ITT's orders jumped 58%. Why look past its biggest deal?

ITT's largest acquisition explains much of its jump in sales and orders. A separate surge in its connectors and aerospace business shows why the industrial manufacturer is also becoming more optimistic about growth in its existing operations.

Third-quarter orders rose 58% to $1.56 billion. Removing acquisitions and currency changes leaves organic growth of 20.5%, well ahead of the 7.6% organic increase in revenue.

Research by Ticker Byline shows that Connect & Control Technologies accounted for about 71% of the increase in organic orders. Its contribution was $144.1 million out of a companywide increase of $203.1 million, based on ITT's sales and orders reconciliations. The division makes connectors and other components used in aerospace, defense and industrial equipment.

Our ITT company profile tracks the financial results, acquisitions and debt behind its changing business.

A second source of momentum

Connect & Control's organic orders grew 55.3%, while its organic revenue increased 18.6%. ITT cited pricing and wins in defense, industrial connectors and aerospace components. Flow Technologies, which supplies pumps and process equipment, also recorded double-digit organic order growth.

The much larger reported growth includes SPX FLOW, bought in March for $4.31 billion, net of acquired cash. That purchase nearly doubled quarterly revenue in Flow Technologies. Companywide revenue reached $1.44 billion, up 44%, with acquisitions accounting for most of the dollar increase.

The stronger existing-business performance has changed the annual outlook. ITT now expects organic revenue growth of 7% to 9%, compared with the 5% to 8% range it gave in August. It raised adjusted earnings guidance to $8.54 to $8.62 a share from $8.12 to $8.32.

The acquisition carries a financing cost

Adjusted quarterly operating profit rose 55% to $303.1 million. Reported operating profit rose 26% to $226.8 million, with the gap reflecting acquisition-related amortization and other adjustments.

Reported earnings from continuing operations fell to $1.38 a share from $1.62. Higher interest costs and more shares following the acquisition weighed on the result. Adjusted earnings rose to $2.26 from $1.89 on ITT's current, comparable definition, which excludes intangible amortization as well as other specified items.

ITT ended the quarter with $3.51 billion in debt at its balance-sheet carrying value and $558.1 million in cash and cash equivalents. During the quarter, it repaid $65 million of the term loan used to fund SPX FLOW. That loan still had $2.81 billion outstanding and matures in March 2028.

More cash expected from the larger business

Quarterly free cash flow rose to $288.4 million from $154.2 million. That measure deducts capital spending from operating cash flow and includes capital-related government incentives. SPX FLOW now contributes to both profit and cash generation.

For the year, ITT raised its free-cash-flow forecast to $600 million to $620 million from $550 million to $580 million. Most of the upgrade comes from higher expected operating cash flow, with a new $5 million capital-incentive assumption also helping.

The order strength gives ITT more work to convert into future sales. The next test is whether connectors and flow equipment can sustain that momentum while the larger company turns more of its profit into cash for debt repayment.