Fitch Affirms ITT's IDR at 'A-'; Outlook Stable

Fitch Ratings has affirmed ITT Corporation's (ITT) Issuer Default Rating (IDR) 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.

KEY RATING DRIVERS

The ratings are supported by ITT's well-established market positions, solid liquidity, strong operating performance including good and improving margins, and solid organic revenue growth driven by improvement in operating performance in all reporting segments. The company has achieved sizable market share gains within the Motion Technologies reporting segment by increasing sales to original equipment manufacturers and by expanding its aftermarket presence.

Fitch believes the company has adequate financial flexibility to meet its short-term funding requirements. ITT's liquidity has remained within the range of $900 million to $1 billion over the last several years supported by a healthy cash balance and availability under its $500 million senior unsecured revolving credit facility. Additionally, the company generates sufficient cash from operations to support its sizable capital expenditures. Fitch projects ITT's financial flexibility will remain solid over the next several years reflecting elevated capital expenditure levels.

The company has adequate credit metrics for the ratings, including minimal debt and low leverage (debt-to-EBITDA) which is expected to be well below 1x over the next several years. Low leverage mitigates ITT's sizable legacy asbestos liabilities which were retained after the separation from Xylem Inc. and Exelis Inc. in 2011.

Sizable asbestos liabilities and uncertainty surrounding potential large future cash outlays is Fitch's main rating concern. The company's estimated 10-year pre-tax liability net of expected recoveries from insurers and other responsible parties totaled approximately $774 million as of June 30, 2014. Net asbestos liabilities increased by $14 million from the same period in 2013. Including after-tax asbestos liabilities (net of assets), Fitch estimates ITT's adjusted debt-to-EBITDAR would be approximately 2.2x at the end of 2014, slightly higher than 2.1x at the end of 2013. Large asbestos liabilities are mitigated by moderate annual cash funding requirements ranging from approximately $10 million to $20 million over the next five years and approximately $35 million to $45 million thereafter.

Fitch's assessment of ITT's asbestos-related risk 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.

Other rating concerns include ITT's end-market cyclicality, which is mitigated by large aftermarket content and solid product and geographic diversification. The company derived 36% of its revenue in the United States, 32% in Europe, and 32% in other areas in 2013. Fitch notes the company generates low free cash flow (FCF; Funds from operations minus CapEx and dividends) relative to cash flow from operations, mainly driven by high capital expenditures and cash outflows related to asbestos claims.

Fitch expects ITT's revenue to increase by mid-single digits in 2014 largely driven by strong organic growth and market share gains in the Motion Technologies segment. Fitch also anticipates a significant increase in operating margins driven by operating improvements in the company's Interconnect Solutions segment and higher aftermarket sales in the Motion Technologies segment. The company's EBITDA margins are expected to increase to approximately 15% in 2014, up from approximately 13% in 2013. Fitch anticipates ITT's revenue growth will moderate in 2015 to low single-digits and projects moderate improvements in EBITDA margin. Additionally, Fitch anticipates ITT will generate above $150 million FCF annually over the next several years, driven by expected growth in revenues and improvements in operating margin.

ITT's global pension obligations totaled approximately $366 million on a gross basis ($281.2 million in U.S.) at Dec. 31, 2013. By the end of 2013, net pension obligations reached approximately $97 million, or 73% and 95% funded on a global and domestic basis, respectively. ITT is not required to fund the majority of its international pension plans. The other post-retirement benefit obligation was $157 million. As of June 2014, ITT contributed $4.8 million to its post-retirement plans. The company does not plan to make additional contributions for the remainder of the year.

The company's large installed base allows it to derive approximately 31% 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.

RATING SENSITIVITIES

Fitch is unlikely to consider a positive rating action in the near future given ITT's limited FCF and significant asbestos liabilities. Fitch may consider a positive rating action if the company's asbestos liabilities and corresponding future cash outlays decline significantly.

Fitch may take a negative rating action if there is a sizable increase in cash outflows associated with asbestos claims that contributes to a liquidity decline below $500 million, or if total estimated asbestos liabilities increase materially. Additionally, Fitch may consider a negative rating action should the company's FCF deteriorate and remain below $50 million driven by operating inefficiencies or high asbestos related cash outflows, or should the company issue debt to fund share repurchases or a sizable acquisition.

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'.

The Rating Outlook is Stable. The affirmation affects approximately $23 million outstanding commercial paper as of June 30, 2014.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=901434

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