ITT INC. - Quarter Report: 2011 March (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
WASHINGTON, D.C. 20549
FORM 10-Q
| (Mark One) | ||
|
þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended March 31, 2011 | ||
|
or
|
||
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission File
Number: 1-5672
ITT CORPORATION
| State of Indiana | 13-5158950 | |
|
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) |
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 þ 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. (Check one):
| Large accelerated filer þ Accelerated filer o Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
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, 2011, there were outstanding
184.1 million shares of common stock ($1 par value per
share) of the registrant.
TABLE OF
CONTENTS
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
PART I. FINANCIAL
INFORMATION
Item 1. FINANCIAL
STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
| QUARTER ENDED MARCH 31 | 2011 | 2010 | ||||||
|
Product revenue
|
$ | 2,053 | $ | 1,953 | ||||
|
Service revenue
|
707 | 625 | ||||||
|
Total revenue
|
2,760 | 2,578 | ||||||
|
Costs of product revenue
|
1,352 | 1,307 | ||||||
|
Costs of service revenue
|
623 | 553 | ||||||
|
Total costs of revenue
|
1,975 | 1,860 | ||||||
|
Gross profit
|
785 | 718 | ||||||
|
Selling, general and administrative expenses
|
430 | 378 | ||||||
|
Research and development expenses
|
61 | 63 | ||||||
|
Transformation costs
|
85 | — | ||||||
|
Asbestos-related costs, net
|
16 | 15 | ||||||
|
Restructuring and asset impairment charges, net
|
5 | 17 | ||||||
|
Operating income
|
188 | 245 | ||||||
|
Interest and non-operating expenses, net
|
17 | 26 | ||||||
|
Income from continuing operations before income tax expense
|
171 | 219 | ||||||
|
Income tax expense
|
45 | 75 | ||||||
|
Income from continuing operations
|
126 | 144 | ||||||
|
(Loss) income from discontinued operations, including tax
benefit (expense) of $1 and $(2), respectively
|
(2 | ) | 2 | |||||
|
Net income
|
$ | 124 | $ | 146 | ||||
|
Earnings Per Share:
|
||||||||
|
Basic:
|
||||||||
|
Continuing operations
|
$ | 0.68 | $ | 0.78 | ||||
|
Discontinued operations
|
(0.01 | ) | 0.02 | |||||
|
Net income
|
$ | 0.67 | $ | 0.80 | ||||
|
Diluted:
|
||||||||
|
Continuing operations
|
$ | 0.67 | $ | 0.78 | ||||
|
Discontinued operations
|
(0.01 | ) | 0.01 | |||||
|
Net income
|
$ | 0.66 | $ | 0.79 | ||||
|
Weighted average common shares – basic
|
185.0 | 183.3 | ||||||
|
Weighted average common shares – diluted
|
186.5 | 184.9 | ||||||
|
Cash dividends declared per common share
|
$ | 0.25 | $ | 0.25 | ||||
The accompanying Notes to
Consolidated Condensed Financial Statements are an integral part
of the above income statements.
1
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
| QUARTER ENDED MARCH 31 | 2011 | 2010 | ||||||
|
Net income
|
$ | 124 | $ | 146 | ||||
|
Other comprehensive income:
|
||||||||
|
Net foreign currency translation adjustment
|
118 | (91 | ) | |||||
|
Net change in postretirement benefit plans, net of tax benefit
of $11 and $9, respectively
|
21 | 15 | ||||||
|
Net change in unrealized gains on investment securities, net of
tax expense of $3 and $2, respectively
|
(7 | ) | 3 | |||||
|
Other comprehensive income (loss)
|
132 | (73 | ) | |||||
|
Comprehensive income
|
$ | 256 | $ | 73 | ||||
|
Disclosure of reclassification adjustment:
|
||||||||
|
Net change in postretirement benefit plans, net of tax:
|
||||||||
|
Amortization of prior service costs, net of tax benefit of less
than $1 |
$ | 1 | $ | — | ||||
|
Amortization of net actuarial loss, net of tax benefit of $11
and $9, respectively
|
20 | 15 | ||||||
|
Net change in postretirement benefit plans, net of tax
|
$ | 21 | $ | 15 | ||||
|
Net change in unrealized gains on investment securities, net of
tax: |
||||||||
|
Unrealized holding (losses) gains arising during period, net of
tax expense of $0 and $2, respectively |
$ | (1 | ) | $ | 3 | |||
|
Gains realized during the period, net of tax expense of
$3 for 2011 |
(6 | ) | — | |||||
|
Net change in unrealized gains on investment securities, net of
tax |
$ | (7 | ) | $ | 3 | |||
The accompanying Notes to
Consolidated Condensed Financial Statements are an integral part
of the above statements of comprehensive income.
2
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
|
March 31, |
December |
|||||||
| 2011 | 31, 2010 | |||||||
| (Unaudited) | ||||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 1,074 | $ | 1,032 | ||||
|
Receivables, net
|
2,075 | 1,944 | ||||||
|
Inventories, net
|
950 | 856 | ||||||
|
Other current assets
|
611 | 562 | ||||||
|
Total current assets
|
4,710 | 4,394 | ||||||
|
Plant, property and equipment, net
|
1,207 | 1,205 | ||||||
|
Goodwill
|
4,318 | 4,277 | ||||||
|
Other intangible assets, net
|
756 | 766 | ||||||
|
Asbestos-related assets
|
931 | 930 | ||||||
|
Other non-current assets
|
804 | 866 | ||||||
|
Total non-current assets
|
8,016 | 8,044 | ||||||
|
Total assets
|
$ | 12,726 | $ | 12,438 | ||||
|
Liabilities and Shareholders’ Equity
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 981 | $ | 1,020 | ||||
|
Accrued and other current liabilities
|
1,703 | 1,714 | ||||||
|
Short-term borrowings and current maturities of long-term debt
|
85 | 11 | ||||||
|
Total current liabilities
|
2,769 | 2,745 | ||||||
|
Postretirement benefits
|
1,715 | 1,733 | ||||||
|
Long-term debt
|
1,354 | 1,354 | ||||||
|
Asbestos-related liabilities
|
1,572 | 1,559 | ||||||
|
Other non-current liabilities
|
548 | 542 | ||||||
|
Total non-current liabilities
|
5,189 | 5,188 | ||||||
|
Total liabilities
|
7,958 | 7,933 | ||||||
|
Shareholders’ Equity:
|
||||||||
|
Common stock:
|
||||||||
|
Authorized – 500.0 shares, $1 par value per
share (207.0 shares issued) Outstanding –
184.8 shares and 184.0 shares,
respectively(a)
|
184 | 183 | ||||||
|
Retained earnings
|
5,539 | 5,409 | ||||||
|
Total accumulated other comprehensive loss
|
(955 | ) | (1,087 | ) | ||||
|
Total shareholders’ equity
|
4,768 | 4,505 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 12,726 | $ | 12,438 | ||||
| (a) | Shares outstanding include unvested restricted common stock of 0.8 at March 31, 2011 and 1.0 at December 31, 2010. |
The accompanying Notes to
Consolidated Condensed Financial Statements are an integral part
of the above balance sheets.
3
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ITT CORPORATION AND
SUBSIDIARIES
| QUARTER ENDED MARCH 31 | 2011 | 2010 | ||||||
|
Operating Activities
|
||||||||
|
Net income
|
$ | 124 | $ | 146 | ||||
|
Less: (Loss) income from discontinued operations
|
(2 | ) | 2 | |||||
|
Income from continuing operations
|
126 | 144 | ||||||
|
Non-cash adjustments to income from continuing operations:
|
||||||||
|
Depreciation and amortization
|
84 | 68 | ||||||
|
Stock-based compensation
|
7 | 8 | ||||||
|
Transformation costs
|
55 | — | ||||||
|
Change in receivables
|
(102 | ) | (72 | ) | ||||
|
Change in inventories
|
(76 | ) | 3 | |||||
|
Change in accounts payable
|
(13 | ) | (10 | ) | ||||
|
Other, net
|
(61 | ) | (74 | ) | ||||
|
Net Cash – Operating activities
|
20 | 67 | ||||||
|
Investing Activities
|
||||||||
|
Capital expenditures
|
(47 | ) | (52 | ) | ||||
|
Acquisitions, net of cash acquired
|
— | (391 | ) | |||||
|
Other, net
|
15 | 2 | ||||||
|
Net Cash – Investing activities
|
(32 | ) | (441 | ) | ||||
|
Financing Activities
|
||||||||
|
Short-term debt, net
|
74 | 151 | ||||||
|
Issuance of common stock
|
33 | 10 | ||||||
|
Dividends paid
|
(92 | ) | (85 | ) | ||||
|
Other, net
|
(7 | ) | — | |||||
|
Net Cash – Financing activities
|
8 | 76 | ||||||
|
Exchange rate effects on cash and cash equivalents
|
46 | (48 | ) | |||||
|
Net cash from discontinued operations
|
— | 10 | ||||||
|
Net change in cash and cash equivalents
|
42 | (336 | ) | |||||
|
Cash and cash equivalents – beginning of year
|
1,032 | 1,216 | ||||||
|
Cash and Cash Equivalents – End of Period
|
$ | 1,074 | $ | 880 | ||||
|
Supplemental Disclosures of Cash Flow Information
|
||||||||
|
Cash paid during the year for:
|
||||||||
|
Interest
|
$ | 3 | $ | 3 | ||||
|
Income taxes (net of refunds received)
|
$ | 17 | $ | 66 | ||||
The accompanying Notes to
Consolidated Condensed Financial Statements are an integral part
of the above statements of cash flows.
4
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
(DOLLARS AND SHARE AMOUNTS IN MILLIONS, UNLESS OTHERWISE
STATED)
NOTE 1
BASIS OF PRESENTATION
BASIS OF PRESENTATION
ITT Corporation is a global multi-industry leader in
high-technology engineering and manufacturing, operating through
three segments; Defense & Information Solutions
(Defense segment), Fluid Technology (Fluid segment) and
Motion & Flow Control (Motion & Flow
segment). 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.
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 (GAAP) have been condensed or omitted pursuant
to such SEC rules. We believe that the disclosures made are
adequate to make the information presented not misleading. We
consistently applied the accounting policies described in
ITT’s 2010 Annual Report on
Form 10-K
(2010 Annual Report) in preparing these unaudited financial
statements, with the exception of accounting standard updates,
described in Note 3, “Recent Accounting
Pronouncements,” adopted on January 1, 2011. Certain
prior year amounts have been reclassified to conform to current
year presentation, as described within these Notes to the
Consolidated Condensed Financial Statements. These financial
statements should be read in conjunction with the financial
statements and notes thereto included in our 2010 Annual Report.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue
and expenses during the reporting period. Estimates are revised
as additional information becomes available. Estimates and
assumptions are used for, but not limited to, asbestos-related
liabilities and recoveries from insurers and other responsible
parties, postretirement obligations and assets, revenue
recognition, income tax contingency accruals and valuation
allowances, goodwill impairment testing and contingent
liabilities. Actual results could differ from these estimates.
ITT’s quarterly financial periods end on the Saturday
closest to the last day of the calendar quarter, except for the
last quarterly period of the fiscal year, which ends on
December 31st. For ease of presentation, the quarterly
financial statements included herein are described as ending on
the last day of the calendar quarter.
NOTE 2
COMPANY TRANSFORMATION
COMPANY TRANSFORMATION
On January 12, 2011, the Company announced that its Board
of Directors had unanimously approved a plan to separate the
Company’s businesses into three independent, publicly
traded companies (the Transformation). Under the Transformation,
ITT will execute tax-free spinoffs to shareholders of its
water-related businesses and its Defense segment. The
water-related business will include the Water &
Wastewater division, including its analytical instrumentation
component, and the Residential & Commercial Water
division, as well as the Flow Control division that is currently
reported within the Motion & Flow segment. The
Industrial Process division, which is currently reported within
the Fluid segment, will continue to operate as a subsidiary of
ITT. After completion of the Transformation, ITT shareholders
will own shares in all three corporations. Following the
Transformation, ITT will continue to trade on the New York Stock
Exchange as an industrial company that supplies highly
engineered solutions in the aerospace, transportation, energy
and industrial markets. The Transformation is anticipated to be
completed by the end of 2011.
5
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ITT CORPORATION AND
SUBSIDIARIES
During the first quarter of 2011, we recognized expenses of $85
related to the planned Transformation. The components of
transformation costs incurred during the first quarter of 2011
are presented below.
|
Transformation Costs:
|
||||
|
Asset impairments
|
$ | 55 | ||
|
Advisory fees
|
22 | |||
|
Other costs
|
8 | |||
|
Total transformation costs
|
$ | 85 | ||
|
Total costs incurred to date
|
$ | 87 | ||
The $55 million non-cash impairment charge relates a
decision to discontinue development of an information technology
consolidation initiative. These costs have not been included in
segment operating results.
|
Transformation accrual – 12/31
|
$ | 2 | ||
|
Charges for actions during the period
|
85 | |||
|
Cash payments
|
(15 | ) | ||
|
Asset impairment
|
(55 | ) | ||
|
Transformation accrual – 3/31
|
$ | 17 | ||
To execute the Transformation, we expect major areas of spending
to include debt refinancing, tax impacts, information technology
investments to build out independent environments for the new
companies, advisory fees, and other Transformation activities.
Our current estimate of the after-tax cash impact of pre-spin
activities associated with the Transformation, including those
initiated during the first quarter, is expected to be
approximately $500. In addition, we recorded a $55 non-cash
impairment charge in the first quarter related to information
system initiatives that were discontinued as a result of the
Transformation. The Company may incur additional costs that are
not currently estimable prior to completion of the
Transformation.
In addition, the Company anticipates incurring material
separation-related spending following the Transformation,
primarily consisting of additional tax impacts, employee-related
costs, continued information systems investments, and advisory
fees.
NOTE 3
RECENT ACCOUNTING PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU)
No. 2009-13,
Multiple-Deliverable Revenue Arrangements, which amended
the accounting for revenue arrangements that contain multiple
elements by eliminating the criteria that objective and reliable
evidence of fair value for undelivered products or services
needs to exist in order to be able to account separately for
deliverables and eliminates the use of the residual method of
allocating arrangement consideration. The amendments establish a
hierarchy for determining the selling price of a deliverable and
will allow for the separation of products and services in more
instances than previously permitted.
We adopted this ASU effective January 1, 2011 for new
arrangements entered into or arrangements materially modified on
or after that date on a prospective basis. In connection with
the adoption of the revised multiple element arrangement
guidance, we revised our revenue recognition accounting
policies. For multiple deliverable arrangements entered into or
materially modified on or after January 1, 2011, we
recognize revenue for a delivered element based on the relative
selling price if the deliverable has stand-alone value to the
customer and, in arrangements that include a general right of
return relative to the delivered element, performance of the
undelivered element is considered probable and substantially in
the Company’s control. The selling price for a deliverable
is based on vendor-specific objective evidence of selling price
(VSOE), if available, third-party evidence of selling price
(TPE), if VSOE is not available, or best estimated selling price
(BESP), if neither VSOE nor TPE is available.
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ITT CORPORATION AND
SUBSIDIARIES
The deliverables in our arrangements with multiple elements
include various products and may include related services, such
as installation and
start-up
services. For multiple element arrangements entered into or
materially modified after adoption of the revised multiple
element arrangement guidance, we allocate arrangement
consideration based on the relative selling prices of the
separate units of accounting determined in accordance with the
hierarchy described above. For deliverables that are sold
separately, we establish VSOE based on the price when the
deliverable is sold separately. We establish TPE, generally for
services, based on prices similarly situated customers pay for
similar services from third party vendors. For those
deliverables for which we are unable to establish VSOE or TPE,
we estimate the selling price considering various factors
including market and pricing trends, geography, product
customization, and profit objectives. Revenue allocated to
products and services are generally recognized as the products
are delivered and the services are performed, provided all other
revenue recognition criteria have been satisfied. The adoption
of ASU
2009-13 did
not result in a material change in either the units of
accounting or the pattern or timing of revenue
recognition. Additionally, the adoption of the revised multiple
element arrangement guidance did not have a material impact on
our financial condition, results of operations or cash flows.
In October 2009, the FASB issued ASU
No. 2009-14,
which amended the accounting requirements for software revenue
recognition. The objective of this update is to address the
accounting for revenue arrangements that contain tangible
products and software. Specifically, products that contain
software that is “more than incidental” to the product
as a whole will be removed from the scope of the software
revenue recognition literature. The amendments align the
accounting for these revenue transaction types with the
amendments described under ASU
2009-13
above. We adopted the provisions of this ASU for new or
materially modified arrangements entered into on or after
January 1, 2011 on a prospective basis. The adoption of
this ASU did not have a material impact on our financial
condition, results of operations or cash flows.
In April 2010, the FASB issued ASU
No. 2010-17,
which establishes authoritative guidance permitting use of the
milestone method of revenue recognition for research or
development arrangements that contain payment provisions or
consideration contingent on the achievement of specified events.
On January 1, 2011, we adopted the provisions of this ASU
on a prospective basis. The adoption of this ASU did not have a
material impact on our financial condition, results of
operations or cash flows.
In December 2010, the FASB issued ASU
No. 2010-28,
which provides additional guidance when testing goodwill for
impairment. Specifically, for reporting units with zero or
negative carrying amounts, an entity is required to perform the
second step of the goodwill impairment test (a comparison
between the carrying amount of a reporting unit’s goodwill
to its implied fair value) if it is more likely than not that a
goodwill impairment exists, considering any adverse qualitative
factors. This guidance is effective for fiscal years, and
interim periods within those years, beginning after
December 15, 2010. As of the date of our most recent
goodwill impairment test, none of our reporting units would have
been affected by the application of this ASU as each reporting
unit had a carrying amount that exceeded zero.
NOTE 4
ACQUISITIONS & DIVESTITURES
ACQUISITIONS & DIVESTITURES
Acquisitions
We did not engage in any acquisitions during the first quarter
of 2011. During the first quarter of 2010, we spent $391, net of
cash acquired. The substantial majority of the first quarter
2010 aggregate purchase price pertained to the acquisition of
Nova Analytics Corporation (Nova) on March 23, 2010 for
$385 which broadened our Fluid segment’s portfolio of
analytical instrumentation tools.
Additionally, in the third quarter of 2010, we completed the
acquisitions of Godwin Pumps of America, Inc. and Godwin
Holdings Limited (collectively referred to as Godwin) for $580,
which expanded our Fluid segment’s presence within the
dewatering market in the United States.
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ITT CORPORATION AND
SUBSIDIARIES
The results of operations and cash flows from our 2010
acquisitions have been included in our Consolidated Condensed
Financial Statements prospectively from their date of
acquisition. Pro forma results of operations for acquisitions
completed in 2010 have not been presented because they are not
material to our Consolidated Condensed Financial Statements,
either individually or in the aggregate.
Divestitures
We did not engage in any divestitures during the first quarter
of 2011 or 2010.
On September 8, 2010 we completed the sale of CAS, Inc.
(CAS), a component of our Defense segment that was engaged in
systems engineering and technical assistance for the
U.S. Government. Subsequent to this divestiture, we do not
have any significant continuing involvement in the operations of
CAS, nor do we expect significant continuing cash flows from
CAS. Accordingly, the financial position, results of operations
and cash flows from CAS are reported as a discontinued operation
and prior year amounts have been reclassified to conform to the
current year presentation. During the first quarter of 2010, CAS
provided third-party revenue and operating income of $57 and $4,
respectively, included within discontinued operations.
NOTE 5
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
During the first quarter of 2011 we recognized restructuring
costs of $5, related to actions initiated primarily within our
Defense segment. We do not expect to incur significant future
charges related to these actions.
2010 Defense
Segment Realignment Activities
During the first quarter of 2010, we recognized a $12
restructuring charge related to a strategic realignment of our
Defense segment to enable better product portfolio integration,
encourage a more coordinated market approach and provide
reductions in overhead costs. The Defense segment was renamed
ITT Defense & Information Solutions and the previous
organizational structure, consisting of seven divisions, was
consolidated into three larger divisions.
This initiative was substantially completed during 2010 and
resulted in a total charge of $27 and headcount reductions of
642, which included 162 factory workers, 457 office workers and
23 management employees. In addition, the operations at three of
the Defense segment’s production sites were relocated and
integrated with other existing sites during the fourth quarter
of 2010. We estimate our Defense segment realignment actions
will yield approximately $61 in annual net savings. The
remaining liability related to the realignment action was $5 as
of March 31, 2011, and is expected to be fully paid during
the remainder of 2011.
NOTE 6
INCOME TAXES
INCOME TAXES
Effective Tax
Rate
For the quarter ended March 31, 2011 we recorded an income
tax expense of $45, compared to $75 for the comparable prior
year period, reflecting an effective tax rate of 26.3% and
34.2%, respectively. The decrease in income tax expense was
primarily attributable to a tax benefit of $23 from
separation-related costs related to the planned Transformation.
The effective tax rate for the first quarter of 2010 was
unfavorably impacted by a discrete income tax charge of $12
associated with the ratification of the U.S. Patient
Protection and Affordable Care Act (the Healthcare Reform Act).
Effective January 1, 2013, the Healthcare Reform Act
eliminates the tax deduction for benefits related to subsidies
received for prescription drug benefits provided under retiree
healthcare benefit plans that were determined to be actuarially
equivalent to Medicare Part D.
8
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ITT CORPORATION AND
SUBSIDIARIES
NOTE 7
EARNINGS PER SHARE
EARNINGS PER SHARE
The following table provides a reconciliation of the data used
in the calculation of basic and diluted earnings per share
computations for income from continuing operations for the first
quarter of 2011 and 2010.
| 2011 | 2010 | |||||||
|
Income from continuing operations
|
$ | 126 | $ | 144 | ||||
|
Weighted average common shares outstanding
|
183.6 | 181.8 | ||||||
|
Add: Weighted average restricted stock awards
outstanding(a)
|
1.4 | 1.5 | ||||||
|
Basic weighted average common shares outstanding
|
185.0 | 183.3 | ||||||
|
Add: Dilutive impact of stock options
|
1.5 | 1.6 | ||||||
|
Diluted weighted average common shares outstanding
|
186.5 | 184.9 | ||||||
|
Basic earnings per share from continuing operations
|
$ | 0.68 | $ | 0.78 | ||||
|
Diluted earnings per share from continuing operations
|
$ | 0.67 | $ | 0.78 | ||||
| (a) | Restricted stock awards containing rights to non-forfeitable dividends which participate in undistributed earnings with common shareholders are considered participating securities for purposes of computing earnings per share. |
The following table provides the number of shares underlying
stock options excluded from the computation of diluted earnings
per share as of March 31, 2011 and 2010 because they were
anti-dilutive.
| 2011 | 2010 | |||||||
|
Anti-dilutive stock options
|
1.2 | 1.8 | ||||||
|
Average exercise price
|
$ | 56.28 | $ | 54.62 | ||||
|
Years of expiration
|
2014-2021 | 2012- 2020 | ||||||
NOTE 8
RECEIVABLES, NET
RECEIVABLES, NET
|
March 31, |
December 31, |
|||||||
| 2011 | 2010 | |||||||
|
Trade accounts receivable
|
$ | 1,597 | $ | 1,579 | ||||
|
Unbilled contract receivable
|
475 | 367 | ||||||
|
Other
|
47 | 47 | ||||||
|
Receivables, gross
|
2,119 | 1,993 | ||||||
|
Allowance for doubtful accounts
|
(41 | ) | (42 | ) | ||||
|
Allowance for cash discounts
|
(3 | ) | (7 | ) | ||||
|
Receivables, net
|
$ | 2,075 | $ | 1,944 | ||||
Unbilled contract receivables represent revenue recognized on
construction-type or production-type contracts that arise based
on performance attainment which, by contract, cannot be billed
as of the balance sheet date. We expect to bill and collect
substantially all of the March 31, 2011 unbilled contract
receivables during the next twelve months as billing milestones
are completed or units are delivered.
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Our outstanding accounts receivable balance, including both
trade and unbilled receivables, from the U.S. Government
was $850 and $806 as of March 31, 2011 and
December 31, 2010, respectively.
NOTE 9
INVENTORIES, NET
INVENTORIES, NET
|
March 31, |
December 31, |
|||||||
| 2011 | 2010 | |||||||
|
Finished goods
|
$ | 231 | $ | 231 | ||||
|
Work in process
|
117 | 88 | ||||||
|
Raw materials
|
358 | 317 | ||||||
| 706 | 636 | |||||||
|
Inventoried costs related to long-term contracts
|
326 | 296 | ||||||
|
Less – progress payments
|
(82 | ) | (76 | ) | ||||
|
Inventoried costs related to long-term contracts, net
|
244 | 220 | ||||||
|
Inventories, net
|
$ | 950 | $ | 856 | ||||
NOTE 10
OTHER CURRENT AND NON-CURRENT ASSETS
OTHER CURRENT AND NON-CURRENT ASSETS
|
March 31, |
December 31, |
|||||||
| 2011 | 2010 | |||||||
|
Current deferred income taxes
|
$ | 282 | $ | 280 | ||||
|
Asbestos-related current assets
|
105 | 105 | ||||||
|
Other
|
224 | 177 | ||||||
|
Other current assets
|
$ | 611 | $ | 562 | ||||
|
Deferred income tax
|
$ | 552 | $ | 554 | ||||
|
Other employee benefit-related assets
|
109 | 106 | ||||||
|
Capitalized software costs
|
71 | 118 | ||||||
|
Other
|
72 | 88 | ||||||
|
Other non-current assets
|
$ | 804 | $ | 866 | ||||
As described in Note 2, “Transformation Costs,”
during the first quarter of 2011 we discontinued the development
of an information technology consolidation initiative and
recorded a capitalized software impairment charge of $55.
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SUBSIDIARIES
NOTE 11
PLANT, PROPERTY AND EQUIPMENT, NET
PLANT, PROPERTY AND EQUIPMENT, NET
|
March 31, |
December 31, |
|||||||
| 2011 | 2010 | |||||||
|
Land and improvements
|
$ | 61 | $ | 59 | ||||
|
Buildings and improvements
|
657 | 642 | ||||||
|
Machinery and equipment
|
1,895 | 1,809 | ||||||
|
Equipment held for lease or rental
|
140 | 132 | ||||||
|
Furniture, fixtures and office equipment
|
241 | 231 | ||||||
|
Construction work in progress
|
122 | 160 | ||||||
|
Other
|
32 | 29 | ||||||
|
Plant, property and equipment, gross
|
3,148 | 3,062 | ||||||
|
Less – accumulated depreciation
|
(1,941 | ) | (1,857 | ) | ||||
|
Plant, property and equipment, net
|
$ | 1,207 | $ | 1,205 | ||||
Depreciation expense of $55 and $44 was recognized in the
quarter ended March 31, 2011 and 2010, respectively.
NOTE 12
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The following table provides a rollforward of the carrying
amount of goodwill for the quarter ended March 31, 2011 by
segment.
|
MOTION & |
||||||||||||||||
| DEFENSE | FLUID | FLOW | TOTAL | |||||||||||||
|
Goodwill — 12/31
|
$ | 2,156 | $ | 1,634 | $ | 487 | $ | 4,277 | ||||||||
|
Foreign currency
|
— | 35 | 6 | 41 | ||||||||||||
|
Goodwill — 3/31
|
$ | 2,156 | $ | 1,669 | $ | 493 | $ | 4,318 | ||||||||
Other Intangible
Assets, Net
| MARCH 31, 2011 | DECEMBER 31, 2010 | |||||||||||||||||||||||
|
GROSS |
GROSS |
|||||||||||||||||||||||
|
CARRYING |
ACCUMULATED |
NET |
CARRYING |
ACCUMULATED |
NET |
|||||||||||||||||||
| AMOUNT | AMORTIZATION | INTANGIBLES | AMOUNT | AMORTIZATION | INTANGIBLES | |||||||||||||||||||
|
Customer and distributor relationships
|
$ | 863 | $ | (331 | ) | $ | 532 | $ | 855 | $ | (312 | ) | $ | 543 | ||||||||||
|
Proprietary technology
|
111 | (39 | ) | 72 | 109 | (35 | ) | 74 | ||||||||||||||||
|
Trademarks
|
36 | (11 | ) | 25 | 35 | (10 | ) | 25 | ||||||||||||||||
|
Patents and other
|
33 | (19 | ) | 14 | 32 | (18 | ) | 14 | ||||||||||||||||
|
Indefinite-lived intangibles
|
113 | — | 113 | 110 | — | 110 | ||||||||||||||||||
|
Other Intangible Assets
|
$ | 1,156 | $ | (400 | ) | $ | 756 | $ | 1,141 | $ | (375 | ) | $ | 766 | ||||||||||
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Amortization expense related to finite-lived intangible assets
for the first quarter 2011 and 2010 was $22 and $20,
respectively. Estimated amortization expense for the remaining
nine months of 2011 and each of the five succeeding years is as
follows:
|
Remaining 2011
|
$ | 71 | ||
|
2012
|
76 | |||
|
2013
|
61 | |||
|
2014
|
56 | |||
|
2015
|
52 | |||
|
2016
|
48 | |||
|
Total
|
$ | 364 | ||
NOTE 13
ACCRUED AND OTHER CURRENT LIABILITIES AND OTHER NON-CURRENT LIABILITIES
ACCRUED AND OTHER CURRENT LIABILITIES AND OTHER NON-CURRENT LIABILITIES
|
March 31, |
December 31, |
|||||||
| 2011 | 2010 | |||||||
|
Compensation and other employee-benefits
|
$ | 558 | $ | 625 | ||||
|
Customer advances and deferred revenue
|
513 | 478 | ||||||
|
Asbestos-related liability
|
117 | 117 | ||||||
|
Other accrued liabilities
|
515 | 494 | ||||||
|
Accrued and other current liabilities
|
$ | 1,703 | $ | 1,714 | ||||
|
Deferred income taxes and other tax-related accruals
|
$ | 186 | $ | 179 | ||||
|
Environmental
|
127 | 128 | ||||||
|
Compensation and other employee-related benefits
|
127 | 117 | ||||||
|
Product liability, guarantees and other legal matters
|
52 | 52 | ||||||
|
Other
|
56 | 66 | ||||||
|
Other non-current liabilities
|
$ | 548 | $ | 542 | ||||
During the first quarter of 2011, we corrected the presentation
of amounts related to customer advances and deferred revenue by
reclassifying $452 from accounts payable to accrued and other
current liabilities as of December 31, 2010 in the
accompanying Consolidated Condensed Balance Sheets. This
reclassification had no impact on amounts reported in the 2010
Annual Report’s Consolidated Income Statements or net cash
from operating activities within the Consolidated Statements of
Cash Flows.
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NOTE 14
DEBT
DEBT
|
March 31, |
December 31, |
|||||||
| 2011 | 2010 | |||||||
|
Commercial paper
|
$ | 70 | $ | - | ||||
|
Short-term loans
|
5 | 1 | ||||||
|
Current maturities of long-term debt and other
|
10 | 10 | ||||||
|
Short-term borrowings and current maturities of long-term debt
|
85 | 11 | ||||||
|
Non-current maturities of long-term debt
|
1,314 | 1,314 | ||||||
|
Non-current capital leases
|
4 | 3 | ||||||
|
Deferred gain on interest rate swaps
|
44 | 45 | ||||||
|
Unamortized discounts and debt issuance costs
|
(8 | ) | (8 | ) | ||||
|
Long-term debt
|
1,354 | 1,354 | ||||||
|
Total debt
|
$ | 1,439 | $ | 1,365 | ||||
The fair value of total debt, excluding the deferred gain on
interest rate swaps, was $1,547 and $1,483 as of March 31,
2011 and December 31, 2010, respectively. Fair value was
primarily determined using quoted prices in active markets for
the identical security obtained from an external pricing service.
NOTE 15
POSTRETIREMENT BENEFIT PLANS
POSTRETIREMENT BENEFIT PLANS
The following table provides the components of net periodic
benefit cost for pension plans, disaggregated by U.S. and
international plans, and other employee-related benefit plans
for the quarters ended March 31, 2011 and 2010.
| 2011 | 2010 | |||||||||||||||||||||||||||||||||||||||
|
Total |
Other |
Total |
Other |
|||||||||||||||||||||||||||||||||||||
| U.S. | Int’l | Pension | Benefits | Total | U.S. | Int’l | Pension | Benefits | Total | |||||||||||||||||||||||||||||||
|
Net periodic benefit cost
|
||||||||||||||||||||||||||||||||||||||||
|
Service cost
|
$ | 29 | $ | 4 | $ | 33 | $ | 1 | $ | 34 | $ | 27 | $ | 4 | $ | 31 | $ | 2 | $ | 33 | ||||||||||||||||||||
|
Interest cost
|
74 | 8 | 82 | 10 | 92 | 77 | 7 | 84 | 10 | 94 | ||||||||||||||||||||||||||||||
|
Expected return on plan assets
|
(102 | ) | (7 | ) | (109 | ) | (6 | ) | (115 | ) | (104 | ) | (6 | ) | (110 | ) | (6 | ) | (116 | ) | ||||||||||||||||||||
|
Amortization of net actuarial loss
|
27 | 1 | 28 | 3 | 31 | 20 | 1 | 21 | 3 | 24 | ||||||||||||||||||||||||||||||
|
Amortization of prior service cost
|
1 | — | 1 | — | 1 | 1 | — | 1 | — | 1 | ||||||||||||||||||||||||||||||
|
Net periodic benefit cost (income)
|
29 | 6 | 35 | 8 | 43 | 21 | 6 | 27 | 9 | 36 | ||||||||||||||||||||||||||||||
We contributed approximately $11 and $2 to our various plans
during the three months ended March 31, 2011 and 2010,
respectively. Additional contributions ranging between $80 and
$100 are expected during the remainder of 2011.
NOTE 16
LONG-TERM INCENTIVE EMPLOYEE COMPENSATION
LONG-TERM INCENTIVE EMPLOYEE COMPENSATION
Our long-term incentive awards program (LTIP) comprises three
components: non-qualified stock options (NQOs), restricted stock
(RS) and a target cash award (TSR). We account for NQOs and RS
as equity-based compensation awards. TSR awards are cash settled
and accounted for as liability-based compensation. LTIP employee
compensation costs are primarily recorded within SG&A
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SUBSIDIARIES
expenses, and are reduced by an estimated forfeiture rate. The
following table provides the impact of these costs in our
consolidated results of operations for the quarters ended
March 31, 2011 and 2010.
| 2011 | 2010 | |||||||
|
Compensation costs on equity-based awards
|
$ | 7 | $ | 8 | ||||
|
Compensation costs on liability-based awards
|
3 | 2 | ||||||
|
Total compensation costs, pre-tax
|
$ | 10 | $ | 10 | ||||
|
Future tax benefit
|
$ | 3 | $ | 3 | ||||
At March 31, 2011, there was $73 of unrecognized
compensation cost related to non-vested NQOs and RS. This cost
is expected to be recognized ratably over a weighted-average
period of 2.2 years. Unrecognized compensation cost of $16
is projected to be incurred under the TSR based on performance
measurements as of March 31, 2011. The TSR unamortized
expense is expected to be recognized over a weighted average
period of 2.5 years. Actual performance measurements in
future periods, may differ from current estimates and positively
or negatively impact the TSR compensation cost recognized, as
well as create volatility between periods.
First Quarter
2011 LTIP Activity
On March 3, 2011, we granted the 2011 LTIP awards. The
grants comprised 0.7 NQOs, 0.5 units of RS and 10.8 TSR
units with respective grant date fair values of $14.86, $57.68
and $1.00, respectively. The NQOs vest either on the completion
of a three-year service period or annually in three equal
installments, as determined by employee level, and have a
ten-year expiration period. RS and TSR units vest on the
completion of a three-year service period.
The fair value of RS corresponds to the closing price of ITT
common stock on the date of grant. The fair value of each NQO
grant was estimated on the date of grant, using a binomial
lattice pricing model that incorporates multiple and variable
assumptions over time, including assumptions such as employee
exercise patterns, stock price volatility and changes in
dividends. The following table details the assumptions utilized
to measure fair value.
|
Dividend yield
|
1.73 | % | ||
|
Expected volatility
|
24.75 | % | ||
|
Expected life (in years)
|
7.0 | |||
|
Risk-free rates
|
3.06 | % | ||
|
Weighted-average grant date fair value
|
$ | 14.86 | ||
Expected volatilities are based on ITT’s historical stock
price volatility and implied volatility derived from traded
options on our stock. ITT uses historical data to estimate
employee option exercise behavior within the valuation model.
Employee groups and option characteristics are considered
separately for valuation purposes. The expected life represents
an estimate of the period of time options are expected to remain
outstanding. The expected life provided above represents the
weighted average of expected behavior for certain groups of
employees who have historically exhibited different behavior.
The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of option grant.
The fair value of TSR units is measured on a quarterly basis and
corresponds to ITT’s total shareholder return as compared
to the total shareholder return of other industrial companies
within the S&P 500 composite subject to a multiplier which
includes a maximum and minimum payout. The relative performance
ranking calculated is adjusted to reflect expected volatility
over the remaining term of the award using a Monte Carlo
simulation.
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ITT CORPORATION AND
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During the first quarter of 2011, 0.8 stock options were
exercised resulting in proceeds of $33. Restrictions on
0.3 shares of RS granted in 2008 lapsed on March 10,
2011 and a corresponding number of shares were issued out of
treasury stock. Typically, during the first quarter of each
year, cash payments are made to settle TSR awards that vested on
December 31st of the preceding year. However, no
payments were made during the first quarter of 2011 as the TSR
performance metric for the 2008 to 2010 performance period was
less than the minimum stipulated in the TSR Award Agreement.
During the first quarter of 2010, payments totaling $18 were
made to settle the vested 2007 TSR award.
NOTE 17
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
From time to time, we are involved in legal proceedings that are
incidental to the operation of our businesses. Some of these
proceedings allege damages relating to environmental exposures,
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. We will
continue to defend vigorously 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 our
cash flow, results of operations, or financial condition, unless
otherwise noted below.
Asbestos
Matters
Background
ITT, including its subsidiary Goulds Pumps, Inc. (Goulds), has
been joined as a defendant with numerous other companies in
product liability lawsuits alleging personal injury due to
asbestos exposure. These claims allege that certain products
sold by us or our subsidiaries prior to 1985 contained a part
manufactured by a third party (e.g., a gasket) which contained
asbestos. To the extent these third-party parts may have
contained asbestos, it 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, 2011, there were 103,678 open claims
against ITT filed in various state and federal courts alleging
injury as a result of exposure to asbestos. Activity related to
these asserted asbestos claims during the period was as follows:
| 2011(a) | ||||
|
Pending claims – 12/31
|
103,575 | |||
|
New claims
|
1,339 | |||
|
Settlements
|
(475 | ) | ||
|
Dismissals
|
(761 | ) | ||
|
Pending claims – 3/31
|
103,678 | |||
| (a) | In September 2010, ITT executed an amended cost-sharing agreement related to a business we disposed of a number of years ago. The amended agreement provides for a sharing of costs for claims resolved between 2010 and 2019 naming ITT or the entity which acquired the disposed business. Claim activity associated with the amended cost-sharing agreement for claims that were not filed against ITT are excluded from the table above. |
Frequently, plaintiffs are unable to identify any ITT or Goulds
product as a source of asbestos exposure. In addition, in a
large majority of the 103,678 pending claims against the
Company, the plaintiffs are unable to demonstrate any injury.
Many of those claims have been placed on inactive dockets
(including 39,680 claims in Mississippi). Our experience to date
is that a substantial portion of resolved claims have been
dismissed without payment by the Company. As a result,
management believes that a large majority of the 103,678 open
claims has little or no settlement value.
15
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ITT CORPORATION AND
SUBSIDIARIES
In the third quarter each year, we conduct a detailed study with
the assistance of outside consultants to review and update, as
appropriate, the underlying assumptions used to estimate our
asbestos liability and related assets. Additionally, we
periodically reassess the time horizon over which a reasonable
estimate of unasserted claims can be projected. As part of our
ongoing review of our net asbestos exposure, each quarter we
assess the most recent data available for the key inputs and
assumptions, comparing the data to the expectations on which the
most recent annual liability and asset estimates were based.
Results of
Operations
The table provided below summarizes the net asbestos charge for
the quarters ended March 31, 2011 and 2010.
| 2011 | 2010 | |||||||||||||||
| Pre-tax | After-tax | Pre-tax | After-tax | |||||||||||||
|
Continuing operations
|
$ | 16 | $ | 10 | $ | 15 | $ | 10 | ||||||||
|
Discontinued operations
|
3 | 2 | 1 | 1 | ||||||||||||
|
Total
|
$ | 19 | $ | 12 | $ | 16 | $ | 11 | ||||||||
Changes in
Financial Position
The Company’s estimated asbestos exposure, net of expected
recoveries from insurers and other responsible parties, for the
resolution of all pending and unasserted asbestos claims
estimated to be filed in the next 10 years was $653 and
$641 as of March 31, 2011 and December 31, 2010,
respectively. The following table provides a rollforward of the
estimated total asbestos liability and related assets for the
quarter ended March 31, 2011.
| Liability | Asset | Net | |||||||||||
|
Balance as of 12/31
|
$ | 1,676 | $ | 1,035 | $ | 641 | |||||||
|
Changes in estimate during the period:
|
|||||||||||||
|
Continuing operations
|
21 | 5 | 16 | ||||||||||
|
Discontinued operations
|
7 | 4 | 3 | ||||||||||
|
Net cash activity
|
(15 | ) | (8 | ) | (7 | ) | |||||||
|
Balance as of 3/31
|
$ | 1,689 | $ | 1,036 | $ | 653 | |||||||
The total asbestos liability and related assets as of
March 31, 2011 and December 31, 2010 include $117
presented within accrued liabilities and $105 presented within
other current assets on our Consolidated Condensed Balance
Sheets, respectively.
The asbestos liability and related receivables are based upon
current, known information. However, future events affecting the
key factors and other variables for either the asbestos
liability or related receivables could cause the actual costs
and recoveries to be materially higher or lower than currently
estimated. Due to these uncertainties, as well as our inability
to reasonably estimate any additional asbestos liability for
claims which may be filed beyond the next 10 years, it is
not possible to predict the ultimate outcome of the cost of
resolving the pending and all unasserted asbestos claims. We
believe it is possible that future events affecting the key
factors and other variables within the next 10 years, as
well as the cost of asbestos claims filed beyond the next
10 years, net of expected recoveries, could have a material
adverse effect on our financial position, results of operations
or cash flows.
16
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ITT CORPORATION AND
SUBSIDIARIES
Other
Matters
The Company is involved in coverage litigation with various
insurers seeking recovery of costs incurred in connection with
certain environmental and product liabilities. In a suit filed
in 1991, ITT Corporation, et al. v. Pacific Indemnity
Corporation et al, Sup. Ct., Los Angeles County, we are seeking
recovery of costs related to environmental losses. Discovery,
procedural matters, changes in California law, and various
appeals have prolonged this case. For several years, the case
was on appeal before the California Court of Appeals from a
decision by the California Superior Court dismissing certain
claims made by ITT. The case is now before the Superior Court.
We have effectuated several settlements with insurers and a
hearing is scheduled for May 2011 on an insurers duty to
defend ITT in several environmental matters.
On February 13, 2003, we commenced an action, Cannon
Electric, Inc. v. Affiliated FM Ins. Co., Sup. Ct., Los
Angeles County, seeking recovery of costs related to asbestos
product liability losses described above. During this coverage
litigation, we entered into
coverage-in-place
settlement agreements with ACE, Wausau and Utica Mutual dated
April 2004, September 2004, and February 2007, respectively.
These agreements provide specific coverage for the
Company’s legacy asbestos liabilities. A trial on several
insurers coverage obligations for Goulds Pumps, Inc., is
scheduled for August 2011. We continue to negotiate coverage in
place agreements with other insurers. Where those negotiations
are not productive, we will request that a trial be scheduled.
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. We were assessed a
total of $50 in fines, forfeitures and penalties. 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. We were also assessed a deferred
prosecution monetary penalty of $50 which is being reduced for
monies spent, during the five-year period following the date of
the Plea Agreement, to accelerate and further the development
and fielding of advanced night vision technology. On
April 12, 2011, the Department of Justice dismissed the
deferred third count of the Deferred Prosecution Agreement. This
dismissal terminates any further obligation of the Company under
the Deferred Prosecution Agreement with the exception of our
obligation to pay $50 as identified above. Management believes
that this matter will not have a material adverse effect on our
consolidated financial position, results of operations or cash
flows.
NOTE 18
SEGMENT INFORMATION
SEGMENT INFORMATION
The Company’s segments are reported on the same basis used
internally for evaluating performance and for allocating
resources. Our three reportable segments are referred to as:
Defense & Information Solutions (Defense segment),
Fluid Technology (Fluid segment), and Motion & Flow
Control (Motion & Flow segment). Corporate and Other
consists of corporate office expenses including compensation,
benefits, occupancy, depreciation, and other administrative
costs, as well as charges related to certain matters, such as
the planned spinoff transaction, asbestos and environmental
matters, that are managed at a corporate level and are not
included in the business segments in evaluating performance or
allocating resources. Assets of the business segments exclude
general corporate assets, which principally consist of cash,
deferred tax assets, insurance receivables, certain property,
plant and equipment, and certain other assets.
Defense – The businesses in this segment are
those that directly serve the military and government agencies
with products and services. Products include tactical
communications equipment, electronic warfare and force
protection equipment, radar systems, integrated structures
equipment and imaging and sensor equipment, which include night
vision goggles, as well as weather, location, surveillance and
other related technologies. Services include air traffic
management, information and cyber solutions, large-scale systems
engineering and integration and defense technologies. The
U.S. Government accounted for approximately 88% of Defense
segment revenue during the first quarters of 2011 and 2010.
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ITT CORPORATION AND
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Fluid – Our Fluid segment is a provider of
water transport and wastewater treatment systems, pumps and
related technologies, and other water and fluid control products
with residential, commercial, and industrial applications.
Motion & Flow – Our
Motion & Flow segment comprises a group of businesses
providing products and services for the areas of transportation,
defense, aerospace, industrial, computer, telecommunications,
medical, marine, and food & beverage. The
Motion & Flow businesses primarily serve the high-end
of their markets, with highly engineered products, high brand
recognition, a focus on new product development and operational
excellence.
|
Product |
Service |
Total |
Product |
Service |
Total |
||||||||||||||||||||
| Revenue | Revenue | Revenue | Revenue | Revenue | Revenue | ||||||||||||||||||||
| Three Months Ended March 31 | 2011 | 2010 | |||||||||||||||||||||||
|
Defense
|
$ | 683 | $ | 658 | $ | 1,341 | $ | 801 | $ | 592 | $ | 1,393 | |||||||||||||
|
Fluid
|
945 | 47 | 992 | 768 | 31 | 799 | |||||||||||||||||||
|
Motion & Flow
|
428 | 2 | 430 | 386 | 2 | 388 | |||||||||||||||||||
|
Eliminations
|
(3 | ) | — | (3 | ) | (2 | ) | — | (2 | ) | |||||||||||||||
|
Total
|
$ | 2,053 | $ | 707 | $ | 2,760 | $ | 1,953 | $ | 625 | $ | 2,578 | |||||||||||||
| Operating Income | Operating Margin | |||||||||||||||
| Three Months Ended March 31 | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Defense
|
$ | 137 | $ | 141 | 10.2 | % | 10.1 | % | ||||||||
|
Fluid
|
124 | 91 | 12.5 | % | 11.4 | % | ||||||||||
|
Motion & Flow
|
65 | 55 | 15.1 | % | 14.2 | % | ||||||||||
|
Corporate and Other
|
(138 | ) | (42 | ) | — | — | ||||||||||
|
Total
|
$ | 188 | $ | 245 | 6.8 | % | 9.5 | % | ||||||||
|
Plant, Property & |
Capital |
Depreciation & |
||||||||||||||||||||||||||||||
| Total Assets | Equipment, Net | Expenditures | Amortization | |||||||||||||||||||||||||||||
| Three Months Ended March 31 | 2011 | 2010(a) | 2011 | 2010(a) | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
Defense
|
$ | 4,239 | $ | 4,149 | $ | 426 | $ | 434 | $ | 12 | $ | 29 | $ | 33 | $ | 33 | ||||||||||||||||
|
Fluid
|
4,339 | 4,055 | 521 | 518 | 21 | 11 | 34 | 20 | ||||||||||||||||||||||||
|
Motion & Flow
|
1,438 | 1,372 | 237 | 230 | 9 | 9 | 14 | 13 | ||||||||||||||||||||||||
|
Corporate and Other
|
2,710 | 2,862 | 23 | 23 | 5 | 3 | 3 | 2 | ||||||||||||||||||||||||
|
Total
|
$ | 12,726 | $ | 12,438 | $ | 1,207 | $ | 1,205 | $ | 47 | $ | 52 | $ | 84 | $ | 68 | ||||||||||||||||
| (a) | Amounts reflect balances as of December 31, 2010. |
The operations from one of our subsidiaries reported within the
Fluid segment as of December 31, 2010 were reclassified
during the first quarter of 2011 and are now reported within the
Motion & Flow segment. Prior periods presented in the
tables above have been retrospectively adjusted to reflect this
change.
18
Table of Contents
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
(In millions,
except per share amounts, unless otherwise stated)
OVERVIEW
ITT Corporation (references herein to “ITT,” “the
Company,” and such words as “we,” “us,”
and “our” include ITT Corporation and its
subsidiaries) is a global multi-industry high-technology
engineering and manufacturing organization. We generate revenue
through the design, manufacture, and sale of a wide range of
products that are engineered to deliver extraordinary solutions
to meet life’s most essential needs — more
livable environments, better protection and safety, and
breakthrough communications that connect our world. Our products
and services provide solutions in the following vital markets:
global defense and security, water and fluids management, and
motion and flow control. Our portfolio includes three core
businesses focused on making a difference in our communities and
the world. From climate change and water scarcity to population
growth, infrastructure modernization, critical communications
and security concerns, ITT is prepared to play a continuing role
in developing sustainable solutions to pressing global problems.
Our business is reported in three segments: Defense &
Information Solutions (Defense segment), Fluid Technology (Fluid
segment), and Motion & Flow Control
(Motion & Flow segment). Our Defense segment is a
major U.S. aerospace and defense contractor delivering
advanced systems and providing technical and operational
services. Our Fluid segment is a leading supplier of pumps and
systems to transport and control water and other fluids. Our
Motion and Flow segment is a manufacturer of highly engineered
critical components, such as brake friction materials,
electrical connectors and switch applications, used in multiple
growth markets.
On January 12, 2011, the Company announced that its Board
of Directors had unanimously approved a plan to separate the
Company’s businesses into three independent, publicly
traded companies (the Transformation). Under the Transformation
plan, ITT would execute tax-free spinoffs to shareholders of its
water-related businesses and its Defense segment. Following
completion of the Transformation, ITT will continue to trade on
the New York Stock Exchange as an industrial company that
supplies highly engineered solutions in the aerospace,
transportation, energy and industrial markets. Following the
completion of the Transformation, ITT shareholders will own
shares in all three corporations. The transaction is anticipated
to be completed by the end of 2011.
Executive
Summary
ITT reported revenue of $2.8 billion for the quarter ended
March 31, 2011, an increase of 7.1% from $2.6 billion
reported in 2010. Benefits from businesses acquired in 2010 and
strengthening commercial markets drove revenue growth and
exceeded declines from certain programs that support the
U.S. Government Armed Services. Operating income for the
first quarter of 2011 was $188, representing a $57 or 23.3%
decline from the prior year, and reflected $85 of costs incurred
associated with the planned spinoff
transaction. Income generated from continuing operations during
the first quarter was $126 and $144, or $0.67 and $0.78 per
diluted share for 2011 and 2010, respectively.
Adjusted income from continuing operations was $182 for the
first quarter of 2011, reflecting an increase of $28, or 18.2%,
over the prior year adjusted amount. Our adjusted income from
continuing operations for the first quarter of 2011 translated
into $0.98 per diluted share as compared to $0.83 per diluted
share from the first quarter of 2010. See the “Key
Performance Indicators and Non-GAAP Measures,” section
included within Management’s Discussion and Analysis for a
reconciliation of the adjusted non-GAAP measures.
19
Table of Contents
Additional highlights for the first quarter of 2011 include the
following:
| n | Significant efforts were undertaken in connection with ITT’s previously announced Transformation, targeted for completion during the fourth quarter of 2011. Costs incurred in connection with these efforts amounted to $85, including a $55 non-cash impairment charge and $30 in advisory and other costs. | |
| n | Organic revenue increased 2.0% reflecting growth of 10.6% from the Motion & Flow segment and 8.4% from the Fluid segment, partially offset by a 4.0% decline from the Defense segment. | |
| n | Orders in excess of $3 billion were received during the quarter, representing double-digit order growth at all segments and a 25.6% total increase over the prior year; potentially signifying an early stage of recovery for late-cycle businesses. | |
| n | Results from our 2010 strategic acquisitions exceeded expectations with revenue of $115 and operating income of $19. |
Further details related to these results are contained in the
Results of Operations section.
2011
Outlook
Total revenue outlook for the full year of 2011 is projected to
be $11.3 billion, representing a reduction from the
previous outlook provided in the 2010 Annual Report due to
uncertainly in the U.S. defense market, which is
anticipated to be partially offset by revenue increases across
the commercial businesses.
Defense segment revenue is projected to be approximately $5.4 to
$5.6, representing a 6.7% decline to the mid-point of the range,
in part due to persistently difficult budget conditions caused
by the U.S. Congress’ Continuing Resolution. Operating
margin for the Defense segment is projected to be approximately
12%. Fluid segment revenue is projected to grow approximately
15%, with organic revenue forecasted to grow 5.5%. Fluid segment
operating margin is projected to be approximately 14%.
Motion & Flow segment revenue is projected to grow
approximately 10% and organic revenue growth for the business is
projected at approximately 6.5%. Operating margin for the
Motion & Flow segment is projected to be approximately
16%.
Our 2011 full-year adjusted earnings per share is projected to
be in a range of $4.70 to $4.82, with the benefits from the
anticipated strong operating performance of our commercial
businesses, expected to outweigh the impact from the various
Defense segment challenges.
To execute the Transformation, we expect major areas of spending
to include debt refinancing, tax impacts, information technology
investments to build out independent environments for the new
companies, advisory fees, and other Transformation activities.
Our current estimate of the after-tax cash impact of pre-spin
activities associated with the Transformation, including those
initiated during the first quarter, is expected to be
approximately $500. In addition, we recorded a $55 non-cash
impairment charge in the first quarter related to information
system initiatives that were discontinued as a result of the
Transformation. The Company may incur additional costs that are
not currently estimable prior to completion of the
Transformation.
In addition, the Company anticipates incurring material
separation-related spending following the Transformation,
primarily consisting of additional tax impacts, employee-related
costs, continued information systems investments, and advisory
fees.
Known Trends
and Uncertainties
There has been no material change in the information concerning
known trends and uncertainties as disclosed in our 2010 Annual
Report on
Form 10-K
(2010 Annual Report).
Key
Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue,
segment operating income and margins, earnings per share, orders
growth, and backlog, among others. In addition, we consider
certain measures to be useful to management and
20
Table of Contents
investors evaluating our operating performance for the periods
presented, and provide a tool for evaluating our ongoing
operations, liquidity and management of assets. This information
can assist investors in assessing our financial performance and
measures our ability to generate capital for deployment among
competing strategic alternatives and initiatives, including, but
not limited to, dividends, acquisitions, share repurchases and
debt repayment. These metrics, however, are not measures of
financial performance under accounting principles generally
accepted in the United States of America (GAAP) and should not
be considered a substitute for revenue, operating income, income
from continuing operations, income from continuing operations
per diluted share or net cash from continuing operations as
determined in accordance with GAAP. We consider the following
non-GAAP measures, which may not be comparable to similarly
titled measures reported by other companies, to be key
performance indicators:
| n | “organic revenue” and “organic orders,” defined as revenue and orders, respectively, excluding the impact of foreign currency fluctuations and contributions from acquisitions and divestitures. Divestitures include sales of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreign currency fluctuations assumes no change in exchange rates from the prior period. | |
| n | “adjusted income from continuing operations” and “adjusted income from continuing operations per diluted share” defined as income from continuing operations and income from continuing operations per diluted share, adjusted to exclude items that may include, but are not limited to, unusual and infrequent non-operating items, transformation costs and non-operating tax settlements or adjustments related to prior periods. Special items represent significant charges or credits that impact current results, but may not be related to the Company’s ongoing operations and performance. The following table provides a reconciliation of adjusted income from continuing operations, including adjusted earnings per diluted share, for the quarters ended March 31, 2011 and 2010. |
| 2011 | 2010 | |||||||
|
Income from continuing operations
|
$ | 126 | $ | 144 | ||||
|
Transformation costs, net of tax
|
62 | — | ||||||
|
Tax-related special
items(a)
|
(6 | ) | 10 | |||||
|
Adjusted income from continuing operations
|
$ | 182 | $ | 154 | ||||
|
Income from continuing operations per diluted share
|
$ | 0.67 | $ | 0.78 | ||||
|
Adjusted income from continuing operations per diluted share
|
$ | 0.98 | $ | 0.83 | ||||
| (a) | The 2011 tax-related special items include $6 recorded to recognize tax credits associated with our operations in Poland. The 2010 tax-related special items primarily include a reduction of deferred tax assets associated with the U.S. Patient Protection and Affordable Care Act (the Healthcare Reform Act). See Note 6, “Income Taxes,” in the Notes to our Consolidated Condensed Financial Statements for further information. |
| n | “free cash flow” defined as net cash provided by operating activities, as reported in the Statement of Cash Flows, less capital expenditures and other significant items that impact current results which management believes are not related to our ongoing operations and performance. Our definition of free cash flow does not consider certain non-discretionary cash payments, such as debt and interest payments. The following table provides a reconciliation of free cash flow for the quarters ended March 31, 2011 and 2010. |
| 2011 | 2010 | |||||||
|
Net cash provided by operating activities
|
$ | 20 | $ | 67 | ||||
|
Capital expenditures
|
(47 | ) | (52 | ) | ||||
|
Transformation cash payments
|
15 | — | ||||||
|
Free cash flow
|
$ | (12 | ) | $ | 15 | |||
21
Table of Contents
DISCUSSION OF
FINANCIAL RESULTS
Quarter Ended March 31
Quarter Ended March 31
| 2011 | 2010 | Change | ||||||||
|
Revenue
|
$ | 2,760 | $ | 2,578 | 7.1% | |||||
|
Gross profit
|
785 | 718 | 9.3% | |||||||
|
Gross margin
|
28.4 | % | 27.9 | % | 50bp | |||||
|
Operating expenses
|
597 | 473 | 26.2% | |||||||
|
Expense to revenue ratio
|
21.6 | % | 18.3 | % | 330bp | |||||
|
Operating income
|
188 | 245 | (23.3)% | |||||||
|
Operating margin
|
6.8 | % | 9.5 | % | (270)bp | |||||
|
Interest and non-operating expenses, net
|
17 | 26 | (34.6)% | |||||||
|
Income tax expense
|
45 | 75 | (40.0)% | |||||||
|
Effective tax rate
|
26.3 | % | 34.2 | % | 790bp | |||||
|
Income from continuing operations
|
126 | 144 | 12.5% | |||||||
REVENUE
Revenue for the first quarter 2011 increased $182 or 7.1%,
primarily driven by growth from our acquisitions of Nova in
March of 2010 and Godwin in August of 2010, as well as strength
across the majority of our commercial businesses. The Fluid and
Motion & Flow segment in total delivered approximately
19% growth within emerging markets. In addition, both segments
benefited from positive results within most major end-markets,
including public utilities and commercial building services,
among others. Overall revenue growth was partially offset by the
expected Defense segment reductions related to the single
channel ground and airborne radio systems (SINCGARS) and jammer
equipment, including Counter RCIED Electronic Warfare (CREW
2.1). The following table illustrates the impact from organic
growth, recent acquisitions, and fluctuations in foreign
currency, in relation to consolidated revenue during the first
quarter of 2011.
| $ Change | % Change | |||||||
|
2010 Revenue
|
$ | 2,578 | ||||||
|
Organic growth
|
52 | 2.0 | % | |||||
|
Acquisitions
|
115 | 4.5 | % | |||||
|
Foreign currency translation
|
15 | 0.6 | % | |||||
|
Total change in revenue
|
182 | 7.1 | % | |||||
|
2011 Revenue
|
$ | 2,760 | ||||||
The following table illustrates the first quarter 2011 and 2010
revenue of our business segments. See below for further
discussion of
year-over-year
revenue activity at the segment level.
| 2011 | 2010 | Change | ||||||||||
|
Defense
|
$ | 1,341 | $ | 1,393 | (3.7 | )% | ||||||
|
Fluid
|
992 | 799 | 24.2 | % | ||||||||
|
Motion & Flow
|
430 | 388 | 10.8 | % | ||||||||
|
Eliminations
|
(3 | ) | (2 | ) | — | |||||||
|
Total
|
$ | 2,760 | $ | 2,578 | 7.1 | % | ||||||
22
Table of Contents
Defense &
Information Solutions
Revenue generated within our Defense segment reflects both
positive and negative results, as benefits from recent service
contract awards were more than offset by revenue declines from
surge-related equipment and program delays due to the
U.S. Government’s continuing resolution. Under the
continuing resolution, U.S. Government agencies, including
the Department of Defense are precluded from starting new
programmatic priorities or increasing production levels in
ongoing procurement programs, unless they receive specific
congressional authorization to reprogram funds.
The following table provides total revenue and
year-over-year
change by Defense segment division.
| 2011 | 2010 | Change | ||||||||||
|
Electronic Systems
|
$ | 392 | $ | 508 | (22.8 | )% | ||||||
|
Geospatial Systems
|
294 | 297 | (1.0 | )% | ||||||||
|
Information Systems
|
660 | 594 | 11.1 | % | ||||||||
|
Eliminations
|
(5 | ) | (6 | ) | — | |||||||
|
Defense segment revenue
|
$ | 1,341 | $ | 1,393 | (3.7 | )% | ||||||
Revenue from the Information Systems division, our service-based
business, increased 11.1% primarily due to receipt of
significant facilities operations maintenance and support
contracts during the second half of 2010. These contracts
include the support of U.S. Armed Services in Kuwait and
Afghanistan. The overall growth in service revenue was reduced
by a decline in software engineering services related to our
involvement in the Data & Analysis Center for Software
(DACS) program.
Revenue from the Electronic Systems division, a product-based
business, was significantly impacted by volume declines of CREW
2.1, special purpose jammers and domestic SINCGARS. The CREW 2.1
program has reached maturity and we do not expect significant
sales to occur under this program going forward. However, during
the first quarter of 2011 we received a significant award for
CREW 3.3, the next generation of CREW technology. The extent by
which CREW 3.3 will replace the CREW 2.1 program is an area of
uncertainty.
Revenue from the Geospatial Systems division declined 1.0%,
primarily due to lower space-based classified program activity
and a reduction in the sales volume of international night
vision, offset by growth in the commercial satellite and GPS
portions of our business.
Orders received during the first quarter of 2011 increased by
26.2% or $306 to $1,474 primarily due to the exercise of an
option year under the total army communications (TACS-WACAA)
agreement as well as additional orders from contract
modifications under the Kuwait Base Operations and Security
Support Services (K-BOSSS) agreement and the Army Prepositioned
Stock 5
(APS-5)
Kuwait agreement. The overall increase in orders from these
contracts was partially offset by a significant Integrated
Defensive Electronic Countermeasures (IDECM) award received
during the first quarter 2010, as well as funding delays on air
traffic management contracts and a decline in U.S. and
international SINCGARS.
Funded order backlog was $4.1 billion at March 31,
2011 and December 31, 2010. The level of order activity
related to programs within the Defense segment can be affected
by the timing of government funding authorizations and project
evaluation cycles.
Year-over-year
comparisons could, at times, be impacted by these factors, among
others.
23
Table of Contents
Fluid
Technology
The Fluid segment generated first quarter revenue of $992,
reflecting growth of $193 or 24.2%, including growth from
acquisitions of $112 or 14.0%. The benefit provided by Godwin, a
third quarter 2010 acquisition reported within the
Water & Wastewater division, exceeded our initial
expectations, driven by increasing dewatering demands in the oil
and gas markets. The following table provides total organic
revenue and
year-over-year
organic revenue growth by division, reconciling to total segment
revenue.
|
Organic |
||||||||||||
| 2011 | 2010 | Growth | ||||||||||
|
Water & Wastewater
|
$ | 428 | $ | 377 | 13.5 | % | ||||||
|
Residential & Commercial Water
|
293 | 267 | 9.7 | % | ||||||||
|
Industrial Process
|
166 | 172 | (3.5 | )% | ||||||||
|
Eliminations
|
(21 | ) | (17 | ) | — | |||||||
|
Fluid organic revenue
|
866 | 799 | 8.4 | % | ||||||||
|
Impact from acquisitions
|
112 | — | ||||||||||
|
Impact from foreign currency
|
14 | — | ||||||||||
|
Fluid segment revenue
|
$ | 992 | $ | 799 | ||||||||
Revenue from our Water & Wastewater division grew
46.2% in total, including $111 from 2010 acquisitions and $12
from foreign currency translation adjustments. Organic revenue
growth of 13.5% was mainly provided by treatment and transport
project activity in the public utilities market and stronger
global dewatering.
Revenue from our Residential & Commercial Water
division grew 10.1% in total, including minimal impacts from
foreign currency translation adjustments. Organic revenue growth
of 9.7% was provided by strength in all of our primary markets,
including commercial and residential building services, light
industry and agriculture/irrigation equipment from strong order
activity experienced in the fourth quarter of 2010.
Revenue from our Industrial Process division declined 2.3% in
total, as strength in the various industrial transport markets,
including chemical and pulp/paper for baseline equipment was
offset by strong prior year results in the transport project
business within the Europe, Middle East and Africa (EMEA) region.
Orders received during the first quarter of 2011 increased by
27.3% or $243 to $1,132, including growth of $120 from
acquisitions. The Industrial Process division generated order
growth of 22.2% due to improved project business tied to
emerging market growth and higher baseline business. The
Water & Wastewater division, which benefited from
acquisitions, generated organic order growth of 13.8%, primarily
due to public utilities transport and treatment equipment.
24
Table of Contents
Motion &
Flow Control
The Motion & Flow segment generated revenue of $430
during the first quarter of 2011, reflecting growth of 10.8%
over the prior year, driven by positive results at each
Motion & Flow segment division. The following table
provides total revenue and
year-over-year
change by Motion & Flow segment division.
| 2011 | 2010 | Change | ||||||||||
|
Motion Technologies
|
$ | 184 | $ | 169 | 8.9 | % | ||||||
|
Interconnect Solutions
|
108 | 98 | 10.2 | % | ||||||||
|
Control Technologies
|
78 | 66 | 18.2 | % | ||||||||
|
Flow Control
|
61 | 56 | 8.9 | % | ||||||||
|
Eliminations
|
(1 | ) | (1 | ) | — | |||||||
|
Motion & Flow segment revenue
|
$ | 430 | $ | 388 | 10.8 | % | ||||||
Revenue from our Motion Technologies division grew 8.9%, driven
by growing emerging market rail equipment activity and strong
aftermarket brake pad demand, as well as a growing share in the
automotive original equipment market, as compared to strong
first quarter 2010 results that benefited from a restocking of
automotive equipment driven by past European stimulus programs.
Revenue from our Interconnect Solutions division grew 10.2%,
driven primarily by market share gains in the aerospace market
and increasing demand for smart-phones that incorporate our
universal connector technology. Strong performance in emerging
markets within the oil and gas and rail markets also contributed
to
year-over-year
growth.
Revenue from our Control Technologies division grew 18.2%, led
by aerospace-related aftermarket products and the production of
high-speed luxury trains in China.
Revenue from our Flow Control division grew 8.9%, primarily
driven by growth of marine and general industrial-related
products.
GROSS
PROFIT
Gross profit for the first quarter 2011 was $785, representing a
$67 increase, or 9.3% from 2010, primarily driven by our 2010
acquisitions which contributed approximately $58. Total organic
revenue growth of $52 and net savings from cost reduction
initiatives were offset by an unfavorable change in Defense
segment product sales mix and increasing commodity costs. The
following table illustrates the first quarter 2011 and
2010 gross profit results of our segments, including gross
margin results.
| 2011 | 2010 | Change | ||||||||||
|
Defense
|
$ | 279 | $ | 307 | (9.1 | )% | ||||||
|
Fluid
|
372 | 287 | 29.6 | % | ||||||||
|
Motion & Flow
|
134 | 124 | 8.1 | % | ||||||||
|
Total gross profit
|
$ | 785 | $ | 718 | 9.3 | % | ||||||
|
Gross margin:
|
||||||||||||
|
Consolidated
|
28.4 | % | 27.9 | % | 50 | bp | ||||||
|
Defense
|
20.8 | % | 22.0 | % | (120 | )bp | ||||||
|
Fluid
|
37.5 | % | 35.9 | % | 160 | bp | ||||||
|
Motion & Flow
|
31.2 | % | 32.0 | % | (80 | )bp | ||||||
25
Table of Contents
OPERATING
EXPENSES
Operating expenses increased 26.2% during the first quarter of
2011 to $597, primarily attributable to costs of $85 recognized
related to the Transformation. The following table provides
further information by expense type, as well as a breakdown of
operating expense by segment.
| 2011 | 2010 | Change | ||||||||||
|
Selling, general and administrative expenses
|
$ | 430 | $ | 378 | 13.8 | % | ||||||
|
Research and development expenses
|
61 | 63 | (3.2 | )% | ||||||||
|
Transformation costs
|
85 | — | (a | ) | ||||||||
|
Asbestos-related costs, net
|
16 | 15 | 6.7 | % | ||||||||
|
Restructuring and asset impairment charges, net
|
5 | 17 | (70.6 | )% | ||||||||
|
Total operating expenses
|
$ | 597 | $ | 473 | 26.2 | % | ||||||
|
By Segment:
|
||||||||||||
|
Defense
|
$ | 142 | $ | 166 | (14.5 | )% | ||||||
|
Fluid
|
248 | 196 | 26.5 | % | ||||||||
|
Motion & Flow
|
69 | 69 | — | |||||||||
|
Corporate & Other
|
138 | 42 | 228.6 | % | ||||||||
| (a) | Not meaningful |
Selling,
General & Administrative Expenses
(SG&A)
SG&A expenses incurred within our Fluid segment increased
$50 or 28.9% during the first quarter of 2011, primarily
reflecting additional costs of $34 related to our newly acquired
Nova and Godwin business. SG&A expenses increased $16 or
4.2% excluding the impact of these businesses primarily due to
increased sales and marketing costs driven by the segment’s
increase in revenue.
SG&A expenses incurred within our Defense segment decreased
$7 or 5.7% during the first quarter of 2011, primarily due to a
reduction in intangible asset amortization expense and selling
costs.
SG&A expenses incurred within our Motion and Flow segment
were relatively flat.
Corporate and other SG&A expenses increased $10 or 34.8%
during the first quarter of 2011, primarily due additional
information technology costs of $6.
Research and
Development Expenses (R&D)
R&D spending was relatively flat
year-over-year.
R&D spending within our Defense segment decreased by $9 or
29.8% compared to 2010, related to the completion of certain
R&D projects for integrated electronic warfare systems and
other radio frequency technologies. R&D spending increased
within our Fluid segment by $5 or 29.3%, primarily due to our
2010 acquisition of Nova.
26
Table of Contents
Transformation
Costs
During the first quarter of 2011, we recognized expenses of $85
related to the planned Transformation. The components of
transformation costs incurred during the first quarter of 2011
are presented below.
|
Transformation Costs:
|
||||
|
Asset impairments
|
$ | 55 | ||
|
Advisory fees
|
22 | |||
|
Other costs
|
8 | |||
|
Total transformation costs
|
$ | 85 | ||
To execute the Transformation, we expect major areas of spending
to include debt refinancing, tax impacts, information technology
investments to build out independent environments for the new
companies, advisory fees, and other Transformation activities.
Our current estimate of the after-tax cash impact of pre-spin
activities associated with the Transformation, including those
initiated during the first quarter, is expected to be
approximately $500. In addition, we recorded a $55 non-cash
impairment charge in the first quarter related to information
system initiatives that were discontinued as a result of the
Transformation. The Company may incur additional costs that are
not currently estimable prior to completion of the
Transformation.
In addition, the Company anticipates incurring material
separation-related spending following the Transformation,
primarily consisting of additional tax impacts, employee-related
costs, continued information systems investments, and advisory
fees.
Asbestos-Related
Costs, Net
During the first quarter of 2011, we recognized net asbestos
related costs of $16, reflecting an increase of $1 over the same
period in the prior year. As part of our annual asbestos
measurement process, the underlying assumptions used to estimate
asbestos liabilities and potential recoveries are estimated
based on our experience since our last detailed review, the
appropriate reference period of years of experience used in
determining each assumption is reassessed, and our expectations
regarding future conditions are evaluated. The net
asbestos-related costs primarily reflect the recognition of
incremental asbestos liabilities and related asbestos assets to
maintain our rolling
10-year
projection of unasserted claims.
The net asbestos expense is primarily recorded within Corporate
and Other; however, an additional net asbestos expense of $3 is
associated with businesses that were disposed of a number of
years ago, and is reported within discontinued operations in our
Consolidated Condensed Financial Statements. See Note 17,
“Commitments and Contingencies,” in our Notes to the
Consolidated Condensed Financial Statements for further
information on our asbestos-related liabilities and assets.
Restructuring
and Asset Impairment Charges, Net
During the first quarter of 2011, we recognized net
restructuring charges of $5 associated with headcount reductions
within our Defense segment. During the first quarter 2010, we
recognized restructuring costs of $17 related to an initiative
to realign our Defense segment. This action was substantially
complete as of December 31, 2010. See Note 5,
“Restructuring and Asset Impairment Charges,” in the
Notes to the Consolidated Condensed Financial Statements for
additional information.
27
Table of Contents
OPERATING
INCOME
We generated operating income of $188 during 2011, a $57 or
23.3% decrease from the prior year, primarily reflecting costs
of $85 associated with the Transformation partially offset by
operational productivity. Operating margin decreased to 6.8% for
2011, a
year-over-year
decline of 270 basis points, including a 310 basis
point impact from spinoff-related costs. The following table
illustrates the 2011 and 2010 operating income results of our
segments, including operating margin results.
| 2011 | 2010 | Change | ||||||||||
|
Defense
|
$ | 137 | $ | 141 | (2.8 | )% | ||||||
|
Fluid
|
124 | 91 | 36.3 | % | ||||||||
|
Motion & Flow
|
65 | 55 | 18.2 | % | ||||||||
|
Segment operating income
|
326 | 287 | 13.6 | % | ||||||||
|
Corporate and Other
|
(138 | ) | (42 | ) | 228.6 | % | ||||||
|
Total operating income
|
$ | 188 | $ | 245 | (23.3 | )% | ||||||
|
Operating margin:
|
||||||||||||
|
Consolidated
|
6.8 | % | 9.5 | % | (270 | )bp | ||||||
|
Defense
|
10.2 | % | 10.1 | % | 10 | bp | ||||||
|
Fluid
|
12.5 | % | 11.4 | % | 110 | bp | ||||||
|
Motion & Flow
|
15.1 | % | 14.2 | % | 90 | bp | ||||||
Defense &
Information Solutions
Operating income at the Defense segment was $137 for the first
quarter of 2011, representing a $4 or 2.8% decline, as compared
to the same prior year period. Volume reductions combined with
unfavorable sales mix provided a net unfavorable impact of
approximately $63. These top-line drivers were partially offset
by an $8 reduction in 2011 restructuring costs, as well as by
$13 of incremental 2011 savings generated by the 2010 actions.
The Defense segment also benefited from incremental net savings
from various other cost reduction initiatives as well as lower
R&D and amortization expenses. The impacts from the items
mentioned above resulted in a relatively flat operating margin
of 10.2% for the first quarter of 2011.
Fluid
Technology
Operating income at the Fluid segment was $124 for the first
quarter of 2011, representing a $33 or 36.3% increase, as
compared to the same prior year period. Operational
productivity, including
year-over-year
revenue growth, as well as savings from restructuring actions
and other cost savings initiatives, such as Value-Based Six
Sigma and global strategic sourcing, were partially offset by
rising commodity and labor costs. These items combined to
provide approximately $23 of benefit to operating income and a
170 basis point improvement to operating margin.
Operating income was also favorably impacted by a $4 reduction
in 2011 restructuring costs, reflecting a 40 basis point
improvement to operating margin. Increased investment spending
of approximately $3 during 2011 resulted in a 30 basis
point decline to operating margin.
The 2010 acquisitions of Nova and Godwin provided benefits of
approximately $18 to operating income, and favorably impacted
operating margin by 40 basis points. In addition,
unfavorable foreign currency fluctuations and additional
postretirement benefit costs resulted in an approximate
110 basis point decline.
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Table of Contents
Motion &
Flow Control
Operating income at the Motion & Flow segment was $65
for the first quarter of 2011, representing a $10 or 18.2%
increase, as compared to the same prior year period. Operational
productivity, including
year-over-year
revenue growth, as well as savings from restructuring actions
and other cost savings initiatives, such as Value-Based Six
Sigma and global strategic sourcing were partially offset by
rising commodity and labor costs, provided approximately $10 of
benefit to operating income and a 90 basis point
improvement to operating margin.
Corporate and
Other
Corporate expenses of $138 incurred during the first quarter of
2011, increased $96 or 228.6%, as compared to the same prior
year period, primarily attributable to $85 of costs incurred in
connection with the Transformation. The increase in corporate
expenses was also impacted by an increase in costs incurred in
connection with an information technology initiative, the
development of which was discontinued during the first quarter
of 2011.
INTEREST AND
NON-OPERATING EXPENSES, NET
| 2011 | 2010 | Change | ||||||||||
|
Interest expense
|
$ | 27 | $ | 25 | 0.8 | % | ||||||
|
Interest income
|
3 | 3 | — | |||||||||
|
Miscellaneous (income) expense, net
|
(7 | ) | 4 | (275.0 | )% | |||||||
|
Total interest and non-operating expenses, net
|
$ | 17 | $ | 26 | (34.6 | )% | ||||||
Interest expense increased by $2 during the first quarter of
2011, as reduced interest and amortization on long-term debt
instruments was offset by tax-related interest and additional
bank commitment fees. The fluctuation in net miscellaneous
income/expense is due to a $9 gain from the sale of securities.
INCOME TAX
EXPENSE
For the quarter ended March 31, 2011 we recorded an income
tax expense of $45, compared to $75 for the comparable prior
year period, reflecting an effective tax rate of 26.3% and
34.2%, respectively. The decrease in income tax expense was
primarily attributable to a tax benefit of $23 from
separation-related costs related to the planned Transformation.
The effective tax rate for the first quarter of 2010 was
unfavorably impacted by a discrete income tax charge of $12
associated with the ratification of the U.S. Patient
Protection and Affordable Care Act (the Healthcare Reform Act).
Effective January 1, 2013, the Healthcare Reform Act
eliminates the tax deduction for benefits related to subsidies
received for prescription drug benefits provided under retiree
healthcare benefit plans that were determined to be actuarially
equivalent to Medicare Part D.
INCOME (LOSS)
FROM DISCONTINUED OPERATIONS, NET OF TAX
Loss from discontinued operations, net of tax, of $2 during the
first quarter of 2011, reflects asbestos-related expense
associated with a business we disposed of a number of years ago.
Income from discontinued operations, net of tax, of $2 during
the first quarter of 2010 primarily reflects the results of CAS,
Inc., a component of our Defense segment, sold on
September 8, 2010.
29
Table of Contents
LIQUIDITY
Funding and
Liquidity Strategy
Our funding needs are monitored and strategies are executed to
meet overall liquidity requirements, including the management of
our capital structure on both a short- and long-term basis. We
believe that cash flows from operations and our access to the
commercial paper market are sufficient to meet our short-term
funding requirements. If our access to the commercial paper
market were adversely affected, we believe that alternative
sources of liquidity, including our existing committed credit
facility and access to the public debt market, would be
sufficient to meet our short-term funding requirements.
Our cash is predominantly held by our foreign subsidiaries in
currencies where we have operations. We manage our worldwide
cash requirements considering available funds among the many
subsidiaries through which we conduct business and the cost
effectiveness with which those funds can be accessed. We
continue to look for opportunities to access cash balances in
excess of local operating requirements to meet global liquidity
needs in a cost-efficient manner. We have and may continue to
transfer cash from certain international subsidiaries to the
U.S. and other international subsidiaries when it is cost
effective to do so. If these funds are needed for our operations
in the U.S., we would be required to accrue and pay
U.S. taxes to repatriate these funds. However, our intent
is to indefinitely reinvest these funds outside of the
U.S. and our current plans do not demonstrate a need to
repatriate them to fund our U.S. operations.
Significant factors that affect our overall management of
liquidity include our credit ratings, the adequacy of commercial
paper and supporting bank lines of credit, and the ability to
attract long-term capital on satisfactory terms. We assess these
factors along with current market conditions on a continuous
basis, and as a result, may alter the mix of our short- and
long-term financing, when it is advantageous to do so.
We access the commercial paper market to supplement the cash
flows generated internally to provide additional short-term
funding for strategic investments and other non-recurring
funding requirements. We manage our short-term liquidity through
the use of our commercial paper program by adjusting the level
of commercial paper borrowings as opportunities to deploy
additional capital arise, it is cost effective to do so and a
sufficient return on investment can be generated.
Our credit ratings as of March 31, 2011 are as follows:
|
Short- |
Long- |
|||
|
Term |
Term |
|||
| Rating Agency | Ratings | Ratings | ||
|
Standard & Poor’s
|
A–2 | BBB+ | ||
|
Moody’s Investors Service
|
P–2 | Baa1 | ||
|
Fitch Ratings
|
F2 | A− | ||
Subsequent to our January 2011 announced plan to separate ITT
into three publicly traded entities, our short-and long-term
credit ratings were modified as follows:
| n | Standard & Poor’s — “CreditWatch Negative” | |
| n | Moody’s Investor Service — “Under review for possible downgrade” | |
| n | Fitch Ratings — “Ratings Watch Evolving” |
30
Table of Contents
Sources and
Uses of Liquidity
Our principal source of liquidity is our cash flow generated
from operating activities, which provides us with the ability to
meet the majority of our short-term funding requirements. The
following table summarizes net cash provided by or used in
operating, investing and financing activities for the three
months ended March 31.
| 2011 | 2010 | |||||||
|
Operating Activities
|
$ | 20 | $ | 67 | ||||
|
Investing Activities
|
(32 | ) | (441 | ) | ||||
|
Financing Activities
|
8 | 76 | ||||||
|
Foreign Exchange
|
46 | (48 | ) | |||||
|
Total net cash flow from continuing operations
|
$ | 42 | $ | (346 | ) | |||
Net cash provided by operating activities was $20 for the first
quarter of 2011, representing a decrease of $47 from the
comparable prior year period. The favorable segment operating
income results during the first quarter of 2011 drove positive
cash generation growth that was offset by an unfavorable change
in working capital balances due to additional inventory
purchases within the Fluid and Defense segments and an increase
in accounts receivable from the U.S. Government. The
increase in Fluid segment inventory primarily relates to second
quarter 2011 sales growth expectations. The increase in Defense
segment inventory primarily relates to the replenishment of
inventory levels for various programs. Cash provided by
operations during the quarter was also impacted by the $15 spent
in connection with the Transformation, additional contributions
of $9 to our postretirement benefit plans and a $7 increase in
asbestos payments, net of recoveries.
Net cash used in investing activities decreased by $409 in 2011
as compared to 2010, related to the purchase of Nova Analytics
in March 2010.
Net cash provided by financing activities decreased by $68 in
2011 as compared to 2010, primarily related to a reduction in
short-term borrowing, partially offset by additional cash inflow
of $23 related to proceeds from the exercise of employee stock
options.
Our average daily outstanding commercial paper balance for the
quarter ended March 2011 was $99 and the maximum outstanding
commercial paper balance during the quarter was $135. As of
March 31, 2011, we had $70 of outstanding commercial paper.
Funding of
Postretirement Plans
Funding requirements under IRS rules are a major consideration
in making contributions to our U.S. postretirement benefit
plans. With respect to U.S. qualified postretirement
benefit plans, we intend to contribute annually not less than
the minimum required by applicable law and regulations.
While the Company has significant discretion in making voluntary
contributions, the Employee Retirement Income Security Act of
1974, as amended by the Pension Protection Act of 2006 and
further amended by the Worker, Retiree, and Employer Recovery
Act of 2008 and applicable Internal Revenue Code regulations,
mandate minimum funding thresholds. Failure to satisfy the
minimum funding thresholds could result in restrictions on our
ability to amend the plan or make benefit payments. We currently
do not believe mandatory contributions will be required to our
U.S. Salaried Retirement Plan during 2011. However, we
contributed $11 to our other postretirement benefit plans and do
anticipate making further contributions in the range of $80 to
$100 during the remainder of 2011.
The funded status at the end of 2011 and future required
contributions will depend primarily on the actual return on
assets during the year and the discount rate used to measure the
benefit obligation at the end of the year. Depending on these
factors, and the resulting funded status of our pension plans,
the level of future statutory minimum contributions could be
material.
31
Table of Contents
CRITICAL
ACCOUNTING ESTIMATES
The preparation of ITT’s financial statements, in
conformity with accounting principles generally accepted in the
United States of America, requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities. ITT believes the most complex
and sensitive judgments, because of their significance to the
consolidated financial statements, result primarily from the
need to make estimates about the effects of matters that are
inherently uncertain. Management’s Discussion and Analysis
in the 2010 Annual Report describes the critical accounting
estimates used in preparation of the Consolidated Condensed
Financial Statements. Actual results in these areas could differ
from management’s estimates. There have been no significant
changes in ITT’s critical accounting estimates during the
first quarter of 2011.
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
Some of the information included herein includes forward-looking
statements intended to qualify for the safe harbor from
liability established by the Private Securities Litigation
Reform Act of 1995 (the Act). These forward-looking statements
include, but are not limited to, statements about the separation
of the Company into three independent publically-traded
companies, the terms and the effect of the separation, the
nature and impact of such a separation, capitalization of the
companies, future strategic plans and other statements that
describe our business strategy, outlook, objectives, plans,
intentions or goals, and any discussion of future operating or
financial performance. Whenever used, words such as
“anticipate,” “estimate,”
“expect,” “project,” “intend,”
“plan,” “believe,” “target” and
other terms of similar meaning are intended to identify such
forward-looking statements. Forward-looking statements are
uncertain and to some extent unpredictable, and involve known
and unknown risks, uncertainties and other important factors
that could cause actual results to differ materially from those
expressed in, or implied from, such forward-looking statements.
Factors that could cause results to differ materially from those
anticipated include, but are not limited to:
| n | Economic, political and social conditions in the countries in which we conduct our businesses; | |
| n | Changes in U.S. or international government defense budgets; | |
| n | Decline in consumer spending; | |
| n | Sales and revenue mix and pricing levels; | |
| n | Availability of adequate labor, commodities, supplies and raw materials; | |
| n | Interest and foreign currency exchange rate fluctuations and changes in local government regulations; | |
| n | Competition, industry capacity and production rates; | |
| n | Ability of third parties, including our commercial partners, counterparties, financial institutions and insurers, to comply with their commitments to us; | |
| n | Our ability to borrow or refinance our existing indebtedness and availability of liquidity sufficient to meet our needs; | |
| n | Changes in the value of goodwill or intangible assets; | |
| n | Our ability to achieve stated synergies or cost savings from acquisitions or divestitures; | |
| n | The number of personal injury claims filed against the company or the degree of liability; | |
| n | Uncertainties with respect to our estimation of asbestos liability exposures, third party recoveries and net cash flows; | |
| n | Our ability to affect restructuring and cost reduction programs and realize savings from such actions; | |
| n | Government regulations and compliance therewith, including compliance with and costs associated with new Dodd-Frank legislation; | |
| n | Changes in technology; | |
| n | Intellectual property matters; | |
| n | Governmental investigations; | |
| n | Potential future postretirement benefit plan contributions and other employment and pension matters; |
32
Table of Contents
| n | Contingencies related to actual or alleged environmental contamination, claims and concerns; | |
| n | Changes in generally accepted accounting principles; and | |
| n | Other factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and our other filings with the Securities and Exchange Commission. | |
| n | In addition, there are risks and uncertainties relating to the planned tax-free spinoffs of our Water and Defense businesses, including the timing and certainty of the completion of those transactions, whether those transactions will result in any tax liability, the operational and financial profile of ITT or any of its businesses after giving effect to the spinoff transactions and the ability of each business to operate as an independent entity. The guidance for full-year 2011 is based on the Company’s current structure and does not give effect to the separation of our water and defense businesses into newly independent public companies. |
We undertake no obligation to update any forward-looking
statements, whether as a result of new information, future
events or otherwise.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the information concerning
market risk as stated in our 2010 Annual Report.
ITEM 4. CONTROLS
AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer of the
Company have evaluated the effectiveness of our disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this report. Based on such evaluation, such officers have
concluded that, as of the end of the period covered by this
report the Company’s disclosure controls and procedures are
effective.
There have been no changes in our internal control over
financial reporting during the last fiscal quarter that have
materially affected or are reasonably likely to materially
affect the Company’s internal control over financial
reporting.
33
Table of Contents
PART II. OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
ITT Corporation and its subsidiaries from time to time are
involved in legal proceedings, the majority of which are
incidental to the operation of their businesses. Some of these
proceedings allege damages relating to personal injury claims,
environmental liabilities, intellectual property matters,
copyright infringement, employment and pension matters,
government contract issues and commercial or contractual
disputes, sometimes related to acquisitions or divestitures. See
information provided below and Note 17, “Commitments
and Contingencies,” in the Notes to Consolidated Condensed
Financial Statements for further information.
Asbestos
Proceedings
ITT, including its subsidiary Goulds Pumps, Inc. (Goulds), has
been joined as a defendant with numerous other companies in
product liability lawsuits alleging personal injury due to
asbestos exposure. These claims allege that certain of our
products sold prior to 1985 contained a part manufactured by a
third party (e.g., a gasket) which contained asbestos. To the
extent these third-party parts may have contained asbestos, it
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. Frequently, the
plaintiffs are unable to identify any ITT or Goulds product as a
source of asbestos exposure. In addition, in a large majority of
the claims against the Company, the plaintiffs are unable to
demonstrate any injury. Many of those claims have been placed on
inactive dockets. Our experience to date is that a substantial
portion of resolved claims have been dismissed without payment
by the Company.
We record a liability for pending asbestos claims and asbestos
claims estimated to be filed over the next 10 years. While
it is probable that we will incur additional costs for future
claims to be filed against the Company, a liability for
potential future claims beyond the next ten years is not
reasonably estimable due to a number of factors. As of
March 31, 2011, we recorded an undiscounted
asbestos-related liability for pending claims and unasserted
claims estimated to be filed over the next 10 years of
$1,689, including expected legal fees, and an associated asset
of $1,036, which represents estimated recoveries from insurers
and other responsible parties, resulting in a net asbestos
exposure of $653.
ITEM 1A. RISK
FACTORS
There has been no material change in the information concerning
risk factors as disclosed in our 2010 Annual Report.
34
Table of Contents
ITEM 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
TOTAL |
MAXIMUM |
|||||||
|
NUMBER |
DOLLAR |
|||||||
|
OF SHARES |
VALUE OF |
|||||||
|
PURCHASED AS |
SHARES THAT |
|||||||
|
PART OF |
MAY YET BE |
|||||||
|
TOTAL |
AVERAGE |
PUBLICLY |
PURCHASED |
|||||
|
NUMBER |
PRICE |
ANNOUNCED |
UNDER THE |
|||||
|
(IN MILLIONS) |
OF SHARES |
PAID |
PLANS OR |
PLANS OR |
||||
| PERIOD | PURCHASED | PER SHARE(1) | PROGRAMS(2) | PROGRAMS(2) | ||||
|
1/1/11 - 1/31/11
|
— | — | — | $ 569 | ||||
|
2/1/11 - 2/28/11
|
— | — | — | $ 569 | ||||
|
3/1/11 - 3/31/11
|
0.1 | $ 56.30 | — | $ 569 | ||||
| (1) | Average price paid per share is calculated on a settlement basis and excludes commission. | |
| (2) | On October 27, 2006, a three-year $1 billion share repurchase program was approved by our Board of Directors. On December 16, 2008, the provisions of the share repurchase program were modified by our Board of Directors to replace the original three-year term with an indefinite term. As of March 31, 2011, we had repurchased 7.1 million shares for $431, including commission fees, under the $1 billion share repurchase program. The program is consistent with our capital allocation process, which has centered on those investments necessary to grow our businesses organically and through acquisitions, while also providing cash returns to shareholders. Our strategy for cash flow utilization is to invest in our business, repay debt, pay dividends, execute strategic acquisitions, and repurchase common stock. |
ITEM 3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM 5. OTHER
INFORMATION
Mine Safety
Disclosure
Pursuant to the reporting requirements under
Section 1503(a) of the Dodd-Frank Act, the Company is
providing the following information: one facility owned and
operated by ITT Water and Wastewater Leopold, Inc. is regulated
by the Federal Mine Health and Safety Act (MSHA). This facility
is a coal processing facility located in Watsontown,
Pennsylvania. In December 2010, the Watsontown facility was
inspected by the MSHA and was issued a minor citation.
Corrective actions have been taken and this citation has been
terminated by the MSHA inspector.
ITEM 6. EXHIBITS
(a) See the Exhibit Index for a list of exhibits filed
herewith.
35
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ITT Corporation
(Registrant)
| By: |
/s/ Janice
M. Klettner
|
Janice M. Klettner
Vice President and Chief Accounting Officer
(Principal accounting officer)
May 2, 2011
36
Table of Contents
EXHIBIT INDEX
|
EXHIBIT |
||||||
| NUMBER | DESCRIPTION | LOCATION | ||||
| (10.01) | * | ITT Corporation Form of Non-Qualified Stock Option Agreement (Band A Employees) | Filed herewith. | |||
| (10.02) | * | ITT Corporation Form of Non-Qualified Stock Option Agreement (Non-Band A Employees) | Filed herewith. | |||
| (10.03) | * | ITT Corporation Form of Restricted Stock Award Agreement | Filed herewith. | |||
| (10.04) | * | ITT Corporation Form TSR Award Agreement | Filed herewith. | |||
| (31.1) | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||||
| (31.2) | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||||
| (32.1) | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference. | ||||
| (32.2) | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference. | ||||
| (101) | The following materials from ITT Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Condensed Income Statements, (ii) Consolidated Condensed Statements of Comprehensive Income, (iii) Consolidated Condensed Balance Sheets, (iv) Consolidated Condensed Statements of Cash Flows and (v) Notes to Consolidated Condensed Financial Statements | Submitted electronically with this report. | ||||
37