ITT Corporation (ITT)

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ITT (ITT)

Q2 2011 Earnings Call

July 29, 2011 9:00 am ET

Executives

Thomas Scalera - Director of IR

Denise Ramos - Chief Financial Officer and Senior Vice President

Steven Loranger - Chairman, Chief Executive Officer and President

Analysts

Robert Stallard - RBC Capital Markets, LLC

Gautam Khanna - Cowen and Company, LLC

Terry Darling - Goldman Sachs Group Inc.

Scott Gaffner - Barclays Capital

Ajay Kejriwal - FBR Capital Markets & Co.

Jeffrey Sprague - Citigroup

Michael Wherley - Janney Montgomery Scott LLC

Deane Dray - Citigroup Inc

Presentation

Operator

Good morning. My name is Wes, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITT Corporation Second Quarter 2011 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Tom Scalera, Vice President of Corporate Finance. Please go ahead, sir.

Thomas Scalera

Thank you, Wes. Good morning, and welcome to ITT's second quarter 2011 investor review. Presenting this morning are ITT's Chairman and CEO, Steve Loranger; and ITT's Chief Financial Officer, Denise Ramos.

I'd like to highlight that this morning's presentation, press release and reconciliations of GAAP and non-GAAP financial measures can be found on our website at itt.com/ir. Please note that any remarks we may make about future expectations, plans, prospects and other circumstances set out in our Safe Harbor statement 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.

Let's now turn to Slide 3 where Steve will provide an overview of our results, as well as an update on our transformation progress.

Steven Loranger

Thank you, Tom. Good morning, and I'd like to thank all of you for joining us today. We are exceedingly pleased with the strong revenue growth and strong operating results that we delivered in the second quarter. Our teams have continued to drive growth while flawlessly executing on our plans to separate into 3 publicly traded companies later this year. We delivered robust growth across our commercial businesses, and our project pipeline is continuing to expand globally.

In defense, we held revenue steady with a strong prior year, and we raised the full year defense revenue outlook despite the recent uncertainty in the overall defense market.

Our second quarter adjusted EPS of $1.18 grew 4% compared to the prior year, exceeding our prior guidance by $0.06 due to solid operating performances and stronger-than-anticipated defense service revenue expansion.

In the quarter, Fluid and Motion and Flow Control continued to deliver strong results. Fluid posted total revenue growth of 26% and organic revenue growth of 9%. Motion and Flow Control revenue improved 7% organically, along with an operating margin expansion of 220 basis points.

Defense's top line performance was nicely combined with a 47% organic order growth rate, leading to $150 million increase in our defense revenue guidance. Despite the many headwinds, our defense business is now projecting revenues to decline only 4%. However, keep in mind that these revenue improvements are entirely driven by a service revenue component that will pressurize margins in the quarter and for some time to come.

And finally, just after the quarter closed, we were excited to announce the acquisition of YSI, which further expands our growing position in the global analytics market, which Denise will cover in more detail shortly.

So let's turn to a more detailed transformation update now on Slide 4. This now being a focused strategy for the corporation this year, since the January 12 announcement, we have made significant progress in advancing our transformation plan. And I want to take this opportunity to thank all of the dedicated employees across ITT that have been extremely hard at work, working around-the-clock and executing the activities that are essential to the acceleration of value creation that drove our spin strategy. I couldn't be more proud of our employees' ability to drive this transaction at an unprecedented speed, all the while maintaining the high degree of professionalism in execution that's deeply embedded in the ITT operating philosophy and the ITT management system.

And as we look forward to the future, I'm also delighted that so many of our dedicated leaders will continue to drive this high degree of excellence into each one of our new companies. In fact, a substantial majority of the 3 new top leadership teams were populated with our internal talent, which is a testimony to the robust, value-based leadership development and succession planning processes that we have in place.

As you all surely know by now, on July 11, we filed our initial Form 10 registration statements for water and defense. I encourage you all to read these documents.

We also developed 4 presentations that were filed on an 8-K, concurrent with the Form 10s, and these presentations provide a crisp summary of the Form 10 mechanics, the preliminary capital allocation overview for all 3 companies, as well as strategic and business overviews of the new ITT water and defense businesses. These are easily accessed on our website.

With respect to the financial aspects of the separation, we remain on track with our cost estimates. We can reaffirm our initial estimates of $500 million after-tax, pre-spin separation costs and, all-in, no more than a 10% increase in non-operating corporate costs. And these corporate costs include not only the traditional corporate costs associated with public companies, but also such things as the anticipated deleveraging in commodity and logistics services and incremental IT and transition service operation costs. And in addition, we're confident that we have executed our goal to create 3 balanced, attractive companies. The thoughtful allocation of resources produced 3 companies with strong balance sheets and financial policies that are expected to be consistent with investment grade credit ratings.

Read the rest of this transcript for free on seekingalpha.com