumps, multiphase boosting system pumps and progressive cavity pumps. Bornemann twin screw pumps are rotating displacement pumps that are ideal for mixtures of crude oil, gas, water and handle virtually any non-homogeneous fluid, regardless of viscosity, lubricity or abrasiveness. Twin screw pumps can be used onshore, offshore and sub-sea and the dry running technology also allows the presence of gases. The multiphase boosting system pumps provide a complete system solution for a wide range of performance conditions and harsh environmental conditions. Progressive cavity pumps are used to convey a wide range of media, in particular highly viscous and abrasive materials such as slurry, crude oil and greases. Progressive cavity pumps are an optimum solution to conveying tasks where the conveyed product is too viscous and flows too poorly to be pumped by other types of pumps.
ITT Engineered Valves
ITT Engineered Valves is a manufacturer of process valves for the biopharmaceutical, mining, power, pulp and paper and general industrial markets. ITT Engineered Valves has over 65 years of experience in design, fabrication and engineering of market leading industrial knife-gate (Fabri-Valve) and sanitary diaphragm valves (Pure-Flo). Pure-Flo is a leading provider of sanitary valves to the global biopharmaceutical market.
ITT PRO Services
ITT PRO Services is the aftermarket solutions offering which strives to extend equipment life in its customers’ facilities. PRO Services provides an array of services focused on reducing equipment total cost of ownership and increasing plant output by minimizing downtime. The typical services provided include parts supply, inventory optimization, field service, energy and reliability assessments, repairs, upgrades and overall equipment maintenance. PRO Services offerings include ProShop Repair and Upgrades, ProCast, ProSmart, Goulds Pumps Parts, PumpSmart, and Plant Performance Services.
ITT C’treat
ITT C’treat is a leading provider of water treatment systems for offshore oil and gas production platforms and has been in business since 1980. Its skid-mounted, reverse osmosis watermakers convert seawater into drinking water and process water for the world’s largest offshore oil and gas exploration and production corporations.
Industrial Process services an extensive base of customers from large multi-national engineering, procurement and construction firms (EPC) to regional distributors with thousands of customers. We estimate this segment’s served addressable market to be in excess of $20 billion worldwide. In 2014, Industrial Process’ customers operated in the oil and gas (39%), chemical & petrochemical (20%), general industrial (16%), mining (13%), pulp & paper (7%) and power (4%) markets. These customers are geographically distributed with a regional mix of North America (50%), Latin America (17%), Asia Pacific (14%), Middle East & Africa (11%) and Europe (8%).
Industrial Process recognizes that serving the customer before, during and after installation is critical. We utilize global and diversified sales channel structures. End-users are serviced by an extensive network of independent industrial distributors (primarily in North America), which account for approximately 29% of total Industrial Process sales, and representatives which complement our customer-focused direct sales and service organization. We also have focused channels dedicated to supporting the EPC firms as their needs are often different from those of other customers.
The pump and valve markets served are highly competitive. For most of our products there are hundreds of regional competitors and a limited number of larger global peers. We consider our larger competitors to include Flowserve Corporation, Sulzer Pumps, SPX Corporation, Ebara Corporation, The Weir Group PLC, Colfax Corporation, Gemu Valves, Inc., and KSB. Primary customer purchase decision drivers include price, delivery times and on-time delivery performance, brand recognition and reputation, perceived quality, breadth of product offerings, commercial terms, technical support and localization. Pricing is typically very competitive for large projects because of the engineering complexity and increased potential for aftermarket opportunities for the original equipment provider.
Our ability to compete is based on having a wide range of engineered industrial pumps designed to meet our customers’ most demanding applications and our capacity to provide customers with an array of after sale services and support. For large projects, our breadth of product offering is an important sales factor as it simplifies the customer’s procurement process. Industrial Process’ ability to expand its product portfolio has been, and is expected to continue to be, a competitive strength.
We benefit from our large global installed base of products, which, because of their function in the processes in which they are installed, require frequent maintenance, repair and replacement. The frequency of repair and maintenance services depends on utilization levels, as well as the conditions and environment in which they operate. Our direct and distributor channels provide market leading service to our customers. As we increase the number of our global installations, we will continue to add service centers and personnel. By positioning our facilities close to customers, we are able to provide quicker responses to their growing aftermarket needs.
The Industrial Process segment demonstrates ITT’s ability to achieve the Premier Customer Experience because the organization works with its customers over the life cycle of the installation and operation of its products in the customers’ facilities or its customers’ end-users in the case of an EPC firm. Industrial Process is able to accomplish this because of its extensive global customer relationships, breadth of product offering, product availability, project management skills, and aftermarket and reliability services.
Motion Technologies
Motion Technologies, headquartered in Barge, Italy, is a global manufacturer of highly engineered and durable components, consisting of brake pads, shock absorbers and damping technologies for the transportation industry. The transportation industry encompasses both personal and public transport equipment, such as passenger cars, light and heavy-duty commercial and military vehicles, buses and rail transportation. Motion Technologies consists of two product categories, Friction Technologies and KONI. Friction Technologies provides the automotive market with high-performance, high-quality brake pads, while KONI provides the transportation industry with shock absorber and damping equipment. Motion Technologies primarily serves the high-end of the transportation industry, with a reputation for quality products and a focus on new product development and operational excellence.
We believe that Motion Technologies is positioned and structured to benefit from the anticipated global growth in the transportation industry. We believe this growth will be driven by increasing urban and middle class populations especially in emerging markets, creating a significant need for additional mass transit infrastructure and individual desire for automobile ownership.
Friction Technologies
Our Friction Technologies business applies innovative research of new friction materials and productive technologies to manufacture a range of brake pads installed as OE pads on cars and light and heavy duty commercial vehicles. Our dedication to customers and to the advancement of braking technologies has built a legacy of quality, reliable products that meet the demands of customers across the globe. Demand for Motion Technologies’ products stem from a variety of end customers and automotive platforms around the world. OE pads are sold either directly to OEMs or to Tier-1 and Tier-2 brake manufacturers. Our OE pads are designed to meet customer specifications and environmental regulations, and to satisfy an array of geographic applications. Most automobile OEM platforms (car model) require specific brake pad formulations and have demanding delivery and volume schedules.
Friction Technologies manufactures aftermarket brake pads designed for the automotive service and repairs market. This market consists of both OE dealers, also referred to as original equipment spares (OES) networks, and independent aftermarket (AM) networks. Brake pads sold within the OES network generally match the specifications of an original auto platform OE brake pad, while our catalog of AM pads feature technology designed to provide up to a range of braking performance levels. Within the service and repairs market, pads are sold either directly to OE manufacturers or Tier-1 and Tier-2 brake manufacturers (such as Continental or TRW) or indirectly through independent distributor channels. Historically, revenue for Friction Technologies has been generally balanced between OE pads and aftermarket brake pads.
Combined sales to Continental and TRW, Motion Technologies' two largest customers, were approximately 40% of 2014 Motion Technologies revenue, however, approximately 20% of this revenue is directly attributable to OES supply agreements signed directly with automakers. In addition, all OE pad contracts are through brake manufacturers even in cases where automakers specify the use of our pads in the braking system.
KONI
The KONI business organizes its various performance shock absorber products into three main product groups: railway rolling stock; car & racing; and bus, truck & trailer. Each product group is managed by a dedicated team for product development and engineering, manufacturing, and sales & marketing, thus assuring the best possible concentration of product specialization and know-how.
Railway Rolling Stock provides a wide range of equipment for passenger rail, locomotives, freight cars, high speed trains and light rail. Offerings include hydraulic shock absorbers (primary, lateral and inter-car), yaw dampers as well as visco-elastic and hydraulic buffers. Revenue opportunities for our rail damping systems are balanced between OE and AM customers. Sales are either directly to train manufacturers and train operators carrying out scheduled train maintenance programs or indirectly through distributors. The rail damping systems market has attractive growth prospects because mass transit systems are benefiting from ongoing large-scale urbanization trends and infrastructure investments. The long-term, enduring nature of these factors fosters a less cyclical market environment.
Car & Racing features performance shock absorbers often using our Frequency Selective Damping (FSD) technology. FSD products are used by car and racing enthusiasts who desire to modify their cars for increased handling performance and comfort. KONI car shock absorbers are sold all over the world, through a distribution network that markets KONI products into specific geographies or customer groups.
Bus, Truck & Trailer manufactures shock absorbers and bus dampers, destined to both OE and AM customers.
Motion Technologies has a market reputation derived from many years of mutual collaboration with major OE manufacturers and is focused on customer satisfaction, quality and on-time delivery. Motion Technologies has a global manufacturing footprint, with production facilities in Western Europe, Eastern Europe and China.
Motion Technologies competes in markets primarily served by large, well-established national and global companies. The brake pads and linings market, which we estimate to be approximately $4 billion, includes companies such as Nisshinbo Automotive Corporation, Akebono Brake Corporation, and Federal-Mogul Corporation. Key competitive drivers within the brake pad business include technical expertise, formulation development capabilities, scale production, product performance, high-quality standards, customer intimacy, reputation and the ability to meet demanding delivery and volume schedules in a reduced amount of time. OE and OES customers usually require long-lasting and well-established relationships, based on mutual trust, local proximity and a wide range of cooperative activities, starting from the design to the sampling, prototyping and testing phases of brake pads. Within the independent AM pads market, Motion Technologies is a leading European provider in a highly fragmented global market.
Competitive drivers in the rail damping systems business include price, technical expertise and product performance. Rail damping systems are considered critical components because of safety requirements and thus they have to be specifically designed according to many different train applications, and must satisfy strict compliance requirements. We estimate the rail damping systems and bus dampers segments have a combined addressable market of approximately $0.6 billion. Motion Technologies is a global leader in the rail dampers component of the complete rail damper system.
Interconnect Solutions
Headquartered in Santa Ana, California, Interconnect Solutions (ICS) designs and manufactures a broad range of highly engineered connectors and cable assemblies for critical applications in harsh environments. ICS's product portfolio includes high performance, military-specification, and commercial electrical connectors of the following types: Circular, Rectangular, Radio Frequency, Fiber Optic, D-sub Miniature, Micro-Miniature and cable assemblies. ICS operates through its brands, Cannon, VEAM and BIW Connector Systems, which deliver solutions to enable the transfer of data, signal, and power into four end-user markets: aerospace and defense, transportation and industrial, medical, and oil and gas. ICS has organized its business around these four end-user markets, with each business unit having a dedicated sales, marketing, engineering, operational and finance team that specializes in solutions for their specific market, providing focused customer support and expertise. ICS is considered a leading company in the harsh environment niche markets it participates in, because of its technological capabilities, customer relationships, cost performance and global footprint.
Aerospace and Defense
The ICS Aerospace and Defense product portfolio includes industry standards-based connectors and customized interconnect solutions for all segments of the commercial aviation and defense industry. These products are designed to withstand the extreme shock, exposure and vibration environments that are typical in aviation and military applications and where reliability and safety are the critical factors.
Transportation and Industrial
The ICS Transportation product portfolio includes connectors for high-speed, mainline, metro and light passenger rail, and electric vehicle applications. The ICS Industrial product portfolio includes connectors for heavy vehicles, industrial production equipment, industrial electronics and instruments, and other industrial applications. Both markets are served through the Cannon brand, which is celebrating its 100-year anniversary in 2015, and VEAM brand. These brands are known for high-performance, high-reliability solutions which withstand high vibrations and are resistant to dirt and fluids.
Medical
The ICS Medical product portfolio consists of connectors and customized solutions that provide high-density, high-speed data delivery with ergonomic, miniaturized form factor primarily utilized in the imaging market.
Oil and Gas
ICS supplies the market primarily with electrical penetrators for oil wells through the BIW Connector Systems brand. Most of these feed-through solutions are used to connect electric submersible pumps (ESPs), downhole instruments and permanent downhole gauges.
ICS has a global production footprint, including major facilities in the United States, Mexico, Germany, and China, which provides geographic proximity and the highest level of customer support to over 2,500 global customers. Products are sold either directly to OEM’s, contract manufacturers and cable system operators or indirectly through partnerships with leading distribution companies, creating an extensive global distribution channel. We have long-lasting relationships with our distributor partners, as many have been selling ICS products for over 70 years. Sales to distributors represented approximately 32% of 2014 ICS revenue.
We estimate the global market for connectors and related products to be approximately $48 billion in 2014. ICS competes with a large number of competitors in a highly fragmented industry. We estimate our addressable market to
be approximately $6 billion in 2014. The major competitors for these products are Amphenol Corporation, Deutsch (TE Connectivity Ltd.), Souriau (Esterline), Harting, and Glenair.
Control Technologies
Control Technologies, headquartered in Valencia, California, specializes in highly engineered aerospace components and industrial products. We offer an extensive portfolio of qualified products such as fuel management, actuation and noise absorption components in the aerospace market and a range of products that manage motion and absorb energy in a variety of industrial markets. Our application expertise allows us to offer customized solutions using modular platforms that effectively deliver our technologies for various customer applications. We have strong aftermarket opportunities, particularly in our aerospace business, and a broad customer base with no single customer accounting for more than 15% of Control Technologies' revenue through our direct sales channel. In addition, sales to major commercial aircraft manufacturers also regularly occur through third-party distributors. Control Technologies’ distribution network represents approximately 20% of revenue.
CT Aerospace
CT Aerospace designs and manufactures flow control and actuation components, motion control, energy absorption and vibration isolation products primarily for commercial aerospace, military and other markets. Our products are generally part of long-lived aerospace and defense platforms that provide for recurring aftermarket opportunities. We estimate the served addressable market for CT Aerospace to be approximately $8 billion worldwide. Our aircraft component products consist of fuel and water pumps, valves, electro-mechanical rotary and linear actuators, and pressure, temperature, limit, and flow switches for various aircraft systems. Our aircraft interior products include a variety of engineered elastomer isolators to protect equipment and keep the interior of the aircraft quiet, stowage bin rate controls, rotary hinge dampers and actuators, and seat recline locks and control cables. We also provide electromechanical seat actuation for premium seating products. Defense products generally include energy absorption applications and aerospace components. Most of our products are sold direct to the customer by our in-house sales force. We utilize a small third-party business for government spare parts distribution. CT Aerospace also has a well-established Federal Aviation Agency (FAA) certified repair station which focuses on the aftermarket. The repair station also carries ISO9001/AS9100 and European Aviation Safety Agency (EASA) accreditations.
Our products are custom designed for specific customer applications. We have a highly skilled engineering group for R&D, application engineering and qualification. We conduct fundamental research internally, with universities, and with our customers. We leverage our technical capability to provide innovative and reliable solutions for our customers. Our flow control and actuation products meet reliability requirements through a unique patented shunt disc technology for pressure and temperature switch applications for hostile environments. In addition, our actuator utilizes a patented optical technology for enhanced reliability. Our pumps have the ability to run dry for extended periods, minimizing potential fire ignition sources in fuel system applications and provide high reliability. Our energy absorption products use patented technology to provide innovative solutions, such as self-compensating valves to allow for wide load variations. Our leading noise/vibration isolation products use patented innovations to improve noise control, reduce weight, and reduce installation time.
CT Aerospace sells a wide range of products to the aerospace industry and has many customers globally. Our business is neither dependent on one or a small number of customers. Our customers are predominantly commercial airframe manufacturers, airframe systems manufacturers, interior manufacturers, seat manufacturers, commercial airlines and defense contractors. We have positions with the leading commercial airframe and systems manufacturers such as Boeing, Airbus, B/E Aerospace, Parker-Hannifin, Eaton, Woodward, Safran, and Honeywell. We have significant content in a number of large commercial transport platforms. We also have significant content on regional and business aircrafts. These platforms provide a long life cycle of original equipment and aftermarket sales.
In the highly regulated aerospace market, we benefit from our large installed base of products. We compete by offering a wide portfolio of reliable products, coupled with advanced application expertise and customer support. We believe application expertise and our reputation for quality significantly enhance our market position. Our ability to collaborate with our customers to deliver a wide range of product offerings has allowed us to compete effectively, to cultivate and maintain customer relationships, and to expand into new markets.
Competitors range from large multi-national corporations to small privately held firms. Our markets are often fragmented and thus there are several types of competitors. CT Aerospace competitors include Circor Aerospace, Inc., Hydra Electric, Lord Corporation, and Hutchinson Worldwide. Competition in these markets focuses on application expertise with effective solutions, product delivery and performance, previous installation history, quality, price and customer support. We have been successful in establishing long-term supply agreements with a number of our larger customers, thereby increasing opportunities to win future business.
Given the highly fragmented nature of the aerospace repair & overhaul industry, CT Aerospace competes with a large number of MRO businesses. Some airlines have established repair and overhaul capabilities which makes them competitors as well. We compete in the repair and overhaul segment of our business by offering a high quality service with increased reliability, coupled with advanced technical expertise.
CT Industrial
CT Industrial designs and manufactures energy absorption, precision motion control, and natural gas regulators, primarily for the automation, heavy industry, infrastructure, and oil and gas markets. We estimate the served addressable market for CT Industrial is approximately $3 billion globally. CT Industrial possesses a specialized set of skills and capabilities that enables us to engineer custom solutions for unique applications. Our energy absorption products consist of customized shocks absorbers, vibration isolators and dampers. Our precision motion control products consist of servomotors, actuators, and controllers.
CT Industrial has solid positions in China, Europe, and North America. It has a broad customer base including end-users, OEM’s, and distributors. Channels to market include direct, commissioned representation and buy-resell distributors. Our ability to collaborate with our customers to deliver comprehensive product offerings has allowed us to compete effectively against our competitors.
Competitors change depending on the product line and range from large multi-national corporations to small privately held firms. The energy absorption, precision motion control and natural gas regulators businesses are highly fragmented and we compete with a global group of industry participants. The main competitors in the energy absorption infrastructure and automation market are Taylor Devices and ACE (a subsidiary of Kaydon, an SKF Group company). The main competitor in the servomotor product line is Kollmorgen. Parker-Hannifin Corporation is a leading competitor in the pneumatic actuation market. CT Industrial will continue to focus on delivery lead times, quality and performance while enhancing our application engineering offering. The development of new customer service strategies will create a differentiated service offering and improve turnaround time in product, quotations and service communications.
Other Company Information
Materials
All of our businesses require various OEM products, manufactured components and raw materials, the availability and prices of which may fluctuate. The principal OEM products and manufactured components assembled into our products include motors, castings, mechanical seals, machined castings, metal fabrications and miscellaneous metal, plastic, or electronic components. The primary raw materials used in manufacturing our products include steel, gold, copper, nickel, iron, aluminum, and tin, as well as specialty alloys, including titanium. Materials are purchased in various forms, such as sheet, bar, rod and wire stock, pellets and metal powders.
Our global sourcing initiatives continue to expand and are designed to capitalize on sources in emerging growth markets and other low-cost sources of purchased goods balanced with efficient coordinated global logistics. Raw materials, supplies and product subassemblies are purchased from third-party suppliers, contract manufacturers, and commodity dealers. For most of our products, we have existing alternate sources of supply, or such materials are readily available. In some instances we depend on a single source of supply, manufacturing or assembly or participate in commodity markets that may be subject to a limited number of suppliers.
We continually monitor the business conditions of our supply chain to maintain our market position and to avoid potential supply disruptions. There have been no raw materials shortages that have had a material adverse impact on our business as a whole, and we have been able to develop a robust supply chain such that we do not anticipate shortages of such materials in the future.
Although some cost increases may be recovered through increased prices to customers, our operating results are generally exposed to such fluctuations. We attempt to control such costs through fixed-priced contracts with suppliers and various other cost containment strategies, such as our Global Indirect Services initiative. We typically acquire materials and components through a combination of blanket and scheduled purchase orders to support our materials requirements for an average of four to eight weeks, with the exception of some specialty materials. From time to time, we experience price volatility or supply constraints for raw materials based on market supply and demand dynamics. In limited circumstances, we may have to obtain scarce components for higher prices on the spot market, which may have a negative impact on gross margin and can periodically create a disruption to production and delivery. We also acquire certain inventory in anticipation of supply constraints or enter into longer-term pricing commitments with vendors to improve the priority, price and availability of supply. We evaluate hedging opportunities to mitigate or minimize the risk of operating margin erosion resulting from the volatility of commodity prices.
Manufacturing Methods
We utilize two primary methods of fulfilling demand for products: build-to-order and engineer-to-order. Build-to-order consists of assembling a group of products with the same pre-defined specifications, generally for our OEM customers. Engineer-to-order consists of assembling a customized system for a customer’s individual order specifications. In both cases, we offer design, integration, test and other production value-added services. We employ build-to-order capabilities to maximize manufacturing and logistics efficiencies by producing high volumes of basic product configurations. Engineering products to order permits the configuration of units to meet the customized requirements of our customers. Our inventory management and distribution practices in both build-to-order and engineer-to-order seek to minimize inventory holding periods, and improve customer delivery performance.
Backlog
Delivery schedules vary from customer to customer based on their requirements. For example, large complex projects in specialized markets such as oil and gas and mining at Industrial Process require longer lead times and production cycles. Delivery delays could arise from supply chain limitations, internal production challenges, changes in the customer’s requirements, or technical difficulties. Total backlog, representing firm orders that have been received, acknowledged and entered into our production systems, was $1,025 and $1,093 at December 31, 2014 and 2013, respectively. Total backlog at December 31, 2014 was comprised of 60% from Industrial Process, 20% from Motion Technologies, 11% from ICS, and 9% from Control Technologies. We expect to satisfy nearly all December 31, 2014 backlog commitments during 2015.
Intellectual Property
We generally seek patent protection for those inventions and improvements that are likely to be incorporated into our products or where proprietary rights are expected to improve our competitive position. The highly customized application engineering embedded within our products, our proprietary rights and our knowledge capabilities all contribute to enhancing our competitive position.
While we own and control a significant number of patents, trade secrets, confidential information, trademarks, trade names, copyrights, and other intellectual property rights which, in the aggregate, are of material importance to our business, management believes that our Company, as a whole, as well as each of our core segments, is not materially dependent on any one intellectual property right or related group of such rights. Patents, patent applications, and license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. As the portfolio of our patents, patent applications, and license agreements has evolved over a long period of time, we do not expect the expiration of any specific patent or other intellectual property right to have a material adverse effect on our financial statements.
Research and Development
R&D is a key element of ITT’s engineering culture and is generally focused on the design and development of products and solutions that anticipate customer needs and emerging trends. Our approach to R&D often begins by working with our customers to address a problem, then engineering a solution to the particular customer need. As a result, our R&D is based on taking technology quickly to the tangible phase, increasing the competitive offering, and increasing the customer service experience through engineered application solutions.
Research and development efforts at Industrial Process focus on robust solutions for our customer’s most difficult problems. The Medium Voltage PumpSmart Product line for the advanced control of critical pumping systems is an example of a life cycle cost solution for difficult applications. This successful innovation relies on the tight integration of key pump knowledge, electronics and software. Industrial Process has continued to expand the range of our high pressure, high temperature and multiphase products in various engineered and industrial applications. A new line of very high flow pump sizes has been released for applications in power and other industrial applications. Industrial Process has continued to extend our mining pump and valve portfolio which has been designed for the toughest applications. Industrial Process has also introduced a state of the art line of hygienic valves for the pharmaceutical and hygienic industries that brings many innovative features and benefits to our customers.
Motion Technologies' R&D activities focus on the design and development of products and solutions that either meet specific customers’ needs or anticipate new market trends and environmental regulations. For example, Motion Technologies tackled new regulatory challenges concerning the use of copper and became the first friction manufacturer to provide copper-free brake pads for commercial vehicle applications. This successful formulation relied on both product innovation as well as innovative processes in thermal treatment. Motion Technologies continues to invest in its R&D centers around the world to enable ITT to provide the appropriate engineering solutions with responsive service to our customers and for the development of new local product launches.
ICS focuses its research and development on creating product solutions that address reduced size, weight and cost requirements; environmental standards compliance; and a general expansion of its existing product lines. A recent
example is the new series of lightweight Cannon Micro-D connectors that are capable of carrying 802.11n wireless transmission frequencies in a Micro-D package enabling enhanced wireless connectivity for passengers in-flight. The Micro-D design addresses the minimal space requirement standards, while easily integrating with related applications, providing the ability to maintain connection and endure in the harshest shock and vibration environments.
Control Technologies' R&D efforts are aimed at producing innovative technologies that solve our customer’s critical issues. For example, CT Industrial is currently developing a series of high pressure fluid viscous dampers to protect building and bridges from seismic events. In addition, CT Aerospace is developing vibration isolators for rotorcrafts to reduce noise and vibration, and a portfolio of valves and actuators for high flow fuel systems.
We anticipate our investments in future R&D activities will moderately increase from current spending levels to ensure a continuing flow of innovative, high quality products and maintain our competitive position in the markets we serve. Such activities are conducted in laboratory and engineering facilities at several of our major manufacturing locations, as well as in our dedicated R&D facilities strategically positioned close to our customers. During 2014, 2013 and 2012, we recognized R&D expenses of $76.6, $67.3, and $62.7, respectively, which were 2.9%, 2.7%, and 2.8%, of revenues, respectively.
Cyclicality and Seasonality
Many of the businesses in which we operate are subject to specific industry and general economic cycles. We consider our connectors business to be an early cycle business, meaning it generally is impacted more in the early portion of an economic cycle, while the automotive and aerospace components businesses tend to be impacted in the middle portion of the cycle and the industrial pump business typically is impacted late in the economic cycle.
Our businesses experience limited seasonal variations, with demand generally at an annual low during summer months (our third quarter) mainly attributable to manufacturing shutdowns and the planned industrial maintenance activities of our customers. Revenue impacts from the limited seasonal variations are typically mitigated by our backlog of orders that allow us to adjust levels of production across the summer months.
Environmental Matters
We are subject to stringent federal, state, local, and foreign environmental laws and regulations concerning air emissions, water discharges and waste disposal. In the U.S., these include, but are not limited to, the Federal Clean Air Act, the Clean Water Act, the Resource, Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act. Environmental requirements are significant factors affecting our operations. We have established an internal program to assess compliance with applicable environmental requirements for our facilities. The program, which includes periodic audits of many of our locations, including our major operating facilities, is designed to identify problems in a timely manner, correct deficiencies and prevent future noncompliance.
We closely monitor our environmental responsibilities, together with trends in the environmental laws. In addition, we have purchased insurance protection against certain environmental risks arising from our business activities. Environmental laws and regulations are subject to change, however, the nature and timing of such changes, if any, is difficult to predict. 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. See "Critical Accounting Estimates" within Item 7, Management's Discussion and Analysis, as well as Note 18, Commitments and Contingencies, to the Consolidated Financial Statements for additional information regarding environmental matters.
Employees
As of December 31, 2014, we had approximately 9,400 employees, of which approximately 3,300 were located in the U.S. Approximately 15% of our U.S. employees are represented by unions. We also have unionized employees in Italy, Germany, and Brazil. No one unionized facility accounts for more than 17% of ITT total revenues. Although our relations with our employees are strong and we have not experienced any material strikes or work stoppages recently, no assurances can be made that we will not experience these or other types of conflicts with labor unions, works councils, other groups representing employees or our employees generally, or that any future negotiations with our labor unions will not result in significant increases in our cost of labor.
We are subject to a wide range of factors that could materially affect future developments and performance. Because of these factors, past performance may not be a reliable indicator of future results. Set forth below and elsewhere in this document are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this document. The most significant factors affecting our business and operations include the following:
Business and Operating Risks
Our exposure to pending and future asbestos claims and related liabilities, assets, and cash flows is subject to significant uncertainties.
ITT, including its subsidiary Goulds Pumps, Inc., has been sued, along with many other companies, in numerous lawsuits in which the plaintiffs claim damages for personal injury arising from exposure to asbestos from component parts of certain products sold or distributed by various defendants, including the Company. We expect to be sued in similar actions in the future. We record an estimated liability related to pending claims and claims estimated to be filed over the next 10 years based on a number of key assumptions, including the plaintiffs’ propensity to sue, claim acceptance rates, disease type, settlement values and defense costs. These assumptions are derived from ITT’s recent experience and reflect the Company’s expectations about future claim activities. These assumptions about the future may or may not prove accurate, and accordingly, the Company may incur additional liabilities in the future. A change in one or more of the inputs used to estimate our asbestos liability could materially change the estimated liability and associated cash flows for pending claims and those estimated to be filed in the next 10 years. Although 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 those costs at this time.
We record an asset that represents our best estimate of probable recoveries from our insurers for the estimated asbestos liabilities. There are significant assumptions made in developing estimates of asbestos-related recoveries, such as policy triggers, policy or contract interpretation, the methodology for allocating claims to policies, and the continued solvency of the Company’s insurers. Certain of our primary coverage-in-place agreements are exhausted which may result in higher net cash outflows until excess carriers begin accepting claims for reimbursement. Performance by our insurers could differ from the assumptions underlying the recognized asset and could result in lower collections of receivables than are currently expected to reduce the Company’s asbestos costs.
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 not possible to predict the ultimate outcome of the cost, nor potential recoveries, of resolving the pending and all unasserted asbestos claims. Additionally, we believe it is possible that the cost of asbestos claims filed beyond the next 10 years, net of expected recoveries, could have a material adverse effect on our financial condition and results of operations.
Many uncertainties exist surrounding asbestos litigation. The Company will continue to evaluate its estimated asbestos-related liability and corresponding estimated insurance reimbursement, as well as the underlying assumptions and process used to derive these amounts. Changes in estimates related to these uncertainties may result in increases or decreases to the net asbestos liability, particularly if the quality or number of claims or settlement or defense costs change significantly, if there are significant developments in the trend of case law or court procedures, or if legislation or another alternative solution is implemented; however, the Company is currently unable to predict such future changes or estimate their potential effect on its net asbestos liability. Although the resolution of asbestos claims may take many years, the effect of changes in our estimates related to our pending or estimated future claims in any given period could be material to our financial condition and results of operations.
In addition, as part of the Distribution, ITT indemnified Exelis and Xylem with respect to asserted and unasserted asbestos claims that relate to the presence or alleged presence of asbestos in products manufactured, repaired or sold prior to the Distribution Date, subject to limited exceptions.
Our operating results and our ability to maintain liquidity or procure capital may be adversely affected by unfavorable economic and capital market conditions associated with global sales and operations and the uncertain geopolitical environment. Adverse conditions in the markets we serve could adversely affect demand for our products.
We have experienced and expect to continue to experience fluctuations in revenues and operating results due to economic and business cycles. Important factors impacting our businesses include the overall strength of the global economy and our customers’ confidence in local and global macroeconomic conditions, industrial spending, interest rates, availability of commercial financing for our customers and unemployment rates.
We serve a diverse mix of customers in global infrastructure industries which can be volatile. The markets in which our businesses operate include automotive, aerospace, oil and gas, industrial, mining, chemical and defense, each of which is impacted by specific industry and general economic cycles. Our revenues, operating results and profitability have varied in the past and may vary from quarter to quarter in the future and can be negatively impacted by volatility in the end markets we serve. We have undertaken measures to reduce the impact of this volatility through diversification of markets we serve and expansion of geographic regions in which we operate. We may be adversely affected by disruptions in financial markets or downturns in macroeconomic conditions in specific countries or regions, or in the various industries in which the Company operates or be subject to adverse changes in the availability and cost of capital, interest rates, tax rates, or regulations in the jurisdictions in which the Company operates.
Our international operations, including U.S. exports, comprise a growing portion of our operations and are a strategic focus for continued future growth. Our strategy calls for increasing sales in overseas markets, including emerging growth markets such as Central and South America, China, Russia, India, Venezuela, and the Middle East. In 2014, 65% of our total sales were to customers operating outside of the United States. Both our sales from international operations and export sales are subject in varying degrees to risks inherent to doing business outside of the United States. These risks include the following:
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• | possibility of unfavorable circumstances arising from host country laws or regulations; |
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• | currency exchange rate fluctuations and restrictions on currency repatriation; |
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• | potential negative consequences from changes to taxation policies; |
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• | the disruption of operations from labor and political disturbances; |
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• | our ability to hire and maintain qualified staff in these regions; and |
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• | changes in tariff and trade barriers and import and export licensing requirements. |
Instability in the global credit markets, including the ongoing European economic and financial difficulties in certain countries and the instability in the geopolitical environment in many parts of the world, may continue to put pressure on global economic conditions. If global economic and market conditions, or economic conditions in key markets, deteriorate further we may experience material impacts on our financial statements.
Adverse changes to financial conditions could jeopardize certain counterparty obligations, including those of our insurers and customers. Restrictive credit markets may also result in customers extending terms for payment and may result in our having higher customer receivables with increased risk of default. We closely monitor the credit worthiness of our insurers and customers and evaluate their ability to service their obligations to us. A tightening of credit markets may reduce funds available to our customers to pay for or buy our products and services for an unknown, but perhaps lengthy, period.
Should market conditions deteriorate, this may adversely affect our ability to manage inventory levels and maintain current levels of profitability. If, for any reason, we lose access to our currently available lines of credit, or if we are required to raise additional capital, we may be unable to do so or we may be able to do so only on unfavorable terms.
We are exposed to fluctuations in foreign currency exchange rates, particularly with respect to the Euro, Chinese renminbi, South Korean won, Hong Kong dollar, Mexican peso, British pound, Czech koruna, Australian dollar, Brazilian real, Canadian dollar, and Russian ruble. In addition, the Company is exposed to the Venezuelan bolivar, which it ceased using as the functional currency of its Venezuelan operations in 2010.
As we continue to grow our business internationally, our operating results could be affected by the relative strength of the European, Asian and developing economies and the impact of currency exchange rate fluctuations. Any significant change in the value of currencies of the countries in which we do business relative to the value of the U.S. dollar could affect our ability to sell products competitively and control our cost structure, which could have a material adverse effect on our financial statements. Accordingly, fluctuations in exchange rates may also impact our results when financial statements of non-U.S. operating units are translated into U.S. dollars. Given that the majority of our sales are non-
U.S. based, a strengthening of the U.S. dollar against other major foreign currencies could adversely affect our results of operations.
In addition to the general risks that we face outside the U.S., we now conduct more of our operations in emerging growth markets than we have in the past, which could involve additional uncertainties, including risks that governments may impose limitations on our ability to repatriate funds; governments may impose withholding or other taxes on remittances and other payments to us, or the amount of any such taxes may increase; governments may seek to nationalize our assets; or governments may impose or increase investment barriers or other restrictions affecting our business. In addition, emerging growth markets pose other uncertainties, including the protection of our intellectual property, pressure on the pricing of our products, and risks of political instability.
A substantial portion of our earnings is generated by our foreign subsidiaries and repatriation of those earnings to the U.S. may be inefficient from a tax perspective. Any distributions, loans or advances to us by our foreign subsidiaries could be subject to taxation under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate.
The cost of compliance with increasingly complex and often conflicting regulations worldwide can also impair our flexibility in modifying product, marketing, pricing, or other strategies for growing our businesses, as well as our ability to improve productivity and maintain acceptable profit margins.
Our business is impacted by our customer's levels of capital investment and maintenance expenditures.
Demand for our industrial products and services depends on the level of capital investment and planned maintenance expenditures of our customers. Our customers' levels of capital expenditures depends, 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 oil and gas companies, chemical companies, mining companies and industrial companies are to varying degrees cyclical and have experienced, or may experience, periodic downturns. 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 lingering uncertainty concerning commodity pricing can cause our customers to be more conservative in their capital planning, which may 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. Any of these results could adversely affect our business and financial results.
Additionally, some of our industrial products customers may choose to delay capital investment and maintenance, even during favorable conditions in their industries or markets. 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 is 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 and financial results.
Failure to compete successfully in our markets could adversely affect our business.
We provide products and services to competitive markets. We believe the principal points of competition in our markets are product performance, reliability and innovation, application expertise, brand reputation, energy efficiency, product life cycle cost, timeliness of delivery, proximity of service centers, effectiveness of our distribution channels and price.
Maintaining and improving our competitive position will require continued investment by us in manufacturing, research and development, engineering, marketing, customer service and support, and our distribution networks. We may not be successful in maintaining our competitive position. Our competitors may develop products that are superior to our products, or may develop more efficient or effective methods of providing products and services or may adapt more quickly than we do to new technologies or evolving customer requirements. Pricing pressures also could cause us to adjust the prices of certain products to stay competitive. We may not be able to compete successfully with existing or new competitors. Risks such as these are particularly apparent in our ICS business, which relies on innovation to stay competitive.
Our operating costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials, energy and related utilities, freight, and cost of labor. In order to remain competitive, we may not be able to recoup all or a portion of these higher costs from our customers through product price increases. Further, our ability to realize financial benefits from Lean Six Sigma activities may not be able to mitigate fully or in part these manufacturing and operating cost increases and, as a result, could negatively impact our profitability.
Quality problems with our manufacturing processes or finished goods could harm our reputation for producing high-quality products and erode our competitive advantage, sales, and market share.
We manufacture key components that are integral to the operation of systems and manufacturing processes in the energy, transportation and industrial markets. Our products provide enabling functionality for applications where reliability and performance are critically important to our customers and the users of their products. As such, quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Our quality certifications are critical to the marketing success of our goods and services. If we fail to meet these standards, our reputation could be damaged, we could lose customers, and our revenue and results of operations could be materially adversely affected. Aside from specific customer standards, our success in part depends on our ability to manufacture to exact tolerances precision-engineered components, subassemblies, and finished devices from multiple materials. If our components fail to meet these standards or fail to adapt to evolving standards, our reputation as a manufacturer of high-quality components will be harmed, our competitive advantage could be damaged, and we could lose customers and market share.
Our business exposes us to potential product liability risks that are inherent in the design, manufacture, and marketing of products for the markets we serve. In addition, many of the devices we manufacture and sell are designed to be used in harsh environments for long periods of time where the cost of failure is high. Component failures, manufacturing defects, design flaws, or inadequate disclosure of product-related risks or product-related information could result in an unsafe condition or injury to, or death of, an end-user of our products. The occurrence of such a problem could result in product liability claims or a recall of, or safety alert relating to, one or more of our products which could ultimately result, in certain cases, in the removal of such products from the marketplace and claims regarding costs associated therewith. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business and reputation and on our ability to attract and retain customers for our products.
Our business could be adversely affected by raw material price volatility and the inability of suppliers to meet quality and delivery requirements.
Our business relies on third-party suppliers for raw materials, components, and contract manufacturing services to produce our products. The supply of raw materials to the Company and to its component parts suppliers and the supply of castings, motors, and other critical components could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect the Company’s results of operations and profit margins. Due to pricing pressure or other factors, the Company may not be able to pass along increased raw material and components parts prices to its customers in the form of price increases or its ability to do so could be delayed. Consequently, our results of operations and financial condition may be adversely affected.
For most of our products, we have existing alternate sources of supply, or such materials are readily available. In some instances we depend on a single source of supply, manufacturing or assembly or participate in commodity markets that may be subject to a limited number of suppliers. Delays in obtaining supplies may result from a number of factors affecting our suppliers, including production interruptions at suppliers, capacity constraints, labor disputes, the impaired financial condition of a particular supplier, the ability of suppliers to meet regulatory requirements, and suppliers’ allocations to other purchasers. Any delay in our suppliers’ abilities to provide us with sufficient quality and flow of materials, price increases, or decreased availability of raw materials or commodities could impair our ability to deliver products to our customers and, accordingly, could have an adverse effect on our business, results of operations and financial position.
Our business could be adversely affected by the inability of suppliers to provide us with certifications relating to conflict minerals.
Since our supply chain is complex, ultimately we may not be able to sufficiently discover the origin of the conflict minerals (generally defined as the minerals tin, tantalum, titanium and gold which have been extracted from the Democratic Republic of the Congo or adjoining countries) used in our products through the due diligence procedures that we implement, which may adversely affect our reputation with our customers, shareholders, and other stakeholders. In such event, we may also face difficulties in satisfying customers who require that all of our products are certified as conflict mineral free. If we are not able to meet such requirements, customers may choose not to purchase our products, which could adversely affect our sales and the value of portions of our inventory. Further, there may be only a limited
number of suppliers offering conflict free minerals and, as a result, we cannot be sure that we will be able to obtain metals, if necessary, from such suppliers in sufficient quantities or at competitive prices. Any one or a combination of these various factors could harm our business, reduce market demand for our products, and adversely affect our financial results.
If we fail to manage the distribution of our products and services effectively, our revenue, gross margin and profitability could suffer. A significant portion of our revenue is derived from a single customer.
We use a variety of sales channels to sell our products and services. Successfully managing these sales channels is a complex process as we sell a broad mix of products through a network of over 800 distributors, agents, and value-added resellers. Moreover, since each distribution method has distinct risks and profit margins, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenue and profit margins. In addition, changes to the sales channels could introduce additional complexity to the sales and inventory management processes and could cause disruptions to customer service or create channel conflicts.
Further, we must manage inventory effectively, particularly with respect to sales to distributors, which involves forecasting demand and potential pricing issues. Distributors may increase orders during periods of product shortages, cancel orders if their inventory is too high or delay orders in anticipation of new products. Our reliance on indirect distribution methods may reduce visibility to end-customer demand, generating a time lag to the market trend with potential negative impacts on strategic decisions, including pricing and operational decisions.
Our financial results could be adversely affected by the loss of a distributor, the loss or deterioration of some distribution or reseller arrangements, channel conflicts including the consolidation of third-party distributors, or if the financial conditions of our channel partners were to weaken. It is not unreasonable to suspect that some of our distributors may have insufficient financial resources and may not be able to withstand changes in business conditions, including economic weakness, leading to a slowness or difficulty in the cash collection process.
A significant portion of our total revenue (and a significant portion of the revenue of our Motion Technologies segment) is derived from a single customer, whom we sell to through OE pad contracts and OES supply agreements with automakers and which is also a third-party distributor for us in the independent aftermarket channel.
Changes in our effective tax rates as a result of changes in the realizability of our deferred tax assets, the geographic mix of earnings, tax examinations or disputes, tax authority rulings, or changes in the tax laws, may adversely affect our financial results.
The Company is subject to income taxes in the U.S. and in various foreign jurisdictions. We exercise significant judgment in calculating our provision for income taxes and other tax liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Furthermore, changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain income or the deductibility of certain expenses, thereby affecting our income tax expense and profitability.
Any significant increase in our future effective tax rates could reduce net income for future periods. Given the global nature of our business, a number of factors may increase our future effective tax rates, including:
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• | decisions to repatriate non-U.S. earnings for which we have not previously provided for U.S. income taxes; |
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• | changes in the geographic mix of our profits among jurisdictions with differing statutory income tax rates; |
| |
• | sustainability of historical income tax rates in the jurisdictions in which we conduct business; |
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• | changes in tax laws applicable to us; |
| |
• | expiration, renewal, or application of tax holidays; |
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• | the resolution of issues arising from tax audits with various tax authorities; and |
| |
• | changes in the valuation of our deferred tax assets, deferred tax liabilities and deferred tax asset valuation allowances. |
The amount of income taxes and other taxes we have paid are subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from amounts paid or reserved, future financial results may include unfavorable tax adjustments. We are currently under routine examination by the U.S. Internal Revenue Service and other tax authorities, and we may be subject to additional examinations in the future. The tax authorities may disagree with our tax treatment of certain material items and thereby increase our tax liability. Failure to sustain our position in these matters could result in a material adverse effect on our financial statements.
Failure to retain our existing senior management, engineering and other key personnel or the inability to attract and retain new qualified personnel could negatively impact our ability to operate or grow our business.
Our success will continue to depend to a significant extent on our ability to retain or attract a significant number of employees in senior management, engineering and other key personnel. The ability to attract or retain employees will depend on our ability to offer competitive compensation, training and cultural benefits. We will need to continue to develop a roster of qualified talent to support business growth and replace departing employees. A failure to retain or attract highly skilled personnel could adversely affect our operating results or ability to operate or grow our business.
Our current information systems structure and applications may pose certain risks.
Our information systems infrastructure is centralized, but our information system applications are both centralized and decentralized. The centralized infrastructure presents a risk in that a potential security breach could have a company-wide impact. The decentralized applications could result in significant replacement costs were the Company to decide to replace a number of the independent operating systems or consolidate operating systems. The inter-relationship of information systems also presents an additional risk when upgrading or replacing information systems. Additionally, our planned initiative to upgrade or replace existing Enterprise Resource Planning (ERP) systems over the next several years was launched during 2014. Implementing new systems may result in unintended changes to the way in which production is performed and transactions are processed. Our ability to execute these ERP systems implementations will directly impact our potential risk exposure during this implementation period.
Security breaches could adversely affect our business and results of operations.
The efficient operation of our business is dependent on computer hardware and software systems. While we believe we have taken many steps to protect our information systems, even the most well-protected information systems are vulnerable to internal and external security breaches including those by computer hackers and cyber terrorists. Furthermore, information technology security threats are increasing in sophistication and frequency. While we actively manage the risks to our information systems that are within our control, we can provide no assurance that our actions will be successful in eliminating or mitigating risks to our systems, networks and data. The unavailability of our information systems, the failure of these systems to perform as anticipated for any reason or any significant breach of security could cause significant disruption to our business and could result in decreased performance and increased overhead costs, causing an adverse effect on our reputation, business, financial condition and results of operations. A breach could also result in the loss of our intellectual property, potentially impacting our long-term capability to compete on sales for affected products. In addition, a breach of security of our information systems could result in litigation, regulatory action and potential liability, as well as increased costs to implement further information security measures.
Portfolio management strategies for growth, including cost-saving initiatives, may not meet expectations.
We regularly review our portfolio of businesses and pursue growth through the acquisition of other companies, assets and product lines that either complement or expand our existing business. Although we conduct what we believe to be a prudent level of investigation regarding the operating and financial condition of the businesses we purchase, a level of risk remains regarding the actual operating condition of these businesses. Until we actually assume operating control of these business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations. Acquisitions involve a number of risks and present financial, managerial and operational challenges that could have a material adverse effect on our reputation and business, including that an acquired business could under-perform relative to our expectations, the failure to realize expected synergies, integration of technology, operations, personnel and financial and other systems, the possibility that we have acquired substantial undisclosed liabilities, potentially insufficient internal controls over financial activities or financial reporting at an acquired company that could impact us on a consolidated basis, diversion of management attention from other businesses, loss of key employees of the acquired businesses, and customer dissatisfaction or performance.
Our portfolio reviews also include the potential for cost-saving initiatives through restructuring, realignment and other initiatives. We strive for and expect to achieve cost savings in connection with certain initiatives, including: (i) manufacturing process and supply chain rationalization; (ii) streamlining redundant administrative overhead and support activities; and (iii) restructuring and repositioning organizations. Cost savings expectations are inherently estimates that are difficult to predict and we cannot provide assurance that we will achieve expected, or any, actual cost savings. Our restructuring activities may place substantial demands on our management, which could lead to the diversion of management’s attention from other business priorities and result in a reduced customer focus.
The level of returns on postretirement benefit plan assets, changes in interest rates and other factors could affect our earnings and cash flows in future periods.
A portion of our current and retired employee population is covered by pension and other employee-related defined benefit plans (collectively, postretirement benefit plans). We may experience significant fluctuations in costs related to postretirement benefit plans as a result of macroeconomic factors, such as interest rates, that are beyond our control. The cost of our postretirement plans is incurred over long periods of time and involves various factors and uncertainties during those periods, which can be volatile and unpredictable, including the rates of return on postretirement benefit plan assets and discount rates used to calculate liabilities and expenses. Management develops each assumption using relevant Company experience in conjunction with market-related data. Our liquidity, cash flows and financial statements could be materially affected by significant changes in key economic indicators, volatility in the financial markets, future legislation and other governmental regulatory actions.
We make contributions to fund our postretirement benefit plans when considered necessary or advantageous to do so. The macro-economic factors discussed above, including the return on postretirement benefit plan assets and the minimum funding requirements established by local government funding or taxing authorities, or established by other agreements, may influence future funding requirements. A significant decline in the fair value of our plan assets, or other adverse changes to our overall pension and other employee-related benefit plans could require increased funding contributions and could adversely affect our financial statements. Future minimum funding requirements will depend primarily on the return on plan assets and discount rate. Depending on these factors, the level of future minimum contributions could be material.
Other Risks, Including Litigation and Regulatory Risk
Changes in environmental laws or regulations, the discovery of previously unknown or more extensive contamination, or the failure of a potentially responsible party to perform may adversely affect our financial results.
We could be affected by changes in environmental laws or regulations, including, for example, those imposed in response to vapor intrusion or climate change concerns.
Environmental laws and regulations allow for the assessment of substantial fines and criminal sanctions as well as facility shutdowns to address violations, and may require the installation of costly pollution control equipment or operational changes to limit emissions or discharges.
Accruals for environmental liabilities are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. Our estimated liability is undiscounted and is reduced to reflect the participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective share of the relevant costs. Such estimates are subject to change and may be affected by many factors, such as new information about a site, evolving scientific knowledge about risk associated with any contamination involved, developments affecting remediation technology, and enforcement by regulatory authorities.
We record an asset that represents our best estimate of probable recoveries from our insurers for the estimated environmental liabilities. There are significant assumptions made in developing estimates of environmental-related recoveries, such as policy triggers, policy or contract interpretation, and the continued solvency of the Company’s insurers. Performance by our insurers could differ from the assumptions underlying the recognized asset and could result in lower collections of receivables than are currently expected.
Developments such as the adoption of new environmental laws and regulations, violations by us of such laws and regulations, discovery of previously unknown or more extensive contamination, litigation involving environmental impacts, our inability to recover costs associated with any such developments, or financial insolvency of other potentially responsible parties could have a material adverse effect on our financial statements.
Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation, as well as export controls and trade sanctions, could result in fines or criminal penalties.
We operate in a number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws. We are subject, however, to the risk that we, our affiliated entities, or the respective officers, directors, employees and agents of ITT, may take action determined to be in violation of such anti-corruption laws, including but not limited to, the U.S. Foreign Corrupt Practices Act of 1977 and the U.K. Bribery Act of 2010, as well as trade sanctions administered by the Office of Foreign Assets Control (OFAC) and the U.S. Department of Commerce. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and might adversely
affect our business, results of operations or financial position. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.
We are subject to laws, regulations and potential liability relating to claims, complaints and proceedings, including those related to product and other matters.
We are subject to various laws, ordinances, regulations and other requirements of government authorities in the U.S. and in foreign countries. Any violations or failure to comply with securities laws, trade or tax rules or similar regulations could create a substantial liability for us, and also could cause harm to our reputation. Changes in laws, ordinances, regulations or other government policies, the nature, timing, and effect of which are uncertain, may significantly increase our expenses and liabilities.
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 product liability, personal injury claims, employment and employee benefit matters and commercial or contractual disputes, sometimes related to acquisitions or divestitures. Additionally, we may become subject to significant claims of which we are currently unaware or the claims of which we are aware may result in our incurring a significantly greater liability than we anticipate or can estimate.
We may be responsible for U.S. Federal income tax liabilities that relate to the Distribution.
In connection with the Distribution, we received a U.S. Internal Revenue Service (IRS) Ruling stating that ITT and its shareholders will not recognize any taxable income, gain, or loss for U.S. Federal income tax purposes as a result of the Distribution. The IRS Ruling, while generally binding upon the IRS, is based on certain factual statements and representations we made to the IRS. If any such factual statements or representations were incomplete or untrue in any material respect, or if the facts on which the IRS Ruling was based are materially different from the facts at the time of the Distribution, the IRS could modify or revoke the IRS Ruling retroactively.
Certain requirements for tax-free treatment that are not covered in the IRS Ruling are addressed in an opinion of counsel delivered in connection with the Distribution. An opinion of counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the Distribution that are different from the conclusions reached in the opinion. Like the IRS Ruling, the opinion is based on certain factual statements and representations, which, if incomplete or untrue in any material respect, could alter counsel’s conclusions.
If all or a portion of the Distribution does not qualify as a tax-free transaction because any of the factual statements or representations in the IRS Ruling or the legal opinion are incomplete or untrue, or because the facts upon which the IRS Ruling is based are materially different from the facts at the time of the Distribution, ITT would recognize a substantial gain for U.S. Federal income tax purposes. In such case, under U.S. Treasury regulations, each member of the ITT consolidated group at the time of the Distribution would be severally liable for the resulting entire amount of any U.S. Federal income tax liability.
The Distribution may expose us to potential liabilities.
In connection with the Distribution we may be exposed to potential liabilities. As part of the Distribution Agreement, ITT, Exelis, and Xylem indemnified each other with respect to such parties’ assumed or retained liabilities pursuant to the Distribution Agreement and breaches of the Distribution Agreement or related spin agreements. There can be no assurance that the indemnity from Exelis and Xylem will be sufficient to protect us against the full amount of these and other liabilities, or that each of Exelis and Xylem will be able to fully satisfy its indemnification obligations. Third-parties could also seek to hold us responsible for any of the liabilities that each of Exelis and Xylem has agreed to assume. Even if we ultimately succeed in recovering from Exelis and/or Xylem any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. In addition, performance on indemnities that we provided Exelis and Xylem may be significant. Each of these risks could negatively affect our business, results of operations and financial position.
Anti-takeover provisions in our organizational documents and Indiana law could delay or prevent a change in control.
Certain provisions of our articles of incorporation and by-laws may delay or prevent a merger or acquisition that a shareholder may consider favorable. For example, the articles of incorporation authorize our Board of Directors to issue one or more series of preferred stock. In addition, the articles of incorporation and by-laws, among other things, do not permit action by written consent of the shareholders. These provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price. Indiana law also imposes some restrictions on mergers and other business combinations between any holder of 10% or more of our outstanding common stock and us as well as certain restrictions on the voting rights of “control shares” of an “issuing public corporation.”
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
We consider the offices, plants, warehouses, and other properties that we own or lease to be in good condition and generally suitable for their intended purpose. We believe these properties are adequate for the Company’s needs and will generally allow for expansion of capacity if needed. The following table summarizes the number and area (in thousands of square feet) of our properties by region and business segment.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Facilities - Owned |
| | Industrial Process | | Motion Technologies | | Interconnect Solutions | | Control Technologies | | Other | | Total |
Location | | # | Area | | # | Area | | # | Area | | # | Area | | # | Area | | # | Area |
Manufacturing: | | | | | | | | | | | | | | | | | | |
North America | | 3 |
| 990.6 |
| | — |
| — |
| | 1 |
| 364.1 |
| | 3 |
| 181.6 |
| | — |
| — |
| | 7 |
| 1,536.3 |
|
Europe | | 2 |
| 186.7 |
| | 4 |
| 848.4 |
| | 1 |
| 231.3 |
| | — |
| — |
| | — |
| — |
| | 7 |
| 1,266.4 |
|
Middle East | | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
|
Asia | | 1 |
| 189.0 |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 1 |
| 189.0 |
|
Latin America | | 2 |
| 114.0 |
| | — |
| — |
| | 1 |
| 358.1 |
| | — |
| — |
| | — |
| — |
| | 3 |
| 472.1 |
|
| | 8 |
| 1,480.3 |
| | 4 |
| 848.4 |
| | 3 |
| 953.5 |
| | 3 |
| 181.6 |
| | — |
| — |
| | 18 |
| 3,463.8 |
|
| | | | | | | | | | | | | | | | | | |
Non-Manufacturing: | | | | | | | | | | | | | | | | | | |
North America | | 6 |
| 124.8 |
| | — |
| — |
| | — |
| — |
| | 2 |
| 84.7 |
| | 3 |
| 59.8 |
| | 11 |
| 269.3 |
|
Europe | | — |
| — |
| | 1 |
| 38.5 |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 1 |
| 38.5 |
|
Middle East | | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
|
Asia | | 1 |
| 38.7 |
| | — |
| — |
| | 1 |
| 13.4 |
| | — |
| — |
| | — |
| — |
| | 2 |
| 52.1 |
|
Latin America | | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
|
| | 7 |
| 163.5 |
| | 1 |
| 38.5 |
| | 1 |
| 13.4 |
| | 2 |
| 84.7 |
| | 3 |
| 59.8 |
| | 14 |
| 359.9 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Facilities - Leased |
| | Industrial Process | | Motion Technologies | | Interconnect Solutions | | Control Technologies | | Other | | Total |
Location | | # | Area | | # | Area | | # | Area | | # | Area | | # | Area | | # | Area |
Manufacturing: | | | | | | | | | | | | | | | | | | |
North America | | 3 |
| 190.8 |
| | — |
| — |
| | 2 |
| 42.2 |
| | 1 |
| 200.0 |
| | — |
| — |
| | 6 |
| 433.0 |
|
Europe | | 2 |
| 27.3 |
| | 1 |
| 261.4 |
| | 1 |
| 52.2 |
| | — |
| — |
| | — |
| — |
| | 4 |
| 340.9 |
|
Middle East | | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
|
Asia | | 11 |
| 608.1 |
| | 3 |
| 302.6 |
| | 1 |
| 294.4 |
| | 1 |
| 39.1 |
| | — |
| — |
| | 16 |
| 1,244.2 |
|
Latin America | | 2 |
| 565.8 |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 2 |
| 565.8 |
|
| | 18 |
| 1,392.0 |
| | 4 |
| 564.0 |
| | 4 |
| 388.8 |
| | 2 |
| 239.1 |
| | — |
| — |
| | 28 |
| 2,583.9 |
|
| | | | | | | | | | | | | | | | | | |
Non-Manufacturing: | | | | | | | | | | | | | | | | | | |
North America | | 26 |
| 507.6 |
| | 2 |
| 58.0 |
| | 5 |
| 12.8 |
| | — |
| — |
| | 8 |
| 181.5 |
| | 41 |
| 759.9 |
|
Europe | | 14 |
| 67.4 |
| | 2 |
| 31.7 |
| | 3 |
| 190.4 |
| | 2 |
| 7.6 |
| | 4 |
| 33.7 |
| | 25 |
| 330.8 |
|
Middle East | | 4 |
| 30.3 |
| | — |
| — |
| | 2 |
| 1.0 |
| | 1 |
| 0.3 |
| | 2 |
| 6.2 |
| | 9 |
| 37.8 |
|
Asia | | 20 |
| 80.4 |
| | 4 |
| 4.4 |
| | 5 |
| 8.2 |
| | 1 |
| 0.5 |
| | 3 |
| 22.2 |
| | 33 |
| 115.7 |
|
Latin America | | 13 |
| 62.2 |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 1 |
| 33.6 |
| | 14 |
| 95.8 |
|
| | 77 |
| 747.9 |
| | 8 |
| 94.1 |
| | 15 |
| 212.4 |
| | 4 |
| 8.4 |
| | 18 |
| 277.2 |
| | 122 |
| 1,340.0 |
|
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 personal injury claims, environmental exposures, intellectual property matters, commercial or contractual disputes, sometimes related to acquisitions or divestitures, and employment and employee benefit matters. We will continue to defend vigorously against all claims.
Asbestos Proceedings
ITT, including its subsidiary Goulds Pumps, Inc., has been sued, along with many other companies in product liability lawsuits alleging personal injury due to asbestos exposure. These claims allege that certain of our products sold prior to 1985 contained a part manufactured by a third party (e.g., a gasket) that 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 or Goulds Pumps, Inc. product as a source of asbestos exposure. In addition, a large percentage of claims pending against the Company have been placed on inactive dockets because the plaintiffs cannot demonstrate a significant compensable loss. Our experience to date is that a majority of resolved claims are dismissed without payment by the Company.
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, the amount of liability for potential future claims beyond the next 10 years is not reasonably estimable due to a number of factors. As of December 31, 2014, we have recorded an undiscounted asbestos-related liability for pending claims and unasserted claims estimated to be filed over the next 10 years of $1,223.2, including expected legal fees, and an associated asset of $476.4 which represents estimated recoveries from insurers, resulting in a net exposure of $746.8. See information provided below and in Note 18, Commitments and Contingencies, to the Consolidated Financial Statements for further information.
|
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company, as of February 2, 2015, are listed below.
|
| | | |
Name | Age | | Current Title |
Denise L. Ramos | 58 | | Chief Executive Officer and President |
Aris C. Chicles | 53 | | Executive Vice President and President, Industrial Process |
Victoria L. Creamer | 45 | | Senior Vice President Human Resources |
Mary Beth Gustafsson | 55 | | Senior Vice President, General Counsel and Chief Compliance Officer |
Munish Nanda | 50 | | Senior Vice President and President, Control Technologies |
Luca Savi | 49 | | Senior Vice President and President, Motion Technologies |
Thomas M. Scalera | 43 | | Senior Vice President and Chief Financial Officer |
Neil W. Yeargin | 49 | | Senior Vice President and President, Interconnect Solutions |
Steven C. Giuliano | 45 | | Vice President and Chief Accounting Officer |
Denise L. Ramos was appointed Chief Executive Officer, President and a director of the Company in October 2011. She previously served as Senior Vice President and Chief Financial Officer of the Company since 2007. Prior to joining the Company, Ms. Ramos served as Chief Financial Officer for Furniture Brands International from 2005 to 2007. From 2000 to 2005, Ms. Ramos served as Senior Vice President and Corporate Treasurer at Yum! Brands, Inc. and Chief Financial Officer for the U.S. division of KFC Corporation. Ms. Ramos began her career in 1979 at Atlantic Richfield Company (ARCO), where she had more than 20 years of business and financial experience serving in a number of increasingly responsible finance positions, including Corporate General Auditor and Assistant Treasurer. Ms. Ramos is currently a director of Praxair, Inc., since April 2014, where she serves on the Audit Committee and the Governance and Nominating Committee. She serves on the Executive Committee of the Board
of Trustees for the Manufacturers Alliance for Productivity and Innovation and is also a member of the Business Roundtable and the Business Council. Ms. Ramos was included in the Top 100 CEO Leaders in Science, Technology, Engineering and Math publication by STEMconnector, she recently received a Distinguished Leadership Award from the New York Hall of Science and she was named to Fortune magazine’s 2014 Top People in Business.
Aris C. Chicles has served as our Executive Vice President and President, Industrial Process since May 2014 and previously as Executive Vice President since October 2011. Prior to that he served as our Senior Vice President, Strategy and Corporate Development from August 2007 to October 2011 and the Vice President, Strategy and Corporate Development from June 2006 to July 2007. Before joining us, Mr. Chicles served as Vice President, Corporate Business Development at American Standard Companies, Inc., a global manufacturer of products and systems in diversified industries including heating, ventilation and air conditioning equipment, bath and kitchen fixtures and faucets, and automotive safety systems, from 2000 to 2006 and he had a 17-year career from 1983 to 2000 with Owens Corning Inc., a leading provider of building materials systems and composite solutions, in a series of progressively responsible operational positions.
Victoria L. Creamer has served as our Senior Vice President, Human Resources since February 2015. Prior to joining ITT, Ms. Creamer served as Vice President, Global Compensation and Recognition of International Business Machines Corporation (“IBM”), a global technology and consulting company, from April 2013 to January 2015. Ms. Creamer held various other positions of increasing levels of responsibility at IBM since 1991.
Mary Beth Gustafsson has served as our Senior Vice President and General Counsel since February 2014 and as our Chief Compliance Officer since August 2014. Prior to joining us, Ms. Gustafsson served as Executive Vice President, General Counsel and Corporate Secretary of First Solar Inc., a global provider of comprehensive photovoltaic solar systems, from 2009 to 2013 and from 2008 to 2009 as Vice President, General Counsel. Ms. Gustafsson was previously Senior Vice President, General Counsel and Secretary of American Standard Companies, Inc., a global manufacturer of products and systems in diversified industries including heating, ventilation and air conditioning equipment, bath and kitchen fixtures and faucets, and automotive safety systems, from 2005 to 2008.
Munish Nanda has served as our Senior Vice President and President, Control Technologies since April 2011 and as our Vice President and Director, Integrated Supply Chain for ITT’s Fluid and Motion Control Group from April 2008 to April 2011. Prior to joining us, Mr. Nanda served in various operating leadership and general management positions with Thermo Fisher Scientific Corp. from July 2001 to April 2008, a provider of laboratory operations management solutions and technologies, and Honeywell Inc. from August 2000 to July 2001, a diversified technology and manufacturing company.
Luca Savi has served as our Senior Vice President and President, Motion Technologies since November 2011. Prior to joining us, Mr. Savi served as Chief Operating Officer, Comau Body Welding at Comau, a subsidiary of the Fiat Group responsible for producing and serving advanced manufacturing systems, from 2009 to 2011 and prior to that as Chief Executive Officer, Comau North America from 2007 to 2009 and Chief Executive Officer, Comau China from 2004 to 2007. Mr. Savi previously held senior leadership roles at Honeywell International, Royal Dutch Shell and Ferruzzi-Montedison Group.
Thomas M. Scalera has served as our Senior Vice President, Chief Financial Officer and Strategy and IT Leader since August 2014 and prior to that as Senior Vice President and Chief Financial Officer since October 2011. He previously served as Vice President, Corporate Finance from 2010 to 2011 and Director, Investor Relations from 2008 to 2010. Prior to joining ITT in 2006, Mr. Scalera held senior financial roles with R.R. Donnelley, Dover Corp., and PricewaterhouseCoopers, LLP.
Neil W. Yeargin has served as our Senior Vice President and President, Interconnect Solutions since February 2013. Prior to joining us, Mr. Yeargin held several leadership roles at Invensys plc, a global maker of software, systems and controls, most recently serving as Senior Vice President, Global Commercial Business from 2011 to 2013 and prior to that as Vice President and General Manager, Americas/APAC from 2008 to 2011. Mr. Yeargin previously held leadership roles in operations, supply chain and process improvement with Cooper Industries and Honeywell Inc. (formerly Allied Signal).
Steven C. Giuliano has served as our Vice President and Chief Accounting Officer since January 2014. Prior to joining us, Mr. Giuliano served as Senior Vice President and Chief Financial Officer from 2009 to 2011 and was Vice President and Chief Financial Officer from 2007 to 2009 of Arch Chemicals, Inc. Mr. Giuliano was Controller of Arch Chemicals from 1999 through 2007, while assuming increasing levels of responsibility.
PART II
|
| |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
COMMON STOCK – MARKET PRICES AND DIVIDENDS
The table below reflects the range of market prices of our common stock as reported in the consolidated transaction reporting system of the New York Stock Exchange (NYSE), the principal market in which this security is traded (under the trading symbol “ITT”).
|
| | | | | | | | | | | | | | | |
| 2014 | | 2013 |
| High |
| | Low |
| | High |
| | Low |
|
Three Months Ended: | | | | | | | |
March 31 | $ | 44.87 |
| | $ | 37.87 |
| | $ | 29.38 |
| | $ | 23.83 |
|
June 30 | 48.24 |
| | 41.48 |
| | 30.93 |
| | 25.94 |
|
September 30 | 49.42 |
| | 44.93 |
| | 36.51 |
| | 29.11 |
|
December 31 | 45.34 |
| | 36.74 |
| | 43.66 |
| | 35.06 |
|
We declared dividends of $0.11 and $0.10 per share of common stock in each of the four quarters of 2014 and 2013, respectively. In the first quarter of 2015, we declared a dividend of $0.1183 per share for shareholders of record on March 13, 2015. 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 deems relevant. Therefore, there can be no assurance as to what level of dividends, if any, will be paid in the future.
There were approximately 10,950 holders of record of our common stock on February 16, 2015.
EQUITY COMPENSATION PLAN INFORMATION
The equity compensation plan information called for by Item 5(a) is set forth under the caption “Equity Compensation Plan Information” in our Proxy Statement for the 2015 Annual Meeting of Shareholders.
During the fiscal year ended December 31, 2014, no equity securities of the Company were sold by the Company that were not registered under the Securities.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table summarizes our purchases of our common stock for the quarter ended December 31, 2014.
|
| | | | | | | | | | | | | | | |
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
PERIOD | TOTAL NUMBER OF SHARES PURCHASED | AVERAGE PRICE PAID PER SHARE(1) | TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS(2) | MAXIMUM DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS(2) |
10/1/2014 - 10/31/2014 | — |
| | — |
| | — |
| | | $ | 350.7 |
| |
11/1/2014 - 11/30/2014 | 0.3 |
| | $ | 43.49 |
| | 0.2 |
| | | $ | 344.1 |
| |
12/1/2014 - 12/31/2014 | 0.6 |
| | $ | 41.87 |
| | 0.6 |
| | | $ | 320.7 |
| |
| |
(1) | Average price paid per share is calculated on a settlement basis and includes commissions. |
| |
(2) | On October 27, 2006, our Board of Directors approved a three-year $1 billion share repurchase program (2006 Share Repurchase Program). On December 16, 2008, our Board of Directors modified the provisions of the 2006 Share Repurchase Program to replace the original three-year term with an indefinite term. As of December 31, 2014, we had repurchased 16.4 shares for $679.3, including commissions, under the 2006 Share Repurchase Program. The program is consistent with our capital allocation process, which has centered on those investments necessary to grow our businesses organically and through acquisitions, while also providing cash returns to shareholders. Our strategy for cash flow utilization is to invest in our business, execute strategic acquisitions, pay dividends and repurchase common stock. |
PERFORMANCE GRAPH
CUMULATIVE TOTAL RETURN
Based upon an initial investment on December 31, 2009 of $100 with dividends reinvested
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2009 | | 12/31/2010 | | 12/31/2011 | | 12/31/2012 | | 12/31/2013 | | 12/31/2014 |
ITT Corporation | $ | 100.00 |
| | $ | 106.97 |
| | $ | 121.96 |
| | $ | 150.57 |
| | $ | 282.13 |
| | $ | 265.56 |
|
S&P 400 Mid-Cap | $ | 100.00 |
| | $ | 126.63 |
| | $ | 124.44 |
| | $ | 146.59 |
| | $ | 195.64 |
| | $ | 214.69 |
|
S&P 400 Capital Goods | $ | 100.00 |
| | $ | 135.56 |
| | $ | 129.39 |
| | $ | 162.41 |
| | $ | 229.59 |
| | $ | 230.16 |
|
This graph is not, and is not intended to be, indicative of future performance of our common stock. This graph shall not be deemed “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act.
|
| |
ITEM 6. | SELECTED FINANCIAL DATA |
The following table presents selected historical financial data derived from the Consolidated Financial Statements for each of the five years presented. The selected financial data should be read in conjunction with, and is qualified in its entirety by reference to, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto.
|
| | | | | | | | | | | | | | | | | | | |
(In Millions, except per share amounts) | 2014 |
| | 2013 |
| | 2012 |
| | 2011 |
| | 2010 |
|
Results of Operations | | | | | | | | | |
Revenue | $ | 2,654.6 |
| | $ | 2,496.9 |
| | $ | 2,227.8 |
| | $ | 2,085.6 |
| | $ | 1,890.7 |
|
Gross profit | 866.4 |
| | 799.8 |
| | 680.2 |
| | 645.0 |
| | 603.9 |
|
Gross margin | 32.6 | % | | 32.0 | % | | 30.5 | % | | 30.9 | % | | 31.9 | % |
Asbestos-related costs, net(a) | 3.9 |
| | 32.8 |
| | 50.9 |
| | 100.4 |
| | 384.8 |
|
Other operating costs(b) | 596.1 |
| | 583.4 |
| | 477.8 |
| | 789.5 |
| | 399.7 |
|
Operating income (loss) | 266.4 |
| | 183.6 |
| | 151.5 |
| | (244.9 | ) | | (180.6 | ) |
Operating margin | 10.0 | % | | 7.4 | % | | 6.8 | % | | (11.7 | )% | | (9.6 | )% |
Income tax expense (benefit)(c) | 71.3 |
| | (309.6 | ) | | 39.6 |
| | 260.6 |
| | (142.2 | ) |
Income (loss) from continuing operations attributable to ITT Corporation | 188.4 |
| | 487.7 |
| | 109.5 |
| | (576.5 | ) | | (130.4 | ) |
(Loss) earnings from discontinued operations, net of tax(d) | (3.9 | ) | | 0.8 |
| | 15.9 |
| | 447.0 |
| | 934.7 |
|
Net income (loss) attributable to ITT Corporation | $ | 184.5 |
| | $ | 488.5 |
| | $ | 125.4 |
| | $ | (129.5 | ) | | $ | 804.3 |
|
Income (loss) from continuing operations per basic share | $ | 2.06 |
| | $ | 5.36 |
| | $ | 1.18 |
| | $ | (6.22 | ) | | $ | (1.42 | ) |
(Loss) income from discontinued operations per basic share | $ | (0.04 | ) | | $ | 0.01 |
| | $ | 0.17 |
| | $ | 4.82 |
| | $ | 10.17 |
|
Net income (loss) per basic share | $ | 2.02 |
| | $ | 5.37 |
| | $ | 1.35 |
| | $ | (1.40 | ) | | $ | 8.75 |
|
Income (loss) from continuing operations per diluted share | $ | 2.03 |
| | $ | 5.28 |
| | $ | 1.16 |
| | $ | (6.22 | ) | | $ | (1.42 | ) |
(Loss) income from discontinued operations per diluted share | $ | (0.04 | ) | | $ | 0.01 |
| | $ | 0.17 |
| | $ | 4.82 |
| | $ | 10.17 |
|
Net income (loss) per diluted share | $ | 1.99 |
| | $ | 5.29 |
| | $ | 1.33 |
| | $ | (1.40 | ) | | $ | 8.75 |
|
Dividends declared | $ | 0.44 |
| | $ | 0.40 |
| | $ | 0.364 |
| | $ | 1.591 |
| | $ | 2.00 |
|
Financial Position | | | | | | | | | |
Cash and cash equivalents(e) | $ | 584.0 |
| | $ | 507.3 |
| | $ | 544.5 |
| | $ | 689.8 |
| | $ | 206.0 |
|
Total assets(f) | 3,631.5 |
| | 3,740.2 |
| | 3,386.1 |
| | 3,671.5 |
| | 12,616.4 |
|
Total debt and capital leases(g) | 8.5 |
| | 48.9 |
| | 26.9 |
| | 6.5 |
| | 1,359.6 |
|
| |
(a) | In 2010, we recognized net asbestos-related costs of $384.8 reflecting several developments, including higher settlement costs and significantly increased activity in several higher-cost jurisdictions, increasing number of cases to be adjudicated and the expected legal costs. See Note 18, “Commitments and Contingencies,” to the Consolidated Financial Statements for further information. |
| |
(b) | The increase in other operating costs from 2011 to 2012 was primarily due to the 2011 Distribution of Exelis and Xylem. In connection with activities taken to create the revised organizational structure and to complete the Distribution (referred to herein as transformation costs) we recognized total transformation costs of $636.2 during 2011, of which $396.1 are presented within income from continuing operations. Transformation costs incurred during 2011 primarily relate to losses on the extinguishment of debt, asset impairments, and employee retention and severance. |
The increase in other operating costs from 2012 to 2013 primarily relates to an additional eleven months of Bornemann operations during 2013.
| |
(c) | The 2011 tax expense of $260.6 includes a $340.7 valuation allowance for U.S. federal and state deferred tax assets as it became more likely than not that these deferred tax assets would not be realized, a $69.3 tax expense for undistributed foreign earnings that were no longer considered indefinitely reinvested, and a $30.9 tax benefit from an increase in state deferred tax assets which were re-measured based on enacted tax rates using different state apportionment factors as a result of the Distribution. The 2013 tax benefit of $309.6 includes the release of a U.S. deferred tax valuation allowance of $374.6 that was initially established in 2011. See Note 5, Income Taxes, to the Consolidated Financial Statements for further information. |
| |
(d) | Discontinued operations include the results of the Shape Cutting Businesses (disposed of in 2012), Exelis (disposed of in 2011), Xylem (disposed of in 2011) and transformation costs of $240.1 recorded during 2011. Transformation costs presented within discontinued operations are costs directly related to the Distribution, primarily advisory fees and information technology costs, which provide no future benefit to the Company. |
| |
(e) | The decline in cash and cash equivalents from 2011 to 2012 was primarily due to the acquisition of Bornemann for $193.2 net of cash acquired. The increase in cash and cash equivalents from 2010 to 2011 was primarily due to receipt of a net cash transfer (the Contribution) of $683.0 and $988.0 from Exelis and Xylem, respectively, in connection with the Distribution, offset in part by the extinguishment of $1,251.0 of long-term debt in October 2011. For all periods, cash and cash equivalents excludes cash and cash equivalents held by discontinued operations at the balance sheet date. See Management’s Discussion & Analysis, Liquidity section for further information. |
| |
(f) | The increase in total assets from 2012 to 2013 is primarily due to the release of a U.S. deferred tax valuation allowance of $374.6. The decline in total assets from 2011 to 2012 is primarily due to a reduction in asbestos-related assets and liabilities resulting from a Settlement Agreement executed during the third quarter of 2012. See Note 18, Commitments and Contingencies, to the Consolidated Financial Statements for further information. The decline in total assets from 2010 to 2011 is primarily attributable to the Distribution of Exelis and Xylem on October 31, 2011, which had total combined assets of $9,322.6 as of December 31, 2010. The assets of Exelis and Xylem, although presented as discontinued operations, are included in total assets for 2009 and 2010. |
| |
(g) | Total debt as of December 31, 2011 reflects the extinguishment of $1,251.0 of long-term debt in October 2011. |
|
| |
ITEM 7. | MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the consolidated financial statements and the notes related thereto. As we noted earlier in the Forward-Looking and Cautionary Statements of this Annual Report on Form 10-K, this Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” (along with other sections of this Annual Report), may contain forward-looking statements. The risks discussed in Part I, Item 1A, “Risk Factors,” and other risks identified in this Annual Report on Form 10-K could cause our actual results may differ materially from those expressed by such forward-looking statements.
OVERVIEW
ITT Corporation is a diversified manufacturer of highly engineered critical components and customized technology solutions for the energy, transportation and industrial markets. Building on its heritage of engineering, ITT partners with its customers to deliver enduring solutions to the key industries that underpin our modern way of life. We manufacture components that are integral to the operation of 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. Each business applies technology and engineering expertise to solve our customer’s most pressing challenges. Our applied engineering aptitude provides a superior business fit with our customers given the critical nature of their applications. This in turn provides us with a unique insight to our customer’s requirements and enables us to develop solutions to assist our customers achieve their business goals. Our technology and customer intimacy in tandem produce opportunities to capture recurring revenue streams, aftermarket opportunities, and long lived original equipment manufacturer (OEM) platforms.
Our product and service offerings are organized into four segments: Industrial Process, Motion Technologies, Interconnect Solutions, and Control Technologies, each of which is discussed above in Part I, Item 1, “Company Overview - Segment Information.”
EXECUTIVE SUMMARY
During 2014, we continued to build on our multi-year strategy of creating profitable growth through our focus on four key strategic areas: Market Expansion, Differentiated Customer Experience, Operational Excellence, and Effective Capital Deployment. To promote these strategies, we invested in capabilities, capacity, technology, and R&D projects to drive growth and value creation. The benefits of these activities and our diversified portfolio are reflected in our 2014 financial results that included revenue growth of 6%, operating income growth of 45%, and operating margin expansion of 260 basis points.
Our focus on Market Expansion contributed to revenue growth in emerging markets of 11% during 2014, and is exemplified by the profitable and sustainable brake pad market share growth in China that has led us to further our capacity investments in the region. We have also seen market expansion in developed geographic markets reflecting focused growth in energy and transportation. In addition, new product developments have allowed us to expand our aerospace solutions into the rotorcraft market. And direct-to-market strategies across our businesses are garnering new customer relationships and strengthening existing ones.
We advanced our Differentiated Customer Experience through investments in our Lean transformation that have led to improvements in many of our key customer metrics. In addition, restructuring initiatives focused on accelerating the turnaround in our connectors and shock absorbers businesses have improved our levels of customer responsiveness. And, we have invested in building capabilities in human resources, information technology, culture and lean that will drive an improved experience for our customers.
A key component of our Operational Excellence strategy is the successful execution of our Lean transformation. Our five-year journey to transform each of our significant revenue producing facilities began in 2012, and is currently on track. The physical transformation of our operations is evident in the meaningful change in factory flow, pull and visual management supported by cultural transformation with high employee engagement, standard work and self-managed teams. Many of our core metrics around safety, quality, delivery, inventory and productivity are improving and we are seeing the positive effects on inventory management and structurally lower breakeven points. We are also moving beyond the factory floor to lean out other critical processes of the value chain to become a truly Lean enterprise.
During 2014, we continued our organic investments in our business with significant capital spending geared towards expanding our brake pad and pump production capacity. We also returned approximately $100 to shareholders in 2014 through a combination of share repurchases and dividends and invested $28 in restructuring initiatives.
From a results standpoint, 2014 was a strong year as we delivered consolidated revenue growth of 6% and organic revenue growth of 7%. The organic revenue growth was most significantly driven by share gains in the global automotive and rail markets and by global sales of project pumps and connectors to the oil and gas market. In addition, we drove a 5% increase in organic orders. Consolidated operating income was $266 for the year, representing an $83 or 45% increase from the prior year, due to improved segment operating performance reflecting higher sales volume and net savings of approximately $60 from productivity, sourcing, and restructuring initiatives and a year-over-year reduction in asbestos-related costs of $29 primarily due to favorable movements in certain key assumptions. Net income from continuing operations was $188 during 2014, resulting in earnings of $2.03 per diluted share. Adjusted income from continuing operations was $229 for 2014, reflecting an increase of $43, or 23%, over the prior year. Our adjusted income from continuing operations translated into $2.47 per diluted share, a $0.45 per share, or 22%, increase over the prior year. See the “Key Performance Indicators and Non-GAAP Measures,” for reconciliation of non-GAAP measures.
Trends and Uncertainties
Our success in 2015 will rely heavily on the effective execution of our strategic plan, however there are certain macro-trends that are out of our control and create uncertainty with regard to our overall business and financial performance. These trends include, but are not limited to, the recent decline in oil prices, instability in regions such as Venezuela and Russia, foreign currency fluctuations, emerging market deceleration, and modest global GDP growth.
A portion of our business provides products, such as pumps and connectors, to the oil and gas market. In connection with the recent declines in the price of oil, we expect to see some level of customer project delays and/or order cancellations during 2015 and possibly after. Depending on the extent to which oil prices continue to decline or stay depressed, this trend could create an unfavorable material effect on the results of our businesses. Revenue stemming from the oil and gas market was approximately 20% of our total revenue during 2014.
Growth in emerging markets is an important component of the growth strategy for Industrial Process and ITT. To date, we have not experienced any material disruptions in our operations, however, during the fourth quarter of 2014, we recognized a charge associated with our Venezuelan subsidiary due to the write-down of certain assets and the remeasurement of the subsidiary's financial statements and contract obligations at a lower foreign currency exchange rate. We will continue to closely monitor developments given the instability in the current political environments. The continuation or escalation of the current geopolitical instability in these regions could negatively impact our results and future growth prospects.
DISCUSSION OF FINANCIAL RESULTS
2014 VERSUS 2013
|
| | | | | | | | | | |
| 2014 |
| | 2013 |
| | Change |
|
Revenue | $ | 2,654.6 |
| | $ | 2,496.9 |
| | 6.3 | % |
Gross profit | 866.4 |
| | 799.8 |
| | 8.3 | % |
Gross margin | 32.6 | % | | 32.0 | % | | 60 | bp |
Operating expenses | 600.0 |
| | 616.2 |
| | (2.6 | )% |
Operating expense to revenue ratio | 22.6 | % | | 24.7 | % | | (210 | )bp |
Operating income | 266.4 |
| | 183.6 |
| | 45.1 | % |
Operating margin | 10.0 | % | | 7.4 | % | | 260 | bp |
Interest and non-operating expenses, net | 4.4 |
| | 3.1 |
| | 41.9 | % |
Income tax expense (benefit) | 71.3 |
| | (309.6 | ) | | (123.0 | )% |
Effective tax rate | 27.2 | % | | (171.5 | )% | | 19,870 | bp |
Income from continuing operations attributable to ITT Corporation | 188.4 |
| | 487.7 |
| | (61.4 | )% |
(Loss) earnings from discontinued operations, net of tax | (3.9 | ) | | 0.8 |
| | (587.5 | )% |
Net income attributable to ITT Corporation | $ | 184.5 |
| | $ | 488.5 |
| | (62.2 | )% |
REVENUE
Revenue for the year ended December 31, 2014 was $2,654.6, reflecting an increase of $157.7, or 6.3%, over the prior year. The Industrial Process segment generated revenue growth of $100.9, or 9.1%, primarily from long-term industrial pump projects serving the oil and gas, mining, and chemical markets in North America and Latin America. The Motion Technologies segment experienced revenue growth of $47.6, or 6.6%, driven by strength in both automotive OE and aftermarket, as well as in the global rail markets. The Interconnect Solutions segment revenue declined $2.7, or 0.7%, primarily due to weakness in the defense and communication market connectors, as well as from the expected decline in our non-strategic connector product lines, offset by growth from oil and gas in the North American market. The Control Technologies segment revenue grew $12.3, or 4.4%, reflecting strength in both our industrial and commercial aerospace markets.
As mentioned previously, in the Executive Summary section of Management's Discussion and Analysis, our future revenue results may be negatively impacted by the current economic and political instability in Russia and Venezuela, foreign currency fluctuations, and the recent decline in the price of oil.
The following table illustrates revenue generated within a specific country or region for the years ended December 31, 2014 and 2013, the corresponding percentage change, and the organic growth, a non-GAAP measure. See below for further discussion of year-over-year revenue activity at the segment level. See the section titled "Key Performance Indicators and Non-GAAP Measures" for a definition and reconciliation of organic revenue growth.
|
| | | | | | | | | | | | | |
| 2014 |
| | 2013 |
| | Change |
| | Organic Growth |
|
United States | $ | 927.0 |
| | $ | 896.2 |
| | 3.4 | % | | 3.5 | % |
Germany | 303.3 |
| | 266.7 |
| | 13.7 | % | | 13.0 | % |
Canada | 139.0 |
| | 106.8 |
| | 30.1 | % | | 30.7 | % |
France | 129.4 |
| | 144.7 |
| | (10.6 | )% | | (11.0 | )% |
Other developed markets | 319.9 |
| | 331.9 |
| | (3.6 | )% | | 5.1 | % |
Total developed markets | 1,818.6 |
| | 1,746.3 |
| | 4.1 | % | | 4.1 | % |
South and Central America(a) | 239.4 |
| | 200.2 |
| | 19.6 | % | | 27.7 | % |
Eastern Europe and Russia | 125.9 |
| | 124.3 |
| | 1.3 | % | | 2.5 | % |
Middle East and Africa | 162.7 |
| | 144.1 |
| | 12.9 | % | | 11.9 | % |
China and Hong Kong | 184.7 |
| | 140.5 |
| | 31.5 | % | | 32.0 | % |
Other emerging growth markets | 123.3 |
| | 141.5 |
| | (12.9 | )% | | (13.2 | )% |
Total emerging growth markets | 836.0 |
| | 750.6 |
| | 11.4 | % | | 13.5 | % |
Total Revenue | $ | 2,654.6 |
| | $ | 2,496.9 |
| | 6.3 | % | | 6.9 | % |
The following table illustrates the year-over-year revenue results from each of our segments for the years ended December 31, 2014 and 2013.
|
| | | | | | | | | | | | | |
| 2014 |
| | 2013 |
| | Change |
| | Organic Growth |
|
Industrial Process | $ | 1,208.3 |
| | $ | 1,107.4 |
| | 9.1 | % | | 10.7 | % |
Motion Technologies | 769.4 |
| | 721.8 |
| | 6.6 | % | | 6.1 | % |
Interconnect Solutions | 392.8 |
| | 395.5 |
| | (0.7 | )% | | (0.4 | )% |
Control Technologies | 290.5 |
| | 278.2 |
| | 4.4 | % | | 4.6 | % |
Eliminations | (6.4 | ) | | (6.0 | ) | | 6.7 | % | | — |
|
Total Revenue | $ | 2,654.6 |
| | $ | 2,496.9 |
| | 6.3 | % | | 6.9 | % |
Industrial Process
Industrial Process revenue for the year ended December 31, 2014 was $1,208.3, reflecting an increase of $100.9, or 9.1%, as compared to the prior year. Unfavorable foreign currency fluctuations negatively impacted revenue growth by $20.6, or 1.9%. Organic revenue increased 10.7%, over the prior year, primarily reflecting market share gains in the large, highly engineered project pump business, driven by our growth in the oil and gas market of approximately 21%. The project pump business also contributed to revenue growth in the mining market of approximately 16% and in the chemical market of approximately 9%. The growth of our project pump business was partially offset by a decline in our Asia Pacific general chemical and mining markets.
Orders for the year ended December 31, 2014 were $1,214.2, reflecting an increase of $52.2, or 4.5%, as compared to the prior year. Unfavorable foreign currency fluctuations negatively impacted order growth by $20.7, or 1.8%. Organic orders increased 6.0%, over the prior year, primarily reflecting a strong fourth quarter of large engineered project business, mainly in the downstream oil and gas markets in Canada that led to full year-over-year growth of approximately $60 in the global oil and gas market. We also experienced strong fourth quarter 2014 orders of pumps and parts for the mining market, primarily to the Latin America region, which contributed to our full year 2014 order growth in the mining market of approximately $10. The level of order and shipment activity related to engineered pumps can vary from period to period, which may impact year-over-year comparisons. Backlog as of December 31, 2014 was $603.4, reflecting a decrease of $40.6, or 6.3%, from the prior year. The year-over-year decrease in backlog is principally due to unfavorable foreign currency translation.
Motion Technologies
Motion Technologies revenue for the year ended December 31, 2014 was $769.4, reflecting an increase of $47.6, or 6.6%, compared to the prior year, due to approximately 5% growth in Friction Technologies and 19.0% growth in KONI. Growth in Friction Technologies came from both the aftermarket and OE channels. Aftermarket benefited from the addition of a new production line, as well as improved production press efficiency rates coming from specific Lean initiatives to meet increased demand. The year-over-year increase in OE was driven by growth in China which corresponds with our investments and strategic focus to gain market share in the Asia Pacific region. Higher year-over-year revenues in KONI related to growth in the global rail market as well as growth in the North American automotive market. Foreign currency translation favorably impacted revenue growth by $3.4, resulting in organic revenue growth of 6.1%, over the prior year.
Orders for the year ended December 31, 2014 were $797.0, reflecting an increase of 7.1% over the prior year, driven by order growth at KONI of approximately 23% from continued strong order intake within the global rail market, along with strong North American aftermarket orders. Orders at our Friction Technologies business increased 4% during 2014, due to key automotive platform wins in Europe and China. Organic orders increased $49.8, or 6.7%, over the prior year.
Interconnect Solutions
Interconnect Solutions revenue for the year ended December 31, 2014 was $392.8, reflecting a decrease of $2.7, or 0.7%, compared to the prior year. The decline in revenue was mainly due to the phase-out of certain non-strategic connector product lines in the communications market and weakness in defense market, which was partially offset by year-over-year growth in our other market areas. Revenue from the oil and gas market increased during 2014 by approximately $7, primarily within North America. Revenue from the transportation and industrial market increased by approximately $6, due primarily to growth in heavy equipment and electric vehicle connector products. Revenue from the commercial aircraft market increased approximately 11% over the prior year. Revenue from the medical technologies market was relatively consistent with the prior year.
Orders decreased during 2014 by 3.0%, to $388.4, primarily reflecting year-over-year declines from the U.S. defense market, and the Asia Pacific medical market. These declines were partially offset by an increase in North America oil and gas orders.
Control Technologies
Control Technologies revenue for the year ended December 31, 2014 was $290.5, reflecting an increase of $12.3, or 4.4%, as compared to the prior year. The increase in revenue was primarily driven by growth of 6% in our CT Industrial division and 4% in the CT Aerospace division. The CT Industrial growth was due to gains in energy absorption products, which experienced growth across all major markets, and from higher sales of natural gas valves due to the continued conversion of commercial vehicles to a natural gas fuel source.
The aerospace growth was due to both higher commercial OE sales of approximately 15%, stemming from increased aircraft production rates, as well as increased sales of aftermarket spares of 38%. Total aftermarket sales grew 2% over the prior year, as the growth in spares was offset by a decline in revenue from an aftermarket program that is ending. In addition, the overall CT aerospace revenue growth was reduced by lower year-over-year sales from our seat actuation product line and a 7% decline in sales to the defense market.
Orders received during the year ended December 31, 2014 were $289.2, reflecting an increase of $13.2, or 4.8%, primarily driven by growth in commercial aerospace OEM components due to production rate increases and share gains, as well as order growth in the aerospace aftermarket spares business.
GROSS PROFIT
Gross profit for the year ended December 31, 2014 was $866.4, an increase of $66.6, or 8.3%, as compared to the prior year. The table below provides gross profit and gross margin by segment for the year ended December 31, 2014 and 2013.
|
| | | | | | | | | | |
| 2014 |
| | 2013 |
| | Change |
|
Industrial Process | $ | 385.4 |
| | $ | 361.7 |
| | 6.6 | % |
Motion Technologies | 219.5 |
| | 193.4 |
| | 13.5 | % |
Interconnect Solutions | 136.8 |
| | 129.7 |
| | 5.5 | % |
Control Technologies | 123.9 |
| | 113.7 |
| | 9.0 | % |
Corporate and Other | 0.8 |
| | 1.3 |
| | (38.5 | )% |
Total gross profit | $ | 866.4 |
| | $ | 799.8 |
| | 8.3 | % |
Gross margin: | | | | | |
Industrial Process | 31.9 | % | | 32.7 | % | | (80 | )bp |
Motion Technologies | 28.5 | % | | 26.8 | % | | 170 | bp |
Interconnect Solutions | 34.8 | % | | 32.8 | % | | 200 | bp |
Control Technologies | 42.7 | % | | 40.9 | % | | 180 | bp |
Consolidated | 32.6 | % | | 32.0 | % | | 60 | bp |
OPERATING EXPENSES
Operating expenses for the year ended December 31, 2014 decreased $16.2 compared to the prior year, primarily due to lower net asbestos-related costs as well as from additional cost savings generated by recent restructuring and Lean initiative actions, which were partially offset by higher R&D costs and strategic investment costs. The following table provides further information by expense type, as well as a breakdown of operating expense by segment.
|
| | | | | | | | | | |
| 2014 |
| | 2013 |
| | Change |
|
Sales and marketing expenses | $ | 219.4 |
| | $ | 216.2 |
| | 1.5 | % |
General and administrative expenses | 300.1 |
| | 299.9 |
| | 0.1 | % |
Research and development expenses | 76.6 |
| | 67.3 |
| | 13.8 | % |
Asbestos-related costs, net | 3.9 |
| | 32.8 |
| | (88.1 | )% |
Total operating expenses | $ | 600.0 |
| | $ | 616.2 |
| | (2.6 | )% |
By Segment: | | | | | |
Industrial Process | $ | 261.5 |
| | $ | 249.7 |
| | 4.7 | % |
Motion Technologies | 88.6 |
| | 93.1 |
| | (4.8 | )% |
Interconnect Solutions | 114.6 |
| | 115.5 |
| | (0.8 | )% |
Control Technologies | 60.4 |
| | 58.4 |
| | 3.4 | % |
Corporate & Other | 74.9 |
| | 99.5 |
| | (24.7 | )% |
Sales and marketing expenses for the year ended December 31, 2014 were $219.4, reflecting an increase of $3.2, or 1.5%, mainly due to increased selling costs associated with higher sales volume. Sales and marketing expenses as a percentage of revenue decreased 40 basis points to 8.3%, primarily due to a decline in marketing expenses of approximately 6% combined with the year-over-year revenue growth.
G&A expenses were $300.1 for the year ended December 31, 2014, which were consistent with the prior year. During 2014 we incurred lower transformation and repositioning costs of $16.1 and received a favorable legal settlement; however these items were offset by an increase in strategic investment costs, charges related to our operations in Venezuela, as well as higher spending on various corporate initiatives, such as Human Resource (HR) capability improvements and our culture initiative.
R&D expenses for the year ended December 31, 2014 were $76.6, reflecting an increase of $9.3, or 13.8%. As a percentage of revenue, R&D expenses increased to 2.9% in 2014 from 2.7% in 2013, as we continued to invest in new product developments for use in new automotive platforms and expanding multiphase pump technology, as well as in various other targeted growth markets. We anticipate our investments in future R&D activities will moderately increase from current spending levels to ensure a continuing flow of innovative, high quality products and maintain our competitive position in the markets we serve.
During 2014, we recognized net asbestos-related costs of $3.9, reflecting a decrease of $28.9 compared to the prior year. The decrease was primarily due to our 2014 asbestos remeasurement that resulted in a year-over-year benefit of $58.8, which was partially offset by a settlement agreement entered into in the prior year with an insurer that resulted in a $31.0 gain. Based on the results of our 2014 remeasurement, we decreased our estimated undiscounted asbestos liability, including legal fees, by $42.8, reflecting a decrease in costs the company estimates will be incurred to resolve all pending claims, as well as unasserted claims estimated to be filed over the next 10 years. The decrease in our estimated liability is a result of several developments, including an expectation of lower defense costs relative to indemnities paid over the projection period and favorable experience in the ratio of dismissed claims versus settled claims. These favorable factors were offset in part by an increasing number of cases expected to be adjudicated. Further, in 2014, the Company increased its estimated asbestos-related assets by $16.0, principally due to the estimated probable recoveries of certain liabilities resulting from the annual study. See Note 18, “Commitments and Contingencies,” in our Notes to the Consolidated Financial Statements for further information on our asbestos-related liabilities and assets.
OPERATING INCOME
Operating income for 2014 was $266.4, reflecting an increase of $82.8, or 45.1%, over the prior year primarily due to segment operating income growth of $58.7 and lower asbestos-related of $28.9. The following table illustrates the 2014 and 2013 operating income and operating margin by segments and at the consolidated level.
|
| | | | | | | | | | |
| 2014 |
| | 2013 |
| | Change |
|
Industrial Process | $ | 123.9 |
| | $ | 112.0 |
| | 10.6 | % |
Motion Technologies | 130.9 |
| | 100.3 |
| | 30.5 | % |
Interconnect Solutions | 22.2 |
| | 14.2 |
| | 56.3 | % |
Control Technologies | 63.5 |
| | 55.3 |
| | 14.8 | % |
Segment operating income | 340.5 |
| | 281.8 |
| | 20.8 | % |
Asbestos-related costs, net | (3.9 | ) | | (32.8 | ) | | (88.1 | )% |
Other corporate costs | (70.2 | ) | | (65.4 | ) | | 7.3 | % |
Total corporate and other costs | (74.1 | ) | | (98.2 | ) | | (24.5 | )% |
Total operating income (loss) | $ | 266.4 |
| | $ | 183.6 |
| | 45.1 | % |
Operating margin: | | | | | |
Industrial Process | 10.3 | % | | 10.1 | % | | 20 | bp |
Motion Technologies | 17.0 | % | | 13.9 | % | | 310 | bp |
Interconnect Solutions | 5.7 | % | | 3.6 | % | | 210 | bp |
Control Technologies | 21.9 | % | | 19.9 | % | | 200 | bp |
Segment operating margin | 12.8 | % | | 11.3 | % | | 150 | bp |
Consolidated operating margin | 10.0 | % | | 7.4 | % | | 260 | bp |
Industrial Process operating income for the year ended December 31, 2014 increased $11.9, or 10.6%, to $123.9 and resulted in an operating margin of 10.3%, reflecting growth of 20 basis points over the prior year. The benefit from increased sales volume, particularly large engineered project pumps, of approximately $20, and a similar benefit from net savings from Lean productivity and global sourcing initiatives taken during 2014 were partially offset by an unfavorable shift of sales mix and continued project pricing pressures, resulting in an approximate 40 basis point increase to operating margin. Acquisition-related costs related to Bornemann, incurred during 2013, and a reduction in postretirement plan costs and repositioning-related expenses provided a year-over-year operating income benefit of $15.3, resulting in a 120 basis point improvement to operating margin, which were offset by higher strategic investment spending, charges of approximately $10 associated with our operations in Venezuela, corporate expense allocations, and operational impacts from certain complex engineering projects.
Motion Technologies operating income for the year ended December 31, 2014 increased $30.6, or 30.5%, to $130.9 and resulted in an operating margin of 17.0%, reflecting growth of 310 basis points over the prior year. The primary growth driver was higher sales volumes which provided approximately $24 of additional operating income and a 200 basis point operating margin improvement. Motion Technologies' results also reflect year-over-year operating income and margin growth from the KONI business which are due to strong sales volume growth, fixed cost reductions, and manufacturing improvements. In addition, net savings from Lean productivity and global sourcing initiatives and a favorable legal settlement during 2014, as well as lower year-over-year restructuring costs provided approximately $29 of additional operating income, and approximately 380 basis point increase to operating margin. The total year-over-year growth in operating income was partially offset by unfavorable OE pricing, as well as higher R&D and other costs related to capacity expansion and start-up costs.
Interconnect Solutions operating income for the year ended December 31, 2014 increased $8.0, or 56.3%, to $22.2 and resulted in an operating margin of 5.7%, reflecting growth of 210 basis points over the prior year. The increase in operating income and margin was primarily driven by the cost savings from our restructuring actions taken over the last 2 years, as well as from additional net savings from Lean and sourcing initiatives and lower year-over-year postretirement employee benefit costs, resulting from a plan modification to reduce future participant benefits, that improved operating income and margin by approximately $27 and 710 basis points, respectively. The favorability of these items was partially offset by costs incurred associated with an action to move certain production lines from one location to another existing lower cost manufacturing site, costs incurred related to the design of an enterprise resource planning system, higher restructuring costs, and a negative change in sales mix that reduced operating income and margin by approximately $20 and 500 basis points, respectively.
Control Technologies operating income for the year ended December 31, 2014 increased $8.2, or 14.8%, to $63.5 and resulted in an operating margin of 21.9%, reflecting growth of 200 basis points over the prior year. The growth in operating income stemmed from net productivity savings generated by Lean and sourcing initiatives, increased sales volume and benefits from pricing initiatives, and lower pension, repositioning and restructuring costs which provided approximately $14 of additional operating income and 400 basis points to operating margin for 2014. However, the benefit provided by these items was partially offset by an unfavorable shift in sales mix related to the decline in sales to the defense market and from an aerospace aftermarket program that is nearing its end of life and higher year-over-year strategic investment-related costs and corporate expense allocations which reduced operating income and margin by approximately $6 and 200 basis points, respectively.
Other corporate costs for the year ended December 31, 2014 increased $4.8, or 7.3%, to $70.2. The increase was due to higher compensation and benefit-related costs, including severance, bonus and stock compensation expenses, combined with a favorable worker's disability insurance adjustment in 2013 that did not occur in 2014. Additionally, other corporate expenses for 2014 were impacted by higher investment spending on various corporate initiatives, such as Human Resource capabilities and our culture initiative. These costs were partially offset by a decline in transformation and repositioning costs of $10.3.
As mentioned previously, in the Executive Summary section of Management's Discussion and Analysis, our future results may be negatively impacted by the current economic and political instability in Russia and Venezuela, foreign currency fluctuations, and the recent decline in the price of oil.
INTEREST AND NON-OPERATING EXPENSES, NET
|
| | | | | | | | | | |
| 2014 |
| | 2013 |
| | Change |
|
Interest expense | $ | 4.0 |
| | $ | 6.3 |
| | (36.5 | )% |
Interest income | 2.5 |
| | 5.0 |
| | (50.0 | )% |
Miscellaneous expense (income), net | 2.9 |
| | 1.8 |
| | 61.1 | % |
Total interest and non-operating expenses, net | $ | 4.4 |
| | $ | 3.1 |
| | 41.9 | % |
Interest expense decreased by $2.3 during 2014, due to a favorable movement in accrued interest associated with unrecognized tax benefits and lower average outstanding debt and commercial paper during 2014.
Interest income decreased by $2.5 during 2014, primarily due to interest received during 2013 in connection with a settlement of legacy receivables and payables with a former ITT entity, partially offset by additional year-over-year interest earned on cash deposit balances.
Miscellaneous expenses (income), net increased $1.1 during 2014, primarily due to income earned during 2013 in connection with transition services arrangements pertaining to the 2011 Distribution of Exelis and Xylem.
INCOME TAX EXPENSE
For the year ended December 31, 2014, the Company recognized an income tax expense of $71.3 representing an effective tax rate of 27.2%, compared to an income tax benefit of $309.6, and an effective tax rate of (171.5)% for 2013. Excluding the impact of the release of the valuation allowance (described further in Note 5, Income Taxes, to the Consolidated Financial Statements) the effective tax rate was 36.0% in 2013. The 2014 effective tax rate includes tax benefits resulting from a tax basis step-up election in Italy and additional income that is eligible for a tax holiday in Korea. These were partially offset by changes in the New York State income tax law during the year which resulted in an increase in tax expense of $3.2.
After considering all available evidence, including a cumulative loss and the absence of any significant positive evidence, the Company recorded a valuation allowance against certain foreign net deferred tax assets in Germany and Venezuela. In addition, a portion of the deferred tax assets in Italy are no longer realizable. The Company continues to maintain a valuation allowance against certain deferred tax assets attributable to state net operating losses and tax credits and certain foreign net deferred tax assets primarily in Luxembourg, Germany, India and China which are not expected to be realized. Overall, the increase in the valuation allowance of $11.8 is primarily attributable to foreign net operating loss carryforwards in Luxembourg.
The Company operates in various tax jurisdictions and is subject to examination by tax authorities in these jurisdictions. The Company is currently under examination in several jurisdictions including Germany, Italy, Korea, the United Kingdom, the U.S. and Venezuela. The U.S. federal income tax audit for the years 2009 through 2011 has received Joint Committee on Taxation review. We anticipate that we will receive the final audit report within the next 12 months. The calculation of our tax liability for unrecognized tax benefits includes dealing with uncertainties in the
application of complex tax laws and regulations in various tax jurisdictions. Due to the complexity of some uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit. The settlement of an examination could result in changes in amounts attributable to us through the Tax Matters Agreement entered into with Exelis and Xylem. 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 $86.5 due to changes in audit status, expiration of statutes of limitations and other events.
(LOSS) EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAX
During 2014, the Company incurred a loss from discontinued operations of $3.9, net of tax, primarily related to a settlement payment to a former ITT entity. During 2013, ITT had income from discontinued operations primarily related to a reversal of warranty reserves and legal-related contingencies associated with previously disposed businesses that were partially offset by a net after-tax loss of $1.3 related to a settlement of legacy receivables and payables with a former ITT entity.
DISCUSSION OF FINANCIAL RESULTS
2013 VERSUS 2012
|
| | | | | | | | | | |
| 2013 |
| | 2012 |
| | Change |
|
Revenue | $ | 2,496.9 |
| | $ | 2,227.8 |
| | 12.1 | % |
Gross profit | 799.8 |
| | 680.2 |
| | 17.6 | % |
Gross margin | 32.0 | % | | 30.5 | % | | 150 | bp |
Operating expenses | 616.2 |
| | 528.7 |
| | 16.6 | % |
Operating expense to revenue ratio | 24.7 | % | | 23.7 | % | | 100 | bp |
Operating income | 183.6 |
| | 151.5 |
| | 21.2 | % |
Operating margin | 7.4 | % | | 6.8 | % | | 60 | bp |
Interest and non-operating expenses, net | 3.1 |
| | 2.4 |
| | 29.2 | % |
Income tax (benefit) expense | (309.6 | ) | | 39.6 |
| | (881.8 | )% |
Effective tax rate | (171.5 | )% | | 26.6 | % | | (19,810 | )bp |
Income from continuing operations attributable to ITT Corporation | 487.7 |
| | 109.5 |
| | 345.4 | % |
Earnings from discontinued operations, net of tax | 0.8 |
| | 15.9 |
| | (95.0 | )% |
Net income attributable to ITT Corporation | $ | 488.5 |
| | $ | 125.4 |
| | 289.6 | % |
REVENUE
Revenue for the year ended December 31, 2013 increased $269.1, or 12.1%%, over the prior year, primarily driven by our fourth quarter 2012 acquisition of Bornemann, which represented $136.0 of the increase. The Industrial Process segment saw organic revenue gains during the year from global expansion in the oil and gas market. In addition, we experienced growth of $95.6, or 15.3%, from our Motion Technologies segment primarily due to year-over-year OEM volume growth from expanded global brake pad market share gains and increased aftermarket demand. Our Interconnect Solutions segment also generated sales growth of $19.8, or 5.3%, with increased sales in all core market categories.
The following table illustrates the year-over-year revenue results from each of our segments for the years ended December 31, 2013 and 2012.
|
| | | | | | | | | | | | | |
| 2013 |
| | 2012 |
| | Change |
| | Organic Growth |
|
Industrial Process | $ | 1,107.4 |
| | $ | 955.8 |
| | 15.9 | % | | 3.7 | % |
Motion Technologies | 721.8 |
| | 626.2 |
| | 15.3 | % | | 12.7 | % |
Interconnect Solutions | 395.5 |
| | 375.7 |
| | 5.3 | % | | 5.9 | % |
Control Technologies | 278.2 |
| | 277.1 |
| | 0.4 | % | | 0.7 | % |
Eliminations | (6.0 | ) | | (7.0 | ) | | (14.3 | )% | | — |
|
Total Revenue | $ | 2,496.9 |
| | $ | 2,227.8 |
| | 12.1 | % | | 6.3 | % |
The following table illustrates revenue generated within a specific country or region for the years ended December 31, 2013 and 2012, the corresponding percentage change, and the organic growth. See below for further discussion of year-over-year revenue activity at the segment level. See the section titled "Key Performance Indicators and Non-GAAP Measures" for a definition and reconciliation of organic revenue growth.
|
| | | | | | | | | | | | | |
| 2013 |
| | 2012 |
| | Change |
| | Organic Growth |
|
United States | $ | 896.2 |
| | $ | 869.3 |
| | 3.1 | % | | 0.9 | % |
Germany | 266.7 |
| | 200.5 |
| | 33.0 | % | | 19.7 | % |
Canada | 106.8 |
| | 81.2 |
| | 31.5 | % | | 16.0 | % |
France | 144.7 |
| | 118.2 |
| | 22.4 | % | | 17.2 | % |
Other developed markets | 331.9 |
| | 319.9 |
| | 3.8 | % | | 1.7 | % |
Total developed markets | 1,746.3 |
| | 1,589.1 |
| | 9.9 | % | | 4.7 | % |
South and Central America(a) | 200.2 |
| | 198.3 |
| | 1.0 | % | | (8.5 | )% |
Eastern Europe and Russia | 124.3 |
| | 103.1 |
| | 20.6 | % | | 11.2 | % |
Middle East and Africa | 144.1 |
| | 114.3 |
| | 26.1 | % | | 19.8 | % |
China and Hong Kong | 140.5 |
| | 113.6 |
| | 23.7 | % | | 17.8 | % |
Other emerging growth markets | 141.5 |
| | 109.4 |
| | 29.3 | % | | 24.8 | % |
Total emerging growth markets | 750.6 |
| | 638.7 |
| | 17.5 | % | | 10.2 | % |
Total Revenue | $ | 2,496.9 |
| | $ | 2,227.8 |
| | 12.1 | % | | 6.3 | % |
Industrial Process
Industrial Process revenue for the year ended December 31, 2013 increased $151.6, or 15.9%, year-over-year, primarily related to our fourth quarter 2012 acquisition of Bornemann. This acquisition provided $136.0 of incremental year-over-year revenue during 2013. Organic revenue increased 3.7% primarily due to gains in the global oil and gas market of approximately 21%, as well as increased shipments of project pumps in the North American chemical market. In addition, organic revenue growth reflected strength in aftermarket sales of approximately 15% as compared to the prior year. The growth in these areas during 2013 was partially offset by year-over-year weakness for North American baseline pumps and valves, delays in large global project shipments, as well as lower activity in the global mining and general industrial markets.
Orders for the year ended December 31, 2013 increased $207.1, or 21.7%, as compared to the prior year, primarily reflecting Bornemann orders of $170.6. Organic orders increased $39.6, or 4.1%, due to an increase in parts orders and increased project business globally, partially offset by lower baseline business and valves orders in North America. The level of order and shipment activity related to engineered pumps can vary from period to period, which may impact year-over-year comparisons.
Motion Technologies
Motion Technologies revenue for the year ended December 31, 2013 increased $95.6, or 15.3%, compared to the prior year, reflecting significant gains in both OEM and aftermarket within the Friction Technologies business. Foreign currency translation favorably impacted revenue growth by $16.1, resulting in organic revenue growth of 12.7%, over the prior year.
Our aftermarket revenues, which are predominately generated within Europe and include OES and independent aftermarket channels, grew by approximately 15% during 2013 reflecting the benefits from a number of new business awards and campaigns from automakers. Additionally, during 2013, we began to generate OES volumes from OE platforms in China.
The strong growth in OEM automotive brake pad volume was driven by Europe and China. The growth in Europe resulted from our increasing number of automotive platforms and share gains, despite continued economic challenges. According to the European Automobile Manufacturers’ Association (ACEA), car sales in Europe were 11.9 units in 2013, a year-over-year decrease of 1.7%.
The Chinese automotive market saw a significant increase in car sales during 2013, approximately 14% according to China Association of Automobile Manufacturers (CAAM). Our investments and strategic focus to gain market share in the region led to growth of approximately 54% in China.
Motion Technologies 2013 revenue growth was partially offset by a decline in revenue from the KONI business primarily related to the delay of various rail infrastructure projects in China and lower orders of military-related shock absorbers in the U.S.
Orders increased during 2013 by 18.8% year-over-year to $743.9, including a favorable impact from foreign currency of $16.1, reflecting significant fourth quarter order growth from Friction Technologies and KONI.
Interconnect Solutions
Interconnect Solutions revenue for the year ended December 31, 2013 increased by $19.8, or 5.3%, compared to the prior year, due to growth in each of our served core markets, attributable to improving macro-economic conditions affecting the connector industry and by increased operational execution. Our growth in the aerospace and defense market of 11.9% was driven by benefits from funded U.S. programs unaffected by the U.S. sequestration and by strong demand from commercial airline manufacturers. Growth in the communications market of 6.0% was driven by a recent position win with a major Smartphone manufacturer and a corresponding production ramp-up during 2013. Growth in the industrial and transportation market of 3.0% reflected increases in North America and Europe as well as growth from sales of medical-related connector equipment. Growth in the oil and gas market of 7.0% primarily reflects increased distribution activity in North and South America.
Orders increased during 2013 by 4.3%, to $400.3, primarily reflecting year-over-year gains from the aerospace and defense and industrial markets.
Control Technologies
Control Technologies revenue for the year ended December 31, 2013 increased by $1.1, or 0.4%, as compared to the prior year, reflecting growth in our aerospace commercial OEM products of approximately 20%, offset by a decline in revenue from our defense and industrial market product applications and an aerospace aftermarket program that is nearing its end of life. Our defense products applications revenue was down approximately 12% for the year, mainly due to programs impacted by the U.S. government sequestration. Revenue from industrial product applications declined approximately 5%, primarily driven by a decline in energy absorption equipment sales due to the completion of two large infrastructure projects during the prior year and lower sales of precision motion control products.
Orders decreased during 2013 by 2.7%, to $276.0, primarily due to large orders received during the fourth quarter of 2012 related to our seat actuation systems. Orders received during 2013 were also impacted by lower defense-related orders and the aerospace aftermarket program that is nearing its end of life. These declines were partially offset by order growth of approximately 30% from commercial OEM product applications driven by improved content levels and higher aircraft production rates.
GROSS PROFIT
Gross profit for the year ended December 31, 2013 was $799.8, an increase of 17.6%, primarily from net savings related to global sourcing and VBLSS initiatives combined with contributions from our Bornemann acquisition. In addition, increased sales volumes were partially offset by an unfavorable change in price and sales mix across segments. The table below provides gross profit and gross margin by segment for the year ended December 31, 2013 and 2012.
|
| | | | | | | | | | |
| 2013 |
| | 2012 |
| | Change |
|
Industrial Process | $ | 361.7 |
| | $ | 294.8 |
| | 22.7 | % |
Motion Technologies | 193.4 |
| | 160.4 |
| | 20.6 | % |
Interconnect Solutions | 129.7 |
| | 111.8 |
| | 16.0 | % |
Control Technologies | 113.7 |
| | 111.8 |
| | 1.7 | % |
Corporate and Other | 1.3 |
| | 1.4 |
| | (7.1 | )% |
Total gross profit | $ | 799.8 |
| | $ | 680.2 |
| | 17.6 | % |
Gross margin: | | | | | |
Industrial Process | 32.7 | % | | 30.8 | % | | 190 | bp |
Motion Technologies | 26.8 | % | | 25.6 | % | | 120 | bp |
Interconnect Solutions | 32.8 | % | | 29.8 | % | | 300 | bp |
Control Technologies | 40.9 | % | | 40.3 | % | | 60 | bp |
Consolidated | 32.0 | % | | 30.5 | % | | |