Fitch Affirms ITT's IDR at 'A-'; Outlook Stable
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 thereafter.
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 possible exposure.
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 cash flows.
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 2.4x.
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, Inc.
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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