ITT - Good Acquisition, Yet Balance Sheet Remains A Potential Liability

| About: ITT Corporation (ITT)

ITT Corp (ITT) announced on Monday that it will acquire Bornemann Pumps for 206 million euro. Shares of ITT rose 1.6% in Monday's trading session.

The Deal

ITT announced that it will acquire Joh. Heinr. Bornemann, a leading provider of highly engineered pumps and systems for the oil and gas industry which is known for its leading edge technologies. ITT will pay 206 million euro in cash for the German-based company, founded already in 1853.

Bornemann Pumps has a strong leadership position for multi-phase pumping systems in the oil and gas market. The company also serves the industrial, food and pharmaceutical sector.

CEO Denise Ramos commented on the acquisition, "The acquisition of Bornemann Pumps would unlock powerful new opportunities for ITT to expand into new markets within the global oil and gas industry. The addition of Bornemann's positive displacement technology would broaden our capabilities while further positioning ITT as a leader in this key end market and enhancing our ability to serve customers through expanded global operational and service platforms."

Bornemann Pumps employs about 550 workers. For its fiscal 2012, the company expects to report annual revenues of 115 million euro. The deal values the German firm at 1.8 times annual revenues. The companies did not specify annual earnings or synergies targets for Bornemann.

The deal is expected to close in the fourth quarter of 2012, and is subject to customary closing conditions and regulatory approval.


ITT ended its second quarter of 2012 with $739 million in cash and equivalents. The company operates with $44 million in short and long term debt, for a net cash position of $695 million. ITT has over $1.5 billion in long term asbestos liabilities outstanding and another $280 million in post-retirement benefits.

For the first six months of 2012, ITT generated revenues of $1.14 billion. The company reported a net profit of $20.0 million, or $0.21 per diluted share. For the full year of 2012, ITT could generate revenues of $2.3 billion. The company guided for adjusted full year earnings of $1.62-$1.72 per share.

The market currently values the firm at $1.93 billion. This implies a valuation of the operating assets of around $1.23 billion. As such, the market values the assets at 0.5 times annual revenues and 8 times operating earnings.

Currently, ITT pays a quarterly dividend of $0.09 per share, for an annual dividend yield of 1.7%.

Investment Thesis

Year to date, shares of ITT have risen a mere 8%. Shares rose from $19 in January to peak at $25 in March after the company issued its full year outlook. Shares steadily fell back to $17 at the start of the summer, on the back of fears about global economic growth. Shares steadily rose back to $21 at the moment.

ITT has been split up in three separate companies last year. The deal with Bornemann Pumps seems rather fair, adding roughly 6-7% in total revenues. The valuation of ITT looks very appealing as the firm has a strong cash position and trades at low valuation multiples.

The legacy of ITT might continue to drag on shares in the future. The quality of the balance sheet is a key concern to me. ITT holds $511 million in goodwill on its balance sheet and carries more than $1.8 billion in retirement and asbestos liabilities. I stay on the sidelines as I suspect some nasty "one-time" bookings in the coming years, despite the appealing valuation multiples.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.