ITT INC. - Quarter Report: 2009 March (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

Commission File Number: 1-5672

 

ITT CORPORATION

 

 

1133 Westchester Avenue, White Plains, NY 10604
(Principal Executive Office)

 

Telephone Number: (914) 641-2000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of April 20, 2009, there were outstanding 182.0 million shares of common stock ($1 par value per share) of the registrant.

 

 

ITT CORPORATION

 

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

 

ITT CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED INCOME STATEMENTS
(In millions, except per share amounts)
(Unaudited)

 

 

 

 

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of the above income statements.

ITT CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except per share amounts)
(Unaudited)

 

 

 

 

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of the above balance sheets.

ITT CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

 

 

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of the above cash flow statements.

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

 

The unaudited consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules. Unless the context otherwise indicates, references herein to “ITT,” “the Company,” and such words as “we,” “us,” and “our” include ITT Corporation and its subsidiaries. ITT believes that the disclosures made are adequate to make the information presented not misleading. ITT consistently applied the accounting policies described in ITT’s 2008 Annual Report on Form 10-K in preparing these unaudited financial statements, except as noted within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — New Accounting Pronouncements. These financial statements should be read in conjunction with the financial statements and notes thereto included in ITT’s 2008 Annual Report on Form 10-K.

 

ITT’s 2009 and 2008 quarterly financial periods end on the Saturday closest to the last day of the quarter, except for the last quarterly period of the fiscal year, which ends on December 31st. For simplicity of presentation, the quarterly financial statements included herein are presented as ending on the last day of the quarter.

 

 

Stock-based and long-term incentive employee compensation cost reduced consolidated results of operations as follows:

 

 

At March 31, 2009, there was $60.9 and $22.7 of total unrecognized compensation cost for the stock-based and long-term incentive plans, respectively, which are expected to be recognized ratably over a weighted-average period of 2.2 years and 1.5 years. During the first quarter of 2009, payments totaling $21.1 were made to settle the Long-Term Incentive Plan 2006 annual grant liability.

 

 

First Quarter 2009 Restructuring Activities

 

During the first quarter of 2009, ITT recorded a net restructuring charge of $10.7, reflecting costs of $6.3 related to new actions and $4.6 related to prior actions, as well as the reversal of $0.2 of restructuring accruals that management determined would not be required. The charges associated with actions announced during the first quarter of 2009 represent a reduction of structural costs, primarily in the Fluid Technology business segment. Planned position eliminations total 118, including 11 factory workers, 94 office workers and 13 management

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

employees. The costs associated with prior years’ plans primarily reflect additional severance costs. The following table details the components of the first quarter 2009 restructuring charge.

 

 

First Quarter 2008 Restructuring Activities

 

During the first quarter of 2008, ITT recorded a net restructuring charge of $3.6, reflecting costs of $1.2 related to new actions and $2.6 related to prior year plans, as well as the reversal of $0.2 of restructuring accruals that management determined would not be required. The charges associated with actions announced during the first quarter of 2008 represent a reduction of structural costs, primarily in the Fluid Technology business segment. Planned position eliminations total 22, including 17 office workers and five management employees. The costs associated with prior years’ plans primarily reflect severance costs. The following table details the components of the first quarter 2008 restructuring charge.

 

 

The restructuring accrual balance as of March 31, 2009 was $42.2, presented on our Consolidated Condensed Balance Sheet within current accrued liabilities, includes $36.1 for accrued severance and $6.1 for accrued facility carrying costs and other. The following table displays a rollforward of the restructuring accruals for the first quarter ended March 31, 2009.

 

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

The following table displays a rollforward of employee positions eliminated associated with restructuring activities through March 31, 2009.

 

 

As of March 31, 2009, all announced planned facility closures have been completed.

 

 

Components of net periodic benefit cost as of March 31, 2009 and 2008 were as follows:

 

 

Net periodic benefit cost increased in the first quarter of 2009, primarily due to the effect of an increase in the amortization of deferred losses, and lower expected returns on plan assets due to lower asset levels, partially offset by an increase in the discount rate for our foreign plans.

 

ITT contributed approximately $5.4 to its various plans during the first quarter of 2009. Additional contributions ranging between $38.0 and $43.0 are expected over the balance of 2009.

 

See Note 16, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements of the 2008 Annual Report on Form 10-K for additional details.

 

 

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

 

A reconciliation of the data used in the calculation of basic and diluted earnings per share computations for income from continuing operations is as follows:

 

 

Shares underlying stock options and restricted stock awards excluded from the computation of diluted earnings per share because they were anti-dilutive were as follows:

 

 

In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. ITT’s adoption of this statement effective January 1, 2009 did not have a material effect on its financial statements. For comparability purposes, prior periods have been adjusted to reflect the impact of adoption of this statement. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — New Accounting Pronouncements for further details.

 

 

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

 

 

 

 

 

Changes in the carrying amount of goodwill for the quarter ended March 31, 2009 by business segment are as follows:

 

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

Information regarding other intangible assets is as follows:

 

 

Amortization expense related to intangible assets for the three month periods ending March 31, 2009 and 2008 were $26.2 and $21.0, respectively.

 

Estimated amortization expense for intangible assets for each of the five succeeding years is as follows:

 

 

Customer relationships, proprietary technology, trademarks and patents and other are amortized over weighted average lives of approximately 15 years, 13 years, 18 years, and 18 years, respectively.

 

 

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

 

 

 

In accordance with the FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” (“FIN 48”) we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

 

As of March 31, 2009 and December 31, 2008, we had $146.6 and $144.9, respectively, of total unrecognized tax benefits. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $78.6 and $76.9, as of March 31, 2009 and December 31, 2008, respectively. We do not believe that the total amount of unrecognized tax benefits will significantly change within twelve months of the reporting date.

 

We classify interest relating to tax matters as a component of interest expense and tax penalties as a component of income tax expense in our Consolidated Condensed Income Statement. We have accrued $29.3 and $28.1 for payment of interest and penalties as of March 31, 2009 and December 31, 2008, respectively.

 

 

ITT Corporation and its subsidiaries from time to time are involved in legal proceedings that are incidental to the operation of their businesses. Some of these proceedings allege damages relating to environmental liabilities, intellectual property matters, copyright infringement, personal injury claims, employment and pension matters, government contract issues and commercial or contractual disputes, sometimes related to acquisitions or divestitures. ITT will continue to vigorously defend itself against all claims. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information including our assessment of the merits of the particular claim, as well as our current reserves and insurance coverage, we do not expect that such legal proceedings will have any material adverse impact on the cash flow, results of operations, or financial condition of ITT on a consolidated basis in the foreseeable future, unless otherwise noted below.

 

See “Critical Accounting Estimates” within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the ITT 2008 Annual Report on Form 10-K, for a discussion of contingent liabilities, including the related estimates, assumptions, uncertainties, and potential financial statement impact from revisions to our estimates.

 

Environmental

 

In the ordinary course of business, ITT is subject to federal, state, local, and foreign environmental laws and regulations. ITT is responsible, or is alleged to be responsible, for ongoing environmental investigation and remediation of sites in various countries. These sites are in various stages of investigation and/or remediation and in many of these proceedings ITT’s liability is considered de minimis. ITT has received notification from the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

sites formerly or currently owned and/or operated by ITT, and other properties impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances where ITT has been identified as a potentially responsible party under federal and state environmental laws and regulations.

 

Accruals for environmental matters are recorded on a site by site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. ITT’s accrued liabilities for these environmental matters represent the best estimates related to the investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as related legal fees. These estimates, and related accruals, are reviewed periodically and updated for progress of investigation and remediation efforts and changes in facts and legal circumstances. Liabilities for these environmental expenditures are recorded on an undiscounted basis.

 

It is difficult to estimate the final total costs of investigation and remediation due to various factors, including incomplete information regarding particular sites and other potentially responsible parties, uncertainty regarding the extent of investigation or remediation and our share, if any, of liability for such conditions, the selection of alternative remedial approaches, and changes in environmental standards and regulatory requirements. In management’s opinion, the total amount accrued is appropriate based on existing facts and circumstances. Management does not anticipate that these liabilities will have a material adverse effect on the consolidated financial position, results of operations or cash flows.

 

The following table illustrates the activity related to ITT’s accrued liabilities for these environmental matters.

 

 

The following table illustrates the low- and high-end range of estimated liability, and number of active sites for these environmental matters as of March 31, 2009.

 

 

In a suit filed in 1991, in the California Superior Court, Los Angeles County, ITT Corporation, et al. v. Pacific Indemnity Corporation et al., against our insurers, we are seeking recovery of costs incurred in connection with certain environmental liabilities. Discovery, procedural matters, changes in California law, and various appeals have prolonged this case. For several years, the case had been on appeal before the California Court of Appeals from a decision by the California Superior Court dismissing certain claims made by ITT. The dismissed claims were claims where the costs incurred were solely due to administrative (versus judicial) actions. However, in April 2007, the Superior Court vacated its earlier ruling, dismissing the claims based on the California Supreme Court’s decision in Powerine Oil Co. v. Superior Court. As a result, the Court of Appeals dismissed the appeal as moot. The case is now back before the Superior Court and the parties are engaged in further discovery. During the course of the litigation, we have negotiated settlements with certain defendant insurance companies and are prepared to pursue legal remedies where reasonable negotiations are not productive.

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

Product Liability and Other Matters

 

ITT, including its subsidiary Goulds Pumps, Inc. (“Goulds”), has been joined as a defendant with numerous other companies in product liability lawsuits alleging injury due to asbestos. These claims allege that our products sold prior to 1985 contained a part manufactured by a third party, e.g., a gasket, which contained asbestos. The asbestos was encapsulated in the gasket (or other) material and was non-friable. In certain other cases, it is alleged that former ITT companies were distributors for other manufacturers’ products that may have contained asbestos.

 

As of March 31, 2009, there were 102,577 open claims against ITT. Frequently, the plaintiffs are unable to demonstrate any injury or do not identify any ITT or Goulds product as a source of asbestos exposure. During the first quarter of 2009, we resolved 1,583 claims. Most of these claims were dismissed, with settlement on a modest percentage of claims. The average amount of settlement per claim has been nominal.

 

Additionally, a large majority of all defense and settlement costs have been covered by insurance. Within the past several years, we have negotiated coverage-in-place agreements with our more significant insurance carriers. We are continuing to seek payment for our net exposure to these costs from our other insurers.

 

Our estimated accrued costs, net of expected insurance recoveries, for the resolution of all pending claims were $28.7 and $27.6 as of March 31, 2009 and December 31, 2008, respectively.

 

The table below provides additional information regarding asbestos-related claims filed against ITT.

 

 

Although it is impossible to predict the ultimate outcome of current open claims, based on current information, our experience in handling these matters, and our substantial insurance program, we do not believe that these claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

While it is probable that we will incur additional costs for claims to be filed in the future, these additional costs are not reasonably estimable at this time. As part of the coverage-in-place agreements, we have assumed the primary responsibility for administering our asbestos-related claims. Prior to these agreements, the asbestos claims were administered and paid by our primary insurance carriers and, as a result, we only have limited information about those claims. We have engaged an outside consultant to construct a comprehensive database of existing claims. The database is expected to provide additional information about the nature of the claims and will allow us to re-assess whether a reasonable estimate of future claims and associated costs can be developed. This effort is anticipated to be completed in the second half of 2009. It is possible that the estimated costs of these future claims, net of expected insurance recoveries, may be material to our results of operations in the period when recorded.

 

We provide an indemnity to U.S. Silica Company for silica personal injury suits filed prior to September 12, 2005 against our former subsidiary Pennsylvania Glass Sand (“PGS”). ITT sold the stock of PGS to U.S. Silica Company in 1985. Over the past three years, the majority of the silica cases involving PGS have been dismissed without payment. Currently there are less than 4,000 cases pending against PGS. The Company expects that the majority of the remaining cases will also be dismissed. Our indemnity had been paid in part by our historic product liability carrier, however, in September 2005, the carrier communicated to us that it would no longer provide insurance for these claims. On October 4, 2005, we filed a suit against the insurer, ITT v. Pacific Employers Insurance Co., CA No. 05CV 5223, in the Superior Court for Los Angeles, CA, seeking defense costs and indemnity from the insurance carrier for Pennsylvania Glass Sand product liabilities. In April 2007, the Court granted our motion for summary judgment on the carrier’s duty to defend the silica cases; however, that decision was overturned

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

on appeal. The matter was returned to the Superior Court in part for determination of several factual issues. We will continue to seek past and future defense costs for these cases from this carrier. We believe that these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. All silica-related costs, net of insurance recoveries, are shared pursuant to the Distribution Agreement.

 

On October 25, 2006, Fencourt Reinsurance Company (“Fencourt”), a subsidiary of The Hartford, filed a contribution claim against ITT for losses incurred by Fencourt as a result of a reinsurance contract obligation it owes to Century Indemnity Company, in the U.S. District Court for the Eastern District of Pennsylvania, Fencourt Reinsurance Co., Ltd. v. ITT Industries, Inc. (C.A. No. 06-4786 U.S. D.Ct E.D.PA). Century Indemnity Company was an insurer of ITT’s Domestic Casualty Program from 1978 through 1992. Fencourt, formed in 1978, was a captive insurer of the predecessor ITT Corporation and provided reinsurance to Century for certain ITT self-insured losses. Fencourt was transferred to The Hartford in the demerger of ITT in 1995. This matter is covered by the 1995 Distribution Agreement and that agreement contains clear language that The Hartford agreed to assume the liabilities of Fencourt and indemnify ITT against all claims against Fencourt. The case is stayed pending the resolution of an arbitration proceeding pending before the American Arbitration Association in New Jersey. On January 20, 2009, the arbitrator issued a favorable decision that ITT is not liable for the losses incurred by Fencourt. The parties are reviewing the case to determine what other matters remain to be decided by the arbitrator. Management believes that this matter will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

In December 2005, the Company received an anonymous complaint regarding the possible payment of commissions to foreign government officials by employees of our Nanjing Goulds Pumps company, in Nanjing, China. Such commission payments may violate the Foreign Corrupt Practices Act. The Company conducted an investigation utilizing internal and external resources and voluntarily disclosed the results of the investigation to the United States Department of Justice and the SEC. On February 11, 2009, the Company entered into a settlement with the SEC in which the Company, without admitting or denying liability, has paid $1.7 in total related to disgorged profits, prejudgment interest and a civil penalty. The settlement also restrains and enjoins the Company from violating Sections 13(b)(2)(A and B) of the Securities and Exchange Act of 1934.

 

On March 27, 2007, we reached a settlement relating to an investigation of our ITT Night Vision Division’s compliance with the International Traffic in Arms Regulations (“ITAR”) pursuant to which we pled guilty to two violations based on the export of defense articles without a license and the omission of material facts in required export reports. The Company was assessed a total of $50.0 in fines, forfeitures and penalties, which was accrued for fully as of December 31, 2006. We also entered into a Deferred Prosecution Agreement with the U.S. Government which deferred action regarding a third count of violations related to ITAR pending our implementation of a remedial action plan, including the appointment of an independent monitor. ITT was also assessed a deferred prosecution monetary penalty of $50.0 which ITT will reduce for monies spent over the five years following the date of the Plea Agreement, to accelerate and further the development and fielding of advanced night vision technology. On October 11, 2007, ITT and the Department of Defense finalized an Administrative Compliance Agreement wherein we agreed to take certain remedial actions including implementing compliance programs and appointing an independent monitor for the oversight of our compliance programs. On December 28, 2007, we finalized a Consent Agreement with the Department of State wherein we agreed to undertake certain remedial actions, including appointment of a Special Compliance Official. The Company continues to perform under the terms of the agreements. Management believes that these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

On April 17, 2007, ITT’s Board of Directors received a letter on behalf of a shareholder requesting that the Board take appropriate action against the employees responsible for the violations at our Night Vision facility described above, which were disclosed on Form 8-K filed on March 30, 2007. The Board of Directors appointed a

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

Special Litigation Committee to evaluate the request. The Special Litigation Committee conducted an investigation with the assistance of independent counsel and concluded that no legal actions should be brought by ITT.

 

During 2007 and 2008, the Company received notice of four shareholder derivative actions each filed in the U.S. District Court for the Southern District of New York, known variously as, Sylvia Piven trustee under trust agreement dated April 3, 1973 f/b/o Sylvia B. Piven, derivatively on behalf of ITT Corporation v. Steve Loranger et al. and ITT Corporation (the “Piven” action), Norman Levy, derivatively on behalf of ITT Industries, Inc. v. Steven R. Loranger et al. and ITT Industries, Inc., Anthony Reale v. Steven R. Loranger et al. and ITT Company [sic], and Robert Wilkinson v. Steven R. Loranger et al. and ITT Corporation. Each case alleges that the ITT’s Board of Directors breached their fiduciary duties by failing to properly oversee ITT’s compliance programs at its Night Vision business. The Complaints seeks compensatory and punitive damages for ITT from its Directors, the removal of the Directors, and the election of new directors. The four cases were consolidated into one action In Re ITT Corporation Derivative Litigation, CA No. 07-CV-2878 (CLB). On motion by the Company, the Piven action was dismissed for lack of diversity. On April 10, 2008, the Court denied the Company’s Motion to Dismiss the consolidated Complaint. ITT filed a Motion for Reconsideration and on November 25, 2008, the Court granted the Motion and dismissed the matter without prejudice. The Court provided the plaintiffs the opportunity to refile the case upon the development of certain additional facts. The plaintiffs refiled the case on December 23, 2008. The Company has filed another Motion to Dismiss which is currently before the Court. The Defendants have also filed a Motion to Dismiss based on the Special Litigation Committee’s report referenced above which is also currently before the Court. Management believes that these derivative suits will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

 

Guarantees & Indemnities

 

Since ITT’s incorporation in 1920, we have acquired and disposed of numerous entities. The related acquisition and disposition agreements contain various representation and warranty clauses and may provide indemnities for a misrepresentation or breach of the representations and warranties by either party. The indemnities address a variety of subjects; the term and monetary amounts of each such indemnity are defined in the specific agreements and may be affected by various conditions and external factors. Many of the indemnities have expired either by operation of law or as a result of the terms of the agreement. We do not have a liability recorded for the historic indemnifications and are not aware of any claims or other information that would give rise to material payments under such indemnities.

 

In December of 2007, we entered into a sale leaseback type agreement for our corporate aircraft, with the aircraft leased back under a five-year operating lease. We have provided, under the lease, a residual value guarantee to the counterparty in the amount of $50.2, which is the maximum amount of undiscounted future payments. We are obligated to make payments under the residual value guarantee to the extent the fair value of the aircraft is less than the residual value guarantee upon termination of the agreement. Currently, we project the fair value of the aircraft to be less than the residual value guarantee. Accordingly, we recorded a loss contingency of $5.1 during the first quarter, which represents the excess of the projected loss over a deferred gain of $5.4 recorded in connection with the sale leaseback transaction.

 

ITT has a number of individually immaterial guarantees outstanding at March 31, 2009, that may be affected by various conditions and external forces, some of which could require that payments be made under such guarantees. We do not believe these payments will have any material adverse impact on the financial position, results of operations or cash flow on a consolidated basis in the foreseeable future.

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(Dollars and share amounts in millions, except per share amounts, unless otherwise stated)

 

Product Warranties

 

ITT warrants numerous products, the terms of which vary widely. In general, ITT warrants its products against defect and specific non-performance. In the automotive businesses, liability for product defects could extend beyond the selling price of the product and could be significant if the defect interrupts production or results in a recall. Changes in product warranty accrual for March 31, 2009 were as follows:

 

 

 

 

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(In millions, except share and per share amounts, unless otherwise stated)

 

Business Overview

 

ITT Corporation and its subsidiaries (“ITT”, “we”, “us”, “our” and “the Company”) is a global multi-industry leader in high-technology engineering and manufacturing engaged directly and through its subsidiaries. We generate revenue and cash through the design, manufacture, and sale of a wide range of engineered products and the provision of related services. For financial reporting purposes our businesses are aggregated and organized into three principal business segments, Defense Electronics & Services, Fluid Technology, and Motion & Flow Control.

 

Our growth strategy is centered on both organic and acquisition growth. Our ability to grow organically stems from our value-based product development process, new and existing technologies, distribution capabilities, customer relationships and strong market positions. In addition to our growth initiatives, we have a number of strategic initiatives within the framework of the ITT Management System aimed at enhancing our operational performance. These include global sourcing, footprint rationalization and realignment, Six Sigma and lean fulfillment.

 

Key Performance Indicators and Non-GAAP Measures

 

Management reviews key performance metrics including sales and revenues, segment operating income and margins, earnings per share, orders growth, and backlog, among others.

 

In addition, we consider the following non-GAAP measures to be key performance indicators:

 

 

Management believes that these metrics are useful to investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations and our management of assets held from period to period. These metrics, however, are not a measure of financial performance under accounting principles generally accepted in the United States of America (“GAAP”) and should not be considered a substitute for sales and revenue growth (decline), or cash flows from operating, investing and financing activities as determined in accordance with GAAP and may not be comparable to similarly titled measures reported by other companies.

 

Executive Summary

 

ITT reported sales and revenues of $2.6 billion during the first quarter of 2009, a decrease of 8.9% from the $2.8 billion reported during the first quarter of 2008, reflecting challenging market conditions for our commercial businesses. Over the same period, income from continuing operations increased 9.1% to $186.5, or $1.02 per diluted share. This increase reflects a reduction in tax expense, as well as lower selling, general and administrative (“SG&A”) and interest expense partially offset by the impact of lower sales volumes, higher restructuring costs, and higher employee benefit plan costs.

 

Financial highlights for the quarter ended March 31, 2009 include:

 

 

 

Other significant highlights for the quarter ended March 31, 2009 include:

 

 

Further details related to these results are contained in the following Consolidated Financial Results and Segment Review sections.

 

2009 Outlook

 

Changes in the global economic environment resulted in difficult market conditions during the first quarter of 2009. We are planning restructuring actions of approximately $65.0 to $70.0 in 2009 (including those taken during the first quarter) and are developing contingency plans that are reactive to any volume declines beyond our expectations for 2009. In this environment, our strategy is to focus on the current needs of our customers, deploy our capital in a disciplined manner, focus on cost controls, and execute on our operational initiatives.

 

Factors impacting our 2009 performance, compared to 2008, include revenue declines in our Fluid Technology and Motion & Flow Control business segments, higher pension and other employee benefit-related costs, and benefits from productivity and cost containment initiatives. We also anticipate that foreign currency fluctuations will continue to have a negative impact on our 2009 results of operations.

 

Known Trends and Uncertainties

 

The following list represents a summary of trends and uncertainties, which could have a significant impact on our results of operations, financial position and/or cash flows from operating, investing and financing activities.

 

 

 

The information provided above does not represent a complete list of trends and uncertainties that could impact our business in either the near or long-term. It should, however, be considered along with the risk factors identified in Item 1A of our 2008 Annual Report on Form 10-K and our disclosure under the caption “Forward-Looking Statements and Cautionary Statements” at the end of this section.

 

Business Segment Overview

 

Summarized below is information on each of our three business segments, including markets served, goods and services provided, relevant factors that could impact results, business challenges, and areas of focus.

Defense Electronics & Services

 

Our Defense Electronics & Services business segment is designed to serve future needs around safety, security, intelligence and communication. Management believes that the Defense Electronics & Services business segment is well positioned with products and services that support our customers’ needs. In addition, we expect new product development to continue to contribute to future growth.

 

The following provides a summary of the Defense Electronics & Services businesses and the goods and services each provides to its respective end-markets.

 

 

Factors that could impact Defense Electronics & Services’ financial results include, the level of defense funding by domestic and foreign governments, our ability to receive contract awards, the ability to develop and market products and services for customers outside of traditional markets and our ability to obtain appropriate export licenses for international sales and business. Primary areas of business focus include new or improved product offerings, new contract wins and successful program execution.

 

Fluid Technology

 

Our Fluid Technology business segment provides critical products and services in markets that are driven by population growth, increasing environmental regulation, global security and global infrastructure trends. Fluid Technology products include water and wastewater treatment systems, pumps and related technologies, and other water and fluid control products with residential, commercial, and industrial applications. The following provides a summary of the Fluid Technology businesses and the goods and services each provides to its respective end-markets.

 

 

Factors that could impact Fluid Technology’s financial results include broad economic conditions in markets served, the ability of municipalities to fund projects, raw material prices and continued demand for replacement parts and servicing. Primary areas of business focus include new product development, geographic expansion into new markets, facility rationalization and global sourcing of direct material purchases.

 

Motion & Flow Control

 

Our Motion & Flow Control business segment provides highly engineered critical components that serve the high-end of our markets. This group of businesses provide products and services for the areas of defense, aerospace, industrial, transportation, computer, telecom and RV/marine. Revenue opportunities are balanced between OEM and after-market customers. In addition to its traditional markets of the U.S. and Western Europe, opportunities in emerging markets such as Asia are increasing.

 

The following provides a summary of the Motion & Flow Control businesses and the goods and services each provides to its respective end-markets.

 

 

The Motion & Flow Control businesses’ financial results are driven by economic conditions in its major markets, the cyclical nature of the transportation industry, production levels of major auto producers, demand for marine and leisure products, raw material prices, the success of new product development, platform life and changes in technology. Primary areas of business focus include expansion into adjacent markets, new product development, manufacturing footprint optimization, global sourcing of direct material purchases and lean fulfillment.

Consolidated Financial Results

 

 

Sales and Revenues

 

Sales and revenues for the quarter ended March 31, 2009 were $2,557.1, representing an 8.9% decrease as compared to the same prior year period. Volume declines, primarily driven by global economic conditions, and unfavorable foreign currency fluctuations continued to negatively impact our Fluid Technology and Motion & Flow Control business segments. Sales and revenues for the Defense Electronics & Services business segment were relatively flat compared to the same prior year period.

 

The following table illustrates the impact of organic growth, acquisitions and divestitures completed during the period, and foreign currency translation fluctuations on sales and revenues during these periods.

 

 

During the first quarter of 2009, we received orders of $2,572.6, a decrease of $110.0 or 4.1% as compared to the same prior year period. On a constant currency basis, orders grew by 0.5% or $13.2. This increase was attributable to organic order growth within our Defense Electronics & Services business segment, mostly offset by organic order decreases at both the Fluid Technology and Motion & Flow Control business segments.

 

Gross Profit

 

Gross profit for the quarter ended March 31, 2009 was $669.1, a 12.1% decrease compared to the same prior year period. This decrease was attributable to the decline in sales and revenues previously mentioned, and unfavorable foreign currency fluctuations, partially offset by benefits from productivity and cost saving initiatives, including efforts to improve supply chain productivity and control material costs.

Gross margin decreased 90 basis points to 26.2% during the quarter due to the same factors mentioned above.

 

Selling, General and Administrative Expenses

 

SG&A expenses decreased 8.7% to $384.0 for the quarter ended March 31, 2009. The decrease was primarily attributable to cost saving initiatives in response to declining global economic conditions and a positive impact from foreign currency exchange translation, partially offset by higher pension and other postretirement plan costs. SG&A as a percentage of sales was 15.0% for both the first quarter 2009 and 2008.

 

Research and Development Expenses

 

Research and development expenses (“R&D”) increased $0.3 to $52.9 for the quarter ended March 31, 2009. R&D as a percentage of sales increased 20 basis points to 2.1%, as we continued our efforts within each of our business segments to support product development.

 

Restructuring and Asset Impairment Charges, Net

 

During the first quarter of 2009, we recorded $10.7 of restructuring and asset impairment charges, a $7.1 increase from the same prior year period. These charges primarily relate to headcount reductions. See the section entitled “Restructuring and Asset Impairment Charges” and Note 3, “Restructuring and Asset Impairment Charges” in the Notes to Consolidated Condensed Financial Statements for additional information.

 

Operating Income

 

Operating income of $221.5 for the first quarter of 2009 reflects a 22.0% decrease as compared to the same prior year period, primarily due to the impact of lower sales volumes, higher employee benefit plan costs, unfavorable foreign currency fluctuations and increased restructuring costs, partially offset by benefits from productivity and cost saving initiatives. Segment operating income decreased 19.1%, driven by volume declines within our commercial businesses, partially offset by operating income growth from our Defense Electronics & Services business segment.

 

Operating margin decreased 140 basis points to 8.7% for the quarter ended March 31, 2009 from the same prior year period, primarily due to the items mentioned above.

 

Interest Expense and Interest Income

 

Interest expense during the first quarter of 2009 decreased 35.0% to $26.4 from the same prior year period. The decrease was attributable to lower year-over-year levels of commercial paper debt.

 

We recorded interest income of $4.3 and $8.4 for the quarters ended March 31, 2009 and 2008, respectively. The decrease was driven by a lower average cash and cash equivalents balance during the first quarter of 2009.

 

Income Tax Expense

 

Income tax expense was $10.0, an effective tax rate 5.1%, for the quarter ended March 31, 2009, compared to $78.0 or 31.3% during the same prior year period. The decrease in income tax expense and the effective tax rate was primarily attributable to the completion of a restructuring of certain international legal entities, which resulted in a reduction of the income tax provision in the amount of $57.7 million. This reduction was based on our determination that the excess investment for financial reporting purposes over the tax basis in certain foreign subsidiaries will be permanently reinvested and the associated deferred tax liability would no longer be required. In addition, income tax expense is lower as a result of the reduced level of income driven by declines in sales and revenues.

Segment Review