Q2 2010 Earnings Call
July 30, 2010 9:00 am ET
Thomas Scalera - Director of IR
Denise Ramos - Chief Financial Officer and Senior Vice President
Steven Loranger - Chairman, Chief Executive Officer, President and Head of Human Resources
Gautam Khanna - Cowen and Company, LLC
James Lucas - Janney Montgomery Scott LLC
Scott Gaffner - Barclays Capital
C. Stephen Tusa - JP Morgan Chase & Co
Ajay Kejriwal - FBR Capital Markets & Co.
Jeffrey Sprague - Citigroup
Nigel Coe - Deutsche Bank AG
Good morning. My name is Wes, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITT Corporation Second Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Tom Scalera, Director of Investor Relations. Please go ahead, sir.
Thank you, Wes. Good morning, and welcome to ITT's second quarter 2010 investor review. Presenting this morning are Chairman and CEO, Steve Loranger; and Chief Financial Officer, Denise Ramos. I'd like to highlight that this morning's presentation, press release and reconciliations of GAAP and non-GAAP financial measures can be found on our website at itt.com/ir.
As always, please note that any remarks we may make about future expectations, plans and prospects, as well as other circumstances set out in our Safe Harbor statement constitute forward-looking statements for purposes of the Safe Harbor provision. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in ITT's Form 10-K, as well as our other public SEC filings.
And now let me turn the things over to Steve.
Good morning, and thank you, all, for joining us. Let me start by sharing some exciting news that we just received. Our Information Systems business just won two contracts totaling $800 million to provide facilities operations, maintenance and training services in both Northern and Southern Afghanistan. As part of our strategy to expand our Information Solutions business into new areas, we're really pleased that both contracts were awarded by a new customer for this business, the U.S. Army Corps of Engineers. So we're really thrilled to initiate a long-term relationship with the Corps and further, we're going to continue some ongoing work to explore some future opportunities with our Fluid Technology business in the Corps, which is the world's largest provider of environmental engineering solutions.
Today, we're also announcing our plan to divest CAS, the $240 million SETA or Systems Engineering and Technical Assistance business in our Defense segment. This divestiture will reduce the potential for future OCI or organizational conflicts of interest. CAS, as some of you know, is an outstanding business. However, as we continue to grow our Defense & Information Solutions business in adjacent growth areas, CAS will be better positioned for growth with another company. As a result, CAS' financial results will be now presented in discontinued operations and will not be reflected in continuing results or our future guidance.
Turning to the second quarter. We're once again pleased with ITT's strong productivity and solid operating margins, and we're making substantial progress realigning our portfolio of essential products and services. Our second quarter adjusted continuing EPS of $1.14 exceeded our expectations by $0.10 per share, and it represents a 9% growth compared to the prior year.
Our Motion & Flow control business once again delivered exceptional performance with significant increases in orders, revenue and operating income. Our Fluid Technology team delivered solid margin expansion with outstanding productivity. And we're continuing to see stabilizing market conditions across our commercial businesses, which was validated by very strong order growth in our organic segments.
Our Defense business delivered improved productivity and lower expenses, which were enabled by the defense transformation our strategic realignment. Organic revenue declined 3% in the quarter, but that also exceeded our expectations. Our strategy and defense to expand in adjacencies continues to work for us as we leverage the diversity of our businesses to offset declines in some of our core products, mainly the U.S. SINCGARS [Single Channel Ground and Airborne Radio System] and the crew. The weaker Q2 orders reflect timing shifts, either into the second half of 2010 or deferrals into 2011.
So as you think about the year, we recalibrated our Defense sales down by about $500 million. But keep in mind that half of this adjustment will relates to the discontinued CAS business. The other portion primarily relates to an Iraqi SINCGARS order that was deferred into 2011.
By way of background, you may recall that we were awarded this contract in 2008, and we have already outfitted 3 of 11 Iraqi battalions. But despite the vital need for this equipment, future turn ons of this contract are now expected to be delayed. But the important takeaway here as you're reflecting on our Defense business is that nothing has fundamentally changed in the architecture and in fact, our strategy to drive adjacent growth is accelerating. So keep in mind when you're looking at the backlog that our Q2 funded orders and backlog statistics do not reflect $2.2 billion of recently awarded long-term service contracts with the FAA, SE2020 program and the Afghanistan North and South contracts.
So in total, we delivered a very strong second quarter and a focused execution of our global teams, combined with the improving conditions in certain end markets, gives us confidence in our ability to deliver a solid second half in 2010. This performance positions us to fully offset the full year $0.11 impact from our recent portfolio positioning activities. So as a result, we're raising our full year operating continued adjusted EPS and we're growing this EPS by 11% now in 2010. And keep in mind that this performance follows a best-in-class EPS result in 2009, which all results in a records earnings performance for 2010, our best year yet.