October 26, 2012 / 6:00 PM / 5 years ago

TEXT-Fitch affirms ITT Corp ratings

Oct 26 - 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.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below