Fitch Affirms ITT's IDR at 'A-'; Outlook Stable
NEW YORK -- October 26, 2012
Fitch Ratings has affirmed ITT Corporation's (ITT) Issuer Default Rating at
'A-' and its short-term IDR at 'F2'. The Rating Outlook is Stable. A full list
of rating actions follows at the end of this release.
The ratings are supported by ITT's well-established market positions, solid
liquidity and strong operating performance including strong organic revenue
growth and steady cash flows from operations. ITT is a global manufacturer
with customers in well-diversified markets including automotive, energy and
mining, industrial processing, aerospace and defense, general industrials, as
well as rail, bus, truck, and trailer.
The company's large installed base allows it to derive approximately 30% of
revenues and a large percentage of operating income from aftermarket sales,
affording the company relative revenue and margin stability during economic
downturns. Additionally, ITT benefits from the balance across business cycles
and from conservative financial policies that include its commitment to
maintaining investment grade ratings.
ITT has retained all of the asbestos liabilities after the split-up with Xylem
Inc. and Exelis Inc. in 2011. The company's estimated 10-year liability net of
expected recoveries from insurers and other responsible parties totaled
approximately $720 million as of June, 2012. It is Fitch's view that ITT's
sizable asbestos liabilities are manageable due to moderate annual cash
funding requirements ranging from approximately $10 million to $20 million
over the next five years and from approximately $35 million to $45 million
Fitch believes the company will manage its financial metrics carefully due to
risks surrounding legacy asbestos and environmental issues. Fitch's evaluation
of asbestos-related risk to ITT's credit profile could change in the event of
an unexpected large cash settlement or a sizable revision of the liabilities,
although there is no indication of either at this time. Fitch notes a recent
asbestos related settlement agreement which decreased asbestos liabilities and
assets by approximately $250 million, somewhat lessening the company's overall
Fitch's other concerns include its end market cyclicality, which is somewhat
mitigated by large aftermarket content and solid product and geographic
diversification. The company has experienced margin pressures during the first
half of 2012 raising a concern regarding ITT's ability to implement price
increases in the future due to competitive pressures and its exposure to
commodity price volatility. ITT generated low free cash flows relative to its
cash flow from operations, mainly driven by high capital expenditures and cash
outflows related to asbestos claims. Despite low leverage, Fitch notes the
possibility of material borrowings in the near term or weaker-than-expected
Fitch expects ITT's revenue to increase by the mid-single digits in 2012
driven by significant growth in its Industrial Process segment due to strong
demand across almost all geographic regions and end-markets. The revenue
growth is expected to be in high-single digits in 2013 driven by higher
expected demand and the acquisition of Joh. Heinr. Bornemann GmbH (Bornemann
Pumps) which is expected to close in the fourth quarter of 2012. The company's
margins may be pressured in 2012 due to competitive pressures and the weakness
in Europe and Interconnect Solutions segment. Fitch expects ITT to generate
$100 million-$150 million of free cash flow (FCF) after dividends annually
over the next several years.
At June 30, 2012, ITT had solid liquidity of $1.2 billion comprised of $739
million cash and approximately $460 million available under its $500 million
revolving credit facility. ITT has strong leverage which is expected to be
well below 1.0 times (x) over the next several years due to the lack of debt
and because Fitch does not usually include asbestos liabilities as a part of
the total debt. Including asbestos liabilities (net of assets), Fitch
estimates adjusted debt to EBITDAR at year-end 2012 would be approximately
After the spin-off of Xylem, Inc. and Exelis, Inc., ITT assumed a small
portion of consolidated ITT's pension obligations, or approximately $278
million as of Dec. 31, 2011. At that date, ITT had a pension deficit of
approximately $146 million, or 56% and 66% funded on a global and domestic
basis, respectively. The other postretirement benefit obligation was $267
million. As of June 2012, ITT contributed $32.8 million to qualified pension
plans. The company plans to contribute additional $0.5 million for the
remainder of the year.
Future Rating Actions:
Fitch is unlikely to consider a positive rating action in the near future
given ITT's limited FCF. A negative rating action may be considered if there
is a sizable increase in cash outflows associated with asbestos claims due to
a large settlement or a significant revision of net asbestos liabilities.
Additionally, Fitch may consider a negative rating action should the company
materially increase its leverage or if it is subject to unexpected obligations
arising from sharing agreements related to spin-offs of Xylem, Inc. or Exelis,
Fitch affirms ITT's ratings as follows:
--IDR at 'A-';
--Senior unsecured bank facilities at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Rating Outlook is Stable. The affirmation affects approximately $40 million
outstanding commercial paper.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
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David Petu, CFA, +1-212-908-0280
One State Street Plaza
New York, NY 10004
Eric Ause, +1-312-606-2302
Craig Fraser, +1-212-908-0310
Brian Bertsch, New York, +1 212-908-0549
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