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Rating Action:

Moody's upgrades ITT Inc. ratings (Sr Unsec to Baa2, CP to P-2); outlook stable

03 Dec 2020

New York, December 03, 2020 -- Moody's Investors Service ("Moody's") upgraded its ratings for ITT Inc. and its subsidiaries (collectively, "ITT" or the company), including the company's senior unsecured debt rating to Baa2 from Baa3, and its short-term commercial paper rating to Prime-2 (P-2) from Prime-3 (P-3). The ratings outlook is stable.

"The upgrades reflect our expectation that the company will sustain improvements in profitability and free cash flows while maintaining relatively low funded debt levels, a strong liquidity profile and well-balanced financial policies," according to Gigi Adamo, Vice President and Moody's lead analyst for ITT.

RATINGS RATIONALE

The ratings upgrades also reflect Moody's expectation that ITT's earnings and cash flow resiliency amid the coronavirus pandemic will be sustained. The aforementioned improvements have translated to credit metrics and an overall credit profile commensurate with a Baa2 senior unsecured rating, including last twelve months ended September 30, 2020 debt/EBITDA of 0.8x (1.8x inclusive of net asbestos-related liabilities).

ITT's Baa2 senior unsecured rating considers the company's diversified operating model that generates consistent earnings and profitability measures (operating margins increased to approximately 15% from 12% in 2017). Sales are balanced across major geographic regions, with the majority earned outside of North America. Importantly, the highly engineered/customized aspect of products and significant share of aftermarket parts are reflected in the company's healthy margins. The benefits of restructuring actions and operational efficiencies are evident in the company's largest business segment, Motion Technologies (approximately 44% of 2019 sales), which manufactures brake components, sealing solutions and shock absorbers, among other products for the transportation industry. Continued growth is expected in this business due to additional market share gains, new awards and automotive demand that is expected to be bottoming, with recovery (albeit slow) over the next few years. Operational initiatives across all ITT segments, including insourcing critical activities, relocating product lines and ramping up utilization will provide support for margin growth beyond the coronavirus pandemic. Strong liquidity, characterized by cash balances exceeding $600 million, annual free cash flow generation in excess of $200 million and availability under both multi-year and 364-day credit facilities also supports the rating.

At the same time, the company's ratings are constrained by its comparatively modest revenue base relatively to similarly rated companies. Although it benefits from a globally diversified revenue stream by end-market, it is also exposed to highly cyclical end-markets spanning automotive, truck and rail transportation to aerospace and defense, general industrial and energy, among others. The short cycle nature of certain of these businesses limits long-term revenue visibility. Additionally, the company's Connect & Control Technologies (CCT) business is expected to continue to be adversely impacted by the slow expected recovery in the commercial aerospace business, which will temper near-term top-line growth. Further, the oil & gas business that is part of the company's Industrial Process and CCT business is also expected to reflect a slower demand recovery. And while the company has made meaningful headway in addressing its asbestos-related liabilities in recent years, it remains a considerable credit risk.

From a corporate governance perspective, the ratings anticipate that the company will maintain a well-balanced financial policy with dividends and share repurchases funded by excess cash generation rather than debt. Favorably, and in line with other manufacturing industry peers, the company has temporarily suspended share repurchase activity amid the coronavirus pandemic. Risks related to sizeable legacy asbestos liabilities continues to be actively managed, with net liabilities reduced to $539 million versus over $700 million at the time of the 2011 ITT spin. During the company's third quarter ended September 30, 2020, it extended the measurement period over which the estimated liability will persist to include unasserted claims through 2052, which moderately increased the net obligation. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

The stable outlook reflects Moody's expectation that the company will maintain its strong operating fundamentals and a relatively conservative financial risk profile.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if ITT increases its revenue base while continuing its positive margin trajectory with operating margins well exceeding 20%. The maintenance of the cash flow benefits attained through improved working capital efficiencies as well as low funded debt levels would also be a consideration. Equally important, a further reduction in the company's asbestos liability and continued demonstration of a well-balanced financial policy that does not increase financial leverage in order to address shareholder return initiatives could support further upwards ratings momentum.

Conversely, ratings could be downgraded if the company's liquidity profile weakens such that it does not have access to its revolving credit facilities and/or cash balances reduce meaningfully to less than $400 million. An erosion in EBITA margins to sub-15% levels and free cash flows of less than $100 million could also pressure the ratings downward. Aggressive shareholder remuneration or debt-funded acquisitions that would materially leverage the balance sheet could also exert downward ratings pressure.

The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody's took the following rating actions:

Upgrades:

..Issuer: ITT Inc.

....Senior Unsecured Bank Credit Facility, Upgraded to Baa2 from Baa3

....Senior Unsecured Commercial Paper, Upgraded to P-2 from P-3

..Issuer: ITT Industries Luxembourg S.a r.l.

....Senior Unsecured Commercial Paper, Upgraded to P-2 from P-3

Outlook Actions:

..Issuer: ITT Inc.

....Outlook, Remains Stable

..Issuer: ITT Industries Luxembourg S.a r.l.

....Outlook, Remains Stable

Headquartered in White Plains, New York, ITT Inc. is a publicly-traded (NYSE: IR) global designer and manufacturer of a wide range of engineered products including a variety of pumps, valves, actuation and other control components, brake pads, shock absorbers and dampening devices used in harsh environments. Principal end markets include the automotive, rail, energy, mining, industrial processing and aerospace & defense industries. Revenues for the latest twelve months ended 30 September 2020 totaled $2.5 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jadijhe (Gigi) Adamo
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Russell Solomon
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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