ITT Corporation (ITT)

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ITT Corporation (ITT)

Q2 2009 Earnings Call Transcript

July 31, 2009 9:00 am ET

Executives

Tom Scalera - Director, IR

Steven Loranger - Chairman, President and CEO

Denise Ramos - SVP and CFO

Analysts

Deane Dray - FBR Capital Markets

John Inch - Merrill Lynch

Shannon O’Callaghan - Barclays Capital

Terry Darling - Goldman Sachs

Jeff Sprague - Citi Investments

Nigel Coe - Deutsche Bank

Mike Schneider - Robert W. Baird

Steve Tusa - JPMorgan

John Baliotti - FTN Equity Capital Markets

Operator

Welcome to ITT Corporation’s second quarter 2009 earnings conference call. Hosting the call today from ITT headquarters is Steven Loranger, President and Chief Executive Officer. He is joined by Denise Ramos, Senior Vice President and Chief Financial Officer.

Today’s call is being recorded and will be available for replay beginning at 1 o’clock PM Eastern Standard Time. The dial-in number is 800-642-1687 and enter pin number 18217977. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. (Operator instructions).

It is now my pleasure to turn the floor over to Tom Scalera, Director of Investor Relations. Tom, you may begin.

Tom Scalera

Thank you, Brandy. Good morning and welcome to ITT’s second quarter 2009 investor review. Presenting this morning are Chairman and CEO Steve Loranger and Chief Financial Officer Denise Ramos.

Today, Steve will highlight second quarter 2009 results and Denise will provide a detailed review of the quarter’s performance and the 2009 earnings outlook. I’d like to highlight that this morning’s presentation, press release, and all non-GAAP financial measures provided during the call can be found on our web site at ITT.com/IR.

Lastly, please note that any remarks we may make about future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor provision.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in ITT’s Form 10-K as well as our other public SEC filings.

And now, let me turn things over to Steve.

Steven Loranger

Thanks Tom. Good morning and thank you all for joining us today to discuss ITT’s second quarter results. Our second quarter performance nicely exceeded our expectations for three reasons. We had outstanding productivity and execution, we had outstanding sales performance versus our forecast in very volatile markets, and we had outstanding performance on corporate cost, interest and taxes.

Let’s look at the second quarter highlights on slide 3, that illustrate the achievements. In the second quarter, we delivered earnings per share that was $0.26 better than the midpoint of our previous guidance. We converted our 139% of our net income to free cash flow. The $462 million in free cash flow was actually 12% better than the prior year and very nice to see some positive variances to prior years these days.

We continued to execute our strategy of disciplined capital deployment. We were very, very pleased with the issuance of a $1 billion in five senior notes at very low average rate of 5.5%, which reflected a very positive reception to this ITT issuance, and we continued to win with our defense strategy, delivering solid results and important orders that validate our alignment with the future deals of our DoD customers.

We remained confident that our defense team will continue to produce solid results through future defense budget cycles due to their focused execution, diversified portfolio and strong customer alignment.

So as a result of our strong productivity improvement and other operating benefits, we are raising the midpoint of our 2009 earnings per share guidance by $0.20 to $3.50 to $3.70 range. This new range also includes accelerated investment in strategic initiatives and additional incremental restructuring actions.

Recent strategic investments have paid nice dividends and we believe that we are going to continue to outperform on a relative basis as long as we continue to invest in our markets, new technology, improve processes, and a better and more efficient cost structure.

While the global economy remains week, which has impacted our commercial markets, our teams have aggressively repositioned the company. Leaders across ITT are driving greater productivity and producing stronger than anticipated results. Their focused execution coupled with disciplined capital deployment and premium free cash flow generation affords us the flexibility to continue making investments in our future growth like we have so many times in the past.

The enduring drivers of our businesses in our broad geographic and end market diversity are providing relative stability in this environment. Ultimately, however, it’s our team focus on our customers anticipating their changing needs and delivering essential solutions that drives our performance forward.

And so with that very positive introduction, let’s turn it over to Denise, to take you through the details of this exceptional quarter.

Denise Ramos

Thanks Steve. As you just heard, our second quarter results on slide 4, exceeded our internal expectation due to the focused efforts of strong leaders all across ITT.

Second quarter organic revenue declined only 5% for the quarter and for the year. The organic revenue performance included flat results at defense, a 7% decline at fluid, and a 19% decline at motion. Revenue results at fluid and motion were better than our internal expectation and defense revenue was in line. Sequential organic revenue improved 7% on defense and fluid side.

Total organic orders were flat compared to the prior year, a 29% improvement offset commercial declines. On a sequential basis, total organic orders were up 3%, despite a 5% decline at fluid.

Segment operating income decreased 15% to $346 million, while segment margins declined 100 basis points to 12.4%. Strong productivity gains helped to partially mitigate the impacts of volume, pension and restructuring expense.

Our recent increase in investment and footprint realignment and integrated supply chain initiatives have been fruitful. Cost based productivity actions exceeded expectations for a second straight quarter, setting us up nicely to improve our full-year productivity target.

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