Table of Contents
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT
ANNUAL REPORT
| (Mark One) | ||
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2010 | ||
|
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
No. 1-5672
ITT
CORPORATION
| Incorporated in the State of Indiana |
13-5158950 (I.R.S. Employer Identification No.) |
1133 Westchester
Avenue, White Plains, NY 10604
(Principal Executive Office)
Telephone Number: (914) 641-2000
(Principal Executive Office)
Telephone Number: (914) 641-2000
Securities
registered pursuant to Section 12(b) of the Act, all of
which are registered on The New York Stock Exchange,
Inc.:
COMMON STOCK,
$1 PAR VALUE
Securities
registered pursuant to Section 12(g) of the Act:
None.
Indicate by check
mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check
mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 (or for such shorter period that the registrant
was required to file such reports), 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 corporate Website, 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 if disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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
Act). Yes o No þ
The aggregate market
value of the common stock of the registrant held by
non-affiliates of the registrant on June 30, 2010 was
approximately $8.3 billion.
As of
February 11, 2011, there were outstanding
183.7 million shares of common stock, $1 par value, of
the registrant.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the
Registrant’s Definitive Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to
Regulation 14A for its 2011 Annual Meeting of Shareholders
are incorporated by reference in Part II and Part III
of this
Form 10-K.
TABLE OF
CONTENTS
* Included
pursuant to Instruction 3 to Item 401(b) of
Regulation S-K.
Table of Contents
PART I
| ITEM 1. | DESCRIPTION OF BUSINESS |
(In millions,
except per share amounts, unless otherwise stated)
COMPANY
OVERVIEW
ITT Corporation,
with 2010 revenue of $11.0 billion, is a global
multi-industry high-technology engineering and manufacturing
organization, with approximately 40 thousand employees,
operations in more than 60 countries, and sales presence in more
than 125 countries. Unless the context otherwise indicates,
references herein to “ITT,” “the Company,”
and such words as “we,” “us,” and
“our” include ITT Corporation and its subsidiaries.
ITT Corporation was incorporated as ITT Industries, Inc. on
September 5, 1995 in the State of Indiana. On July 1,
2006, ITT Industries, Inc. changed its name to ITT Corporation.
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 three 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 Corporation is prepared to play a
continuing role in developing sustainable solutions to pressing
global problems.
Our business
comprises three principal business segments that are aligned
with the markets they serve: Defense & Information
Solutions (Defense segment), Fluid Technology (Fluid segment),
and Motion & Flow Control (Motion & Flow
segment). Our Defense segment is a major United States 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 for
multiple growth markets. The following chart depicts the 2010
revenue on a percentage basis generated by business segment.
See Note 21,
“Business Segment Information” in the Notes to
Consolidated Financial Statements for financial information
about segments and geographic areas.
Recent
Acquisitions and Divestitures
Over the past five
years, we have spent in excess of $3.4 billion acquiring
businesses that provide a strategic fit with businesses we
presently conduct. During this period we have acquired 25
businesses that have provided approximately $2 billion in
annual revenue at the time of acquisition. Our most significant
acquisition during the past five years was that of EDO
Corporation (EDO) in December 2007 for approximately
$1.8 billion. The acquisition of EDO provided additional
product offerings in the defense and security market and
approximately $1.1 billion in annual revenue. In 2010, we
completed the acquisitions of Nova Analytics Corporation (Nova)
and Godwin Pumps of America, Inc. and Godwin Holdings Limited
(collectively referred to as Godwin). Nova, a manufacturer of
premium quality laboratory, field, portable and on-line
analytical instruments used in water and wastewater,
environmental, medical, and food and beverage applications,
provides us with brands, technologies, distribution and
after-market content in the analytical instrumentation market.
Godwin is a supplier and servicer of automatic self-priming and
on-demand pumping solutions serving the global industrial,
construction, mining, municipal, oil and gas dewatering markets.
The addition of Godwin’s specialized products and skills
complements our Fluid segment’s broad submersible pump
portfolio and global sales and distribution network.
Over the past five
years we have received proceeds of approximately $800 from the
divestiture of ten businesses with combined annual revenue of
approximately $1.2 billion at the time of divestiture. The
most significant divestitures that occurred during the five-year
period were our CAS Inc. (CAS), Switches and Automotive Fluid
Handling Systems (FHS) businesses. On September 8, 2010 we
completed the sale of CAS for $237. CAS was a component of our
Defense segment engaging in systems engineering and technical
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assistance (SETA)
for the U.S. Government. On July 26, 2007, we
completed the sale of substantially all of our Switches
business, with the remaining portion of the business sold during
2008. The two-part sale generated aggregate proceeds of $228. On
February 26, 2006, we completed the sale of FHS, for $188.
The financial position and results of operations from these
businesses have been presented as discontinued operations.
2011 Announcement
of 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 distinct, publicly traded companies.
Following completion of the transaction, 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. Under the plan,
ITT shareholders will own shares in all three corporations
following the completion of the transaction. The transaction is
anticipated to be completed by the end of 2011.
Under the plan, ITT
would execute tax-free spinoffs to shareholders of its
water-related businesses and its Defense & Information
Solutions segment. The water-related business will include the
Water & Wastewater division and the
Residential & Commercial Water division as well as the
Flow Control division that is currently reported within the
Motion & Flow Control segment. The Industrial Process
division which is currently reported within the Fluid segment
will continue to operate as a division of ITT Corporation. The
following chart provides an overview of the planned company
transformation and estimated 2011 pro forma revenue, without
other adjustment.
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The balance of the
disclosures in this Annual Report on
Form 10-K
relate to the current operations of ITT, except as may be
specifically described otherwise.
Sales and
Distribution
We manage our
business and report our financial results based on our current
principal business segments mentioned above. Our customers are
organized by defense and commercial customer groups, and
distribution of our products occurs by direct
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sales to end
customers and indirectly through our channel partners. Our
channel partners include:
| • | Resellers that sell our products, frequently with their own value-added products or services, to targeted customer groups | |
| • | Distribution partners that supply our solutions to smaller resellers with which we do not have direct relationships | |
| • | Independent distributors that sell our products into specific geographies or customer segments in which we have little or no presence |
Our distribution mix
differs substantially by business and region. We believe that
customer buying patterns and different regional market
conditions necessitate sales, marketing and distribution efforts
to be tailored accordingly. We are focused on driving the depth
and breadth of our sales footprint in addition to efficiencies
and productivity gains in both the direct and indirect business.
Materials
Our business relies
on third-party suppliers, contract manufacturing and commodity
markets to secure raw materials, parts and components used in
our products. In some instances we depend on a single source of
supply, manufacturing or assembly or participate in commodity
markets that may be subject to a limited number of suppliers.
All of our
businesses require various raw materials, the availability and
prices of which may fluctuate. Although some cost increases may
be recovered through increased prices to customers, our
operating results are exposed to such fluctuations. We attempt
to control such costs through fixed-priced contracts with
suppliers and various other programs, such as our global
strategic sourcing initiative. There have been no raw materials
shortages that have had a material adverse impact on our
business as a whole.
For most of our
products, we have existing alternate sources of supply, or such
sources are readily available. We typically acquire materials
and components through a combination of blanket and scheduled
purchase orders to support our materials requirements for an
average of four to eight weeks, with the exception of some
specialty material. From time to time, we may experience price
volatility or supply constraints for materials that are not
available from multiple sources. Frequently, we are able to
obtain scarce components for somewhat higher prices on the open
market, which may have an impact on gross margin but does not
disrupt production. We also acquire certain inventory in
anticipation of supply constraints or enter into longer-term
pricing commitments with vendors to improve the priority, price
and availability of supply.
Manufacturing
Methods
We utilize two
primary methods of fulfilling demand for products:
build-to-order
and
engineer-to-order.
We employ
build-to-order
capabilities to maximize manufacturing and logistics
efficiencies by producing high volumes of basic product
configurations. Engineering products to order permits the
configuration of units to meet the customization requirements of
our customers. Our inventory management and distribution
practices in both
build-to-order
and
engineer-to-order
seek to minimize inventory holding periods by taking delivery of
the inventory and manufacturing immediately prior to the sale or
distribution of products to our customers.
Significant
Customers
The
U.S. Government is our only customer that accounts for
greater than 10% of consolidated revenue. The operations of our
Defense segment represent the substantial majority of our sales
to the U.S. Government. In total, the U.S. Government
represented 46%, 52% and 51% of our consolidated revenue results
during 2010, 2009 and 2008, respectively.
Research and
Development
Research and
development is a key element of ITT’s engineering culture
and is generally focused on the design and development of
products and solutions that anticipate customer needs and
emerging trends. Our businesses invest substantial resources for
research and development (R&D) activities. We anticipate
our investments in future R&D activities will be consistent
with recent spending levels to ensure a continuing flow of
innovative, high-quality products and maintain our competitive
position in the markets we serve. Such activities are conducted
in laboratory and engineering facilities at several of our major
manufacturing locations. During 2010, 2009 and 2008, we
recognized Company-funded R&D expenses of $253, $258, and
$236, respectively, within operating expenses.
We also conduct
R&D activities pursuant to contracts with the
U.S. Government, generally related to the design of systems
and equipment, as well as studies and experimentation to
accomplish specific technical objectives. The knowledge gained
from such R&D activities may be used in future production
activities, including follow-on contracts for full-scale
production of products based on the prototypes or models
developed during the R&D phase. Costs incurred in
connection with these activities are not included in the
Company-funded R&D amounts noted above. R&D costs
attributable to contracts with customers are recognized within
costs of revenue when the expense is incurred.
Intellectual
Property
We generally seek
patent protection for those inventions and improvements likely
to be incorporated into our products or where proprietary rights
will improve our competitive position. We believe
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that our patents and
applications are important for maintaining the competitive
differentiation of our products and improving our return on
research and development investments. While we own and control a
significant number of patents, trade secrets, confidential
information, trademarks, trade names, copyrights, and other
intellectual property rights which, in the aggregate, are of
material importance to our business, management believes that
our business, as a whole, as well as each of our core business
segments, is not materially dependent on any one intellectual
property right or related group of such rights.
Patents, patent
applications, and license agreements will expire or terminate
over time by operation of law, in accordance with their terms or
otherwise. As the portfolio of our patents, patent applications,
and license agreements has evolved over time, we do not expect
the expiration of any specific patent to have a material adverse
effect on our financial position, results of operations or cash
flows.
In addition to the
development of our patents, we are licensed to use certain
patents, technology, and other intellectual property rights
owned and controlled by others, and, similarly, the
U.S. Government
and/or other
entities may be licensed to use certain patents, technology, and
other intellectual property rights owned and controlled by us,
under U.S. Government contracts or otherwise when we
consider such licenses to be in our best interests.
Environmental
Matters
We are subject to
stringent environmental laws and regulations concerning air
emissions, water discharges and waste disposal. In the United
States, such environmental laws and regulations include the
Federal Clean Air Act, the Clean Water Act, the Resource,
Conservation and Recovery Act, and the Comprehensive
Environmental Response, Compensation and Liability Act.
Environmental requirements are significant factors affecting all
operations. We have established an internal program to assess
compliance with applicable environmental requirements for all of
our facilities. The program is designed to identify problems in
a timely manner, correct deficiencies and prevent future
noncompliance. Over the past several years, we have conducted
regular, thorough audits of our major operating facilities. As a
result, management believes that our companies are in
substantial compliance with current environmental regulations.
Management does not
believe, based on current circumstances, that we will incur
compliance costs pursuant to such regulations that will have a
material adverse effect on our financial position, results of
operations or cash flows. We closely monitor our environmental
responsibilities, together with trends in the environmental
laws. While environmental laws and regulations are subject to
change, the nature of such is inherently unpredictable and the
timing of potential changes is uncertain. However, the effect of
legislative or regulatory changes could be material to the
Company’s financial condition or results of operations. In
addition, we have purchased insurance protection against certain
unknown environmental risks.
Accruals for
environmental matters are recorded on a
site-by-site
basis when it is probable that a liability has been incurred and
the amount of the liability can be reasonably estimated, based
on current law and existing technologies. Our estimated
liability is reduced to reflect the anticipated participation of
other potentially responsible parties in those instances where
it is probable that such parties are legally responsible and
financially capable of paying their respective share of the
relevant costs. At December 31, 2010, we had accrued $139
related to environmental matters.
Available
Information, Internet Address and Internet Access to Current and
Periodic Reports
ITT’s website
address is www.itt.com. ITT makes available free of charge on or
through www.itt.com/ir our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (SEC).
Information contained on our website is not incorporated by
reference unless specifically stated herein. As noted, we file
the above reports electronically with the SEC, and they are
available on the SEC’s web site (www.sec.gov). In addition,
all reports filed by ITT with the SEC may be read and copied at
the SEC’s Public Reference Room located at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
OVERVIEW OF
BUSINESS SEGMENTS
Defense and
Information Solutions
Our Defense segment
is a major defense contractor and trusted provider of
mission-critical products and services that support the Armed
Services of the U.S. Government and its allies, as well as
manufacturer of highly-engineered innovative technologies to
meet the emerging requirements of U.S. government agencies
and commercial customers. Our products are designed to serve
needs around safety, security, intelligence and communication.
During 2010, we
executed a strategic realignment of the Defense segment to
better align with the emerging needs of its expanding global
customer base, which is increasingly integrated and
network-centric. The Defense segment was renamed ITT Defense and
Information Solutions and the previous organizational structure,
consisting of seven divisions, was consolidated into three
larger divisions. The realignment
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provided for better
product portfolio integration, encouraging a more coordinated
market approach while providing reductions in overhead costs.
The realigned Defense segment divisions are: Electronic Systems
(ES), Information Systems (IS), and Geospatial Systems (GS). The
following table illustrates the annual revenue for the Defense
segment and the percentage of revenue by segment division.
| 2010 | 2009 | 2008 | |||||||||||||
|
Defense segment revenue
|
$ | 5,897 | $ | 6,067 | $ | 6,064 | |||||||||
|
Percentage of revenue by division:
|
|||||||||||||||
|
Electronic Systems
|
41 | % | 43 | % | 46 | % | |||||||||
|
Information Systems
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39 | 38 | 36 | ||||||||||||
|
Geospatial Systems
|
20 | 19 | 18 | ||||||||||||
Customers
The principal
customer for our Defense segment is the U.S. Government,
specifically the U.S. Department of Defense (DoD). A
substantial portion of U.S. Government work is performed in
the United States under prime contracts and subcontracts, some
of which by statute are subject to profit limitations and all of
which are subject to termination by the U.S. Government,
although such terminations generally are rare. A portion of our
business is classified by the U.S. Government and cannot be
specifically described. The operating results of these
classified programs are included in our Consolidated Financial
Statements. The business risks associated with classified
programs, as a general matter, do not differ materially from
those of our other government programs and products.
We also serve as a
contractor and supplier for other U.S. government agencies,
including the intelligence community, National Aeronautics and
Space Administration (NASA), Federal Aviation Administration
(FAA), Department of Homeland Security, and several
first-responder agencies. In addition, we provide certain
products to international governments through direct channels
and the U.S. foreign military sales program. A smaller, but
growing portion of our business is with commercial customers.
The following table illustrates annual revenue for the Defense
segment, as well as the approximate percentage of revenue by
customer class.
| 2010 | 2009 | |||||||||
|
Percentage of revenue by customer class:
|
||||||||||
|
U.S. Government – DoD
|
73 | % | 77 | % | ||||||
|
U.S. Government – Other Agencies
|
13 | % | 11 | % | ||||||
|
International
governments(a)
|
10 | % | 9 | % | ||||||
|
Commercial
|
4 | % | 3 | % | ||||||
| (a) | Includes revenue derived through the U.S. Government’s foreign military sales program (FMS). The FMS program is the government-to-government method for selling U.S. defense equipment, services, and training. |
Defense Segment
Divisions
Electronic
Systems Division
(ES) –
This division develops tactical communications equipment,
electronic warfare and force protection equipment, radar systems
and integrated structures equipment, providing the
U.S. Armed Forces and its allies the ability to sense and
deny threats to manned and unmanned platforms, ships, submarines
and ground vehicles, and provides soldiers with secure and
reliable networked communications. The realigned ES division,
based in Clifton, New Jersey, consists of the businesses that
previously were included within the prior Electronic Systems and
Communication Systems divisions, as well as a portion of the
Intelligence & Information Warfare division. Further
details on the types of programs supported by the division
include:
| n | Communication systems equipment including Single Channel Ground and Airborne Radio (SINCGARS) equipment and Advanced Tactical Communications Systems (ATCS) as well as the development of Soldier Radio Waveform (SRW), the U.S. next generation capability to support network-centric operations. Other programs include SpearNet systems for the individual soldier, and fully programmable radio systems, including Soldier and Sensor Radios. | |
| n | Force protection equipment including electronic countermeasures, interference mitigation technology, secure voice, data link and command and control systems and products. Countermeasure technology include CREW 2.1 which is equipment designed to neutralize certain improvised explosive devices from detonating. | |
| n | Integrated electronic warfare systems, including Advanced Integrated Defensive Electronic Warfare Suite (AIDEWS) and Integrated Defensive Electronic Countermeasures (IDECM), allowing pilots and unmanned aerial vehicles to detect, deny, and evade battlefield threats. | |
| n | Integrated structures equipment related to the carriage and release of weapons from an aircraft and lightweight advanced fiber-reinforced composite products. | |
| n | Radar systems providing area surveillance and precision-approach control capabilities in fixed-site, transportable and mobile configurations including the integrated tactical Air Traffic Control System and the GCA-2000. |
Information
Systems Division
(IS) –
This division provides world-class integrated networked
solutions across a broad spectrum of customers including
military, intelligence, civil and commercial organizations. IS
provides advanced systems and technologies in the areas of air
traffic management, information and cyber solutions, large-scale
systems engineering and integration and defense technologies. We
provide the U.S. Government with both the advanced
technologies that will manage their data flow and the personnel
they need to run their sophisticated
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communications
centers and systems. The realigned IS division, based in
Herndon, Virginia, consists of the businesses that previously
were included within the prior Advanced Engineering &
Sciences and Systems divisions, as well as a portion of the
Intelligence & Information Warfare division. Further
details on the types of programs and services provided by the
division include:
| n | Providing systems integration, communications, engineering and technical support solutions ranging from strategic command and control and tactical warning and attack assessment, to testing, training and range evaluation. | |
| n | Providing total systems support solutions for combat equipment, tactical information systems and facilities management. | |
| n | Developing and deploying the Automatic Dependent Surveillance – Broadcast (ADS-B) system, a key component of the FAA’s program to modernize the nation’s air transportation system; | |
| n | Providing NASA’s Goddard Space Flight Center with telemetry, tracking and command services for near-Earth missions by supporting NASA’s Space and Near Earth Networks, which provide most of the communications and tracking services for a wide range of Earth-orbiting spacecraft, including the International Space Station, the space shuttle, the Hubble Space Telescope and the Earth Observing System satellites. | |
| n | Providing information sharing, protection and integration solutions for intelligence and military customers for enhanced situational clarity by building intelligent core environments that transform data into actionable knowledge – in real-time. |
Geospatial
Systems Division
(GS) –
This division develops sophisticated digital imaging and sensor
equipment systems that provide sight and situational awareness
at the space, airborne, ground and soldier levels. Imaging and
sensor equipment includes night vision goggles, as well as
weather, location, surveillance and other related technologies.
GS’s systems process and distribute information through
defined networks, such that battlefield command posts and
planning headquarters have the capabilities of viewing images
provided by
on-the-ground
troops. The realigned GS division, based in Rochester, New York,
consists of the businesses that previously were included within
the prior Space Systems and Night Vision divisions.
The GS division
serves a broad range of customers that include NASA, National
Oceanic and Atmospheric Administration (NOAA), U.S. Air
Force, U.S. Allied Military Forces and the U.S. Army.
The products and services provided encompass: night vision
goggles, sensor fused night vision goggles, monocular and weapon
sights for ground forces, and image intensifier tubes required
for all of these systems; satellite-based imaging payloads for
intelligence, surveillance and reconnaissance solutions;
high-resolution commercial imaging systems with earth and space
science applications, climate and environmental monitoring
sensors and systems, GPS navigation and software applications
designed for image and data processing and dissemination.
Order
Backlog
Funded order
backlog, which represents unfilled firm orders for which funding
has been authorized and appropriated by the customer, was
$4.1 billion at December 31, 2010 compared to
$5.1 billion at December 31, 2009. Certain defense
programs have contract periods in excess of one year, as such we
do not expect to fulfill all funded order backlog obligations
during 2011; however, we do expect to satisfy a substantial
portion. Unfunded order backlog, which represents unfunded firm
orders and potential options on multi-year contracts, excluding
protested awards and potential orders under indefinite
delivery/indefinite quantity (ID/IQ) contracts, was
approximately $7.4 billion at December 31, 2010 as
compared to approximately $4.9 billion at December 31,
2009. The level of order activity and related backlog associated
with programs within the Defense segment can be affected by
project evaluation cycles, the timing of government funding
authorizations, the general timing of the budget approval
process and non-linear sales fluctuations associated with
certain long-term production contracts.
Year-over-year
comparisons could, at times, be impacted by these factors, among
others.
U.S. Government
Regulatory Matters
We act as a prime
contractor or major subcontractor for numerous
U.S. Government programs. As a result, we are subject to
extensive regulations and requirements of the
U.S. Government agencies and entities which govern these
programs, including with respect to the award, administration
and performance of contracts under such programs. We are also
subject to certain unique business risks associated with
U.S. Government program funding and appropriations and
U.S. Government contracts, and with supplying
technologically advanced, cutting-edge defense-related products
and services to the U.S. Government.
U.S. Government
contracts generally are subject to the Federal Acquisition
Regulation (FAR), which sets forth policies, procedures and
requirements for the acquisition of goods and services by the
U.S. Government, agency-specific regulations that implement
or supplement FAR, such as the DoD’s Defense Federal
Acquisition Regulation Supplement (DFARS) and other
applicable laws and regulations. These regulations impose a
broad range of requirements, many of which are unique to
government contracting, including various procurement,
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import and export,
security, contract pricing and cost, contract termination and
adjustment, and audit requirements. A contractor’s failure
to comply with these regulations and requirements could result
in reductions to the value of contracts, contract modifications
or termination, and the assessment of penalties and fines and
lead to suspension or debarment, for cause, from government
contracting or subcontracting for a period of time. In addition,
government contractors are also subject to routine audits and
investigations by U.S. Government agencies such as the
Defense Contract Audit Agency (DCAA). These agencies review a
contractor’s performance under its contracts, cost
structure and compliance with applicable laws, regulations and
standards. The DCAA also reviews the adequacy of and a
contractor’s compliance with its internal control systems
and policies, including the contractor’s purchasing,
property, estimating, compensation and management information
systems.
U.S. Government
contracts include both cost reimbursement and fixed-price
contracts. Cost reimbursement contracts, subject to a
contract-ceiling amount in certain cases, provide for the
reimbursement of allowable costs plus the payment of a fee.
These contracts fall into three basic types: (i) cost plus
fixed fee contracts which provide for the payment of a fixed fee
irrespective of the final cost of performance, (ii) cost
plus incentive fee contracts which provide for increases or
decreases in the fee, within specified limits, based upon actual
results as compared to contractual targets relating to such
factors as cost, performance and delivery schedule, and
(iii) cost plus award fee contracts which provide for the
payment of an award fee determined at the discretion of the
customer based upon the performance of the contractor against
pre-established criteria. Under cost reimbursement type
contracts, the contractor is reimbursed periodically for
allowable costs and is paid a portion of the fee based on
contract progress. Some costs incident to performing contracts
have been made partially or wholly unallowable for reimbursement
by statute, FAR or other regulation. Examples of such costs
include charitable contributions, certain merger and acquisition
costs, lobbying costs, interest expense and certain litigation
defense costs.
Fixed-price
contracts are either firm fixed-price contracts or fixed-price
incentive contracts. Under firm fixed-price contracts, the
contractor agrees to perform a specific scope of work for a
fixed price and as a result, benefits from cost savings and
carries the burden of cost overruns. Under fixed-price incentive
contracts, the contractor shares with the government savings
accrued from contracts performed for less than target costs and
costs incurred in excess of targets up to a negotiated ceiling
price (which is higher than the target cost) and carries the
entire burden of costs exceeding the negotiated ceiling price.
Accordingly, under such incentive contracts, the
contractor’s profit may also be adjusted up or down
depending upon whether specified performance objectives are met.
Under firm fixed-price and fixed-price incentive type contracts,
the contractor usually receives either milestone payments based
on a percentage of the total contract price or monthly progress
payments generally based on a percentage of costs incurred. The
remaining amount, including profits or incentive fees, is billed
upon delivery and acceptance of end items under the contract.
U.S. Government
contracts generally also permit the government to terminate the
contract, in whole or in part, without prior notice, at the
government’s convenience or for default based on
performance. If a contract is terminated for convenience, the
contractor is generally entitled to payments for its allowable
costs and will receive some allowance for profit on the work
performed. If a contract is terminated for default, the
contractor is generally entitled to payments for its work that
has been accepted by the government. The
U.S. Government’s right to terminate its contracts has
not had a material adverse effect upon our results of operations
or financial condition.
U.S. Government
programs generally are implemented by the award of individual
contracts and subcontracts. Congress generally appropriates
funds on a fiscal year basis even though a program may extend
across several fiscal years. Consequently, programs are often
only partially funded initially and additional funds are
committed only as Congress makes further appropriations. The
contracts and subcontracts under a program generally are subject
to termination for convenience or adjustment if appropriations
for such programs are not available or change. The
U.S. Government is required to equitably adjust a contract
price for additions or reductions in scope or other changes
ordered by it.
We are also involved
in U.S. Government programs which are classified by the
U.S. Government and cannot be specifically described in
this Annual Report on
Form 10-K.
The operating results of these classified programs are included
in our Consolidated Financial Statements. The business risks and
considerations associated with these classified programs
generally do not differ materially from those of our other
U.S. Government programs and products, and are subject to
the same oversight and internal controls as other
U.S. Government programs.
We are subject to
government regulations and contract requirements which may
differ from U.S. Government regulation with respect to our
sales to
non-U.S. customers.
Sales and income from international operations and investments
are subject to U.S. Government laws, regulations and
policies, including the International Traffic in Arms
Regulations (ITAR) and the Foreign Corrupt Practices Act (FCPA)
and export laws and
8
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regulations, as well
as foreign government laws, regulations and procurement policies
and practices, which may differ from U.S. Government
regulation, including import-export control, investments,
exchange controls, repatriation of earnings and requirements to
expend a portion of program funds in-country. The export from
the U.S. of many of our products may require the issuance
of a license by either the U.S. Department of State under
the Arms Export Control Act of 1976 (formerly the Foreign
Military Sales Act) and its implementing regulations under the
ITAR, the U.S. Department of Commerce under the Export
Administration Act and its implementing regulations as kept in
force by the International Emergency Economic Powers Act of 1977
(IEEPA),
and/or the
U.S. Department of the Treasury under IEEPA or the Trading
with the Enemy Act of 1917. Such licenses may be denied for
reasons of U.S. national security or foreign policy. In the
case of certain exports of defense equipment and services, the
Department of State must notify Congress at least
15-60 days
(depending on the identity of the importing country that will
utilize the equipment and services) prior to authorizing such
exports. During that time, Congress may take action to block or
delay a proposed export by joint resolution which is subject to
Presidential veto.
Competitive
Conditions
We compete with many
companies in the U.S. defense industry for a number of
programs, both large and small, but primarily with Lockheed
Martin Corporation, The Boeing Company, Raytheon Company,
General Dynamics Corporation, L-3 Communications Corporation,
SAIC Inc., Northrop Grumman Corporation, Harris Corporation and
BAE Systems, Inc. Intense competition and long operating cycles
are both key characteristics of our business and the defense
industry. We also compete internationally against these same
companies, as well as Thales Group, EADS N.V., Finmeccanica
S.p.A., SAAB and many others. It is common in this industry for
work on major programs to be shared among a number of companies.
A company competing to be a prime contractor may, upon ultimate
award of the contract to another party, serve as a subcontractor
for the ultimate prime contracting party. It is not uncommon to
compete for a contract award with a peer company and,
simultaneously, perform as a supplier to or a customer of such
competitor on other contracts. The nature of major defense
programs, conducted under binding contracts, allows companies
that perform well to benefit from a level of program continuity
not common in many industries.
Our success in the
competitive defense industry depends upon our ability to develop
and market our products and services, as well as our ability to
provide the people, technologies, facilities, equipment, and
financial capacity needed to deliver those products and services
with maximum efficiency. We must continue to maintain sources
for raw materials, fabricated parts, electronic components, and
major subassemblies. In this manufacturing and systems
integration environment, effective oversight of subcontractors
and suppliers is as vital to success as managing internal
operations.
Similarly, there is
intense competition among many companies in the information and
services markets. Programs within the information and services
market as compared to product-based programs are generally
shorter in duration, more labor intensive and have extremely
competitive margin rates. Competitors in the information and
services markets include the defense industry participants
mentioned above, as well as many other large and small entities
with expertise in various specialized areas. Our ability to
compete successfully in the information and services markets
depends on a number of factors; most important is the capability
to deploy skilled professionals, many requiring security
clearances, at competitive prices across the diverse spectrum of
these markets. Accordingly, we have implemented various
workforce initiatives to ensure our success in attracting,
developing and retaining sufficient resources to maintain or
improve our competitive position within these markets.
Fluid
Technology
Our Fluid segment
provides critical products and services in markets that are
driven by population growth, urbanization, increasing
environmental concerns and regulation, and global infrastructure
trends. Products include water transport and wastewater
treatment systems, pumps and related technologies, and other
water and fluid control products with municipal, residential,
commercial and industrial applications. Our engineers have
designed and fielded breakthrough technologies for fluid
handling products that conserve resources, increase
efficiencies, and improve the quality of life for individuals,
businesses, and communities. This segment brings its product and
services portfolio to market through three market-oriented
business divisions: Water & Wastewater,
Residential & Commercial Water, and Industrial
Process. The following table illustrates the annual revenue for
the Fluid segment and the percentage of revenue by segment
division.
| 2010 | 2009 | 2008 | |||||||||||||
|
Fluid segment revenue
|
$ | 3,670 | $ | 3,363 | $ | 3,841 | |||||||||
|
Percentage of revenue by division:
|
|||||||||||||||
|
Water & Wastewater
|
52 | % | 49 | % | 47 | % | |||||||||
|
Residential & Commercial Water
|
29 | 30 | 32 | ||||||||||||
|
Industrial Process
|
19 | 21 | 21 | ||||||||||||
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Our strategy to
expand across the value chain to provide better service for our
customers is moving us from a product supplier to a solution
provider. For example, our Fluid segment’s product
offerings extend from its core of submersible pumps and mixers
to complete systems with intelligent control technologies that
manage plant operation, technologies that analyze the waste
stream, and products and systems to treat water through
biological, filtration, oxidation and disinfection processes.
Geographic
Profile
The Fluid
segment’s primary geographic markets are the United States
and Western Europe; however we have and may continue to make
investments in areas that align with our strategy for growth in
emerging markets. For example, during the past three years, we
have invested in production and assembly facilities in Eastern
Europe, China, India and Brazil. ITT strives to provide its
global customer base with the systems and solutions they need to
meet ever-increasing demands on life cycle cost control and
energy and operating efficiencies. The following chart provides
an overview of the Fluid segment’s geographic profile
depicted as a percentage of 2010 revenue by customer location.
In addition to the
listing of significant locations provided in Item 2,
“Properties,” the Fluid segment maintains a global
network of service centers providing after-market customer care.
Service centers offer an array of integrated service solutions
for industry including: preventive monitoring, contract
maintenance, emergency field service, engineered upgrades,
inventory management, and overhauls for pumps and other rotating
equipment.
Fluid Segment
Divisions
Water &
Wastewater Division
(WWW) –
based in Stockholm, Sweden, WWW is a leader in water and
wastewater handling and treatment. We provide global direct
sales and service capabilities, working close to our customers
to deliver energy-efficient and reliable solutions to customers
in more than 140 countries. Our portfolio of products offers a
full range of advanced treatment systems to clean and disinfect
water, intelligent pumps and controls to transport water and
wastewater, and full-service dewatering capabilities including
pump sales, rental and onsite services to remove unwanted water.
ITT is the originator and largest manufacturer of submersible
pumps and mixers that form the heart of many of the world’s
wastewater treatment facilities, as well as a leader in
biological treatment systems for municipal and industrial
wastewater. We are also a manufacturer of analytic
instrumentation used to provide precise analysis and measurement
for water and wastewater, environmental, medical, industrial,
and food and beverage applications. Our brands include Flygt,
Lowara, Sanitaire, Wedeco, Grindex, A-C Pump, Engineered Valves,
ABJ, Well Point, WET, Leopold, PCI, Godwin Pumps, Royce
Technologies, Secomam, ebro, SI Analytics, STM, WTW, AADI,
Bellingham + Stanley, OI Analytical, CMS Research, and Global
Water.
Residential &
Commercial Water Division
(RCW) –
based in Morton Grove, Illinois, RCW manufactures pumps, systems
and accessories which provide energy-efficient solutions for
building heating, ventilation and air conditioning (HVAC)
systems, pressure booster systems for building service and
irrigation applications, turnkey fire pump packages, and
residential pumps. Our brands include Goulds Pumps,
Bell & Gossett, Vogel, Lowara, McDonnell &
Miller, Red Jacket, Flowtronex, A-C Fire Pumps, Domestic Pump,
Hoffman Specialty, Marlow Pumps, ITT Standard, WET, and Laing.
Our portfolio of products includes those that promote
“Green building” and Leadership in Energy and
Environmental Design (LEED) applications.
Industrial
Process Division
(IP) –
based in Seneca Falls, New York, IP manufactures pumps, valves,
reverse osmosis units, heat exchangers and control systems. Our
industrial portfolio of specialized technologies provides
solutions with oil and gas, mining, power generation, chemical,
paper and biopharmaceutical applications. Our products are
engineered for challenging environments and offer reduced
maintenance costs and energy-saving solutions. ITT’s
industrial pump products are paired with our desalination
reverse osmosis units to create additional resources in areas of
the world where availability to water is extremely limited. Our
brands include Goulds Pumps, Centripro, Pure-Flo, C’treat,
PPS, and Pro Services.
Order
Backlog
Order backlog as of
December 31, 2010 and 2009 was $903 and $824, respectively.
Delivery schedules vary from customer to customer based upon
their requirements. Typically, large projects require longer
lead production cycle and delays can occur from time to time. We
expect the majority of our current backlog will be recognized as
revenue within 2011.
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Competitive
Conditions
We compete against
large and well-established national and global competitors and,
in some markets, against regional and local companies. The
markets for our products are fragmented and highly competitive,
with primary competitive drivers being price, reputation,
quality, energy efficiency, timeliness of delivery and technical
expertise, as well as contractual terms and previous
installation history. Our ability to use our portfolio of
products, solutions and services to meet customer needs is a
competitive strength.
Our market approach
is to create value for our customers throughout their
procurement cycle. We continue to explore and develop potential
new offerings in conjunction with our customers. In the early
phases of project design, we endeavor to create value in
optimizing the selection of equipment for the customer’s
specific application, as we are capable of providing technical
expertise on product and system capabilities even outside the
scope of our specific products, solutions and services. After
the equipment is constructed and delivered to the
customer’s site, we continue to create value through our
after-market capabilities by optimizing the performance of the
equipment over its operational life.
Competition in the
water transport and treatment technologies markets focuses on
product performance and design, quality, delivery, and price. In
the sale of products and services, we benefit from our large
installed base of pumps, valves and other equipment, which
continually require maintenance, repair and replacement parts
due to the nature of the products and the conditions under which
they operate. Timeliness of delivery, quality and the proximity
of service centers are important customer considerations when
selecting a provider for after-market products and services. In
geographic regions where we are locally positioned to provide a
quick response, customers have traditionally relied on us,
rather than our competitors, for after-market products relating
to our highly engineered and customized products.
Competition in
commercial and residential technologies markets focuses on trade
names, product performance, quality, and price. We compete by
offering a wide variety of innovative and high-quality products,
which are competitively priced. We believe our distribution
channels and reputation for quality also contribute to our
market position.
In the pursuit of
large industrial capital projects, competitive drivers and
competition vary depending on the application and products
involved. Industries experiencing slow growth generally tend to
have a competitive environment more heavily influenced by price
due to supply outweighing demand, and price competition tends to
be more significant for original equipment orders than
after-market services. Considering the domestic and global
economic environments in 2010 and current forecasts for 2011,
pricing was and, we believe, may continue to be a particularly
influential competitive factor.
Motion &
Flow Control
Our
Motion & Flow segment delivers highly engineered,
durable components that succeed in challenging environments
where the cost of failure is high. The segment manufactures
high-performance shock absorbers and brake friction materials
for the transportation industry, switch applications for the
industrial and aerospace industries, electrical connectors used
in telecommunications, computers, aerospace, medical and
industrial applications, and a wide range of pumps and tailored
products for marine, food & beverage and general
industrial markets. The segment primarily serves the high end of
its markets, with brand recognition and a focus on new product
development and operational excellence. The following table
illustrates the annual revenue for the Motion & Flow
segment and the percentage of revenue by segment division.
| 2010 | 2009 | 2008 | |||||||||||||
|
Motion & Flow segment revenue
|
$ | 1,441 | $ | 1,253 | $ | 1,583 | |||||||||
|
Percentage of revenue by division:
|
|||||||||||||||
|
Motion Technologies
|
38 | % | 39 | % | 35 | % | |||||||||
|
Interconnect Solutions
|
28 | 27 | 29 | ||||||||||||
|
Control Technologies
|
19 | 19 | 20 | ||||||||||||
|
Flow Control
|
15 | 15 | 16 | ||||||||||||
The
Motion & Flow segment’s financial results are
driven by economic conditions in its major markets, the cyclical
nature of the transportation industry, production levels of
major auto producers, demand for marine and leisure products,
raw material prices, the success of new product development,
platform life and changes in technology. Revenue opportunities
are balanced between original equipment manufacturing (OEM) and
after-market customers. Primary areas of business focus include
expansion into adjacent markets, new product development,
manufacturing footprint optimization, global sourcing of direct
material purchases and lean fulfillment.
Geographic
Profile
In addition to the
traditional markets of the U.S. and Western Europe,
opportunities in emerging markets within Asia Pacific, Eastern
Europe and Latin America are increasing. The following chart
provides an overview of the Motion & Flow
segment’s geographic profile depicted as a percentage of
2010 revenue by customer location.
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Motion &
Flow Segment Divisions
Motion
Technologies Division
(MT) –
based in Lainate, Italy, MT, through its Friction Technologies
and Koni businesses, is a leader in brake pad, shock absorber
and damping technology for the automotive and public
transportation industries. Our Friction Technologies business
applies innovative research of new friction materials and the
identification of highly productive technologies to produce a
range of automotive brake products to satisfy the precise needs
of global manufacturers of car parts, motor vehicles, commercial
vehicles, and trucks, from light-weight to severe duty. Our Koni
business manufactures performance shock absorbers and railway
equipment, using its Frequency Selective Damping (FSD) and
Continuously Variable Damping (CVD) technologies, for use
in three main customer groups: Car; Bus, Truck &
Trailer; and Railway.
Interconnect
Solutions Division
(ICS) –
based in Santa Ana, California, ICS designs and manufactures a
wide range of highly specialized products that make it possible
to connect with our electronic world, including connectors,
interconnects, cable assemblies, multi-function grips,
input/output card kits and smart card systems. Through our
brands that include Cannon, VEAM and BIW, this division serves
customers in the defense, aerospace, industrial, oil and gas,
medical, handheld electronics, alternative energy and
transportation markets.
Control
Technologies Division
(CT) –
based in Valencia, California, CT is a worldwide supplier of
valves, actuators, pumps and switches for the commercial,
military, regional, business jet and general aviation markets.
Products are sold globally to OEM and after-market customers. CT
also sells switches, regulators, custom energy absorption and
vibration isolation, and shape-cutting products for industrial
applications in the oil and gas, fluid power, power generation,
chemical, transportation, and general industrial markets. CT
brands include ITT Aerospace, Jarret, Neo-Dyn, Conoflow,
Enidine, Enivate, Cleveland Motion Controls, Burny, and Kaliburn.
Flow Control
Division
(FC) –
based in Gloucester, Massachusetts, FC is a leading producer of
pumps and related products for the marine, food &
beverage and general industrial markets. Products are sold
worldwide under the brand names Jabsco, Rule, Flojet,
Midland-ACS, LVM, and Alcon. FC, through its Flojet and Totton
brands, is also a producer of pumps and components for beverage
applications. Both Jabsco and Flojet also produce pumps for
other specialty industrial fluid dispensing applications. Flow
Control businesses provide valve actuation control systems for
harsh environments, including oil and gas pipelines, as well as
solenoid valves with a wide array of end uses ranging from
petrochemical plants to drag cars.
Order
Backlog
Order backlog as of
December 31, 2010 and 2009 was $398 and $376, respectively.
Orders are filled based on customer delivery schedules that
typically cover no longer than three months. We expect that
substantially all backlog will be recognized as revenue during
2011.
Competitive
Conditions
In
Motion & Flow, competition is encountered in
substantially all areas of its business and is therefore a
significant factor. This competitive environment has resulted in
increased pressure to reduce pricing and maintain a continuous
focus on cost structures. We compete against large and
well-established national and global competitors and, in some
markets, against regional and local companies. The markets for
our products are fragmented and highly competitive, with primary
competitive drivers being price, product capability, product
quality, delivery, customer service and technical expertise. We
are focused on differentiated new product development and
leveraging our strong customer relationships and improved cost
structures, striving to maintain our competitive advantage.
The automotive and
public transportation industries are highly competitive in
nature. We compete with many manufacturers and distributors
globally to supply OEMs and to serve the after-market.
Competition is driven by price, technology, product quality,
timeliness of delivery, customer service and breadth of
products. Our customer and product-specific product range has
allowed us to satisfy the precise technical needs of our
customers. Through our continuous pursuit and development of
market-leading friction materials and
state-of-the-art
manufacturing processes, we have become a leading supplier to
global automotive manufacturers.
The worldwide
connectors industry is fragmented and highly competitive.
Competition is mainly driven by technological innovation, price,
delivery and customer service. We compete against many companies
of varied size and scope by offering a broad range of
differentiated and high-quality products, which are
competitively priced. We believe our robust design and
value-based product development, coupled with our global
engineering, manufacturing and distribution
12
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capabilities, drive
a focus on our customers from design inception through
production to final delivery and allow for continued new market
expansion.
As a world leader in
the design, manufacturing and supply of commercial, military,
industrial and aerospace products such as switches, actuators,
pumps and valves, Motion & Flow faces competition from
many different companies or divisions thereof in substantially
all areas of business. We compete primarily on the basis of
product quality and innovation, reputation, customer service and
price competitiveness. Sales of our reliable and high-quality
products in the industrial and aerospace markets are made to
both end-users and our large client base of OEMs and
sub-tier
suppliers who trust our products to support their program
applications as designed. Relationships developed with these key
customers based on our technological and engineering
capabilities, quality performance, delivery, and service have
enabled us to obtain business on OEM programs for their systems
and components and subsequently obtain the follow-on
after-market business.
Motion &
Flow also produces and sells pumps and related products for the
marine & leisure, food & beverage and
general industrial markets. A focus on product reliability and
new product innovation and development has allowed us to compete
effectively, to cultivate and maintain key customer
relationships and to serve and to expand into many niche and new
markets.
| Item 1A. | RISK FACTORS |
We are subject to
various risks and uncertainties relating to or arising out of
the nature of our businesses, financial conditions and results
of operations, including those discussed below, which may affect
the value of our common stock. We believe the risks discussed
below are currently the most significant. If any of the events
or circumstances described in the following risk factors occur,
our business, financial condition or results of operations may
suffer, and the trading price of our common stock could decline.
Spinoff
Transactions
The proposed
spinoffs of our water and defense businesses are contingent upon
the satisfaction of a number of conditions, may require
significant time and attention of our management, may not
achieve the intended results, and may present difficulties that
could have an adverse effect on us.
We expect to file a
Registration Statement on Form 10 with the Securities and
Exchange Commission (SEC) with respect to the distribution to
our stockholders of all of the shares of common stock of two of
our subsidiaries that would hold, directly or indirectly, the
assets and liabilities for our water-related and defense-related
businesses, respectively. Completion of the spinoff transactions
will be contingent upon the approval of our Board of Directors,
a favorable ruling from the Internal Revenue Service (IRS), the
effectiveness of each of the Registration Statements on
Form 10 and other conditions. For these and other reasons,
the spinoff transactions may not be completed or may not be
completed prior to the end of the year. Additionally, execution
of the proposed spinoff transactions may require significant
time and attention from management, which could distract
management from the operation of our business and the execution
of our other strategic initiatives. Our employees may also be
distracted due to uncertainty about their future roles with each
of the separate companies pending the completion of the spinoff
transactions. Further, if the spinoff transactions are
completed, each of these transactions may not achieve the
intended results. Any such difficulties could have an adverse
effect on our business, results of operations or financial
condition.
The spinoff
transactions could result in substantial tax
liability.
We will request a
private letter ruling from the IRS substantially to the effect
that, for U.S. federal income tax purposes, each of the
spinoff transactions and certain related transactions will
qualify under Sections 355
and/or 368
of the Internal Revenue Code (the Code). Our receipt of the
private letter ruling will be a condition to the completion of
the spinoffs. If the factual assumptions or representations made
in the private letter ruling request are inaccurate or
incomplete in any material respect, then we will not be able to
rely on the ruling. Furthermore, the IRS will not rule on
whether a distribution such as the spinoff satisfies certain
requirements necessary to obtain tax-free treatment under
Section 355 of the Code. Rather, the private letter ruling
will be based on representations by us that those requirements
have been satisfied, and any inaccuracy in those representations
could invalidate the ruling. The spinoffs will also be
conditioned on our receipt of an opinion of outside counsel, in
form and substance satisfactory to us, substantially to the
effect that, for U.S. federal income tax purposes, the
spinoffs and certain related transactions will qualify under
Sections 355
and/or 368
of the Code. The opinion will rely on, among other things, the
continuing validity of the private letter ruling and various
assumptions and representations as to factual matters made by
each of the spinoff companies and us which, if inaccurate or
incomplete in any material respect, would jeopardize the
conclusions reached by such counsel in its opinion. The opinion
will not be binding on the IRS or the courts, and there can be
no assurance that the IRS or the courts will not challenge
13
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the conclusions
stated in the opinion or that any such challenge would not
prevail.
If, notwithstanding
receipt of the private letter ruling and opinion, the spinoff
transactions were determined to be a taxable transaction, each
U.S. holder of our common stock who receives shares of the
spinoff companies in the spinoff transactions would generally be
treated as receiving a taxable distribution of property in an
amount equal to the fair market value of the shares of the
spinoff company received. That distribution would be taxable to
each such stockholder as a dividend to the extent of our current
and accumulated earnings and profits. For each such stockholder,
any amount that exceeded our earnings and profits would be
treated first as a non-taxable return of capital to the extent
of such stockholder’s tax basis in our shares of common
stock with any remaining amount being taxed as a capital gain.
In addition, if certain related transactions were to fail to
qualify for tax-free treatment, the spinoff companies would be
treated as if they had each sold part of their respective assets
(which will be retained by us) in a taxable sale for fair market
value and we would be treated as receiving such assets from the
spinoff companies as a taxable dividend.
Under the terms of
the tax sharing agreement we will determine which company will
be responsible for any taxes imposed by the spinoff transactions.
If the spinoff
transactions are completed, our operational and financial
profile will change and we will be a smaller, less diversified
company than ITT’s current operations.
If consummated, the
proposed spinoff transactions will result in ITT being a
smaller, less diversified company than we currently are with a
narrower business focus than we currently have. We will have a
more limited business with greater concentration in the
industrial products market and may be more vulnerable to
changing market conditions, which could materially and adversely
affect our business, financial condition and results of
operations. In addition, the diversification of revenues, costs,
and cash flows will diminish. As such, it is possible that our
results of operations, cash flows, working capital and financing
requirements may be subject to increased volatility. Our
operations may also be impacted by a limited ability to attract
new employees in a timely manner.
If the proposed
spinoff transactions are consummated, there may be substantial
changes in our stockholder base, which may cause the price of
our common stock to fluctuate following the proposed
spinoffs.
Investors holding
our common stock may hold our common stock because of a decision
to invest in a company that operates in multiple markets with a
diversified commercial and defense portfolio. If the proposed
spinoff transactions are consummated, shares of our common stock
will represent an investment in a smaller company with its
business concentrated in the engineered industrial products
industry. These changes may not match some holders’
investment strategies or meet minimum criteria for inclusion in
stock market indices, which could cause investors to sell their
shares of our common stock. Excessive selling pressure could
cause the market price of our common stock to decrease following
the consummation of the proposed spinoff.
Business and
Operating Risks
We are dependent
on the U.S. Government for a substantial portion of our
revenue.
Approximately 46% of
our 2010 revenue was derived from products and services
ultimately sold to the U.S. Government, including the
Department of Defense (DoD), and our results are therefore
affected by, among other things, the annual federal budget,
appropriations made to defense programs, spending levels and the
timing of appropriations for defense programs. DoD budget and
priorities impacting the programs can be affected by external
threats to our national security, funding for on-going
operations in Iraq and Afghanistan, future priorities of the
current presidential administration, and the overall health of
the U.S. and world economies. Our future results may be
impacted by our ability to receive awards under new and on-going
defense programs, as well as other U.S. Government
programs, our ability to develop and market products and
services under these programs, as well as the variability of
timing and size of certain key orders. The U.S. Government
has the ability to terminate contracts for convenience or for
default; therefore, our future results could be materially
impacted by the termination or failure to fund one or more
significant contracts by the U.S. Government. Since many of
our government contracts are fixed-price, increased costs which
cannot be justified as an increase to the contract value exposes
the risk of reduced profitability and the potential loss of
future business. In addition, numerous contracts are subject to
security and facility clearances, as well as export licenses,
which, if withdrawn, restricted or made unavailable, would
adversely affect our business. Changes in U.S. Government
contracting regulations, and related governmental investigations
could increase our costs of regulatory compliance and could have
a negative effect on our brand name and on our ability to win
new business.
Our exposure to
pending and future asbestos claims and related assets,
liabilities, and cash flows are subject to significant
uncertainties, which could have
14
Table of Contents
adverse effects
on our financial condition, results of operations and cash
flows.
ITT, including its
subsidiary Goulds Pumps, Inc., has been joined as a defendant in
numerous lawsuits and claims in which the plaintiffs claim
damages for personal injury arising from exposure to asbestos in
connection with certain products sold or distributed that may
have contained asbestos. We expect to be named as defendants in
similar actions in the future. We record an estimated liability
related to pending claims and claims estimated to be received
over the next ten years based on a number of key assumptions,
including the plaintiffs’ propensity to sue, claim
acceptance rates, disease type, settlement values and defense
costs. These assumptions are derived from ITT’s recent
experience and reflect the Company’s expectations about
future claim activities. These assumptions about the future may
or may not prove accurate, and accordingly, the Company may
incur additional liabilities in the future. A change in one or
more of the inputs used to estimate the asbestos liability could
materially change the estimated liability and associated cash
flows for pending claims and those estimated to be filed in the
next 10 years. Although it is probable that the Company
will incur additional costs for asbestos claims filed beyond the
next 10 years, we do not believe there is a reasonable
basis for estimating those costs at this time.
We record an asset
that represents our best estimate of probable recoveries from
insurers or other responsible parties for the estimated asbestos
liabilities. There are significant assumptions made in
developing estimates of asbestos-related recoveries, such as
policy triggers, policy or contract interpretation, the
methodology for allocating claims to policies, and the continued
solvency of the Company’s insurers or other responsible
parties. The assumptions underlying the recorded asset may not
prove accurate, and as such, actual performance by our insurers
and other responsible parties could result in lower receivables
or cash flows expected to reduce the Company’s asbestos
costs.
Due to these
uncertainties, as well as our inability to reasonably estimate
any additional asbestos liability for claims that may be filed
beyond the next 10 years, it is not possible to predict the
ultimate outcome of the cost, nor potential recoveries, of
resolving the pending and all unasserted asbestos claims.
Additionally, we believe it is possible that 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.
The level of
returns on postretirement benefit plan assets, changes in
interest rates and other factors could affect our earnings and
cash flows in future periods.
A substantial
portion of our current and retired employee population is
covered by pension and other employee-related defined benefit
plans (collectively, postretirement benefit plans). We may
experience significant fluctuations in costs related to
postretirement benefit plans as a result of macro-economic
factors, such as interest rates, that are beyond our control.
The cost of our postretirement plans is incurred over long
periods of time and involves various factors and uncertainties
during those periods, which can be volatile and unpredictable,
including the rates of return on postretirement benefit plan
assets, discount rates used to calculate liabilities and
expenses, rates of future compensation increases, and trends for
future medical costs. Management develops each assumption using
relevant Company experience in conjunction with market-related
data. Our financial position and results of operations could be
materially affected by significant changes in key economic
indicators, financial market volatility, future legislation and
other governmental regulatory actions.
We make
contributions to fund our postretirement benefit plans when
considered necessary or advantageous to do so. The
macro-economic factors discussed above, including the return on
postretirement benefit plan assets and the minimum funding
requirements established by local government funding or tax
authorities, or established by other agreement, may influence
future funding requirements. A significant decline in the fair
value of our plan assets, or other adverse changes to our
overall pension and other employee-related benefit plans could
require us to make significant funding contributions and affect
cash flows in future periods.
U.S. Government
Cost Accounting Standards govern the extent to which
postretirement costs and plan contributions are allocable to and
recoverable under contracts with the U.S. Government. As a
result, we have sought and expect to continue to seek
reimbursement from the DoD for a portion of our postretirement
costs and plan contributions.
We rely on our
information systems in our operations. Security breaches could
adversely affect our business and results of
operations.
The efficient
operation of our business is dependent on computer hardware and
software systems. Even the most well-protected information
systems are vulnerable to internal and external security
breaches including by those computer hackers and cyber
terrorists. The unavailability of the information systems, the
failure of these systems to perform as anticipated for any
reason or any significant breach of security could disrupt our
business and could result in decreased performance and
15
Table of Contents
increased overhead
costs, causing an adverse effect on our business, results of
operations or financial condition.
Our systems are
decentralized, which presents various risks, including the risk
that we may be slower or less able to identify or react to
problems affecting a key business than we would be in a more
centralized environment. In addition, “company-wide”
business initiatives, such as the integration of information
technology systems, or the formation of a technology system
impacting different parts of our business, are often more
challenging and costly to implement, and their risk of failure
higher, than they would be in a more centralized environment.
Depending on the nature of the initiative in question, such
failure could materially adversely affect our business,
financial condition or results of operations.
Our business
could be adversely affected by raw material price volatility and
the inability of key suppliers to meet quality and delivery
requirements.
Our business relies
on third-party suppliers, contract manufacturing and commodity
markets to secure raw materials, parts and components used in
our products. We are exposed to volatility in the prices and
availability of these materials. In some instances, we depend
upon a single source of supply, manufacturing or assembly or
participate in commodity markets that may be subject to
allocations of limited supplies by suppliers. Delays in
obtaining supplies may result from a number of factors affecting
our suppliers, including capacity constraints, labor disputes,
the impaired financial condition of a particular supplier,
suppliers’ allocations to other purchasers, ability to meet
regulatory requirements, weather emergencies or acts of war or
terrorism. Any delay in our suppliers’ abilities to provide
us with necessary materials, price increases, or decreased
availability of raw materials or commodities could impair our
ability to deliver products to our customers and, accordingly,
could have a material adverse effect on our business, results of
operations and financial condition.
Other Risks,
including Litigation and Regulatory Risk
The effects of
changes in worldwide economic and capital markets conditions may
significantly affect our revenue, profitability, results of
operations and our ability to maintain liquidity or procure
capital.
The Company’s
business may be adversely affected by factors in the United
States and other countries that are beyond its control, such as
disruptions in financial markets or downturns in economic
activity in specific countries or regions, or in the various
industries in which the Company operates; social, political or
labor conditions in specific countries or regions; or adverse
changes in the availability and cost of capital, interest rates,
tax rates, or regulations in the jurisdictions in which the
Company operates. If, for any reason, we lose access to our
currently available lines of credit, or if we are required to
raise additional capital, we may be unable to do so in the
current credit and stock market environment, or we may be able
to do so only on unfavorable terms.
Adverse changes to
financial conditions could jeopardize certain counterparty
obligations, including those of our insurers and financial
institutions and other third parties. The tightening of credit
markets may reduce the funds available to our customers to buy
our products and services for an unknown, but perhaps lengthy,
period. Restrictive credit markets may also result in customers
extending times for payment and may result in our having higher
customer receivables with increased default rates. General
concerns about the fundamental soundness of domestic and foreign
economies may also cause customers to reduce consumption even in
a stable marketplace.
Many of the
businesses in which we operate are subject to specific industry
and general economic cycles. Certain businesses are subject to
industry cycles, including but not limited to the residential
and commercial real estate, construction, oil and gas, mining
and minerals, transportation, automotive and aerospace
industries. Downturns in these industries could adversely affect
portions of our businesses.
We are subject to
laws, regulations and potential liability relating to claims,
complaints and proceedings, including those related to
antitrust, environmental, product, and other matters.
We are subject to
various laws, ordinances, regulations and other requirements of
government authorities in foreign countries and in the United
States, any violations of which could create a substantial
liability for us, and also could cause harm to our reputation.
Changes in laws, ordinances, regulations or other government
policies, the nature, timing, and effect of which are uncertain,
may significantly increase our expenses and liabilities.
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 liabilities, product
liability, personal injury claims, employment and pension
matters, government contract issues and commercial or
contractual disputes, sometimes related to acquisitions or
divestitures. Additionally, we may become subject to significant
claims of which we are currently unaware or the claims of which
we are aware may result in our incurring a significantly greater
liability than we anticipate or can estimate.
16
Table of Contents
Unanticipated
changes in our tax rate or exposure to additional tax
liabilities resulting from changes to tax laws among other
factors could negatively affect our profitability.
Results from our
international operations could be adversely affected by changes
in economic conditions, foreign currency fluctuations and
changes in local government regulations.
Our international
operations, including sales of U.S. exports, comprise a
growing portion of our operations and are a strategic focus for
continued future growth. Our strategy calls for increasing sales
to operations in overseas markets, including developing markets
such as Central and South America, China, India and the Middle
East. In 2010, approximately 34% of our total sales were to
customers operating outside of the United States. Risks related
to international operations include exchange control
regulations, wage and price controls, employment regulations,
foreign investment laws, import, export and other trade
restrictions, changes in regulations regarding transactions with
state-owned enterprises, nationalization of private enterprises,
government instability, our ability to hire and maintain
qualified staff in these regions and maintaining the safety of
our employees. The cost of compliance with increasingly complex
and often conflicting regulations worldwide can also impair our
flexibility in modifying product, marketing, pricing, or other
strategies for growing our businesses, as well as our ability to
improve productivity and maintain acceptable operating margins.
As we continue to
grow our business internationally, our operating results could
be affected by the relative strength of the European, Asian and
developing economies and the impact of currency exchange rate
fluctuations.
Implementation of
the various provisions of the Dodd-Frank Act may increase our
operating costs or otherwise have a material adverse effect on
our business, financial condition or results of
operations.
On July 21,
2010, President Obama signed the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act). This legislation
affects comprehensive changes to the regulation of financial
services in the United States and will subject us to additional
federal regulation. The Dodd-Frank Act will require the Federal
Deposit Insurance Corporation (FDIC), the Securities and
Exchange Commission (SEC) and other federal agencies to enact
numerous new rules, many of which may not be implemented for
several months or years. We cannot predict with any certainty
the requirements of the regulations ultimately adopted or how
the Dodd-Frank Act and such regulations will impact the cost of
compliance for a public company. We are currently evaluating and
monitoring developments with respect to the Dodd-Frank Act and
the resulting rule proposals and cannot predict or estimate the
amount of the additional costs we may incur or the timing of
such costs.
These laws,
regulations and standards required by the Dodd-Frank Act are
subject to varying interpretations, in many cases due to their
lack of specificity, and, as a result, their application in
practice may evolve over time as new guidance is provided by
regulatory and governing bodies. This could result in continuing
uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance
practices. We intend to invest resources to comply with evolving
laws, regulations and standards, and this investment may result
in increased general and administrative expenses and a diversion
of management’s time and attention from revenue-generating
activities to compliance activities. If our efforts to comply
with new laws, regulations and standards differ from the
activities intended by regulatory or governing bodies due to
ambiguities related to practice, regulatory authorities may
initiate legal proceedings against us and our business may be
harmed. We also expect these new rules and regulations will make
it more expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced
coverage or incur substantially higher costs to obtain coverage.
These factors could also make it more difficult for us to
attract and retain qualified members of our board of directors,
particularly to serve on our audit committee, and qualified
executive officers.
The Dodd-Frank Act
also requires companies in the mining industry to disclose in
their periodic reports filed with the SEC substantial additional
information about safety issues relating to their mining
operations. The mining industry is already subject to stringent
safety and health standards and recent mining accidents in West
Virginia and abroad have received international attention and
have led to responses at the state and national levels that have
resulted in increased scrutiny of mining operations,
particularly underground mining operations. This heightened
scrutiny could generate negative publicity for the mining
industry, increase the cost of compliance with mining
regulations or result in the passage of new laws and
regulations, any of which could negatively affect our business
results.
| Item 1B. | UNRESOLVED STAFF COMMENTS |
None.
17
Table of Contents
| Item 2. | PROPERTIES |
We have 575
locations, in 51 countries on 6 continents. These
properties total 22 million square feet, of which 499
locations, or 12 million square feet are leased. We
consider the many offices, plants, warehouses, and other
properties that we own or lease to be in good condition and
generally suitable for the purposes for which they are used. The
following table shows the significant locations by segment and
division.
|
SQ FT |
|||||||||||
| LOCATION | DIVISION | (IN ’000S) | OWNED / LEASED | ||||||||
|
Defense segment
|
|||||||||||
|
Clifton, New Jersey
|
Electronic Systems | 921 | Owned | ||||||||
|
Rochester, New York
|
Geospatial Systems | 440 | Owned | ||||||||
|
Fort Wayne, Indiana
|
Electronic Systems | 302 | Leased | ||||||||
|
Roanoke, Virginia
|
Geospatial Systems | 251 | Owned | ||||||||
|
Rochester, New York
|
Geospatial Systems | 250 | Leased | ||||||||
|
Fort Wayne, Indiana
|
Electronic Systems | 241 | Owned | ||||||||
|
Rochester, New York
|
Geospatial Systems | 225 | Owned | ||||||||
|
Fluid segment
|
|||||||||||
|
Emmaboda, Sweden
|
Water and Wastewater | 1,156 | Owned | ||||||||
|
Metz, France
|
Water and Wastewater | 870 | Leased | ||||||||
|
Seneca Falls, New York
|
Industrial Process | 828 | Owned | ||||||||
|
Morton Grove, Illinois
|
Residential and Commercial Water | 530 | Owned | ||||||||
|
Veneto, Italy
|
Residential and Commercial Water | 379 | Owned | ||||||||
|
Auburn, New York
|
Residential and Commercial Water | 298 | Owned | ||||||||
|
Lubbock, Texas
|
Residential and Commercial Water | 229 | Owned | ||||||||
|
Shenzhen, China
|
All divisions | 227 | Leased | ||||||||
|
Cheektowaga, New York
|
Residential and Commercial Water | 200 | Owned | ||||||||
|
Motion and Flow segment
|
|||||||||||
|
Oud Beijerland, Netherlands
|
Motion Technologies | 379 | Owned | ||||||||
|
Sonora, Mexico
|
Interconnect Solutions | 358 | Owned | ||||||||
|
Santa Ana, California
|
Interconnect Solutions | 301 | Owned | ||||||||
|
Piemonte, Italy
|
Motion Technologies | 279 | Owned | ||||||||
|
Ostrava, Czech Republic
|
Motion Technologies | 256 | Leased | ||||||||
|
Weinstadt, Germany
|
Interconnect Solutions | 231 | Owned | ||||||||
|
Valencia, California
|
Control Technologies | 200 | Leased | ||||||||
|
Corporate Headquarters
|
|||||||||||
|
White Plains, New York
|
Corporate Headquarters | 95 | Leased | ||||||||
18
Table of Contents
| Item 3. | 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 19, “Commitments
and Contingencies,” in the Notes to Consolidated 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 December 31,
2010, we recorded an undiscounted asbestos-related liability for
pending claims and unasserted claims estimated to be filed over
the next 10 years of $1,676, including expected legal fees,
and an associated asset of $1,034, which represents estimated
recoveries from insurers and other responsible parties,
resulting in a net asbestos exposure of $642.
Other
Proceedings
On April 17,
2007, ITT’s Board of Directors received a letter on behalf
of a shareholder requesting that the Board take appropriate
action against the employees responsible for the violations at
our Night Vision facility described above. During 2007 and 2008,
the Company also received notice of four shareholder derivative
actions each filed in the U.S. District Court for the
Southern District of New York. On July 10, 2010, the Court
granted the Defendants’ Motion to Terminate the
proceedings. This matter is concluded.
| Item 4. | [REMOVED AND RESERVED] |
19
Table of Contents
EXECUTIVE
OFFICERS OF THE REGISTRANT
The following
information is provided regarding the executive officers of ITT.
Each of the executive officers was elected to his or her
position by the Company’s Board of Directors.
|
AGE AT |
OTHER BUSINESS
EXPERIENCE DURING |
||||||||||
| NAME | 2/1/11 | CURRENT TITLE | PAST 5 YEARS | ||||||||
|
Angela A. Buonocore
|
52 | Senior Vice President, Chief Communications Officer (2008) | Vice President, Director of Corporate Relations, ITT (2007); Vice President, Corporate Communications, The Pepsi Bottling Group (2001) | ||||||||
|
Aris C. Chicles
|
49 | Senior Vice President, Director of Strategy and Corporate Development (2008) | Vice President, Director of Strategy and Corporate Development, ITT (2006) | ||||||||
|
Frank R. Jimenez
|
46 | Vice President, General Counsel (2009) | General Counsel of the Navy (2006) | ||||||||
|
Janice M. Klettner
|
50 | Vice President, Chief Accounting Officer (2008) | Chief Accounting Officer and Assistant Secretary, ITT (2006) | ||||||||
|
Steven R. Loranger
|
58 | Chairman, President and Chief Executive Officer (2004) | |||||||||
|
David F. Melcher
|
56 | Senior Vice President, ITT, President, ITT Defense & Information Solutions (2010) | Vice President, ITT, President, ITT Defense Electronics & Services (2008); Vice President, Strategy and Business Development (2008), ITT Defense Electronics & Services (2008); Lieutenant General, U.S. Army, Deputy Chief of Staff, Military Deputy for Budget (2006) | ||||||||
|
Gretchen W. McClain
|
48 | Senior Vice President, ITT, President, ITT Fluid and Motion Control (2008) | Vice President, ITT, President, ITT Fluid Technology (2007); President, ITT Residential & Commercial Water (2005) | ||||||||
|
Denise L. Ramos
|
54 | Senior Vice President and Chief Financial Officer (2007) | Chief Financial Officer, Furniture Brands International (2005) | ||||||||
Note:
Date in parentheses indicates the year in which the position was
assumed.
20
Table of Contents
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
COMMON
STOCK – MARKET PRICES AND DIVIDENDS
| 2010 | 2009 | ||||||||||||||||||
| HIGH | LOW | HIGH | LOW | ||||||||||||||||
|
Three Months Ended:
|
|||||||||||||||||||
|
March 31
|
$ | 55.61 | $ | 47.41 | $ | 51.42 | $ | 31.94 | |||||||||||
|
June 30
|
57.99 | 44.17 | 46.91 | 37.26 | |||||||||||||||
|
September 30
|
50.79 | 42.05 | 52.71 | 41.15 | |||||||||||||||
|
December 31
|
53.24 | 45.06 | 56.95 | 48.43 | |||||||||||||||
The above table
reflects the range of market prices of our common stock as
reported in the consolidated transaction reporting system of the
New York Stock Exchange, the principal market in which this
security is traded (under the trading symbol “ITT”).
During the period from January 1, 2011 through
January 31, 2011, the high and low reported market prices
of our common stock were $64.00 and $51.80, respectively. ITT
common stock is also listed on the Euronext Exchange under the
“ITT” trading symbol.
We declared
dividends of $0.25 and $0.2125 per share of common stock in each
of the four quarters of 2010 and 2009, respectively. In the
first quarter of 2011, we declared a dividend of $0.25 per share
for shareholders of record on March 2, 2011. Dividend
decisions are subject to the discretion of our Board of
Directors and will be based on, and affected by, a number of
factors, including operating results and financial requirements.
Therefore, there can be no assurance as to what level of
dividends, if any, will be paid in the future.
There were 19,269
holders of record of our common stock on February 11, 2011.
EQUITY
COMPENSATION PLAN INFORMATION
The information
called for by Item 5(a) is incorporated herein by reference
to the portions of the definitive proxy statement referred to in
Item 10 of this Annual Report on
Form 10-K
set forth under the caption “Equity Compensation Plan
Information.”
ISSUER
PURCHASES OF EQUITY SECURITIES
The following table
summarizes our purchases of our common stock for the quarter
ended December 31, 2010.
|
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) | ||||||||||||||||
|
10/1/10 – 10/31/10
|
– | – | – | $ | 569 | |||||||||||||||
|
11/1/10 – 11/30/10
|
– | – | – | $ | 569 | |||||||||||||||
|
12/1/10 – 12/31/10
|
– | – | – | $ | 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 December 31, 2010, 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. |
21
Table of Contents
PERFORMANCE
GRAPH
CUMULATIVE TOTAL RETURN
CUMULATIVE TOTAL RETURN
Based upon an
initial investment on December 31, 2005 of $100 with
dividends reinvested
| 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | |||||||||||||||||||||||||
|
ITT Corporation
|
$ | 100.00 | $ | 111.45 | $ | 130.69 | $ | 92.20 | $ | 101.69 | $ | 108.78 | ||||||||||||||||||
|
S&P 500
|
$ | 100.00 | $ | 115.79 | $ | 122.16 | $ | 76.96 | $ | 97.33 | $ | 111.99 | ||||||||||||||||||
|
S&P 500 Industrials Index
|
$ | 100.00 | $ | 113.29 | $ | 126.93 | $ | 76.26 | $ | 92.22 | $ | 116.87 | ||||||||||||||||||
Information
provided in the Performance Graph shall not be deemed filed with
the SEC.
22
Table of Contents
| ITEM 6. | SELECTED FINANCIAL DATA |
The following table
presents selected historical financial data derived from the
audited Consolidated Financial Statements and other Company
information for each of the five years presented. Prior year
amounts have been reclassified to reflect discontinued
operations. This information should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition
and Results of Operations and the audited Consolidated Financial
Statements and the Notes thereto.
| (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||
|
Results of Operations
|
|||||||||||||||||||||||||
|
Revenue(a)
|
$ | 10,995 | $ | 10,674 | $ | 11,476 | $ | 9,000 | $ | 7,808 | |||||||||||||||
|
Operating
income(b)
|
900 | 894 | 1,198 | 978 | 801 | ||||||||||||||||||||
|
Operating
margin(b)
|
8.2 | % | 8.4 | % | 10.4 | % | 10.9 | % | 10.3 | % | |||||||||||||||
|
Income from continuing operations
|
654 | 641 | 768 | 633 | 500 | ||||||||||||||||||||
|
Income from continuing operations per diluted share
|
$ | 3.53 | $ | 3.49 | $ | 4.17 | $ | 3.43 | $ | 2.66 | |||||||||||||||
|
Dividends declared
|
$ | 1.00 | $ | 0.85 | $ | 0.70 | $ | 0.56 | $ | 0.44 | |||||||||||||||
|
Financial Position
|
|||||||||||||||||||||||||
|
Total
assets(a)
|
$ | 12,438 | $ | 11,129 | $ | 10,480 | $ | 11,553 | $ | 7,401 | |||||||||||||||
|
Total
debt(a)
|
1,365 | 1,506 | 2,147 | 3,566 | 1,097 | ||||||||||||||||||||
| (a) | In September 2007 and December 2007, we acquired International Motion Control (IMC) and EDO Corporation (EDO), respectively. These businesses contributed 2008 revenue growth of approximately 19.0%, as compared to 2007. These businesses provided $2,758 of total assets and $2,154 of total debt on date of acquisition. |
| (b) | The decline in operating income and operating margin from 2008 to 2009 and 2010 is primarily attributable to the recognition of a net asbestos liability related to pending claims and unasserted claims estimated to be filed over the next ten years. The 2010 and 2009 asbestos charges, net of estimated recoveries from insurers and other responsible parties, included in operating income were $385 and $238, respectively. It is probable that we will incur additional liabilities for asbestos claims filed beyond our current 10-year horizon and such liabilities may be material. |
23
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ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In millions,
except per share amounts, unless otherwise stated)
EXECUTIVE
SUMMARY
ITT reported revenue
of $11.0 billion for the year ended December 31, 2010,
an increase of 3.0% from $10.7 billion reported in 2009.
Benefits from newly acquired businesses and a general recovery
from the challenging 2009 market conditions drove revenue growth
and exceeded declines from certain programs that support the
U.S. Government Armed Services. Investments in strategic
operational and productivity initiatives taken over the past two
years provided significant
year-over-year
savings; however, these savings were largely offset by
additional asbestos-related costs, and resulted in 2010 income
from continuing operations of $654 or $3.53 per diluted share,
reflecting growth of 2.0%.
Adjusted income from
continuing operations was $818 for 2010, reflecting an increase
of $132, or 19.2%, over the prior year adjusted amount. Our
adjusted income from continuing operations translated into $4.41
per diluted share, which represents a record level for ITT and a
$0.68 or 18.2% increase over the prior year. 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.
Additional financial
highlights for 2010 include the following:
| n | Deployment of more than $1.0 billion of capital into a number of strategic acquisitions in growth markets, most notably the acquisitions of Nova and Godwin in our Fluid segment, which provided earnings accretion of $0.08 per share. | |
| n | Execution of a strategic transformation at our Defense segment that created greater efficiencies and better aligned our technical capabilities with our customers’ needs. Additionally, we completed the divestiture of CAS, our SETA business, which generated proceeds of $237 and an after-tax gain on sale of $130. | |
| n | Cash flow from operating activities of $1.2 billion, an 18% increase in our annual dividend to shareholders, and a cash position at the end of the year in excess of $1.0 billion. | |
| n | Net charge to operating income of $385 relating to asbestos exposures, reflecting an increase in our estimated liability net of insurance and other third-party recoveries, as a result of deteriorating conditions which affected several key factors used to estimate the net liability. | |
| n | Positions secured on a number of significant U.S. Government programs, including the FAA Systems Engineering 2020 (SE2020) support, the NASA Space Communications Network Services and the Kuwait and Afghanistan Base Operations & Security Support Services. | |
| n | In January 2011, the announcement of our plan to transform ITT into three distinct, publicly traded companies by the end of 2011. |
Further details
related to these results are contained in the following
Consolidated Financial Results and Segment Review sections.
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 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 |
24
Table of Contents
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 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. A reconciliation of adjusted income from continuing
operations, including adjusted earnings per diluted share, is
provided below.
| 2010 | 2009 | 2008 | |||||||||||||
|
Income from continuing operations
|
$ | 654 | $ | 641 | $ | 768 | |||||||||
|
Adjusted net asbestos-related costs, net of
tax(a)
|
205 | 131 | — | ||||||||||||
|
Tax-related special
items(b)
|
(41 | ) | (86 | ) | (34 | ) | |||||||||
|
Adjusted income from continuing operations
|
818 | 686 | 734 | ||||||||||||
|
Income from continuing operations per diluted share
|
$ | 3.53 | $ | 3.49 | $ | 4.17 | |||||||||
|
Adjusted income from continuing operations per diluted share
|
$ | 4.41 | $ | 3.73 | $ | 3.99 | |||||||||
| (a) | The net asbestos-related costs, net of tax, include costs related to an annual remeasurement of our asbestos assets and liabilities. Quarterly provisions for net asbestos-related costs, net of tax which relate to maintaining a rolling 10-year projection period are not included as a special item. The following table provides a reconciliation of net asbestos-related costs to adjusted net asbestos-related costs, net of tax, included as a special item. |
| 2010 | 2009 | |||||||||
|
Net asbestos-related costs before taxes
|
$ | 385 | $ | 238 | ||||||
|
Less: net asbestos-related costs incurred outside annual
remeasurement
|
(55 | ) | (28 | ) | ||||||
|
Net asbestos-related costs related to annual remeasurement
before taxes
|
330 | 210 | ||||||||
|
Tax rate
|
38.0 | % | 37.7 | % | ||||||
|
Adjusted net asbestos-related costs, net of tax
|
$ | 205 | $ | 131 | ||||||
See
Note 19, “Commitments and Contingencies,” in the
Notes to our Consolidated Financial Statements for further
information.
| (b) | The 2010 tax-related special items primarily include a reversal of certain valuation allowances, a reversal of uncertain tax positions and a reduction of deferred tax assets associated with the U.S. Patient Protection and Affordable Care Act (the Healthcare Reform Act). The 2009 tax-related special items primarily relate to interest received on a tax settlement and the reversal of deferred tax liabilities relating to a restructuring of certain international legal entities. The 2008 tax-related special items primarily relate to a tax account validation adjustment. See Note 6, “Income Taxes,” in the Notes to our Consolidated 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. A reconciliation of free cash flow is provided below. |
| 2010 | 2009 | 2008 | |||||||||||||
|
Net cash from continuing operations
|
$ | 1,234 | $ | 1,258 | $ | 1,107 | |||||||||
|
Capital expenditures
|
(328 | ) | (271 | ) | (248 | ) | |||||||||
|
Discretionary pension contributions, net of tax
|
31 | 62 | — | ||||||||||||
|
Free cash flow
|
$ | 937 | $ | 1,049 | $ | 859 | |||||||||
2011
Outlook
Revenue for the full
year 2011 is expected to grow to approximately
$11.4 billion with adjusted earnings in the range of
approximately $4.62 to $4.82 per diluted share. Organic revenue
is expected to grow approximately 2%, with solid growth in the
commercial businesses more than offsetting a slight decline in
the Defense segment. Full-year revenue for the Defense segment
is expected to decline approximately 2%, and operating margin is
expected to decline to approximately 12.4%. Fluid segment
revenue is expected to grow approximately 12%, and organic
revenue growth is projected at approximately 5%. Fluid segment
operating margin is expected to grow to approximately 14.0%.
Motion & Flow segment revenue growth is expected to be
approximately 7%, reflecting organic revenue growth of
approximately 5%. Operating margin for Motion & Flow
segment is estimated to grow to approximately 15.0%. This
guidance excludes future impacts to earnings per share and
operating margin that will result from the Company’s
recently announced spinoff transaction.
On January 12,
2011, the Company announced a plan to spinoff its water-related
and defense-related businesses by the end of 2011. The
water-related businesses will include the Water &
Wastewater division and the Residential & Commercial
Water division, as well as the Flow Control division that is
currently reported within the Motion & Flow Control
segment. This new water business is estimated to generate pro
forma 2011 revenue of approximately $3.6 billion. The new
defense-related business, that will include the divisions that
currently comprise our Defense segment, is estimated to generate
pro forma 2011 revenue of approximately $5.8 billion. The
new ITT will include the divisions that comprise our
Motion & Flow segment, except for the Flow Control
division, and will include
25
Table of Contents
the Industrial
Process division currently reported within the Fluid segment.
The new ITT is estimated to generate pro forma 2011 revenue of
approximately $2.1 billion. Pro forma revenue presented
above is without other adjustment.
Known Trends and
Uncertainties
The following list
represents a summary of trends and uncertainties which could
have a significant impact on our results of operations,
financial position
and/or cash
flows:
| n | The global economic environment remains in a relative state of uncertainty. Although financial markets have recovered from their lows in 2009, we consider the overall global economic recovery to be a gradual, long-term process. In the U.S., gradual improvements in credit availability, solid consumer spending, moderate job creation and less uncertainty about new regulations and taxes should work to reinforce the economic recovery. However, downside factors such as the challenges facing local, state and federal government finance and possible spillover of Europe’s sovereign debt crisis could limit or delay U.S. growth. Within Europe, the sovereign debt crisis has weakened the recovery process and created the potential for significant volatility during 2011. The potential for unforeseen adverse macroeconomic events remains a concern and the occurrence of such events could have a significant unfavorable effect on our business. | |
| n | The FY 2011 U.S. Department of Defense (DoD) budget was submitted to Congress by President Obama, but remains under deliberation. Agencies including the Department of Defense are operating under a continuing resolution. There is a chance this continuing resolution could be extended for the full fiscal year by the new Congress. Federal cabinet departments and agencies operating under a full-year continuing resolution, instead of enacted annual FY 2011 appropriations, are precluded from starting new programmatic initiatives or increasing production levels in ongoing procurement programs, unless they receive specific congressional authorization to reprogram funds. The administration’s spending and programmatic priorities, detailed in the DoD budget request and aligned with the 2010 Quadrennial Defense Review, include investments of an enduring nature and focus on the future challenges of modernization and transformation of forces and capabilities. Examples include intelligence, surveillance and reconnaissance, network communications, cyber warfare and security, unmanned aircraft and integrated logistics support. Our portfolio of defense solutions, which covers a broad range of air, sea and ground platforms and applications, aligns with the priorities outlined by the DoD. However, uncertainty related to potential changes in appropriations and priorities could materially impact our business. | |
| n | Programs related specifically to the support of ongoing operations in Iraq and Afghanistan face declining revenue streams going forward. This expectation is reflected in our business plans. The degree to which a reduction in these activities accelerates or not remains an area of uncertainty. There has been particular uncertainty around the U.S. administration’s earlier statements and intentions regarding reducing troop level presence in Afghanistan beginning in mid-2011. | |
| n | Ongoing Department of Defense acquisition reform and Secretary Gates’ cost savings initiatives, combined with increased industry competitiveness to win long-term positions on key programs, could add pressure to industry profit margins going forward. | |
| n | A portion of our Fluid segment’s revenue is derived from municipal projects and services. European austerity measures and budget pressures within the U.S. have forced governments to plan for reductions in spending, reevaluate their priorities and postpone wastewater infrastructure projects. These actions have led to a reduction in demand, increased competition and pricing pressures. Our ability or inability to secure project orders in this challenging environment could significantly affect our Fluid segment results. | |
| n | A portion of the Fluid segment’s revenue is derived from U.S. commercial construction spending and residential real estate activity. Commercial construction build rates are expected to remain low during the majority of 2011 as the build versus buy indicator for real estate investors continues to favor investing in existing buildings due to depressed asset prices. Similarly, consensus expectations for residential homebuilding are mixed, reflecting uncertainty around the likelihood and magnitude of a recovery. The continued uncertainty and volatility within these markets could significantly affect the results of our Fluid segment. | |
| n | A portion of our business provides pumps for the general industrial, mining, pulp and paper, chemical and petroleum processing industries. Emerging markets have led in the global industrial project recovery, most significantly within the mining industry as high metal prices have promoted robust demand for mining equipment. However, as long as global economic uncertainty remains it will be |
26
Table of Contents
| difficult to predict how the trends in industrial project orders may be impacted. |
| n | A portion of our Motion & Flow segment provides original equipment and after-market products to the automotive industry. Governmental automotive stimulus programs introduced during 2009 encouraged moderate recovery and induced increased levels of inventory restocking during 2010. However, as these programs have reached their conclusion, the potential for unfavorable trends within the automotive industry, particularly within Europe where we have a concentration of our business, continues to exist and could negatively impact our future results. | |
| n | The connectors industry experienced significant declines in both orders and sales during 2009. Recent connectors industry data indicates that the recovering order trend experienced during 2010 has slowed over the past few months, but remains favorable compared to 2009. Due to the significant volatility experienced within this industry, it is difficult to predict how order trends will be impacted during 2011. | |
| n | While projecting future asbestos costs is subject to numerous variables and uncertainties that are inherently difficult to predict, developments in several key factors since the third quarter of 2009 negatively impacted the assumptions used in our estimates. Further deterioration in these factors could have an unfavorable effect on our estimated asbestos costs and negatively affect our results of operations. In 2011, we expect higher net asbestos charges and greater net cash outflows as a result of the effects of inflation and a decline in the amount of available insurance or other recoveries. In addition, it is probable that we will incur additional liabilities for asbestos claims filed beyond our current 10-year horizon and such liabilities may be material. See Note 19 “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements for further information. | |
| n | The Company currently anticipates significant expenditures associated with the planned spinoff transaction primarily consisting of employee-related costs, costs to start up certain stand-alone functions and information technology systems and other one-time transaction related costs, including investment banking, consulting fees. |
The information
provided above does not represent a complete list of trends and
uncertainties that could impact our business in either the near
or long-term. It should, however, be considered along with the
risk factors identified in Item 1A of this Annual Report on
Form 10-K
and our disclosure under the caption “Forward-Looking
Statements” at the end of this section.
DISCUSSION OF
FINANCIAL RESULTS
2010 VERSUS 2009
2010 VERSUS 2009
| 2010 | 2009 | CHANGE | |||||||||||||
|
Revenue
|
$ | 10,995 | $ | 10,674 | 3.0 | % | |||||||||
|
Gross profit
|
3,175 | 3,024 | 5.0 | % | |||||||||||
|
Gross margin
|
28.9 | % | 28.3 | % | 60 | bp | |||||||||
|
Operating expenses
|
2,275 | 2,130 | 6.8 | % | |||||||||||
|
Expense to revenue ratio
|
20.7 | % | 20.0 | % | 70 | bp | |||||||||
|
Operating income
|
900 | 894 | 0.7 | % | |||||||||||
|
Operating margin
|
8.2 | % | 8.4 | % | (20 | )bp | |||||||||
|
Interest and non-operating expenses, net
|
82 | 84 | (2.4 | )% | |||||||||||
|
Income tax expense
|
164 | 169 | (3.0 | )% | |||||||||||
|
Effective tax rate
|
20.0 | % | 20.9 | % | (90 | )bp | |||||||||
|
Income from continuing operations
|
654 | 641 | 2.0 | % | |||||||||||
REVENUE
Our 2010 revenue was
marked by growth from strategic acquisitions as well as a level
of economic recovery within a majority of our commercial
businesses, most notably the businesses that comprise our
Motion & Flow segment. Revenue within our commercial
businesses benefited during 2010 from order and stocking delays
caused by the uncertainty manifested throughout 2009. Although
revenue has not yet reached the levels achieved during 2008, we
believe that our competitive position and portfolio of highly
engineered products will continue to be strengthened by a
gradual economic improvement. The following table illustrates
the 2010 and 2009 revenue of our business segments. See below
for further discussion of
year-over-year
revenue activity at the segment level.
| 2010 | 2009 | CHANGE | |||||||||||||
|
Defense
|
$ | 5,897 | $ | 6,067 | (2.8 | )% | |||||||||
|
Fluid
|
3,670 | 3,363 | 9.1 | % | |||||||||||
|
Motion & Flow
|
1,441 | 1,253 | 15.0 | % | |||||||||||
|
Eliminations
|
(13 | ) | (9 | ) | — | ||||||||||
|
Total
|
$ | 10,995 | $ | 10,674 | 3.0 | % | |||||||||
27
Table of Contents
The following table
illustrates the impact from organic growth, recent acquisitions,
and fluctuations in foreign currency, in relation to
consolidated revenue during 2010.
| $ CHANGE | % CHANGE | |||||||||
|
2009 Revenue
|
$ | 10,674 | ||||||||
|
Organic growth
|
80 | 0.8 | % | |||||||
|
Acquisitions/(divestitures), net
|
270 | 2.5 | % | |||||||
|
Foreign currency translation
|
(29 | ) | (0.3 | )% | ||||||
|
Total change in revenue
|
321 | 3.0 | % | |||||||
|
2010 Revenue
|
$ | 10,995 | ||||||||
Defense &
Information Solutions
The 2010 revenue
generated by our Defense segment was $5,897, reflecting a
decline of $170 or 2.8% from the segment’s 2009 revenue of
$6,067. These results were driven by a decline in product
revenue of 4.9%, or $186, which was mitigated by consistent
results from service revenue programs. The following table
provides total revenue and
year-over-year
change by Defense segment division.
| 2010 | 2009 | CHANGE | |||||||||||||
|
Electronic Systems
|
$ | 2,425 | $ | 2,629 | (7.8 | )% | |||||||||
|
Geospatial Systems
|
1,188 | 1,172 | 1.4 | % | |||||||||||
|
Information Systems
|
2,304 | 2,292 | 0.5 | % | |||||||||||
|
Eliminations
|
(20 | ) | (26 | ) | — | ||||||||||
|
Defense segment revenue
|
$ | 5,897 | $ | 6,067 | (2.8 | )% | |||||||||
The 2010 product
revenue results were impacted by volume declines in
surge-related equipment, specifically CREW 2.1 (Counter RCIED
Electronic Warfare) electronic jammers and U.S. Single
Channel Ground and Airborne Radio Systems (SINCGARS) related to
the urgent and compelling needs in past years. Declines in
activity related to these two programs resulted in an
approximate $608 decrease in revenue. However, significant
strength in the majority of our other programs that support the
U.S. Department of Defense and other government agencies,
most notably special purpose electronic jammer equipment and
composite structures as well as an increase in the volume of
night vision goggles sold to U.S. allies, partially
mitigated the significant decline in the CREW 2.1 and SINCGARS
programs. Order activity related to CREW 2.1 and
U.S. SINCGARS programs began receding in 2009 due to
reduced U.S. troop deployment and programmatic timing.
However, during 2010 we received key awards to develop the next
generation of battlefield improvised explosive device detection,
such as CREW 3.2 and 3.3.
The 2010 service
revenue was relatively flat as compared to the prior year.
Logistical service, air-traffic management and international
security program activities generated growth of approximately
8.4% during 2010. The strength in the logistical service portion
of our business were assisted by activity under several key
facilities management awards received in the second half of 2009
and during 2010, including Kuwait, Afghanistan and the Logistics
Civil Augmentation Program (LOGCAP), among others. However,
growth from these programs was offset by a decline in our
involvement in the Data & Analysis Center for Software
(DACS) program.
As noted in the
“Executive Summary” section, during 2010 we secured
positions on a number of significant U.S. Government
service-related programs, including the FAA Systems Engineering
2020 (SE2020) support, the NASA Space Communications Network
Services (SCNS) and the Kuwait and Afghanistan Base
Operations & Security Support Services. These
contracts have an estimated total potential value approximately
$4.9 billion with all options exercised. See below for
further information:
SE2020 –
this contract has been awarded by the FAA to lead a team of
aviation industry companies to support the development of
advanced concepts involving the most challenging issues facing
the FAA’s Next Generation Air Transportation System
initiative to modernize the U.S. national airspace system.
This contract has a ceiling value with all options exercised of
$1.4 billion, with a five-year base period and five
one-year options.
Kuwait Facilities
Operations –
this contract has been awarded by the U.S. Army Rock Island
Contracting Center to provide comprehensive support services for
all U.S. Army facilities in Kuwait. This contract has an
estimated potential worth with all options exercised of
$1.4 billion, with a one-year base period and four one-year
options.
SCNS –
this contract was originally awarded to ITT in October 2008 to
support NASA space and near-Earth networks that provide most of
the communications and tracking services for a wide range of
Earth-orbiting spacecraft, but commencement of the contract work
was delayed due to a number of protests filed by the incumbent
contractor. These protests were cleared during the fourth
quarter of 2010. The contract has a base performance period of
five years and three months, with two
one-year
option periods, and a maximum estimated potential value with all
options exercised of $1.26 billion.
Afghanistan
National Security Forces Facilities
Support –
this award actual pertains to two individual contracts from the
U.S. Army Corps of Engineers Middle East District to
provide facilities operations, maintenance and training services
for the Afghanistan National Security Forces in Northern
Afghanistan and Southern Afghanistan. Each award is for a
one-year base period with options for four additional years. The
contract has
28
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an estimated
potential value of $450 million for Northern Afghanistan
and $350 million for Southern Afghanistan, with all options
exercised.
Fluid
Technology
The 2010 Fluid
segment revenue of $3,670 grew 9.1%, including a $271 benefit
from recent acquisitions, primarily Godwin Pumps and Nova
Analytics. These acquisitions expanded our product offerings in
the on-demand dewatering pump rental and analytical
instrumentation markets. The revenue generated by these two
businesses during 2010 exceeded our initial expectations. In
2011 we expect continued growth from these businesses due to
increased leverage from our deep customer base and distribution
channels.
The following table
provides total organic revenue and
year-over-year
organic revenue growth by division, reconciling to total segment
revenue.
|
ORGANIC |
|||||||||||||||
| 2010 | 2009 | GROWTH | |||||||||||||
|
Water & Wastewater
|
$ | 1,682 | $ | 1,657 | 1.5 | % | |||||||||
|
Residential & Commercial Water
|
1,105 | 1,062 | 4.0 | % | |||||||||||
|
Industrial Process
|
680 | 719 | (5.4 | )% | |||||||||||
|
Fluid organic revenue
|
$ | 3,467 | $ | 3,438 | 0.8 | % | |||||||||
|
Impact from acquisitions
|
271 | — | |||||||||||||
|
Impact from foreign currency
|
3 | — | |||||||||||||
|
Eliminations
|
(71 | ) | (75 | ) | |||||||||||
|
Fluid segment revenue
|
$ | 3,670 | $ | 3,363 | |||||||||||
Organic revenue
growth of 1.5% derived from our Water & Wastewater
division reflects mixed regional results. Organic revenue
derived within the U.S. and Canada increased approximately
9% compared to 2009, driven primarily by increased volume of
transport equipment. Organic revenue within the Asia Pacific
region increased approximately 19% due to positive results from
transport and dewatering equipment. Growth in these regions was
partially offset by the continued challenging economic and
competitive pricing conditions within Europe that impacted the
majority of our products lines, resulting in an approximate 6%
revenue decline.
The organic revenue
growth of 4.0% generated by our Residential &
Commercial Water division was driven by growth in residential
building services equipment and light industrial equipment. We
attribute these positive results to the slow but continuing
restocking of inventory and gradual recovery within the
residential and commercial markets. Our significant installed
base of equipment also provided demand stability.
Organic revenue from
our Industrial Process division declined 5.4% during 2010
reflecting declines in large industrial projects, partially
offset by growth from after-market pumps and parts volume due to
improved customer facility utilization. The decline in large
industrial project revenue was consistent with the significant
reduction in long-lead industrial project orders experienced
during 2009. Delayed starts for received oil and gas orders also
contributed to the overall decline. Orders have improved 11.8%
or $76 from 2009, resulting primarily from after-market pumps
and parts volume, as well as demand in emerging markets related
to oil and gas and mining projects.
Motion &
Flow Control
The
Motion & Flow segment generated revenue of $1,441
during 2010, reflecting growth of 15.0% over the prior year,
primarily driven by improved market conditions within the
majority of markets served, as well as market share growth from
new product releases and key platform wins. Unfavorable foreign
currency fluctuations negatively impacted revenue growth by $31
or 2.5% in 2010. The following table provides total revenue and
year-over-year
change by Motion & Flow segment division.
| 2010 | 2009 | CHANGE | |||||||||||||
|
Motion Technologies
|
$ | 548 | $ | 491 | 11.6 | % | |||||||||
|
Interconnect Solutions
|
413 | 341 | 21.1 | % | |||||||||||
|
Control Technologies
|
275 | 243 | 13.2 | % | |||||||||||
|
Flow Control
|
211 | 184 | 14.7 | % | |||||||||||
|
Eliminations
|
(6 | ) | (6 | ) | — | ||||||||||
|
Motion & Flow segment revenue
|
$ | 1,441 | $ | 1,253 | 15.0 | % | |||||||||
The Motion
Technologies division generated revenue growth of 11.6% during
2010, including negative impacts from unfavorable foreign
currency fluctuations of 5.1%. The growth was driven by European
automotive stimulus programs in place during the latter part of
2009 that bolstered demand in our primary geographic markets. In
addition, key platform wins obtained during the past
18 months within Europe and other regions increased our
share in the original equipment brake pad market.
The Interconnect
Solutions division generated revenue growth of 21.1% during
2010, driven by the overall strengthening and recovery within
the majority of markets served. During 2010, we also received
key platform wins on Smartphone devices that increased our share
within the communications market.
The Control
Technologies division generated revenue growth of 13.2% during
2010, reflecting overall strengthening of the general
industrial, aerospace and defense markets served by this
division as compared to prior year.
The Flow Control
division generated revenue growth of 14.7% during 2010,
reflecting gains in the food and beverage
29
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market from new
product releases. Our products in the marine markets benefited
from a major re-stocking in distribution. Specialty industrial
products growth reflected an increased presence in emerging
markets.
GROSS
PROFIT
Gross profit for
2010 was $3,175, representing a $151 increase, or 5.0% from
2009, that includes contributions of approximately $102 from our
2010 acquisitions. Organic revenue growth of $80, driven by
increased volume, was more than offset by an unfavorable change
in Defense segment product sales mix and pricing that
contributed to an overall decline in gross profit of
approximately $131. However, the overall impact from price
reductions was mitigated by significant net savings, which more
than offset rising material and labor costs, generated by
productivity and other cost-reduction initiatives. See further
discussion on the 2010 net savings generated by our
business segment within the “Operating Income”
discussion below. The following table illustrates the 2010 and
2009 gross profit results of our business segments,
including gross margin results.
| 2010 | 2009 | CHANGE | |||||||||||||
|
Defense
|
$ | 1,367 | $ | 1,430 | (4.4 | )% | |||||||||
|
Fluid
|
1,345 | 1,196 | 12.5 | % | |||||||||||
|
Motion & Flow
|
461 | 395 | 16.7 | % | |||||||||||
|
Corporate and Other
|
2 | 3 | — | ||||||||||||
|
Total gross profit
|
$ | 3,175 | $ | 3,024 | 5.0 | % | |||||||||
|
Gross margin:
|
28.9 | % | 28.3 | % | 60 | bp | |||||||||
|
Defense
|
23.2 | % | 23.6 | % | (40 | )bp | |||||||||
|
Fluid
|
36.6 | % | 35.6 | % | 100 | bp | |||||||||
|
Motion & Flow
|
32.0 | % | 31.5 | % | 50 | bp | |||||||||
OPERATING
EXPENSES
Operating expenses
increased 6.8% during 2010 to $2,275, primarily attributable to
an increase in net asbestos-related costs resulting from
unfavorable trends in certain key assumptions that are reviewed
during our annual assessment of the asbestos liability. The
following table provides further information by expense type, as
well as a breakdown of operating expense by segment.
| 2010 | 2009 | CHANGE | |||||||||||||
|
Selling, general and administrative expenses
|
$ | 1,584 | $ | 1,555 | 1.9 | % | |||||||||
|
Research and development expenses
|
253 | 258 | (1.9 | )% | |||||||||||
|
Asbestos-related costs, net
|
385 | 238 | 61.8 | % | |||||||||||
|
Restructuring and asset impairment charges, net
|
53 | 79 | (32.9 | )% | |||||||||||
|
Total
|
$ | 2,275 | $ | 2,130 | 6.8 | % | |||||||||
|
By Segment:
|
|||||||||||||||
|
Defense
|
$ | 615 | $ | 669 | (8.1 | )% | |||||||||
|
Fluid
|
866 | 804 | 7.7 | % | |||||||||||
|
Motion & Flow
|
282 | 277 | 1.8 | % | |||||||||||
|
Corporate & Other
|
512 | 380 | 34.7 | % | |||||||||||
Selling,
General & Administrative Expenses
(SG&A)
SG&A expenses
incurred within our Fluid segment increased $75 or 10.7% during
2010, primarily reflecting additional costs of $68 related to
our newly acquired Godwin and Nova businesses.
SG&A expenses
incurred within our Motion & Flow segment increased
$29 or 15.3% during 2010, primarily reflecting the impact from
an increase in sales volumes, as well as additional spending on
various strategic investments.
The incremental
SG&A expenses incurred within our commercial segments were
partially offset by a $59, or 11.4% decrease within our Defense
segment. This decline includes a $24 decrease in selling and
other general expenses resulting primarily from the headcount
reductions and the decline in 2010 revenue, as well as a $22
benefit from reduced amortization expense related to intangible
assets acquired in connection with our 2007 purchase of EDO
Corporation.
Research and
Development Expenses (R&D)
R&D spending
was relatively flat
year-over-year.
R&D spending within our Defense segment decreased by $23 or
16.5% compared to 2009, 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 $10 or 16.1%, primarily due to our
newly acquired Nova business.
30
Table of Contents
Asbestos-Related
Costs, Net
During 2010, we
recognized net asbestos related costs of $385, reflecting an
increase of $147 over the prior year, primarily reflecting the
impact of our annual update to the underlying assumptions used
in our liability and asset estimates. As part of the annual
update, 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.
Based on the results
of this annual update in 2010, we increased our estimated
undiscounted asbestos liability, including legal fees, by $691,
reflecting costs that the Company is estimated to incur to
resolve all pending claims, as well as unasserted claims
estimated to be filed over the next 10 years. The increase
in our estimated liability is a result of several developments,
including higher settlement costs and significantly increased
activity in several higher-cost jurisdictions, increasing the
number of cases to be adjudicated and the expected legal costs.
Our 2010 detailed review of the asbestos-related assets,
including estimated recoveries from insurers and other
responsible parties, resulted in a $372 increase in the recorded
asset.
The net asbestos
expense is primarily recorded within Corporate and Other;
however, a portion of the expense is associated with businesses
that were disposed of a number of years ago, and is reported
within discontinued operations in our Consolidated Financial
Statements. See Note 19, “Commitments &
Contingencies,” in our Notes to the Consolidated Financial
Statements for further information on our asbestos-related
liability and assets.
Restructuring and
Asset Impairment Charges, Net
During 2010, we
recognized net restructuring charges of $52, representing a $27
or 34.2% decrease as compared to the prior year. This decrease
in expense was mainly attributable to a fewer number of actions
that were initiated during 2010 versus 2009.
Our largest 2010
restructuring initiative related to a Defense segment
realignment action that commenced during the first quarter, with
the objective of enabling better product portfolio integration,
encouraging a more coordinated market approach and reducing
operational redundancies. This action resulted in the
recognition of $28 of restructuring expense and the closure of
three facilities. As of December 31, 2010, we consider this
action to be substantially complete, except for remaining cash
payments of $9 to settle remaining severance liabilities. We
estimate our Defense realignment actions will yield
approximately $61 in annual net savings, including estimated
2011 savings of $27 incremental to 2010.
In addition to the
Defense realignment action, we incurred $24 related to other
various restructuring initiatives that were not individually
material. We consider the majority of these initiatives to be
substantially complete as of December 31, 2010, except for
remaining cash payments of $13. We estimate aggregate annual net
savings of approximately $37 from our other 2010 actions,
including estimated 2011 savings of $33 incremental to 2010.
See Note 5,
“Restructuring and Asset Impairment Charges,” in the
Notes to the Consolidated Financial Statements for additional
information.
OPERATING
INCOME
We generated
operating income of $900 during 2010, a 0.7% increase from the
prior year, primarily reflecting growth from our Fluid and
Motion & Flow segment operations, offset by an
unfavorable increase in net asbestos-related costs. Operating
margin decreased to 8.2% for 2010, a
year-over-year
decline of 20 basis points. The increase in net
asbestos-related costs provided an unfavorable impact of
130 basis points to the 2010 operating margin. The
following table illustrates the 2010 and 2009 operating income
results of our business segments, including operating margin
results.
| 2010 | 2009 | CHANGE | |||||||||||||
|
Defense
|
$ | 752 | $ | 761 | (1.2 | )% | |||||||||
|
Fluid
|
479 | 393 | 21.9 | % | |||||||||||
|
Motion & Flow
|
179 | 118 | 51.7 | % | |||||||||||
|
Segment operating income
|
1,410 | 1,272 | 10.8 | % | |||||||||||
|
Corporate and Other
|
(510 | ) | (378 | ) | (34.9 | )% | |||||||||
|
Total operating income
|
$ | 900 | $ | 894 | 0.7 | % | |||||||||
|
Operating margin:
|
|||||||||||||||
|
Consolidated
|
8.2 | % | 8.4 | % | (20 | )bp | |||||||||
|
Defense
|
12.8 | % | 12.5 | % | 30 | bp | |||||||||
|
Fluid
|
13.1 | % | 11.7 | % | 140 | bp | |||||||||
|
Motion & Flow
|
12.4 | % | 9.4 | % | 300 | bp | |||||||||
Defense &
Information Solutions
Volume reductions
combined with unfavorable sales mix, pricing pressures, and
additional restructuring expenses of approximately $28 led to
the decline in operating income. These impacts were partially
offset by reduced selling, administrative and general expenses
of approximately $24 and lower R&D expenses of
approximately $24 as a result of Defense realignment activities.
Additionally, lower amortization of approximately $22 also
mitigated the negative impacts above. The year on year increase
in margin of 30 bps was attributed to the
31
Table of Contents
benefits outlined
above offsetting the volume, sales mix and pricing challenges in
2010.
Fluid
Technology
Operational
productivity, including savings from restructuring actions and
other cost savings initiatives, such as, Value-Based Six Sigma
and global strategic sourcing, as well as
year-over-year
revenue growth, were partially offset by rising costs of
materials and labor. These items combined to provide
approximately $87 of benefit to operating income and a
240 basis point improvement to operating margin.
Operating income was
also favorably impacted by a $23 reduction in 2010 restructuring
costs, reflecting an 80 basis point improvement to
operating margin. Increased investment spending of approximately
$37 during 2010 in technology, R&D and the Value-Based
Commercial Excellence initiative, among others, resulted in a
100 basis point decline to operating margin.
The 2010
acquisitions of Nova and Godwin provided benefits of
approximately $26 to operating income, but unfavorably impacted
operating margin by 30 basis points due to costs incurred
associated with the purchase. In addition, unfavorable foreign
currency fluctuations and additional postretirement benefit
costs resulted in an approximate 50 basis point decline.
Motion &
Flow Control
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
costs of materials and labor, provided approximately $47 of
benefit to operating income and a 180 basis point
improvement to operating margin.
Operating income was
also favorably impacted by a $32 reduction in 2010 restructuring
costs, reflecting a 220 basis point improvement to
operating margin. Increased investment spending of approximately
$10 during 2010 in technology, R&D and the Value-Based
Commercial Excellence initiative, among others, resulted in a
70 basis point decline to operating margin. In addition,
unfavorable foreign currency fluctuations and additional
postretirement benefit costs resulted in an approximate
50 basis point decline.
Corporate and
Other
We incurred
corporate and other expenses of $510 during 2010, reflecting an
increase of $132 compared to 2009. The increase in expense
primarily relates to the recognition of additional
asbestos-related costs as mentioned above in the “Operating
Expenses” discussion.
Impacts to
Operating Income from Postretirement Expense
Postretirement costs
(pension and other employee-related defined benefit plans)
affect results in all segments. We recorded $126 of net periodic
postretirement cost during 2010, compared with costs of $99 in
2009. As more fully described in Note 16,
“Postretirement Benefit Plans,” in the Notes to
Consolidated Financial Statements, the primary drivers behind
the increase in the net periodic postretirement cost were the
higher service costs due to the addition of approximately
3,000 employees following the EDO acquisition into the
U.S. Salaried Retirement Plan (SRP), and increased
amortization of net actuarial losses that resulted from the 2008
financial market decline, partially offset by an increase in
expected returns on a higher base of plan assets.
In 2011, we expect
to incur approximately $184 of net periodic postretirement cost,
representing an increase of $58, or 46.0% as compared to 2010.
This increase is primarily attributable to additional
amortization of net actuarial losses.
U.S. Government
Cost Accounting Standards govern the extent to which
postretirement costs and plan contributions are allocable to and
recoverable under contracts with the U.S. Government. As a
result, we have sought and expect to continue to seek
reimbursement from the DoD for a portion of our postretirement
costs and plan contributions.
INTEREST AND
NON-OPERATING EXPENSES, NET
| 2010 | 2009 | |||||||||
|
Interest expense
|
$ | 100 | $ | 99 | ||||||
|
Interest income
|
16 | 24 | ||||||||
|
Miscellaneous (income) expense, net
|
(2 | ) | 9 | |||||||
|
Total interest and non-operating expenses, net
|
$ | 82 | $ | 84 | ||||||
Interest expense for
2010 was relatively flat as compared to 2009, as a reduction in
interest expense derived from commercial paper of $20 was offset
by an increase in interest expense from long-term debt. Our
daily average outstanding commercial paper balance decreased
from $704 in 2009 to $231 in 2010. The decline in 2010 interest
income was primarily due to the recognition of an $13 interest
refund received in conjunction with an IRS tax settlement during
2009. The fluctuation in net miscellaneous expense is due to the
sale of certain
available-for-sale
investments during 2010 that resulted in a pre-tax gain of $7.
32
Table of Contents
INCOME TAX
EXPENSE
Income tax expense
was $164 or 20.0% of income from continuing operations before
income taxes for 2010, compared to $169 or 20.9% during the
prior year. The
year-over-year
decrease in the income tax expense was primarily attributable to
an additional tax benefit of $41 related to an increase in
asbestos-related costs coupled with an additional tax benefit of
$26 from the reversal of valuation allowances on certain capital
loss carryforwards as it became more likely than not that these
deferred tax assets would be realized. These 2010 tax benefits
largely replaced the prior year benefit of $58 from an
international legal entity restructuring.
INCOME
FROM DISCONTINUED OPERATIONS, NET OF TAX
Income from
discontinued operations, net of tax, was $144 for 2010, as
compared to $3 for 2009. The increase of $141 primarily reflects
the recognition of an after-tax gain on sale of $130 related to
our divesture of CAS, Inc. (CAS), a component of our Defense
segment, which was sold on September 8, 2010. CAS generated
after-tax income from operations of $9 for both the 2009
twelve-month period and 2010 period prior to its sale. Also
included within income from discontinued operations is an
after-tax net asbestos-related benefit of $6 in 2010 as compared
to expense of $6 during 2009, related to a business we disposed
of a number of years ago.
DISCUSSION OF
FINANCIAL RESULTS
2009
Versus 2008
| 2009 | 2008 | CHANGE | ||||||||||||
|
Revenue
|
$ | 10,674 | $ | 11,476 | (7.0)% | |||||||||
|
Gross profit
|
3,024 | 3,214 | (5.9)% | |||||||||||
|
Gross margin
|
28.3 | % | 28.0 | % | 30bp | |||||||||
|
Operating expenses
|
2,130 | 2,016 | 5.7% | |||||||||||
|
Expense to revenue ratio
|
20.0 | % | 17.6 | % | 240bp | |||||||||
|
Operating income
|
894 | 1,198 | (25.4)% | |||||||||||
|
Operating margin
|
8.4 | % | 10.4 | % | (200)bp | |||||||||
|
Interest and non-operating expenses, net
|
84 | 122 | (31.1)% | |||||||||||
|
Income tax expense
|
169 | 308 | (45.1)% | |||||||||||
|
Effective tax rate
|
20.9 | % | 28.6 | % | (770)bp | |||||||||
|
Income from continuing operations
|
641 | 768 | (16.5)% | |||||||||||
REVENUE
The deteriorating
global economic conditions experienced during 2009 created
recessionary challenges within our Fluid and Motion &
Flow segments. As a result, we experienced a significant decline
in order activity that translated into a 14.9% decrease in
revenue from these segments. However, the full extent of the
unfavorable conditions experienced during 2009 was mitigated by
the results of our defense businesses that are less prone to
volatility in periods of economic uncertainty. The following
table illustrates the 2009 and 2008 revenue results of our
business segments. See below for further discussion of
year-over-year
revenue and order activity at the segment level.
| 2009 | 2008 | CHANGE | |||||||||||||
|
Defense
|
$ | 6,067 | $ | 6,064 | — | ||||||||||
|
Fluid
|
3,363 | 3,841 | (12.4 | )% | |||||||||||
|
Motion & Flow
|
1,253 | 1,583 | (20.8 | )% | |||||||||||
|
Eliminations
|
(9 | ) | (12 | ) | — | ||||||||||
|
Total
|
$ | 10,674 | $ | 11,476 | (7.0 | )% | |||||||||
The following table
illustrates the impact from organic growth, acquisitions
completed during the year, and fluctuations in foreign currency,
in relation to consolidated revenue during 2009.
| $ CHANGE | % CHANGE | |||||||||
|
2008 Revenue
|
$ | 11,476 | ||||||||
|
Organic decline
|
(567 | ) | (4.9 | )% | ||||||
|
Acquisitions/(divestitures), net
|
(12 | ) | (0.1 | )% | ||||||
|
Foreign currency translation
|
(223 | ) | (2.0 | )% | ||||||
|
Total change in revenue
|
(802 | ) | (7.0 | )% | ||||||
|
2009 Revenue
|
$ | 10,674 | ||||||||
Defense &
Information Solutions
The 2009 revenue
generated by our Defense segment was $6,067, consistent with the
segment’s 2008 revenue of $6,064. These results reflect
year-over-year
growth in service revenue programs of $140 or 6.5% and a decline
in product revenue of $137 or 3.5%.
The 2009 service
revenue benefited from logistical service contract wins at
Fort Benning and Maxwell Air Force Base, as well as
increased activity under the Global Maintenance and Supply
Services (GMASS) agreement with the U.S. Army. In addition,
service revenue during 2009 benefited from an increase in
engineering services related to the Tethered Aerostat Radar
System (TARS) program and the Federal Aviation
Administration’s (FAA) next generation air-traffic control
program. These positive service revenue contributions were
partially offset by a decline in Logistics Civil Augmentation
Program (LOGCAP) revenues.
The 2009 product
revenue results were impacted by volume declines in our C4
(command, control, communications and computers) business,
U.S. SINCGARS and CREW 2.1. In addition, our 2009 program
revenue was adversely affected by timing of deliveries for our
electronic ground warfare systems.
33
Table of Contents
The decline in
revenue from these programs was partially offset by revenue
growth from increased volume of night vision goggles to
international countries, Airborne Integrated Electronic warfare
systems and radar systems, as well as the GPS Navigation project
and other classified programs.
Fluid
Technology
The 2009 revenue
generated by our Fluid segment was $3,363, representing a
decline of $478 or 12.4% from the segment’s 2008 revenue of
$3,841. These results include a favorable impact from
acquisitions of $24 and an unfavorable impact from foreign
currency fluctuations of $153, resulting in an organic revenue
decline of $349 or 9.1%. The decline in organic revenue was
primarily the result of lower volumes and significant overall
weakness in most markets served due to challenging global
economic conditions. Organic revenue within the
Residential & Commercial Water division decreased
$170, the Water & Wastewater division decreased $90,
and the Industrial Process division decreased $85. However, the
overall impact from unfavorable conditions was partially
mitigated by stable results from product sales to municipal
markets, as well as from long-term construction type contracts
within the oil & gas and power generating markets.
Motion &
Flow Control
The 2009 revenue
generated by our Motion & Flow segment was $1,253,
representing a decline of $330 or 20.8% from the segment’s
2008 revenue of $1,583. These results include unfavorable
impacts from divestitures of $36 and foreign currency
fluctuations of $66, resulting in an organic revenue decline of
$228 or 14.4%. The decline in organic revenue was primarily the
result of lower volumes caused by challenging global economic
conditions affecting the majority of markets served. The
declines were mitigated during the latter half of 2009, through
market share gains in the beverage and marine markets, benefits
from European automotive stimulus programs, and solid results in
rail-related products within emerging markets.
Organic revenue at
our Motion Technologies division decreased $36 or 6.3%,
reflecting weakness in the automotive and rail markets during
the majority of 2009. These declines were partially offset,
however, by strength in both markets during the latter half of
2009 resulting from benefits from European government stimulus
programs and growth in emerging markets primarily related to
efforts on China’s high-speed rail project.
Organic revenue at
our Interconnect Solutions division declined $102 or 22.5%.
These results are in-line with the overall connectors industry
which experienced significant reductions in revenue and orders
during 2009. This division serves the aerospace and industrial
markets which were severely impacted by the economic downturn.
Organic revenue at
our Flow Control division decreased $30 or 12.0%, primarily
attributable to declines within the global industrial market,
partially offset by market share gains in the beverage industry
and a relatively flat marine market which saw declines in
original equipment sales being offset by an increase in
after-market sales.
Organic revenue at
our Control Technologies division declined $56 or 17.5%. These
results reflect a reduction in commercial aerospace original
equipment production and sluggish after-market sales
performance, as well as the impact of decreased industrial
production activity, partially offset by strong performance in
the defense market.
GROSS
PROFIT
Gross profit for
2009 was $3,024, representing a $190 or 5.9% decrease from 2008.
This decrease was attributable to the decline in revenue and
unfavorable foreign currency fluctuations, partially offset by
benefits from productivity gains, including efforts to improve
supply chain productivity and control material costs. Gross
margin increased 30 basis points to 28.3% during 2009. The
30 basis point improvement is primarily due to benefits
from productivity improvements and various other cost-saving
initiatives, which more than offset the impacts from reductions
in sales volumes. The following table illustrates the 2009 and
2008 gross profit results of our business segments,
including gross margin results.
| 2009 | 2008 | CHANGE | |||||||||||||
|
Defense
|
$ | 1,430 | $ | 1,378 | 3.8 | % | |||||||||
|
Fluid
|
1,196 | 1,333 | (10.3) | % | |||||||||||
|
Motion & Flow
|
395 | 500 | (21.0) | % | |||||||||||
|
Corporate and Other
|
3 | 3 | — | ||||||||||||
|
Total gross profit
|
$ | 3,024 | $ | 3,214 | (5.9) | % | |||||||||
|
Gross margin:
|
28.3 | % | 28.0 | % | 30 | bp | |||||||||
|
Defense
|
23.6 | % | 22.7 | % | 90 | bp | |||||||||
|
Fluid
|
35.6 | % | 34.7 | % | 90 | bp | |||||||||
|
Motion & Flow
|
31.5 | % | 31.6 | % | (10) | bp | |||||||||
OPERATING
EXPENSES
Operating expenses
increased 5.7% during 2009 to $2,130, primarily attributable to
a $224 increase in net asbestos-related costs resulting from our
initial recognition of an estimated liability, net of expected
recoveries from insurance and other responsible parties, for
claims projected to be filed against the Company over the next
10 years. The increase in net asbestos-related costs was
partially offset by a reduction in SG&A expenses of $134.
The following table provides further information by expense
type, as well as a breakdown of operating expense by segment.
34
Table of Contents
| 2009 | 2008 | CHANGE | |||||||||||||
|
Selling, general and administrative expenses
|
$ | 1,555 | $ | 1,689 | (7.9 | )% | |||||||||
|
Research and development expenses
|
258 | 236 | 9.3 | % | |||||||||||
|
Asbestos-related costs, net
|
238 | 14 | (a | ) | |||||||||||
|
Restructuring and asset impairment charges, net
|
79 | 77 | 2.6 | % | |||||||||||
|
Total
|
$ | 2,130 | $ | 2,016 | 5.7 | % | |||||||||
|
By Segment:
|
|||||||||||||||
|
Defense
|
$ | 669 | $ | 663 | 0.1 | % | |||||||||
|
Fluid
|
804 | 864 | (6.9 | )% | |||||||||||
|
Motion & Flow
|
277 | 309 | (10.4 | )% | |||||||||||
|
Corporate & Other
|
380 | 180 | 111.1 | % | |||||||||||
| (a) | Not meaningful |
Selling,
General & Administrative Expenses
(SG&A)
SG&A decreased
7.9% to $1,555 in 2009. The
year-over-year
decrease was primarily attributable to cost-saving initiatives
in response to declining global economic conditions, lower sales
volumes, favorable foreign currency exchange translation and
lower stock compensation expense, partially offset by higher
postretirement plan costs.
Research
and Development Expenses (R&D)
R&D expenses
increased $22 during 2009 over the prior year, primarily due to
increased spending for development materials on key growth
platforms across our Defense segment.
Asbestos-Related
Costs, Net
During 2009, we
recorded asbestos-related costs of $238, related to the
estimated liability, net of expected recoveries from insurers
and other responsible parties, for claims projected to be filed
against the Company over the next 10 years. See
Note 19, “Commitments & Contingencies,”
in the Notes to Consolidated Financial Statements for additional
information.
Restructuring
and Asset Impairment Charges, Net
During 2009, we
recognized net restructuring charges of $79, representing a $2
increase as compared to 2008. The charges associated with 2009
actions primarily represent severance costs for reductions in
headcount associated with the strategic relocation of certain
production operations within our Fluid and Motion &
Flow segments to lower-cost regions, as well as other various
planned reductions in headcount associated with our lean
fulfillment initiative. Planned position eliminations totaled
1,092 employees, including 528 factory workers, 530 office
workers and 34 management employees.
OPERATING
INCOME
We generated
operating income of $894 during 2009, a 25.4% decrease from
2008, primarily reflecting volume declines and increased
asbestos-related costs. These negative impacts were partially
offset by benefits from the implementation of extensive
cost-saving initiatives and productivity improvements, such as
structural changes made to optimize our sourcing and reduce
cycle times. In addition, we completed a strategic realignment
of our Motion & Flow segment to better leverage our
production capabilities and cost structures as well as reduce
operational redundancies. Operating margin decreased to 8.4% for
2009, a
year-over-year
decline of 200 basis points, primarily attributable to
reductions in sales volumes and the impact of asbestos-related
costs. These negative impacts were partially offset by benefits
from productivity improvements and various cost-saving
initiatives. The following table illustrates the 2009 and 2008
operating income results of our business segments, including
operating margin results.
| 2009 | 2008 | CHANGE | |||||||||||||
|
Defense
|
$ | 761 | $ | 715 | 6.4 | % | |||||||||
|
Fluid
|
393 | 469 | (16.2 | )% | |||||||||||
|
Motion & Flow
|
118 | 192 | (38.5 | )% | |||||||||||
|
Segment operating income
|
1,272 | 1,376 | (7.6 | )% | |||||||||||
|
Corporate and Other
|
(378 | ) | (178 | ) | (112.4 | )% | |||||||||
|
Total operating income
|
$ | 894 | $ | 1,198 | (25.4 | )% | |||||||||
|
Operating margin:
|
|||||||||||||||
|
Consolidated
|
8.4 | % | 10.4 | % | (200 | )bp | |||||||||
|
Defense
|
12.5 | % | 11.8 | % | 70 | bp | |||||||||
|
Fluid
|
11.7 | % | 12.2 | % | (50 | )bp | |||||||||
|
Motion & Flow
|
9.4 | % | 12.1 | % | (270 | )bp | |||||||||
Defense &
Information Solutions
Operating income
increased $46 or 6.4% during 2009, resulting in an operating
margin of 12.5%, an improvement of 70 basis points versus
2008. The
year-over-year
growth, reflecting reduced costs of revenue and SG&A
expenses, was primarily attributable to benefits from
cost-saving initiatives, such as productivity and sourcing
strategies. These benefits were partially offset by increases in
costs of materials, labor and other overhead, other unfavorable
program mix impacts, higher postretirement benefit plan costs
and increased investments in R&D.
Fluid
Technology
Operating income for
2009 decreased $76 or 16.2% from 2008, with a decline in
operating margin of 50 basis points to 11.7%. These
declines were primarily attributable to reductions in sales
volumes and higher postretirement benefit plan expenses,
35
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partially offset by
strong productivity, which provided increasing benefits as the
year progressed, and lower realignment costs.
Motion &
Flow Control
Operating income
decreased $74 or 38.5% during 2009, including impacts from
unfavorable foreign currency fluctuations of $25. The decline
was primarily affected by lower sales volume, as well as higher
postretirement plan costs, partially offset by benefits from net
cost reductions driven by various cost-saving initiatives and
lower realignment costs. In the second half of 2009, we began
realizing benefits associated with the significant restructuring
and realignment actions taken during 2008 and 2009. As a result,
this contributed to
year-over-year
improvements in operating income of $17 in the fourth quarter.
Operating margin decreased 270 basis points to 9.4% during
2009, primarily reflecting the factors described above.
Corporate and
Other
We incurred
corporate and other expenses of $378 during 2009, reflecting an
increase of $200 or 112.4% as compared to 2008. The increase in
expense primarily relates to the recognition of additional
asbestos-related costs as mentioned above in the “Operating
Expenses” discussion, partially offset by lower
environmental-related and bonus costs, as well as investment
gains on corporate-owned life insurance policies.
Impacts to
Operating Income from Postretirement Expense
We recorded $99 of
net periodic postretirement cost during 2009, compared with
costs of $29 in 2008. The primary drivers behind the increase
were the effect of an increase in the amortization of net
actuarial losses, and expected returns on a lower base of plan
assets, partially offset by an increase in the discount rate for
our foreign plans.
INTEREST
AND NON-OPERATING EXPENSES, NET
| 2009 | 2008 | CHANGE | |||||||||||||
|
Interest expense
|
$ | 99 | $ | 140 | (29.3 | )% | |||||||||
|
Interest income
|
24 | 31 | (22.6 | )% | |||||||||||
|
Miscellaneous expense, net
|
9 | 13 | (30.8 | )% | |||||||||||
|
Total Interest and non-operating expenses, net
|
$ | 84 | $ | 122 | (31.1 | )% | |||||||||
Interest expense
decreased 29.3% during 2009, due to interest rate declines on
our commercial paper and variable rate debt, as well as lower
year-over-year
levels of outstanding commercial paper and a decrease in
interest related to taxes, partially offset by an increase in
interest expense on fixed-rate debt related to the
$1.0 billion debt issuance in May 2009. The
2009 year-over-year
decrease in interest income of 22.6% was primarily due to lower
average interest rates during the 2009 periods as compared to
the prior year, partially offset by the recognition of interest
refunds of $13 received in conjunction with an IRS tax
settlement.
INCOME
TAX EXPENSE
Income tax expense
was $169 or 20.9% of income from continuing operations before
income taxes for 2009, compared to $308 or 28.6% during 2008.
The
year-over-year
decrease in the effective tax rate was primarily attributable to
the completion of a one-time restructuring of certain
international legal entities which resulted in a reduction of
the income tax provision in the amount of $58. In addition,
reversals of valuation allowances of $17, coupled with other tax
credits and allowable deductions of $12, largely offset the
prior year benefit from a tax account validation adjustment of
$37. See Note 6, “Income Taxes,” in the Notes to
Consolidated Financial Statements for additional information.
INCOME
FROM DISCONTINUED OPERATIONS, NET OF TAX
Income from
discontinued operations, net of tax, was $3 for 2009,
respectively, as compared to $27 for 2008. During the 2008, we
completed the sale of the remaining component of the Switches
businesses that generated total after-tax income of $6,
including an after-tax gain on sale of $5. During 2010 we
classified CAS, a component of our Defense segment, as a
discontinued operation. CAS generated after-tax income from
operations of $9 during 2009, as compared to $7 during 2008.
Also included within income from discontinued operations during
2009 was additional after-tax net asbestos-related expense of
$6, related to a business we disposed of a number of years ago.
LIQUIDITY AND
CAPITAL RESOURCES
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
predominately 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
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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.
Credit
Facilities
Our commercial paper
program is supported by a three-year revolving $1.5 billion
credit agreement (August 2010 Credit Facility). In August 2010,
we replaced a five-year revolving $1.75 billion credit
agreement that was due to expire in November 2010 with the
August 2010 Credit Facility. The revolving credit agreement is
intended to provide access to additional liquidity as a source
of funding for the commercial paper program, if needed. Our
policy is to maintain unused committed bank lines of credit in
an amount greater than outstanding commercial paper balances.
The interest rate for borrowings under the August 2010 Credit
Facility is generally based on the London Interbank Offered Rate
(LIBOR), plus a spread, which reflects our debt rating. The
provisions of the August 2010 Credit Facility require that we
maintain an interest coverage ratio, as defined, of 3.5 times.
At December 31, 2010, our interest coverage ratio was well
in excess of the minimum requirements.
Our credit ratings
as of December 31, 2010 are as follows:
|
Short-Term |
Long-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 have
been 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” |
We consider certain
debt ratios, including the total debt to total capitalization
ratio and the net debt to net capitalization ratio, to be key
indicators for management and investors in evaluating our
financial leverage, structure and strength as well as our
ability to finance operations. We calculate the total debt to
total capitalization ratio as total short-and long-term
borrowings (total debt) divided by shareholders’ equity
plus total debt (total capitalization). We calculate the net
debt to net capitalization ratio as total debt less cash and
cash equivalents divided by total capitalization less cash and
cash equivalents. Our current debt ratios have positioned us to
grow our business with investments for organic growth and
through strategic acquisitions, while providing the ability to
return value to shareholders through dividends and share
repurchases.
| 2010 | 2009 | |||||||||
|
Debt to total capitalization
|
23.3 | % | 28.0 | % | ||||||
|
Net debt to net capitalization
|
6.9 | % | 7.0 | % | ||||||
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 provides net cash provided by operating activities and
used in investing and financing activities for each of the
previous three years.
| 2010 | 2009 | 2008 | |||||||||||||
|
Operating Activities
|
$ | 1,234 | $ | 1,258 | $ | 1,107 | |||||||||
|
Investing Activities
|
(1,117 | ) | (285 | ) | (502 | ) | |||||||||
|
Financing Activities
|
(290 | ) | (772 | ) | (1,407 | ) | |||||||||
|
Foreign Exchange
|
(18 | ) | 40 | (74 | ) | ||||||||||
|
Total net cash flow from continuing operations
|
$ | (191 | ) | $ | 241 | $ | (876 | ) | |||||||
37
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Net cash provided by
operating activities decreased by $24 in 2010 as compared to
2009. Contributing factors included: $162 of higher
2010 net tax payments driven by a 2009 income tax refund of
$26 and the timing of a $40 extension payment made during the
beginning of 2010, an unfavorable 2010 impact from the timing of
Defense segment collections received in December 2009 related to
certain advance payments, an $85 reduction in contributions to
pension plans, that included a $50 discretionary pension
contribution in 2010, a $58 benefit from 2010 acquisitions and
additional cash generation from sales growth.
Net cash provided by
operating activities increased by $151 in 2009 as compared to
2008. Contributing factors included: $320 from improved accounts
receivable conversion and benefits primarily from the timing of
Defense segment collections received in December 2009 related to
certain advanced customer payments, $99 reduction in net tax
payments that included a $26 income tax refund received during
2009 and the timing of a $40 extension payment that was not
processed until 2010, a decline in cash receipts due to
decreased sales volume, $137 additional contributions to pension
plans, including a $100 discretionary 2009 contribution and a
$28 increase in restructuring-related payments.
The annual net cash
outflows associated with our asbestos-related liability are
projected to average $25 over the next five years, as compared
to an average of approximately $10 to $15 in the past three
years, and increase to an average of approximately $50 to $60
over the remainder of the projection period. We do not believe,
subject to risks and uncertainties inherent in the estimation
process, that the net asbestos-related liability for unasserted
claims estimated to be filed over the next 10 years will
materially affect our short-term or long-term liquidity
positions or our net annual cash flows.
Net cash used in
investing activities increased by $832 in 2010 as compared to
2009. We invested an additional $1,007 during 2010 in various
strategic acquisitions, including Nova and Godwin. We also
increased our capital expenditure spending by $57, primarily
related to the implementation of an entity-wide enterprise
resource planning (ERP) system and additional investments into
our Godwin business. The additional investment spending noted
above was partially offset by an increase of $237 in proceeds
from the sale of CAS and other assets and businesses during 2010.
Net cash used in
investing activities decreased by $217 in 2009 as compared to
2008, primarily related to a $242 decline in acquisition
spending. During 2008, we spent $227 related to EDO acquisition
payments that carried over from 2007 to 2008 and $49 related to
the acquisitions of several smaller companies. During 2009, we
made $50 of additional investments related to the construction
of radio towers in support of the ADS-B program with the FAA and
the implementation of an entity-wide ERP system. These
additional investments were partially offset by 2008 spending
related to ITT’s new corporate headquarters.
During 2009 and
2008, we used approximately $1.8 billion of cash generated
from operations to repay our December 31, 2007 outstanding
short-term debt balance of $2,907 that principally resulted from
our financing of the EDO and IMC acquisitions in 2007. The
remainder of this short-term debt was repaid using the proceeds
from a $1.0 billion long-term debt issuance in May 2009.
Our cash usage related to financing activities during 2010 was
primarily for the $176 payment of dividends that represented an
18.9% increase as compared to 2009. Also during 2010, we used
$79 to retire two long-term outstanding debentures.
Consistent with our
2009 and 2010 objectives surrounding the preservation of
liquidity, we did not participate in the share repurchase
program during either of these years. In 2008, we spent $75,
including commission fees, on the repurchase of common stock.
Our average daily
outstanding commercial paper balance for the year ended 2010 was
$231. The maximum outstanding commercial paper during 2010 was
$620, corresponding to our acquisition of Nova Analytics. As of
December 31, 2010, we did not have any commercial paper
outstanding.
Funding of
Postretirement Plans
At December 31,
2010, our postretirement benefit plans were underfunded by
$1.7 billion. The $1.7 billion underfunded obligation
includes $773 related to the U.S. SRP. A substantial
portion of the underfunded position arose during the fourth
quarter of 2008, when we recognized a significant decline in the
fair market value of our postretirement benefit plan assets.
Favorable market conditions during the latter half of 2009 and
throughout 2010 resulted in an increase in the fair market value
of our postretirement benefit plan assets. As of
December 31, 2010, the U.S. SRP was 83% funded.
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. In 2010, we
contributed $76 to our postretirement plans, including a
voluntary contribution of $50 to the U.S. SRP during the
fourth quarter.
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
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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. Given our
2010 voluntary contribution of $50, we currently do not believe
mandatory contributions will be required to our U.S. SRP
during 2011. However, we do anticipate making contributions to
our other postretirement benefit plans in the range of $90 to
$110 during 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.
Capital
Resources
Long-term debt is
raised through the offering of debt securities primarily within
the United States capital markets. Long-term debt is generally
defined as any debt with an original maturity greater than
12 months. We had the following long-term debt outstanding
at December 31:
| 2010 | 2009 | |||||||||
|
Current portion of long-term debt
|
$ | 10 | $ | 10 | ||||||
|
Non-current portion of long-term debt
|
1,354 | 1,431 | ||||||||
|
Total long-term debt
|
$ | 1,364 | $ | 1,441 | ||||||
See further details
on total year-end stated rates on debt and maturities in
Note 15, “Debt,” in the Notes to Consolidated
Financial Statements.
At December 31,
2010, our availability to additional sources of long- and
short-term funding includes access to the capital markets
through an unlimited 2009 Shelf Registration Statement, a
$1.5 billion commercial paper program and approximately
$132 in unused credit lines. Our commercial paper program is
supported by a three-year revolving $1.5 billion credit
agreement.
Contractual
Obligations
ITT’s
commitment to make future payments under long-term contractual
obligations was as follows, as of December 31, 2010:
| PAYMENTS DUE BY PERIOD | |||||||||||||||||||||||||
|
LESS THAN |
MORE THAN |
||||||||||||||||||||||||
| CONTRACTUAL OBLIGATIONS | TOTAL | 1 YEAR | 1-3 YEARS | 3-5 YEARS | 5 YEARS | ||||||||||||||||||||
|
Debt(1)
|
$ | 1,328 | $ | 11 | $ | 24 | $ | 539 | $ | 754 | |||||||||||||||
|
Interest
payments(2)
|
636 | 77 | 153 | 113 | 293 | ||||||||||||||||||||
|
Operating
leases(3)
|
654 | 143 | 205 | 123 | 183 | ||||||||||||||||||||
|
Purchase
obligations(4)
|
682 | 415 | 256 | 11 | — | ||||||||||||||||||||
|
Other long-term obligations reflected on balance
sheet(5)
|
169 | 17 | 27 | 26 | 99 | ||||||||||||||||||||
|
Total
|
$ | 3,469 | $ | 663 | $ | 665 | $ | 812 | $ | 1,329 | |||||||||||||||
In addition to the
amounts presented in the table above, we have recorded
liabilities for pending and unasserted asbestos claims estimated
to be filed over the next ten years and uncertain tax positions
of $1,676 and $192, respectively, in our Consolidated Balance
Sheet as of December 31, 2010. These amounts have been
excluded from the contractual obligations table due to an
inability to reasonably estimate the timing of payments in
individual years.
| (1) | See Note 15, “Debt,” in the Notes to Consolidated Financial Statements, for discussion of the use and availability of debt and revolving credit agreements. Amounts represent total long-term debt, including current maturities and exclude the deferred gain on interest rate swaps and unamortized discounts and debt issuance costs. |
| (2) | Amounts represent estimate of future interest payments on long-term debt outstanding as of December 31, 2010. For variable rate debt, the interest rate in effect at year end was utilized. |
| (3) | Refer to Note 14, “Leases and Rentals,” in the Notes to Consolidated Financial Statements, for further discussion of lease and rental agreements. |
| (4) | Represents unconditional purchase agreements that are enforceable and legally binding and that specify all significant terms to purchase goods or services, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase agreements that are cancellable without penalty have been excluded. |
| (5) | Other long-term obligations include estimated environmental payments. We estimate, based on historical experience that we will spend between $12 and $15 per year on environmental investigation and remediation. We are contractually required to spend a portion of these monies based on existing agreements with various governmental agencies and other entities. At December 31, 2010, our best estimate for environmental liabilities is $139. In addition, other long-term obligations include letters of credit, and payments in connection with our settlement of compliance issues in the Defense segment. |
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Table of Contents
Off-Balance Sheet
Arrangements
Off-balance sheet
arrangements represent transactions, agreements or other
contractual arrangements with unconsolidated entities, where an
obligation or contingent interest exists. Our off-balance sheet
arrangements, as of December 31, 2010, consist of
indemnities related to acquisition and disposition agreements
and certain third-party guarantees.
Indemnities
Since ITT’s
incorporation in 1920, we have acquired and disposed of numerous
entities. The related acquisition and disposition agreements
contain various representation and warranty clauses and may
provide indemnities for a misrepresentation or breach of the
representations and warranties by either party. The indemnities
address a variety of subjects; the term and monetary amounts of
each such indemnity are defined in the specific agreements and
may be affected by various conditions and external factors. Many
of the indemnities have expired either by operation of law or as
a result of the terms of the agreement. We do not have a
liability recorded for the historic indemnifications and are not
aware of any claims or other information that would give rise to
material payments under such indemnities.
Guarantees
As part of a sale
leaseback agreement for our corporate aircraft, we have provided
a residual value guarantee to the lessor for the future value of
the aircraft, with maximum exposure of $42. During 2010, we
increased our loss contingency to $17 due to a decline in the
projected fair value of the aircraft at the December 2012 lease
expiration date.
Critical
Accounting Estimates
The preparation of
financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and the
disclosure of contingent liabilities. Management bases its
estimates on historical experience and on various other
assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Senior
management has discussed the development, selection and
disclosure of these estimates with the Audit Committee of
ITT’s Board of Directors.
Significant
accounting policies used in the preparation of the Consolidated
Financial Statements are discussed in Note 1, “Summary
of Significant Accounting Policies,” in the Notes to
Consolidated Financial Statements. Accounting estimates and
assumptions discussed in this section are those that we consider
most critical to an understanding of our financial statements
because they are inherently uncertain, involve significant
judgments, include areas where different estimates reasonably
could have been used, and changes in the estimate that are
reasonably possible could materially impact the financial
statements. Management believes that the accounting estimates
employed and the resulting balances are reasonable; however,
actual results in these areas could differ from
management’s estimates under different assumptions or
conditions.
Asbestos
Matters
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.
Estimating our
exposure to asbestos claims is subject to significant management
judgment, as there is significant uncertainty and risk
associated with the variables that can affect the timing,
severity, quantity and resolution of claims. The methodology
used to project future asbestos costs is based largely on the
Company’s experience in a reference period, including the
last few years, for claims filed, settled and dismissed, and is
supplemented by management’s expectations of the future.
This experience is compared to the results of previously
conducted epidemiological studies by estimating the number of
individuals likely to develop asbestos-related diseases. Those
studies were undertaken in connection with an independent
analysis of the population of U.S. workers across eleven
different industry and occupation categories believed to have
been exposed to asbestos. Using information for the industry and
occupation categories relevant to the Company, an estimate is
developed of the number of claims estimated to be filed against
the Company over the next ten years, as well as the aggregate
settlement costs that would be incurred to resolve both pending
and estimated future claims based on the average settlement
costs by disease during the reference period. In addition, the
estimate is augmented for the costs of defending asbestos claims
in the tort system using a forecast based on recent experience,
as well as discussions with the Company’s defense counsel.
In addition, the Company retains a consulting firm to assist
management in estimating our potential exposure to pending
asbestos claims and for claims estimated to be filed over the
next 10 years. The methodology to project future
40
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asbestos costs is
one in which the underlying assumptions are separately assessed
for their reasonableness and then each is used as an input to
the liability estimate. Our assessment of the underlying
assumptions is based upon recent experience and future
expectations, yielding only one value for each assumption.
The liability
estimate is most sensitive to those factors surrounding
mesothelioma and lung cancer claims, as together, these claims
represent nearly 90 percent of the estimated asbestos
liability. These factors include the number of new claims filed
against the Company, the projected average settlement costs
(including the rate of inflation assumed), and the percentage of
claims dismissed against the Company. These factors are
interdependent, and no one factor predominates in estimating the
asbestos liability. While there are other potential inputs to
the estimation model, our methodology relies on the best input
available in the circumstances for each individual assumption
and does not create a range of reasonably possible outcomes.
Projecting future asbestos costs is subject to numerous
variables and uncertainties that are inherently difficult to
predict. In addition to the uncertainties surrounding the key
factors discussed above, other factors include the long latency
period prior to the manifestation of the asbestos-related
disease, costs of medical treatment, the impact of bankruptcies
of other companies that are co-defendants, uncertainties
surrounding the litigation process from jurisdiction to
jurisdiction and from case to case, and the impact of potential
legislative or judicial changes.
Furthermore, any
predictions with respect to the variables impacting the estimate
of the asbestos liability are subject to even greater
uncertainty as the projection period lengthens. In light of the
uncertainties and variables inherent in the long-term projection
of the Company’s total asbestos liability, although it is
probable that the Company will incur additional costs for
asbestos claims filed beyond the next 10 years, we do not
believe there is a reasonable basis for estimating those costs
at this time. As part of our ongoing review of asbestos claims,
each quarter we assess the most recent data available for the
key inputs and assumptions, comparing the data to our
expectations on which the most recent annual liability estimate
was based.
We record a
corresponding asbestos-related asset that represents our best
estimate of probable recoveries related to the recorded asbestos
liability. In developing this estimate, the Company considers
coverage-in-place
and other settlement agreements with its insurers and other
contractual agreements with responsible parties, as well as a
number of additional factors. These additional factors include
current levels of recovery experience, the financial viability
of the insurance companies or other responsible parties, the
method by which losses will be allocated to the various
insurance policies and the years covered by those policies, and
interpretation of the various policy and contract terms and
limits and their interrelationships. The timing and amount of
reimbursements will vary due to differing policy terms and
certain gaps in coverage as a result of some insurer
insolvencies. In addition, the Company retains an insurance
consulting firm to assist management in estimating probable
recoveries for pending asbestos claims and for claims estimated
to be filed over the next 10 years based on the analysis of
policy terms, the likelihood of recovery provided by our legal
counsel, assuming the continued viability of those insurance
carriers and other responsible parties that are currently
solvent, and incorporating risk mitigation judgments where
policy terms or other factors were not certain.
We have estimated
that we will be able to recover 62 percent of the
settlement and defense costs for pending claims, as well as
unasserted claims estimated to be filed over the next
10 years from our insurers and other responsible parties.
However, because there are gaps in our coverage, reflecting
certain uninsured periods and prior insurance settlements, and
we expect that certain policies from some of our primary
insurers will exhaust within the next 10 years, the
recovery rate is expected to decline for potential additional
asbestos liabilities. Insurance coverage in the tenth year of
our estimate of the asbestos liability is currently projected to
be approximately 25 percent. Future recoverability rates
may also be impacted by other factors, such as future insurance
settlements, insolvencies and judicial determinations relevant
to our coverage program, which are difficult to predict and
subject to a high degree of uncertainty.
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 the
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 the 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.
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
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expectations on
which the most recent annual liability and asset estimates were
based. 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.
See Note 19,
“Commitments and Contingencies” in the Notes to
Consolidated Financial Statements for further information.
Postretirement
Plans
ITT sponsors
numerous defined benefit pension plans for employees around the
world. The determination of projected benefit obligations and
the recognition of expenses related to pension plans are
dependent on various assumptions. These major assumptions
primarily relate to discount rates, long-term expected rates of
return on plan assets, rate of future compensation increases,
mortality and termination (some of which are disclosed in
Note 16, “Postretirement Benefit Plans,” in the
Notes to Consolidated Financial Statements) and other factors.
Actual results that differ from our assumptions are accumulated
and are amortized generally over the estimated future working
life of the plan participants.
Significant
Assumptions
Management develops
each assumption using relevant Company experience, in
conjunction with market-related data for each individual country
in which such plans exist. All assumptions are reviewed
periodically with third party actuarial consultants and adjusted
as necessary. The table included below provides the weighted
average assumptions used to estimate our defined benefit pension
obligations and costs as of and for the years ended 2010 and
2009.
| 2010 | 2009 | |||||||||||||||||
| U.S. | Int’l | U.S. | Int’l | |||||||||||||||
|
Obligation Assumptions:
|
||||||||||||||||||
|
Discount rate
|
5.73 | % | 5.47 | % | 6.00 | % | 5.79 | % | ||||||||||
|
Rate of future compensation increase
|
4.00 | % | 3.26 | % | 4.00 | % | 3.87 | % | ||||||||||
|
Cost Assumptions:
|
||||||||||||||||||
|
Discount rate
|
6.00 | % | 5.79 | % | 6.25 | % | 6.14 | % | ||||||||||
|
Expected return on plan assets
|
9.00 | % | 7.33 | % | 9.00 | % | 7.29 | % | ||||||||||
|
Rate of future compensation increase
|
4.00 | % | 3.84 | % | 4.00 | % | 3.64 | % | ||||||||||
We determine our
expected return on plan assets by evaluating both historical
returns and estimates of future returns. Specifically, we
analyze the plan’s actual historical annual return on
assets over the past 15, 20 and 25 years; estimate future
returns based on independent estimates of asset class returns;
and evaluate historical broad market returns over long-term
timeframes based on our strategic asset allocation, which is
detailed in Note 16, “Postretirement Benefit
Plans,” in the Notes to Consolidated Financial Statements.
Based on the
approach described above, we estimate the long-term annual rate
of return on assets for domestic pension plans at 9.0%. For
reference, our actual geometric average annual return on plan
assets for domestic pension plans was 8.8%, 10.1% and 10.3%, for
the past 15, 20, and 25 year periods, respectively.
The chart below
shows actual returns versus the expected long-term returns for
our U.S. pension plans that were utilized in the
calculation of the net periodic pension cost for each respective
year. See Note 16, “Postretirement Benefit
Plans,” in the Notes to Consolidated Financial Statements
for more information.
| 2010 | 2009 | 2008 | |||||||||||
|
Expected long-term rate of return on plan assets
|
9.0 | % | 9.0 | % | 9.0 | % | |||||||
|
Actual rate of return on plan assets
|
14.1 | % | 24.1 | % | (31.2 | )% | |||||||
For the recognition
of net periodic pension cost, the calculation of the expected
return on plan assets is generally derived using a
market-related value of plan assets based on average asset
values at the measurement date over the last five years. The use
of fair value, rather than a calculated value, could materially
affect net periodic pension cost. Our weighted average expected
return on plan assets for all pension plans, including foreign
affiliate plans, at December 31, 2010 is 8.87%.
The discount rate
reflects our expectation of the present value of expected future
cash payments for benefits at the measurement date. A decrease
in the discount rate increases the present value of benefit
obligations and increases pension expense. We base the discount
rate assumption on current investment yields of high-quality
fixed income investments during the retirement benefits maturity
period. The pension discount rate was determined by considering
an interest rate yield curve comprising AAA/AA bonds, with
maturities between zero and thirty years, developed by the
plan’s actuaries. Annual benefit payments are then
discounted to present value using this yield curve to develop a
single-point discount rate matching the plan’s
characteristics. Our weighted average discount rate for all
pension plans, including foreign affiliate plans, at
December 31, 2010 is 5.71%.
The rate of future
compensation increase assumption reflects our long-term actual
experience and future and near-
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term outlook. At
December 31, 2010, our expected rate of future compensation
of 4.0% for U.S. plan participants was unchanged from the
prior year.
Pension
Expense
A 25 basis
point change in the expected rate of return on plan assets,
discount rate, or rate of future compensation increases, would
have the following effect on 2011 pension expense:
|
INCREASE/(DECREASE) |
||||||||||
| IN PENSION EXPENSE | ||||||||||
|
25 BASIS |
25 BASIS |
|||||||||
| POINT INCREASE | POINT DECREASE | |||||||||
|
Long-term rate of return on assets used to determine net
periodic benefit cost
|
$ | (10 | ) | $ | 10 | |||||
|
Discount rate used to determine net periodic benefit cost
|
(13 | ) | 13 | |||||||
|
Rate of future compensation increases used to determine net
periodic pension cost
|
4 | (3 | ) | |||||||
The amounts included
in the table above are on a pre-tax basis, without consideration
to potential reimbursement from the DoD.
Funded
Status
Funded status is
derived by subtracting the respective year-end values of the
projected benefit obligations from the fair value of plan
assets. ITT’s U.S. Salaried Pension Plan represents
approximately 76% of the total pension obligation, and therefore
the funded status of the U.S. Salaried Retirement Plan has
a considerable impact on the overall funded status of our
pension plans.
We estimate that
every 25 basis point change in the discount rate impacts
the funded status of the U.S. Salaried Pension Plan by
approximately $118. Similarly, every five percentage point
change in the actual 2011 rate of return on assets impacts the
same plan by approximately $187.
Fair Value of
Plan Assets
The plan assets of
our postretirement plans comprise a broad range of investments,
including domestic and foreign equity securities, interests in
private equity and hedge funds, fixed income investments,
commodities, real estate and cash and cash equivalents.
A substantial
portion of our postretirement benefit plan assets portfolio
comprises investments in private equity and hedge funds. The
private equity and hedge fund investments are generally measured
at net asset value. However, in certain instances, the values
reported by the asset managers were not current at the
measurement date. Accordingly, management has estimated
adjustments to the last reported value where necessary to
measure the assets at fair value at the measurement date.
These adjustments
consider information received from the asset managers, as well
as general market information. The adjustment recorded for these
assets represented approximately one percent of total plan
assets. Asset values for other positions were generally measured
using market observable prices.
See Note 16,
“Postretirement Benefit Plans” in the Notes to
Consolidated Financial Statements for further information.
Revenue
Recognition
The Defense segment
and certain businesses within the Fluid segment enter into
long-term construction-type sales contracts for which revenue is
recognized under the
percentage-of-completion
method, based upon units of delivery, percentage of costs
incurred to total costs, or the completion of scheduled
performance milestones. Revenues and profits recognized under
the
percentage-of-completion
methods are based on management’s estimates such as total
contract revenues, contract costs and the extent of progress
toward completion. Due to the long-term nature of the contracts,
these estimates are subject to uncertainties and require
significant judgment. Negotiated fees under certain contracts
may be increased or decreased in accordance with cost or
performance incentive provisions which measure actual
performance against established targets or other criteria. Such
incentive fee awards or penalties are included in revenue when
there is sufficient information to reasonably assess anticipated
contract performance. Our claims on contracts are recorded only
if it is probable the claim will result in additional contract
revenue and the amounts can be reliably estimated. Estimates of
contract costs include labor hours and rates, subcontractor
costs and material costs. These estimates consider historical
performance, the complexity of the work to be performed, the
estimated time to complete the project, and other economic
factors such as inflation and market rates.
We update our
estimates on a periodic basis and any revisions to such
estimates are recorded in earnings in the period in which they
are determined. Provisions for estimated losses, if any, on
uncompleted long-term contracts, are made in the period in which
such losses are determined.
We record a
reduction in revenue at the time of sale for estimated product
returns, rebates and other allowances, based on historical
experience and known trends. Future market conditions and
product transitions may require us to take actions to increase
customer incentive offerings, possibly resulting in an
incremental reduction of revenue at the time the incentive is
offered.
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Additionally,
accruals for estimated expenses related to warranties are made
at the time products are sold or services are rendered and are
recorded as a component of costs of revenue. These accruals are
established using historical information on the nature,
frequency and average cost of warranty claims and estimates of
future costs. Our standard product warranty terms generally
include post-sales support and repairs or replacement of a
product at no additional charge for a specified period of time.
While we engage in extensive product quality programs and
processes, we base our estimated warranty obligation on product
warranty terms offered to customers, ongoing product failure
rates, material usage and service delivery costs incurred in
correcting a product failure, as well as specific product class
failures outside of our baseline experience. If actual product
failure rates, repair rates or any other post-sales support
costs differ from these estimates, revisions to the estimated
warranty liability would be required.
Income
Taxes
Deferred tax assets
and liabilities are determined based on temporary differences
between the financial reporting and tax bases of assets and
liabilities, applying enacted tax rates in effect for the year
in which we expect the differences will reverse. Based on the
evaluation of available evidence, we recognize future tax
benefits, such as net operating loss carryfowards, to the extent
that we believe it is more likely than not we will realize these
benefits. We periodically assess the likelihood that we will be
able to recover our deferred tax assets and reflect any changes
to our estimate of the amount we are more likely than not to
realize in the valuation allowance, with a corresponding
adjustment to earnings or other comprehensive income (loss), as
appropriate.
In assessing the
need for a valuation allowance, we look to the future reversal
of existing taxable temporary differences, taxable income in
carryback years, the feasibility of tax planning strategies and
estimated future taxable income. The valuation allowance can be
affected by changes to tax laws, changes to statutory tax rates
and changes to future taxable income estimates.
Our effective tax
rate reflects the impact of certain undistributed foreign
earnings for which we have not provided U.S. taxes because
we plan to reinvest such earnings indefinitely outside the
United States. We plan foreign earnings remittance amounts based
on projected cash flow needs, as well as the working capital and
long-term investment requirements of our foreign subsidiaries
and our domestic operations. Based on these assumptions, we
estimate the amount we will distribute to the United States and
provide the U.S. federal taxes due on these amounts.
Material changes in our estimates of cash, working capital and
long-term investment requirements in the various jurisdictions
in which we do business could impact our effective tax rate.
The calculation of
our tax liabilities involves dealing with uncertainties in the
application of complex tax regulations in a multitude of
jurisdictions across our global operations. We recognize
potential liabilities and record tax liabilities for anticipated
tax audit issues in the U.S. and other tax jurisdictions
based on our estimate of whether, and to the extent to which,
additional taxes will be due. Furthermore, we recognize the tax
benefit from an uncertain tax position only if it is more likely
than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial
statements from such a position are measured based on the
largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement.
We adjust our
liability for uncertain tax positions in light of changing facts
and circumstances; however, due to the complexity of some of
these uncertainties, the ultimate resolution may result in a
payment that is materially different from our current estimate
of the tax liabilities. If our estimate of tax liabilities
proves to be less than the ultimate assessment, an additional
tax expense would result. If a payment of these amounts
ultimately proves to be less than the recorded amounts, the
reversal of the liabilities would result in tax benefits being
recognized in the period when we determine the liabilities are
no longer necessary.
Goodwill and
Other Intangible Assets
We review goodwill
and indefinite-lived intangible assets for impairment annually
and whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable. We also
review the carrying value of our finite-lived intangible assets
for potential impairment when impairment indicators arise. We
conduct our annual impairment test as of the first day of the
fourth quarter. We perform a two-step impairment test for
goodwill. In the first step, we compare the estimated fair value
of each reporting unit to its carrying value. If the estimated
fair value of the reporting unit exceeds the carrying value of
the net assets assigned to that reporting unit, goodwill is not
impaired and we are not required to perform further testing. If
the carrying value of the net assets assigned to the reporting
unit exceeds its fair value, then we must perform the second
step of the impairment test in order to measure the impairment
loss to be recorded. If the carrying value of a reporting
unit’s goodwill exceeds its implied fair value, then we
record an impairment loss equal to the difference. In our annual
impairment test for indefinite-lived intangible assets, we
compare the fair value of those assets to their carrying value.
We recognize an impairment loss when the estimated fair value
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of the
indefinite-lived intangible asset is less than its carrying
value. We estimate the fair value of our reporting units and
intangible assets with indefinite lives using an income
approach. Under the income approach, we calculate fair value
based on the present value of estimated future cash flows.
Determining the fair
value of a reporting unit or an indefinite-lived intangible
asset is judgmental in nature and involves the use of
significant estimates and assumptions, particularly related to
future operating results and cash flows. These estimates and
assumptions include, but are not limited to, revenue growth
rates and operating margins used to calculate projected future
cash flows, risk-adjusted discount rates, assumed royalty rates,
future economic and market conditions and identification of
appropriate market comparable data. In addition, the
identification of reporting units and the allocation of assets
and liabilities to the reporting units when determining the
carrying value of each reporting unit also requires judgment.
Goodwill is tested for impairment at the reporting unit level,
which is either the reportable segment (e.g., for the Fluid
segment) identified in Note 21, “Business Segment
Information,” to our Notes to the Consolidated Financial
Statements, or one level below (e.g., the divisions of our
Defense and Motion and Flow segments). The fair value of our
reporting units and indefinite-lived intangible assets are based
on estimates and assumptions that are believed to be reasonable.
Significant changes to these estimates and assumptions could
adversely impact our conclusions. Actual future results may
differ from those estimates.
Our 2010 annual
goodwill impairment analysis indicated the estimated fair value
of our reporting units significantly exceeded their carrying
value, and accordingly, no impairment charges were recorded. In
order to evaluate the sensitivity of the fair value estimates on
the goodwill impairment test, we applied a hypothetical
100 basis point increase to the discount rates utilized, a
ten percent reduction in expected future cash flows, and reduced
the assumed future growth rates of each reporting unit to zero.
These hypothetical changes did not result in any reporting unit
failing step one of the impairment test. Further, our 2010
annual indefinite-lived intangible asset impairment test did not
result in an impairment charge as the estimated fair value of
the assets exceeded their carrying value.
New Accounting
Pronouncements
See Note 2,
“New Accounting Pronouncements,” in the Notes to the
Consolidated Financial Statements for a complete discussion of
recent accounting pronouncements. There were no new
pronouncements which we expect to have a material impact on our
financial condition and results of operations in future periods.
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
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:
| n | The effects of the proposed spinoffs of our water and defense business; | |
| n | The tax liability associated with the proposed spinoff transactions; | |
| n | The size of ITT’s operational and financial profile after the spinoffs; | |
| 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 revenues 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 | Acquisitions or divestitures; | |
| n | Personal injury claims; | |
| 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; |
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| n | Contingencies related to actual or alleged environmental contamination, claims and concerns; and | |
| n | Changes in generally accepted accounting principles. |
We undertake no
obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise. 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 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.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of our
global operating and financing activities, we are exposed to
market risks from changes in foreign currency exchange rates,
interest rates and commodity prices, which may adversely affect
our operating results and financial position. The impact from
changes in market conditions is generally minimized through our
normal operating and financing activities. However, we use
derivative instruments, primarily forward contracts, to manage
some of these exposures. We do not use derivative financial
instruments for trading or other speculative purposes. To
minimize the risk of counterparty non-performance, derivative
instrument agreements are made only through major financial
institutions and there is no significant concentration of
exposure with any one party. A summary of our accounting
policies for derivative financial instruments is included in
Note 1, “Significant Accounting Policies,” in the
Notes to the Consolidated Financial Statements.
Foreign Currency
Exchange Rate Exposures
Our foreign currency
exchange rate risk relates to receipts from customers, payments
to suppliers and intercompany transactions denominated in
foreign currencies. We primarily utilize forward contracts to
mitigate exposures related to intercompany transactions. As of
December 31, 2010, we had a total of 13 forward contracts
in place to mitigate exposures related to intercompany
transactions with an aggregate notional amount of $197 and
related net fair value of $2. These forward contracts are all
short-term in duration, generally maturing within three months
from contract date. We may also use derivative financial
instruments to offset risk related to receipts from customers
and payments to suppliers, when it is believed that the exposure
will not be limited by our normal operating and financing
activities. Our principal currency exposures relate to the
U.S. dollar, Euro, Swedish krona, British pound, Canadian
dollar, Chinese renminbi and Australian dollar. We currently do
not believe the net exposure related to receipts from customers
and payments to suppliers to be significant, as such we have not
entered into any derivative financial instruments to offset this
potential exposure.
Effective
January 1, 2010, Venezuela was determined to be a highly
inflationary economy. In addition, on January 8, 2010,
Venezuela announced the devaluation of the Bolivar and provided
further currency adjustments on January 1, 2011. Given our
limited presence in Venezuela, the devaluation, as well as the
highly inflationary accounting treatment is not expected to have
a material impact on our results of operations, financial
position or cash flows.
Interest Rate
Exposures
As of
December 31, 2010, we do not have a material exposure to
interest rate risk as our debt portfolio entirely comprises
long-term, fixed-rate instruments. We issue commercial paper,
which exposes us to changes in interest rates; however, we do
not have an outstanding commercial paper balance as of
December 31, 2010. We do not account for our long-term debt
using the fair value option.
Commodity Price
Exposures:
Portions of our
business are exposed to volatility in the prices of certain
commodities, such as copper, nickel and aluminum, among others.
Our primary exposure to this volatility resides with the use of
these materials in purchased component parts. We generally
maintain long-term fixed price contracts on raw materials and
component parts; however, we are prone to exposure as these
contracts expire. We estimate that a hypothetical 10% adverse
movement in prices for raw metal commodities would not be
material to the financial position, results of operations or
cash flows; however, it is difficult to estimate the extent and
timing of how such a rise in raw metal commodities would impact
our total cost of purchased component parts.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
See Index to
Consolidated Financial Statements and Schedule herein.
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS
AND PROCEDURES
Attached as exhibits
to the
Form 10-K
are certifications of the Company’s Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), which are required in
accordance with
46
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Rule 13a-14
of the Securities Exchange Act of 1934 (Act), as amended.
| (a) | Evaluation of Disclosure Controls and Procedures |
The Company, with
the participation of various levels of management, including the
CEO and CFO, conducted an evaluation of effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in the
Rules 13a-15(e)
and
15d-15(e) of
the Act) as of December 31, 2010. 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.
In 2002, the Company
established a Disclosure Committee with responsibility for
considering and evaluating the materiality of information and
reviewing disclosure obligations on a timely basis. The
Disclosure Committee meets regularly and assists the CEO and the
CFO in designing, establishing, reviewing and evaluating the
Company’s disclosure controls and procedures.
| (b) | Management’s Report on Internal Control Over Financial Reporting |
The Company’s
management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Act. The Company’s internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America.
Internal control
over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in
reasonable detail, completely, accurately and fairly reflect the
transactions and dispositions of the Company’s assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of the financial
statements in accordance with accounting principles generally
accepted in the United States of America; (iii) provide
reasonable assurance that Company receipts and expenditures are
made only in accordance with the authorization of management and
the directors of the Company, and (iv) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of assets that
could have a material effect on the Consolidated Financial
Statements. Internal control over financial reporting includes
the controls themselves, monitoring and internal auditing
practices and actions taken to correct deficiencies as
identified.
Management assessed
the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2010. Management
based this assessment on criteria for effective internal control
over financial reporting described in “Internal
Control — Integrated Framework” issued by the
Committee of Sponsoring Organizations (COSO) of the Treadway
Commission. Management’s assessment included an evaluation
of the design of the Company’s internal control over
financial reporting and testing of the operational effectiveness
of its internal control over financial reporting. Management
reviewed the results of its assessment with the Audit Committee
of our Board of Directors.
Based on this
assessment, management determined that, as of December 31,
2010, the Company maintained effective internal control over
financial reporting.
The Company’s
management, including the CEO and the CFO, does not expect that
our internal controls over financial reporting, because of
inherent limitations, will prevent or detect all errors and all
fraud. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may be
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management’s
assessment, included herein, should be read in conjunction with
the certifications and the report issued by Deloitte &
Touche LLP (Deloitte & Touche), an independent
registered public accounting firm, as stated in their report,
which appears subsequent to Item 9A(c) in this Annual
Report on
Form 10-K.
| (c) | Changes in Internal Control over Financial Reporting |
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.
ITEM 9B. 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. During 2010, MSHA
inspected the Watsontown facility four times. MSHA identified
one machine guarding violation during the inspection that
commenced on July 7, 2010. This violation was corrected and
the Company paid a fine of $127 dollars. As of the date of
filing of this Annual Report on
Form 10-K,
MSHA has identified one violation but has not assessed penalties
related to the inspection that commenced on December 6,
2010.
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REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
ITT
Corporation
White
Plains, New York
We have audited the
internal control over financial reporting of ITT Corporation and
subsidiaries (the “Company”) as of December 31,
2010, based on criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting
based on our audit.
We conducted our
audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s
internal control over financial reporting is a process designed
by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons
performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the
inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness
of the internal control over financial reporting to future
periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010,
based on the criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also
audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated
financial statements as of and for the year ended
December 31, 2010 of the Company and our report dated
February 24, 2011 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte &
Touche
LLP
Stamford, Connecticut
February 24,
2011
48
Table of Contents
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information
called for by Item 10 with respect to directors is
incorporated herein by reference to the portions of the
definitive proxy statement for the Company’s 2010 annual
meeting of shareholders to be filed pursuant to
Regulation 14A of the Exchange Act set forth under the
captions “Election of Directors,” “Information
About the Board of Directors” and “Report of the Audit
Committee.”
The information
called for by Item 10 with respect to executive officers is
set forth above in Part I under the caption “Executive
Officers of the Registrant.”
ITT has adopted
corporate governance principles and charters for each of its
standing committees. The principles address director
qualification standards, election and selection of an
independent presiding director, as well as responsibilities,
access to management and independent advisors, compensation,
orientation and continuing education, management succession
principles and board and committee self-evaluation. The
corporate governance principles and charters are available on
the company’s website at
www.itt.com/responsibility/governance/principles-charters. A
copy of the corporate governance principles and charters is also
available to any shareholder who requests a copy from the
Company’s secretary.
ITT has also adopted
a written code of ethics, the “Code of Corporate
Conduct,” which is applicable to all ITT directors,
officers and employees, including the Company’s Chief
Executive Officer, Chief Financial Officer, and Chief Accounting
Officer and other executive officers identified pursuant to this
Item 10 (collectively, the “Selected Officers”).
In accordance with the SEC’s rules and regulations, a copy
of the code was filed as an exhibit to the 2002
Form 10-K
and has been posted on our website and a copy of the code is
also available to any shareholder who requests it. ITT intends
to disclose any changes in or waivers from its code of ethics
applicable to any Selected Officer or director on its website at
www.itt.com.
Pursuant to New York
Stock Exchange (NYSE) Listing Company Manual
Section 303A.12(a), the Company submitted a
Section 12(a) CEO Certification to the NYSE in 2010. The
Company also filed with the SEC, as exhibits to the
Company’s current Annual Report on
Form 10-K,
the certifications required under Section 302 of the
Sarbanes-Oxley Act for its Chief Executive Officer and Chief
Financial Officer.
ITEM 11. EXECUTIVE
COMPENSATION
The information
called for by Item 11 is incorporated herein by reference
to the portions of the definitive proxy statement referred to in
Item 10 set forth under the caption “Executive
Compensation.”
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information
called for by Item 12 is incorporated herein by reference
to the portions of the definitive proxy statement referred to in
Item 10 set forth under the captions “Beneficial
Ownership of ITT Corporation Common Stock” and “Equity
Compensation Plan Information.”
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information
called for by Item 13 is incorporated herein by reference
portions to the definitive proxy statement referred to in
Item 10.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The information
called for by Item 14 is incorporated herein by reference
to the portions of the definitive proxy statement referred to in
Item 10 set forth under the caption “Independent
Auditor Fees.”
49
Table of Contents
PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULE
(a) Documents
filed as a part of this report:
| 1. | See Index to Consolidated Financial Statements appearing on page 51 for a list of the financial statements filed as a part of this report. | |
| 2. | See Exhibit Index beginning on pages II-2 for a list of the exhibits filed or incorporated herein as a part of this report. |
| (b) | Financial Statement Schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements filed as part of this report. |
50
Table of Contents
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
| ITEM | PAGE | |
| 52 | ||
| 53 | ||
| 54 | ||
| 55 | ||
| 56 | ||
| 57 | ||
| 58 | ||
| 63 | ||
| 64 | ||
| 65 | ||
| 66 | ||
| 67 | ||
| 69 | ||
| 70 | ||
| 70 | ||
| 70 | ||
| 70 | ||
| 71 | ||
| 72 | ||
| 72 | ||
| 72 | ||
| 73 | ||
| 82 | ||
| 85 | ||
| 85 | ||
| 90 | ||
| 91 | ||
| 92 | ||
| 93 | ||
51
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
ITT
Corporation
White
Plains, New York
We have audited the
accompanying consolidated balance sheets of ITT Corporation and
subsidiaries (the “Company”) as of December 31,
2010 and 2009, and the related consolidated statements of
income, comprehensive income, cash flows, and changes in
shareholders’ equity for each of the three years in the
period ended December 31, 2010. These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such
consolidated financial statements present fairly, in all
material respects, the financial position of ITT Corporation and
subsidiaries as of December 31, 2010 and 2009, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2010, in
conformity with accounting principles generally accepted in the
United States of America.
We have also
audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s
internal control over financial reporting as of
December 31, 2010, based on the criteria established in
Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 24, 2011 expressed
an unqualified opinion on the Company’s internal control
over financial reporting.
/s/ Deloitte &
Touche
LLP
Stamford, Connecticut
February 24,
2011
52
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
INCOME STATEMENTS
|
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS) |
|||||||||||||||
| YEAR ENDED DECEMBER 31 | 2010 | 2009 | 2008 | ||||||||||||
|
Product revenue
|
$ | 8,494 | $ | 8,244 | $ | 9,181 | |||||||||
|
Service revenue
|
2,501 | 2,430 | 2,295 | ||||||||||||
|
Total revenue
|
10,995 | 10,674 | 11,476 | ||||||||||||
|
Costs of product revenue
|
5,624 | 5,528 | 6,255 | ||||||||||||
|
Costs of service revenue
|
2,196 | 2,122 | 2,007 | ||||||||||||
|
Total costs of revenue
|
7,820 | 7,650 | 8,262 | ||||||||||||
|
Gross profit
|
3,175 | 3,024 | 3,214 | ||||||||||||
|
Selling, general and administrative expenses
|
1,584 | 1,555 | 1,689 | ||||||||||||
|
Research and development expenses
|
253 | 258 | 236 | ||||||||||||
|
Asbestos-related costs, net
|
385 | 238 | 14 | ||||||||||||
|
Restructuring and asset impairment charges, net
|
53 | 79 | 77 | ||||||||||||
|
Operating income
|
900 | 894 | 1,198 | ||||||||||||
|
Interest expense
|
100 | 99 | 140 | ||||||||||||
|
Interest income
|
16 | 24 | 31 | ||||||||||||
|
Miscellaneous (income) expense, net
|
(2 | ) | 9 | 13 | |||||||||||
|
Income from continuing operations before income tax expense
|
818 | 810 | 1,076 | ||||||||||||
|
Income tax expense
|
164 | 169 | 308 | ||||||||||||
|
Income from continuing operations
|
654 | 641 | 768 | ||||||||||||
|
Income from discontinued operations, including tax (expense)
benefit of $(8), $(1) and $2, respectively
|
144 | 3 | 27 | ||||||||||||
|
Net income
|
$ | 798 | $ | 644 | $ | 795 | |||||||||
|
Earnings Per Share:
|
|||||||||||||||
|
Basic:
|
|||||||||||||||
|
Continuing operations
|
$ | 3.55 | $ | 3.51 | $ | 4.22 | |||||||||
|
Discontinued operations
|
0.79 | 0.02 | 0.15 | ||||||||||||
|
Net income
|
$ | 4.34 | $ | 3.53 | $ | 4.37 | |||||||||
|
Diluted:
|
|||||||||||||||
|
Continuing operations
|
$ | 3.53 | $ | 3.49 | $ | 4.17 | |||||||||
|
Discontinued operations
|
0.77 | 0.01 | 0.15 | ||||||||||||
|
Net income
|
$ | 4.30 | $ | 3.50 | $ | 4.32 | |||||||||
|
Weighted average common shares – basic
|
183.9 | 182.5 | 181.9 | ||||||||||||
|
Weighted average common shares – diluted
|
185.3 | 183.9 | 184.0 | ||||||||||||
|
Cash dividends declared per common share
|
$ | 1.00 | $ | 0.85 | $ | 0.70 | |||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above income statements.
53
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
(IN MILLIONS) |
|||||||||||||||
| YEAR ENDED DECEMBER 31 | 2010 | 2009 | 2008 | ||||||||||||
|
Net income
|
$ | 798 | $ | 644 | $ | 795 | |||||||||
|
Other comprehensive income:
|
|||||||||||||||
|
Net foreign currency translation adjustment
|
(74 | ) | 126 | (221 | ) | ||||||||||
|
Net change in postretirement benefit plans, net of tax (expense)
benefit of $(19), $(89) and $781, respectively
|
27 | 146 | (1,338 | ) | |||||||||||
|
Net change in unrealized gains on investment securities, net of
tax (expense) of $0, $(7) and $0, respectively
|
— | 11 | — | ||||||||||||
|
Other comprehensive (loss) income
|
(47 | ) | 283 | (1,559 | ) | ||||||||||
|
Comprehensive income (loss)
|
$ | 751 | $ | 927 | $ | (764 | ) | ||||||||
|
Disclosure of reclassification adjustment:
|
|||||||||||||||
|
Net foreign currency translation adjustment:
|
|||||||||||||||
|
Foreign currency translation (loss) gain
|
$ | (74 | ) | $ | 126 | $ | (215 | ) | |||||||
|
Foreign currency translation gains included in net income
|
— | — | (6 | ) | |||||||||||
|
Net foreign currency translation adjustment
|
$ | (74 | ) | $ | 126 | $ | (221 | ) | |||||||
|
Net change in postretirement benefit plans, net of tax:
|
|||||||||||||||
|
Prior service (cost) benefit from plan amendment, net of tax
benefit (expense) of $1, $(1) and $(1), respectively
|
$ | (3 | ) | $ | 2 | $ | 2 | ||||||||
|
Net actuarial (loss) gain arising during the period, net of tax
benefit(expense) of $14, $(61) and $792, respectively
|
(24 | ) | 100 | (1,357 | ) | ||||||||||
|
Unrealized changes in postretirement benefit plans, net of tax
|
(27 | ) | 102 | (1,355 | ) | ||||||||||
|
Amortization of prior service costs, net of tax benefit of $1,
$3 and $2, respectively
|
1 | 5 | 4 | ||||||||||||
|
Amortization of net actuarial loss, net of tax benefit of $33,
$24 and $8, respectively
|
53 | 39 | 13 | ||||||||||||
|
Total amortization from accumulated other comprehensive income
into net period benefit cost, net of tax
|
54 | 44 | 17 | ||||||||||||
|
Net change in postretirement benefit plans, net of tax
|
$ | 27 | $ | 146 | $ | (1,338 | ) | ||||||||
|
Net change in unrealized gains on investment securities, net of
tax:
|
|||||||||||||||
|
Unrealized holding gains arising during period, net of tax
expense of $3, $7 and $0, respectively
|
$ | 4 | $ | 11 | $ | — | |||||||||
|
Realized gains arising during the period, net of tax expense of
$3, $0 and $0, respectively
|
(4 | ) | — | — | |||||||||||
|
Net change in unrealized gains on investment securities, net of
tax
|
$ | — | $ | 11 | $ | — | |||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements of comprehensive income
(loss).
54
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS) |
||||||||||
| DECEMBER 31 | 2010 | 2009 | ||||||||
|
Assets
|
||||||||||
|
Current assets:
|
||||||||||
|
Cash and cash equivalents
|
$ | 1,032 | $ | 1,216 | ||||||
|
Receivables, net
|
1,944 | 1,754 | ||||||||
|
Inventories, net
|
856 | 802 | ||||||||
|
Other current assets
|
562 | 579 | ||||||||
|
Total current assets
|
4,394 | 4,351 | ||||||||
|
Plant, property and equipment, net
|
1,205 | 1,050 | ||||||||
|
Deferred income taxes
|
554 | 583 | ||||||||
|
Goodwill
|
4,277 | 3,788 | ||||||||
|
Other intangible assets, net
|
766 | 501 | ||||||||
|
Asbestos-related assets
|
930 | 604 | ||||||||
|
Other non-current assets
|
312 | 252 | ||||||||
|
Total non-current assets
|
8,044 | 6,778 | ||||||||
|
Total assets
|
$ | 12,438 | $ | 11,129 | ||||||
|
Liabilities and Shareholders’ Equity
|
||||||||||
|
Current liabilities:
|
||||||||||
|
Accounts payable
|
$ | 1,472 | $ | 1,273 | ||||||
|
Accrued liabilities
|
1,262 | 1,276 | ||||||||
|
Short-term borrowings and current maturities of long-term debt
|
11 | 75 | ||||||||
|
Total current liabilities
|
2,745 | 2,624 | ||||||||
|
Postretirement benefits
|
1,733 | 1,788 | ||||||||
|
Long-term debt
|
1,354 | 1,431 | ||||||||
|
Asbestos-related liabilities
|
1,559 | 867 | ||||||||
|
Other non-current liabilities
|
542 | 541 | ||||||||
|
Total non-current liabilities
|
5,188 | 4,627 | ||||||||
|
Total liabilities
|
7,933 | 7,251 | ||||||||
|
Shareholders’ Equity:
|
||||||||||
|
Common stock: Authorized – 500.0 shares,
$1 par value per share (206.9 shares issued)
Outstanding – 184.0 shares and 182.9 shares,
respectively(a)
|
183 | 181 | ||||||||
|
Retained earnings
|
5,409 | 4,737 | ||||||||
|
Total accumulated other comprehensive loss
|
(1,087 | ) | (1,040 | ) | ||||||
|
Total shareholders’ equity
|
4,505 | 3,878 | ||||||||
|
Total liabilities and shareholders’ equity
|
$ | 12,438 | $ | 11,129 | ||||||
| (a) | Shares outstanding include unvested restricted common stock of 1.0 and 1.3 at December 31, 2010 and 2009, respectively. |
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above balance sheets.
55
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(IN MILLIONS) |
|||||||||||||||
| YEAR ENDED DECEMBER 31 | 2010 | 2009 | 2008 | ||||||||||||
|
Operating Activities
|
|||||||||||||||
|
Net income
|
$ | 798 | $ | 644 | $ | 795 | |||||||||
|
Less: Income from discontinued operations
|
144 | 3 | 27 | ||||||||||||
|
Income from continuing operations
|
654 | 641 | 768 | ||||||||||||
|
Adjustments to income from continuing operations:
|
|||||||||||||||
|
Depreciation and amortization
|
297 | 289 | 274 | ||||||||||||
|
Deferred income taxes
|
(115 | ) | (77 | ) | 12 | ||||||||||
|
Stock-based compensation
|
30 | 31 | 30 | ||||||||||||
|
Asbestos-related costs, net
|
385 | 238 | 14 | ||||||||||||
|
Restructuring and asset impairment charges, net
|
53 | 79 | 77 | ||||||||||||
|
Payments for restructuring
|
(70 | ) | (82 | ) | (54 | ) | |||||||||
|
Contributions to pension plans
|
(76 | ) | (161 | ) | (24 | ) | |||||||||
|
Change in receivables
|
(150 | ) | 187 | (108 | ) | ||||||||||
|
Change in inventories
|
50 | 21 | 70 | ||||||||||||
|
Change in accounts payable
|
174 | 33 | (50 | ) | |||||||||||
|
Change in accrued liabilities
|
47 | 6 | 109 | ||||||||||||
|
Change in accrued taxes
|
(73 | ) | 63 | 5 | |||||||||||
|
Change in other assets
|
(24 | ) | (21 | ) | (5 | ) | |||||||||
|
Change in other liabilities
|
35 | (13 | ) | (7 | ) | ||||||||||
|
Other, net
|
17 | 24 | (4 | ) | |||||||||||
|
Net Cash – Operating activities
|
1,234 | 1,258 | 1,107 | ||||||||||||
|
Investing Activities
|
|||||||||||||||
|
Capital expenditures
|
(328 | ) | (271 | ) | (248 | ) | |||||||||
|
Acquisitions, net of cash acquired
|
(1,041 | ) | (34 | ) | (276 | ) | |||||||||
|
Proceeds from sale of discontinued operations and other assets
|
257 | 20 | 22 | ||||||||||||
|
Other, net
|
(5 | ) | — | — | |||||||||||
|
Net Cash – Investing activities
|
(1,117 | ) | (285 | ) | (502 | ) | |||||||||
|
Financing Activities
|
|||||||||||||||
|
Short-term debt, net
|
(63 | ) | (1,603 | ) | (1,229 | ) | |||||||||
|
Long-term debt repaid
|
(79 | ) | (29 | ) | (23 | ) | |||||||||
|
Long-term debt issued
|
1 | 992 | 1 | ||||||||||||
|
Repurchase of common stock
|
— | — | (75 | ) | |||||||||||
|
Proceeds from issuance of common stock
|
28 | 15 | 34 | ||||||||||||
|
Dividends paid
|
(176 | ) | (148 | ) | (121 | ) | |||||||||
|
Other, net
|
(1 | ) | 1 | 6 | |||||||||||
|
Net Cash – Financing activities
|
(290 | ) | (772 | ) | (1,407 | ) | |||||||||
|
Exchange rate effects on cash and cash equivalents
|
(18 | ) | 40 | (74 | ) | ||||||||||
|
Net cash from discontinued operations
|
7 | 10 | 1 | ||||||||||||
|
Net change in cash and cash equivalents
|
(184 | ) | 251 | (875 | ) | ||||||||||
|
Cash and cash equivalents – beginning of year
|
1,216 | 965 | 1,840 | ||||||||||||
|
Cash and Cash Equivalents – End of Year
|
$ | 1,032 | $ | 1,216 | $ | 965 | |||||||||
|
Supplemental Disclosures of Cash Flow Information
|
|||||||||||||||
|
Cash paid during the year for:
|
|||||||||||||||
|
Interest
|
$ | 92 | $ | 90 | $ | 136 | |||||||||
|
Income taxes (net of refunds received)
|
$ | 343 | $ | 181 | $ | 280 | |||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements of cash flows.
56
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
(IN MILLIONS) |
SHARES | DOLLARS | ||||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||||||
|
Common Stock
|
||||||||||||||||||||||||||||
|
Common stock, beginning balance
|
181 | 180 | 180 | $ | 181 | $ | 180 | $ | 180 | |||||||||||||||||||
|
Activity from stock incentive plans
|
2 | 1 | 1 | 2 | 1 | 1 | ||||||||||||||||||||||
|
Repurchase of common stock
|
– | – | (1 | ) | – | – | (1 | ) | ||||||||||||||||||||
|
Common stock, ending balance
|
183 | 181 | 180 | $ | 183 | $ | 181 | $ | 180 | |||||||||||||||||||
|
Retained Earnings
|
||||||||||||||||||||||||||||
|
Retained earnings, beginning balance
|
$ | 4,737 | $ | 4,203 | $ | 3,529 | ||||||||||||||||||||||
|
Net income
|
798 | 644 | 795 | |||||||||||||||||||||||||
|
Cash dividends declared on common stock
|
(184 | ) | (155 | ) | (127 | ) | ||||||||||||||||||||||
|
Repurchase of common stock, additional
paid-in-capital
|
– | – | (75 | ) | ||||||||||||||||||||||||
|
Activity from stock incentive plans, additional
paid-in-capital
|
58 | 45 | 81 | |||||||||||||||||||||||||
|
Retained earnings, ending balance
|
$ | 5,409 | $ | 4,737 | $ | 4,203 | ||||||||||||||||||||||
|
Accumulated Other Comprehensive Loss
|
||||||||||||||||||||||||||||
|
Postretirement benefit plans, beginning balance
|
$ | (1,388 | ) | $ | (1,534 | ) | $ | (196 | ) | |||||||||||||||||||
|
Net change in postretirement benefit plans
|
27 | 146 | (1,338 | ) | ||||||||||||||||||||||||
|
Postretirement benefit plans, ending balance
|
(1,361 | ) | (1,388 | ) | (1,534 | ) | ||||||||||||||||||||||
|
Cumulative translation adjustments, beginning balance
|
336 | 210 | 431 | |||||||||||||||||||||||||
|
Net foreign currency translation adjustment
|
(74 | ) | 126 | (221 | ) | |||||||||||||||||||||||
|
Cumulative translation adjustments, ending balance
|
262 | 336 | 210 | |||||||||||||||||||||||||
|
Unrealized gain on investment securities, beginning balance
|
12 | 1 | 1 | |||||||||||||||||||||||||
|
Net change in unrealized gains on investment securities
|
– | 11 | – | |||||||||||||||||||||||||
|
Unrealized gain on investment securities, ending balance
|
12 | 12 | 1 | |||||||||||||||||||||||||
|
Total accumulated other comprehensive loss
|
$ | (1,087 | ) | $ | (1,040 | ) | $ | (1,323 | ) | |||||||||||||||||||
|
Total Shareholders’ Equity
|
||||||||||||||||||||||||||||
|
Total shareholders’ equity, beginning balance
|
$ | 3,878 | $ | 3,060 | $ | 3,945 | ||||||||||||||||||||||
|
Net change in common stock
|
2 | 1 | – | |||||||||||||||||||||||||
|
Net change in retained earnings
|
672 | 534 | 674 | |||||||||||||||||||||||||
|
Net change in accumulated other comprehensive income
|
(47 | ) | 283 | (1,559 | ) | |||||||||||||||||||||||
|
Total shareholders’ equity, ending balance
|
$ | 4,505 | $ | 3,878 | $ | 3,060 | ||||||||||||||||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements of changes in
shareholders’ equity.
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS AND SHARE AMOUNTS IN MILLIONS, UNLESS OTHERWISE STATED)
(DOLLARS AND SHARE AMOUNTS IN MILLIONS, UNLESS OTHERWISE STATED)
NOTE 1
Summary
of Significant Accounting Policies
Basis of
Presentation
ITT Corporation is a
global multi-industry leader in high-technology engineering and
manufacturing, operating through three principal business
segments; Defense & Information Solutions (Defense
segment), Fluid Technology (Fluid segment) and
Motion & Flow Control (Motion & Flow
segment). The Consolidated Financial Statements are prepared in
conformity with accounting principles generally accepted in the
United States of America (GAAP). 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. Certain prior year amounts have been reclassified
to conform to the current year presentation. Reclassifications
principally relate to the designation of CAS, Inc. (CAS) as a
discontinued operation and accordingly, these reclassifications
have affected the results of continuing operations for
historical periods. See Note 4, “Discontinued
Operations,” in our Notes to the Consolidated Financial
Statements for further information on the CAS divestiture.
Use of
Estimates
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.
Consolidation
Principles
ITT consolidates
companies in which it has a controlling financial interest or
when ITT is considered the primary beneficiary of a variable
interest entity. We account for investments in companies over
which we have the ability to exercise significant influence, but
do not hold a controlling interest under the equity method, and
we record our proportionate share of income or losses in the
Consolidated Income Statements. The results of companies
acquired or disposed of during the fiscal year are included in
the Consolidated Financial Statements from the effective date of
acquisition or up to the date of disposal. All intercompany
transactions have been eliminated.
Business
Combinations
ITT allocates the
purchase price of its acquisitions to the tangible and
intangible assets acquired, liabilities assumed, and
non-controlling interests acquired based on their estimated fair
value at the acquisition date. Changes to acquisition date fair
values prior to the expiration of the measurement period, a
period not to exceed 12 months from date of acquisition,
are recorded as an adjustment to the associated goodwill.
Changes to acquisition date fair values after expiration of the
measurement period are recorded in earnings. The excess of the
acquisition price over those estimated fair values is recorded
as goodwill. Acquisition-related expenses and restructuring
costs are recognized separately from the business combination
and are expensed as incurred.
Revenue
Recognition
Revenue is
recognized when persuasive evidence of an arrangement exists,
the price is fixed or determinable, collectability is reasonably
assured and delivery has occurred or services have been
rendered. For product sales, other than long-term
construction-type contracts, we recognize revenue at the time
title and risks and rewards of ownership pass, which is
generally when products are shipped. Certain contracts with
customers require delivery, installation, testing, certification
or other acceptance provisions to be satisfied before revenue is
recognized. We recognize revenue on product sales to channel
partners, including resellers, distributors or value-added
solution providers at the time of sale when the channel partners
have economic substance apart from ITT and ITT has completed its
obligations related to the sale. Service revenue is recognized
as services are performed. For agreements that contain multiple
deliverables, we recognize revenue for a delivered element when
it has stand-alone value to the customer, there is objective and
reliable evidence of fair value of the undelivered elements,
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 Defense segment
and certain businesses within the Fluid segment enter into
long-term construction-type sales contracts for which revenue is
recognized under the
percentage-of-completion
method based upon units of delivery, percentage of costs
incurred to total costs, or the completion of scheduled
performance milestones. For units of delivery, revenues and
profits are recognized based upon the ratio of actual
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units delivered to
estimated total units to be delivered under the contract. Under
the
cost-to-total
cost method, revenue is recognized based upon the ratio of costs
incurred to estimated total costs at completion. Revenue is
recognized under the milestone method, based upon accomplishing
a clear deliverable output of contract performance with value to
the customer. Revenue under cost-reimbursement contracts is
recorded as costs are incurred and includes estimated earned
fees or profits calculated on the basis of the relationship
between costs incurred and total estimated costs. Revenue and
profits on
time-and-material
type contracts are recognized based on billable rates times
direct labor hours incurred plus material and other reimbursable
costs incurred. The completed contract method is utilized when
reasonable and reliable cost estimates for a project cannot be
made. Amounts invoiced to customers in excess of revenue
recognized are recorded as deferred revenue, until the revenue
recognition criteria are satisfied, and is recorded as a
component of accounts payable. Revenue that is earned and
recognized in excess of amounts invoiced is recorded as a
component of trade receivables.
During the
performance of long-term sale contracts, estimated final
contract prices and costs are periodically reviewed and
revisions are made as required and recorded in earnings in the
period in which they are determined. Additionally, the fees
under certain contracts may be increased or decreased in
accordance with cost or performance incentive provisions which
measure actual performance against established targets or other
criteria. Such incentive fee awards or penalties are included in
revenue when there is sufficient information to reasonably
assess anticipated contract performance. Our claims on contracts
are recorded only if it is probable the claim will result in
additional contract revenue and the amounts can be reliably
estimated. Provisions for estimated losses, if any, on
uncompleted long-term contracts, are made in the period in which
such losses are determined and are recorded as a component of
costs of revenue.
We record a
reduction in revenue at the time of sale for estimated product
returns, rebates and other allowances, based on historical
experience and known trends. Additionally, accruals for
estimated expenses related to warranties are made at the time
products are sold or services are rendered and are recorded as a
component of costs of revenue. These accruals are established
using historical information on the nature, frequency and
average cost of warranty claims and estimates of future costs.
Revenue is reported
net of any required taxes collected from customers and remitted
to government authorities, with the collected taxes recorded as
current liabilities until remitted to the relevant government
authority.
Shipping and
Handling Costs
Shipping and
handling costs are recorded as a component of costs of revenue.
Postretirement
Benefit Plans
ITT sponsors
numerous pension and other employee-related defined benefit
plans (collectively, postretirement benefit plans) for employees
around the world. The determination of benefit obligations and
the recognition of expenses related to postretirement plans are
dependent on various assumptions. The major assumptions
primarily relate to discount rates, long-term expected rates of
return on plan assets, rate of future compensation increases,
mortality, termination, health care inflation trend rates and
other factors. Management develops each assumption using
relevant company experience in conjunction with market-related
data for each individual country in which such plans exist. All
actuarial assumptions are reviewed periodically with third-party
consultants and adjusted as necessary. For the recognition of
net periodic postretirement cost, the calculation of the
long-term expected return on plan assets is generally derived
using a market-related value of plan assets based on yearly
average asset values at the measurement date over the last five
years. Actual results that differ from our assumptions are
accumulated and amortized over the estimated future working life
of the plan participants.
The fair value of
plan assets is determined based on market prices or estimated
fair value at the measurement date. See Note 16,
“Postretirement Benefit Plans,” for further
information on the measurement of fair value.
The funded or
unfunded position of each plan is recorded on our balance sheet.
Actuarial gains and losses and prior service costs or credits
that have not yet been recognized through net income are
recorded in accumulated other comprehensive income within
shareholders’ equity, net of taxes, until they are
amortized as a component of net periodic postretirement cost.
Research and
Development
Research and
development (R&D) programs include Company-sponsored
activities as well as activities performed pursuant to customer
contracts. R&D costs incurred as part of a
Company-sponsored activity are charged to expense as incurred
and are reported as a component of operating income within the
R&D expense line. R&D costs incurred under customer
contracts reported as a component of costs of revenue when the
expense is incurred.
Stock-Based
Compensation
Stock-based awards
issued to employees and non-employee directors include
non-qualified stock options, restricted stock
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awards and certain
liability-based awards. Compensation costs resulting from
share-based payment transactions are recognized primarily within
SG&A, at fair value over the requisite service period
(typically three years) on a straight-line basis. The calculated
compensation cost is adjusted based on an estimate of awards
ultimately expected to vest. The fair value of a non-qualified
stock option is determined on the date of grant using a binomial
lattice pricing model incorporating multiple and variable
assumptions over time, including assumptions such as employee
exercise patterns, stock price volatility and changes in
dividends. The fair value of restricted stock awards is
determined using the closing price of the Company’s common
stock on date of grant. The fair value of our liability-based
awards, including cash awards under our Long-Term Incentive
Plan, is reassessed at the end of each reporting period,
including an adjustment for awards that are not ultimately
expected to vest.
Asbestos-Related
Contingencies and Receivables
ITT is a defendant
in product liability lawsuits alleging personal injury due to
asbestos exposure. We recognize an undiscounted liability for
any asbestos-related contingency that is probable of occurrence
and reasonably estimable. We have accrued for the estimated
value of pending claims and unasserted claims estimated to be
filed over the next 10 years, including legal fees. Factors
utilized in determining the liability for both pending and
unasserted claims include: disease type, average settlement
costs, percentage of claims settled or dismissed, and the number
of new claims filed against the Company. In light of the
uncertainties and variables inherent in the long-term projection
of the Company’s total asbestos liability, although it is
probable that the Company will incur additional costs for
asbestos claims filed beyond the next 10 years, we do not
believe there is a reasonable basis for estimating those costs
at this time. In addition, the Company retains a consulting firm
to assist management in estimating our potential exposure to
pending asbestos claims and for claims estimated to be filed
over the next 10 years.
The Company has also
recorded an asbestos asset, comprised predominantly of an
insurance asset and expected recoveries from other responsible
parties. The asbestos asset represents our best estimate of
probable recoveries from third parties for pending claims, as
well as unasserted claims estimated to be filed over the next
10 years. The timing and amount of reimbursements will vary
due to differing policy terms and certain gaps in coverage as a
result of possible insurer insolvencies.
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. 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 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.
Restructuring
We periodically
initiate management approved restructuring activities to achieve
cost savings through reduced operational redundancies and to
strategically position ourselves in the market in response to
prevailing economic conditions and associated customer demand.
Costs associated with restructuring actions can include
severance, infrastructure charges to vacate facilities or
consolidate operations, contract termination costs and other
related charges. For involuntary separation plans, a liability
is recognized when it is probable and reasonably estimable. For
voluntary separation plans, a liability is recognized when the
employee irrevocably accepts the voluntary termination. For
one-time termination benefits, such as additional severance pay
or benefit payouts, and other exit costs, such as lease
termination costs, the liability is measured and recognized
initially at fair value in the period in which the liability is
incurred, with subsequent changes to the liability recognized as
adjustments in the period of change.
Income
Taxes
We determine the
provision for income taxes using the asset and liability
approach. Under this approach, deferred income taxes represent
the expected future tax consequences of temporary differences
between the carrying amounts and tax basis of assets and
liabilities. We record a valuation allowance to reduce deferred
tax assets when uncertainty regarding their realizability exists.
In assessing the
need for a valuation allowance, we look to the future reversal
of existing taxable temporary differences, taxable income in
carryback years, the feasibility of tax planning strategies and
estimated future taxable income. The valuation allowance can be
affected by changes to tax laws, changes to statutory tax rates
and changes to future taxable income estimates.
We recognize tax
benefits from uncertain tax positions only if it is more likely
than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the Consolidated
Financial Statements from such positions are measured based on
the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement.
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Foreign
Currency Translation
The national
currencies of our foreign companies are generally the functional
currencies. Balance sheet accounts are translated at the
exchange rate in effect at the end of each period; income
statement accounts are translated at the average rates of
exchange prevailing during the period. Gains and losses on
foreign currency translations are reflected in the cumulative
translation adjustments component of shareholders’ equity.
Net gains or losses from foreign currency transactions are
reported currently in selling, general and administrative
expenses.
Earnings Per
Share
Basic earnings per
common share considers the weighted average number of common
shares outstanding, as well as outstanding unvested share-based
payment awards that contain rights to nonforfeitable dividends.
Diluted earnings per share considers the outstanding shares
utilized in the basic earnings per share calculation as well as
the dilutive effect of outstanding stock options and restricted
stock that do not contain rights to nonforfeitable dividends.
Cash and Cash
Equivalents
ITT considers all
highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. We did not have any
investments in marketable securities reported within cash and
cash equivalents as of December 31, 2010. As of
December 31, 2009, marketable securities included in cash
and cash equivalents totaled $72.
Concentrations
of Credit Risk
Financial
instruments that potentially subject ITT to significant
concentrations of credit risk consist principally of cash and
cash equivalents, accounts receivable from trade customers, and
derivative contracts. We maintain cash and cash equivalents and
derivative contracts with various financial institutions. These
financial institutions are located in many different
geographical regions, and our policy is designed to limit
exposure with any one institution. As part of our cash and risk
management processes, we perform periodic evaluations of the
relative credit standing of the financial institutions. We have
not sustained any material credit losses during the previous
three years from instruments held at financial institutions. We
may utilize forward contracts to protect against the effects of
foreign currency fluctuations. Such contracts involve the risk
of non-performance by the counterparty.
The
U.S. government accounted for 25% and 18% of gross accounts
receivable at December 31, 2010 and 2009, respectively.
Credit risk with respect to other accounts receivable is
generally diversified due to the large number of entities
comprising ITT’s customer base and their dispersion across
many different industries and geographic regions. ITT performs
ongoing credit evaluations of the financial condition of its
third-party distributors, resellers and other customers and
requires collateral, such as letters of credit and bank
guarantees, in certain circumstances.
Allowance for
Doubtful Accounts
We determine our
allowance for doubtful accounts using a combination of factors
to reduce our trade receivables balances to their estimated net
realizable amount. We maintain an allowance for doubtful
accounts based on a variety of factors, including the length of
time receivables are past due, macroeconomic trends and
conditions, significant one-time events, historical experience
and the financial condition of customers. We record a specific
reserve for individual accounts when we become aware of specific
customer circumstances, such as in the case of bankruptcy
filings or deterioration in the customer’s operating
results or financial position. The past due or delinquency
status of a receivable is based on the contractual payment terms
of the receivable. If circumstances related to the specific
customer change, we adjust estimates of the recoverability of
receivables as appropriate.
Inventories
Inventories are
recorded at the lower of cost or market, with cost generally
computed on a
first-in,
first-out (FIFO) basis. A full absorption policy is employed
using standard cost techniques that are periodically reviewed
and adjusted. Estimated losses from obsolete and slow-moving
inventories are recorded to reduce inventory values to their
estimated net realizable value. Inventories valued under the
last-in,
first-out (LIFO) method represent 7.1% and 6.4% of total 2010
and 2009 inventories, respectively. There would not have been a
material difference in the value of inventories if the FIFO
method had been used to value all inventories.
Inventoried costs
related to long-term contracts are stated at the actual
production cost, including overhead and other related
non-recurring costs incurred to date reduced by amounts
identified with revenue recognized on units delivered or
progress completed. General and administrative costs applicable
to cost-reimbursement type contracts are also included in
inventories. Inventoried costs relating to long-term contracts
and programs are reduced by charging any amounts in excess of
estimated realizable value to costs of revenue.
Plant,
Property and Equipment
Plant, property and
equipment, including capitalized interest applicable to major
project expenditures, are recorded at cost. Depreciation is
computed on a straight-line basis over the economic useful lives
of the assets involved as follows: buildings
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and
improvements – five to 40 years, machinery and
equipment – two to 10 years, furniture and office
equipment – three to seven years, and
other – five to 40 years. Leasehold improvements
are depreciated over the life of the lease or the asset,
whichever is shorter. Fully depreciated assets are retained in
property and accumulated depreciation accounts until disposal.
Capitalized
Internal Use Software
ITT capitalizes
certain internal and external costs incurred to acquire or
create internal use software, principally related to software
coding, designing system interfaces and installation and testing
of the software. ITT amortizes capitalized internal use software
costs using the straight-line method over the estimated useful
life of the software, generally from three to seven years.
Long-Lived
Asset Impairment
Long-lived assets,
including intangible assets with finite lives, are tested for
impairment whenever events or changes in circumstances indicate
their carrying value may not be recoverable. We assess the
recoverability of long-lived assets based on the undiscounted
future cash flow the assets are expected to generate and
recognize an impairment loss when estimated undiscounted future
cash flows expected to result from the use of the asset plus net
proceeds expected from disposition of the asset, if any, are
less than the carrying value of the asset. When an impairment is
identified, we reduce the carrying amount of the asset to its
estimated fair value based on a discounted cash flow approach
or, when available and appropriate, to comparable market values.
Goodwill and
Intangible Assets
Goodwill represents
purchase consideration paid in a business combination that
exceeds the values assigned to the net assets of acquired
businesses. Intangible assets include customer relationships,
proprietary technology, trademarks, patents and other intangible
assets. Intangible assets with a finite life are amortized on a
straight-line basis over an estimated economic useful life,
which generally range from
15-20 years,
and are tested for impairment if indicators of impairment are
identified. Certain of our intangible assets have an indefinite
life, namely certain brands and trademarks.
Goodwill and
indefinite-lived intangible assets are not amortized, but
instead are tested for impairment annually (or more frequently
if impairment indicators arise, such as changes to the reporting
unit structure, significant adverse changes in the business
climate or an adverse action or assessment by a regulator). We
conduct our annual impairment testing on the first day of the
fourth quarter. For goodwill, the impairment test is a two-step
test. In the first step, the estimated fair value of each
reporting unit is compared to the carrying value of the net
assets assigned to that reporting unit. If the estimated fair
value of the reporting unit exceeds its carrying value, goodwill
is not impaired and the second step of the impairment test is
not performed. If the carrying value of the reporting unit
exceeds its estimated fair value, then the second step of the
impairment test is performed in order to measure the impairment
loss to be recorded. If the carrying value of a reporting
unit’s goodwill exceeds its implied fair value, then we
record an impairment loss equal to the difference. We estimate
the fair value of our reporting units and indefinite-lived
intangible assets using an income approach. Under the income
approach, we estimate fair value based on the present value of
estimated future cash flows.
Commitments
and Contingencies
We record accruals
for commitments and loss contingencies for those which are both
probable and the amount can be reasonably estimated. In
addition, legal fees are accrued for cases where a loss is
probable and the related fees can be reasonably estimated.
Significant judgment is required to determine both probability
and the estimated amount of loss. We review these accruals
quarterly and adjust the accruals to reflect the impact of
negotiations, settlements, rulings, advice of legal counsel, and
other updated information.
Accruals for
environmental matters are recorded on a site by site basis when
it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated, based on current
law and existing technologies. Our estimated liability is
reduced to reflect the anticipated participation of other
potentially responsible parties in those instances where it is
probable that such parties are legally responsible and
financially capable of paying their respective shares of the
relevant costs. These accruals are adjusted periodically as
assessment and remediation efforts progress or as additional
technical or legal information become available. Actual costs to
be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating
environmental exposures. Accruals for environmental liabilities
are primarily included in other non-current liabilities at
undiscounted amounts and exclude claims for recoveries from
insurance companies or other third parties. Recoveries from
insurance companies or other third parties are primarily
included in other non-current assets when the recovery is
probable.
Fair Value
Measurements
We determine fair
value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. We use a
hierarchical structure to prioritize the inputs to valuation
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techniques used to
measure fair value into three broad levels. The fair value
hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1), then
to quoted market prices for similar assets or liabilities in
active markets (Level 2) and gives the lowest priority
to unobservable inputs (Level 3).
Derivative
Financial Instruments
ITT uses derivative
financial instruments, primarily foreign currency forward
contracts, to mitigate exposure from foreign currency exchange
rate fluctuations as it pertains to intercompany transactions.
We do not use derivative instruments for speculative purposes.
We record derivatives at their fair value as either a current
asset or current liability. We include adjustments to reflect
changes in fair values of derivatives in earnings as these
contracts are not designated as hedges. The amount of gains and
losses recorded related to our foreign currency exchange
contracts and the net fair value of our outstanding contracts
was not material as of and for the years ended 2010, 2009 and
2008. The fair values associated with the foreign currency
contracts have been determined using the net position of the
contracts and the applicable spot rates and forward rates as of
the reporting date.
ITT may use interest
rate swaps to manage its debt portfolio, the related financing
costs and interest rate structure. Interest rate swaps involve
the periodic exchange of payments without the exchange of
underlying principal or notional amounts. Net payments are
recognized as an adjustment to interest expense. When interest
rate swaps designated as hedges are terminated, unrealized gains
or losses are deferred and amortized over the shorter of the
remaining original term of the hedging instrument or the
remaining life of the underlying debt instrument. Such gains or
losses are reflected in net interest expense. As of
December 31, 2010 and 2009 we did not have any material
open interest rate swaps.
NOTE 2
New
Accounting Pronouncements
Pronouncements
Not Yet Adopted
In December 2010,
the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (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 if it is more likely
than not that a goodwill impairment exists, considering any
adverse qualitative factors. As of the date of our 2010 annual
goodwill impairment test, the net carrying amounts for each of
our reporting units exceeded zero. This guidance is effective
for fiscal years, and interim periods within those years,
beginning after December 15, 2010. We currently do not
expect the adoption of this ASU on January 1, 2011 to have
a significant effect on our Consolidated Financial Statements.
In October 2009, the
FASB issued ASU
No. 2009-13,
which amended the accounting for revenue arrangements that
contain multiple elements. The objective of this amendment is to
address the accounting for multiple-deliverable arrangements to
enable vendors to account for products or services
(deliverables) separately rather than as a combined unit. 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. The guidance provided within ASU
2009-13 is
effective for new or materially modified arrangements in fiscal
years beginning on or after June 15, 2010 and allows for
either prospective or retrospective application, with early
adoption permitted. We will adopt the provisions of this ASU on
January 1, 2011. Although we continue to evaluate the
effects adoption of this ASU will have, we currently do not
believe our results of operations, financial position or
liquidity will be adversely affected.
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. The guidance provided within ASU
2009-14 is
effective for new or materially modified arrangements in fiscal
years beginning on or after June 15, 2010 and allows for
either prospective or retrospective application, with early
adoption permitted. We do not believe adoption of this ASU on
January 1, 2011 will have a significant impact on our
Consolidated Financial Statements.
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.
This guidance is effective for milestones achieved in fiscal
years beginning on or after June 15, 2010 and allows for
either prospective or retrospective application, with early
adoption permitted. We do not believe adoption of this ASU on
January 1, 2011 will have a significant impact on our
Consolidated Financial Statements.
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Recently
Adopted Accounting Pronouncements
In June 2009, the
FASB amended the accounting and disclosure requirements related
to the consolidation of variable interest entities (VIE(s)). The
amendments include replacing the quantitative-based risks and
rewards calculation for determining which enterprise, if any,
has a controlling financial interest in VIE(s) with an approach
focused on identifying which enterprise has the power to direct
the activities of VIE(s) that most significantly impact the
entity’s economic performance and (1) the obligation
to absorb losses of the entity or (2) the right to receive
benefits from the entity. In addition, the amendments require an
ongoing assessment of whether an enterprise is the primary
beneficiary of the VIE(s) and requires additional disclosures
about an enterprise’s involvement in VIE(s). The adoption
of these amendments on January 1, 2010 did not have a
material impact on our Consolidated Financial Statements.
In September 2009,
the FASB issued ASU
2009-12
which provides guidance under the Fair Value Measurements and
Disclosures Topic,
ASC 820-10.
The new guidance provides investors a practical expedient for
measuring the fair value of investments in certain entities that
calculate net asset value per share (NAV). This ASU is effective
for periods ending after December 15, 2009. Adoption did
not have a material effect on our Consolidated Financial
Statements.
In August 2009, the
FASB issued ASU
2009-05
which provides additional guidance on the application of fair
value techniques for liabilities under the Fair Value
Measurements and Disclosures Topic (ASC 820). The guidance
clarifies that the quoted price for the liability when traded as
an asset in an active market is a Level 1 measurement, when
no adjustment to the quoted price is required. In the absence of
a Level 1 (quoted price) measurement, an entity must use
one or more valuation techniques to estimate fair value in a
manner consistent with the principles in ASC 820. The
requirements under this ASU were effective for our fourth
quarter period beginning October 1, 2009. Adoption did not
have a material effect on our Consolidated Financial Statements.
In January 2009, the
FASB amended the requirements pertaining to the method of
applying the acquisition method of accounting for business
combinations. These amendments included that acquisition costs
will generally be expensed as incurred; noncontrolling interests
will be valued at fair value at the acquisition date; in-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date;
restructuring costs associated with a business combination will
generally be expensed subsequent to the acquisition date; and
changes in deferred tax asset valuation allowances and income
tax uncertainties after the acquisition date generally will
affect income tax expense. These amendments have been applied
prospectively to business combinations with an acquisition date
subsequent to January 1, 2009. While the new business
combination accounting guidance did not have a material impact
on our Consolidated Financial Statements on adoption, the
effects on future periods will depend upon the nature and
significance of future business combinations.
NOTE 3
Acquisitions
During 2010, we
spent an aggregate of $1,041, net of cash acquired, primarily on
the acquisitions of Nova Analytics Corporation (Nova) and Godwin
Pumps of America, Inc. and Godwin Holdings Limited (collectively
referred to as Godwin). The results of operations and cash flows
from our 2010 acquisitions have been included in our
Consolidated Financial Statements prospectively from their date
of acquisition. Pro forma results of operations for acquisitions
completed in 2010, 2009 and 2008 have not been presented because
they are not material to our Consolidated Financial Statements,
either individually or in the aggregate. Provided below is
additional information related to the Nova and Godwin
acquisitions.
Nova
Analytics
On March 23,
2010, we acquired 100% of the outstanding stock of Nova, a
manufacturer of premium quality laboratory, field, portable and
on-line analytical instruments used in water and wastewater,
environmental, medical, and food and beverage applications, for
a purchase price of $385, net of cash acquired. Nova provides us
with brands, technologies, distribution and after-market content
in the analytical instrumentation market. The addition of Nova
broadens the solutions our Fluid segment offers customers in key
markets such as municipal water and wastewater, industrial
processing, and food and beverage.
The purchase price
for Nova was allocated to the net tangible and intangible assets
acquired and liabilities assumed based on their estimated fair
values as of March 23, 2010. The aggregate estimated fair
value of distributor relationships, trademarks and proprietary
technology was $112, $42 and $10, respectively. Other assets
acquired and liabilities assumed as part of the acquisition were
$70 primarily related to working capital balances and $81
primarily related to deferred tax liabilities, respectively. The
excess of the purchase price over the estimated fair value of
net assets acquired equal to $232 was recorded as goodwill
(which is not expected to be deductible for income tax
purposes). The goodwill arising from the acquisition consists
largely of the planned expansion of the Nova footprint to new
geographic markets, synergies and economies of scale. All of the
goodwill has been assigned to the Fluid segment.
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Godwin
Pumps
On August 3,
2010, we acquired 100% of the privately held stock of Godwin for
a purchase price of $580, net of cash acquired. Godwin is a
supplier and servicer of automatic self-priming and on-demand
pumping solutions serving the global industrial, construction,
mining, municipal, oil and gas dewatering markets. The addition
of Godwin’s specialized products and skills to our Fluid
segment’s broad submersible pump portfolio and global sales
and distribution network provides significant geographic
expansion opportunities.
The purchase price
for Godwin was allocated to the net tangible and intangible
assets acquired and liabilities assumed based on their estimated
fair values as of August 3, 2010. The aggregate estimated
fair value of customer relationships, trademarks and proprietary
technology was $107, $46 and $14, respectively. Other assets
acquired as part of the acquisition were $191, primarily
including rental equipment, inventory, and trade receivables.
Liabilities assumed as part of the acquisition were $30. The
excess of the purchase price over the fair value of net assets
acquired equal to $252 was recorded as goodwill, a significant
portion of which is expected to be deductible for income tax
purposes. The goodwill arising from the acquisition is primarily
related to the planned geographic expansion of Godwin’s
operations. All of the goodwill has been assigned to the Fluid
segment.
2009 and 2008
Acquisitions
During 2009, we
spent $34, net of cash acquired, on acquisitions that were not
material individually or in the aggregate to our results of
operations or financial position. The most significant of these
acquisitions was Laing GmbH (Laing), which we acquired in May of
2009. Laing, a privately held producer of energy-efficient
circulator pumps primarily used in residential and commercial
plumbing and heating, ventilating and air conditioning systems,
was fully integrated into the Fluid segment during 2009.
During 2008, we
spent $276, net of cash acquired, on acquisitions that were not
material individually or in the aggregate to our results of
operations or financial position. The cash spent on acquisitions
during 2008 included $226 related to our 2007 acquisition of EDO
Corporation (EDO), a global aerospace and defense company.
NOTE 4
Discontinued
Operations
During 2010 we sold
CAS, Inc. (CAS), a component of our Defense &
Information Solutions business segment (Defense segment)
engaging in systems engineering and technical assistance (SETA)
for the U.S. Government. The sale of CAS was completed on
September 8, 2010, resulting in the recognition of a $130
after-tax gain, reported as a component of income from
discontinued operations within our Consolidated Income
Statements. This transaction resulted in a tax benefit of $4,
primarily due to the difference in the book and tax bases of
CAS. Proceeds from the sale of CAS were $237.
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 and results of operations from CAS are
reported as a discontinued operation for the periods
presented.
The
following table provides third-party revenue and operating
income provided by CAS included within discontinued operations.
| 2010 | 2009 | 2008 | |||||||||||
|
Revenue
|
$ | 160 | $ | 231 | $ | 218 | |||||||
|
Pre-tax operating income
|
13 | 15 | 12 | ||||||||||
Assets and
liabilities of CAS reported as discontinued operations within
our Consolidated Balance Sheet are presented in the table below.
| 2009 | |||||
|
Receivables, net
|
$ | 43 | |||
|
Plant, property and equipment, net
|
1 | ||||
|
Goodwill
|
76 | ||||
|
Other intangible assets, net
|
18 | ||||
|
Deferred income taxes
|
2 | ||||
|
Other assets
|
1 | ||||
|
Total assets of discontinued operations
|
$ | 141 | |||
|
Accounts payable
|
$ | 19 | |||
|
Accrued expenses
|
17 | ||||
|
Deferred income taxes
|
8 | ||||
|
Total liabilities of discontinued operations
|
$ | 44 | |||
We did not engage in
any divestiture actions that were material individually or in
the aggregate to our results of operations or financial
position, in either 2009 or 2008. We received proceeds from the
sale of assets and businesses of $20 and $22 during 2009 and
2008, respectively. Amounts reported as discontinued operations
within the Consolidated Income Statements for these years
pertain to costs incurred on previously divested businesses that
were reported as discontinued operations in the period of
divestiture.
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NOTE 5
Restructuring
and Asset Impairment Charges
We have initiated
various restructuring activities throughout the business during
the past three years, of which only the realignment of our
Defense segment in 2010 and an entity-wide reduction in force in
the fourth quarter of 2008 are considered individually
significant. See further discussion on these two plans below.
The components of
all restructuring costs incurred during each of the previous
three years ended are presented below.
| 2010 | 2009 | 2008 | |||||||||||||
|
By component:
|
|||||||||||||||
|
Severance charges
|
$ | 47 | $ | 71 | $ | 66 | |||||||||
|
Other restructuring charges
|
10 | 11 | 10 | ||||||||||||
|
Reversal of restructuring accruals
|
(5 | ) | (3 | ) | (2 | ) | |||||||||
|
Total net restructuring charge
|
52 | 79 | 74 | ||||||||||||
|
Asset impairment charge
|
1 | – | 3 | ||||||||||||
|
Total net restructuring and impairment charge
|
$ | 53 | $ | 79 | $ | 77 | |||||||||
|
By segment:
|
|||||||||||||||
|
Defense
|
$ | 33 | $ | 5 | $ | 11 | |||||||||
|
Fluid
|
14 | 37 | 34 | ||||||||||||
|
Motion & Flow
|
5 | 37 | 30 | ||||||||||||
|
Corporate and Other
|
1 | – | 2 | ||||||||||||
The following table
displays a rollforward of the restructuring accruals, presented
on our Consolidated Balance Sheet within accrued liabilities,
for the each of the previous three years ended.
| 2010 | 2009 | |||||||||
|
Restructuring accruals – 1/1
|
$ | 53 | $ | 58 | ||||||
|
Charges for plans initiated during the year
|
50 | 71 | ||||||||
|
Charges for plans initiated in prior years
|
7 | 11 | ||||||||
|
Cash payments
|
(70 | ) | (82 | ) | ||||||
|
Asset write-offs
|
(1 | ) | (2 | ) | ||||||
|
Reversal of accruals
|
(5 | ) | (3 | ) | ||||||
|
Foreign exchange translation and other
|
(2 | ) | – | |||||||
|
Restructuring accruals – 12/31
|
$ | 32 | $ | 53 | ||||||
|
By accrual type:
|
||||||||||
|
Severance accrual
|
$ | 26 | $ | 46 | ||||||
|
Facility carrying and other costs accrual
|
6 | 7 | ||||||||
|
By segment:
|
||||||||||
|
Defense
|
$ | 17 | $ | 4 | ||||||
|
Fluid
|
7 | 18 | ||||||||
|
Motion & Flow
|
8 | 31 | ||||||||
|
Corporate and Other
|
– | – | ||||||||
The following is a
rollforward of employee position eliminations associated with
restructuring activities through 2010:
| 2010 | 2009 | |||||||||
|
Planned reductions – 1/1
|
407 | 510 | ||||||||
|
Additional planned reductions
|
1,265 | 1,125 | ||||||||
|
Actual reductions
|
(1,488 | ) | (1,228 | ) | ||||||
|
Planned reductions – 12/31
|
184 | 407 | ||||||||
2010 Defense
Segment Realignment Activities
During the first
quarter of 2010, we initiated an action to realign our Defense
segment to enable better product portfolio integration,
encouraging a more coordinated market approach and reduced
operational redundancies. As part of the strategic realignment
of the Defense segment, the previous organizational structure,
consisting of seven divisions, was consolidated into three
larger divisions. The charges incurred during 2010 under this
action primarily related to employee severance, and to a lesser
extent, lease cancellation and other costs associated with three
facilities that were substantially closed during 2010. Headcount
reductions totaling 642 were originally planned under this
action, including 162 factory workers, 457 office workers and 23
management employees. As of December 31, 2010,
substantially all of this headcount initiative has been
completed. We do not expect to incur significant restructuring
charges under this action going forward. We estimate our
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Defense realignment
actions will yield approximately $61 in annual net
savings.
The
following table provides a rollforward of the restructuring
accrual associated with this action, including the related
charges and payments.
| 2010 | |||||
|
Restructuring accruals – 1/1
|
$ | – | |||
|
Restructuring charges
|
28 | ||||
|
Cash payments
|
(18 | ) | |||
|
Reversal of accruals
|
(1 | ) | |||
|
Foreign exchange translation and other
|
– | ||||
|
Restructuring accruals – 12/31
|
$ | 9 | |||
Fourth Quarter
2008 Reduction in Force Activities
During the fourth
quarter of 2008, we initiated an action to reduce headcount
across our businesses in response to declining economic
conditions. The fourth quarter 2008 reduction in force
activities resulted in $64 of total restructuring charges. The
charges by segment were: Fluid $29, Motion & Flow $23,
Defense $11 and Corporate & Other $1. This action has
resulted in a total headcount reduction of 1,257, including 601
factory workers, 628 office workers and 28 management
employees.
The
following table provides a rollforward of the restructuring
accrual associated with this action, including the related
charges and payments.
| 2010 | 2009 | |||||||||
|
Restructuring accruals – 1/1
|
$ | 8 | $ | 46 | ||||||
|
Restructuring charges
|
– | 8 | ||||||||
|
Cash payments
|
(4 | ) | (45 | ) | ||||||
|
Reversal of accruals
|
(1 | ) | (1 | ) | ||||||
|
Foreign exchange translation and other
|
– | – | ||||||||
|
Restructuring accruals – 12/31
|
$ | 3 | $ | 8 | ||||||
NOTE 6
Income
Taxes
Income tax data from
continuing operations is as follows:
| 2010 | 2009 | 2008 | |||||||||||||
|
Income components:
|
|||||||||||||||
|
United States
|
$ | 352 | $ | 432 | $ | 651 | |||||||||
|
International
|
466 | 378 | 425 | ||||||||||||
|
Total pre-tax income
|
$ | 818 | $ | 810 | $ | 1,076 | |||||||||
|
Income tax expense components:
|
|||||||||||||||
|
Current income tax provision:
|
|||||||||||||||
|
United States – federal
|
$ | 152 | $ | 129 | $ | 160 | |||||||||
|
United States – state and local
|
18 | 8 | 5 | ||||||||||||
|
International
|
109 | 109 | 131 | ||||||||||||
|
Total current income tax provision
|
279 | 246 | 296 | ||||||||||||
|
Deferred income tax provision:
|
|||||||||||||||
|
United States – federal
|
(112 | ) | (45 | ) | 19 | ||||||||||
|
United States – state and local
|
(9 | ) | (14 | ) | (1 | ) | |||||||||
|
International
|
6 | (18 | ) | (6 | ) | ||||||||||
|
Total deferred income tax provision
|
(115 | ) | (77 | ) | 12 | ||||||||||
|
Total income tax expense
|
$ | 164 | $ | 169 | $ | 308 | |||||||||
|
Effective income tax rate
|
20.0 | % | 20.9 | % | 28.6 | % | |||||||||
A reconciliation of
the tax provision for continuing operations at the
U.S. statutory rate to the effective income tax expense
rate as reported is as follows:
| 2010 | 2009 | 2008 | |||||||||||||
|
Tax provision at U.S. statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | |||||||||
|
International restructurings
|
– | (7.1 | ) | – | |||||||||||
|
Foreign tax rate differential
|
(5.9 | ) | (4.4 | ) | (2.2 | ) | |||||||||
|
Effect of repatriation of foreign earnings
|
(3.1 | ) | (0.4 | ) | (0.4 | ) | |||||||||
|
State and local income tax
|
1.1 | (1.5 | ) | 0.4 | |||||||||||
|
Research credit
|
(1.1 | ) | (0.9 | ) | (0.3 | ) | |||||||||
|
Tax examinations
|
(1.4 | ) | – | – | |||||||||||
|
Domestic manufacturing deduction
|
(2.6 | ) | (1.3 | ) | (0.3 | ) | |||||||||
|
Tax account validation adjustment
|
– | – | (3.9 | ) | |||||||||||
|
Other
|
(2.0 | ) | 1.5 | 0.3 | |||||||||||
|
Effective income tax expense rate
|
20.0 | % | 20.9 | % | 28.6 | % | |||||||||
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Deferred tax assets
and liabilities are determined based on temporary differences
between the financial reporting and tax bases of assets and
liabilities, applying enacted tax rates in effect for the year
in which we expect the differences will reverse.
Deferred tax assets
and liabilities include the following:
| 2010 | 2009 | |||||||||
|
Deferred Tax Assets:
|
||||||||||
|
Employee benefits
|
$ | 650 | $ | 736 | ||||||
|
Accruals
|
391 | 281 | ||||||||
|
Loss carryforwards
|
148 | 200 | ||||||||
|
Other
|
110 | 39 | ||||||||
|
Subtotal
|
1,299 | 1,256 | ||||||||
|
Valuation allowance
|
(116 | ) | (150 | ) | ||||||
|
Net deferred tax assets
|
$ | 1,183 | $ | 1,106 | ||||||
|
Deferred Tax Liabilities:
|
||||||||||
|
Intangibles
|
$ | 355 | $ | 324 | ||||||
|
Accelerated depreciation
|
50 | 47 | ||||||||
|
Investment
|
8 | 16 | ||||||||
|
Total deferred tax liabilities
|
$ | 413 | $ | 387 | ||||||
Included within the
deferred tax table provided above is $6 of net deferred tax
liability as of December 31, 2009 related to discontinued
operations.
Deferred taxes in
the Consolidated Balance Sheets consist of the following:
| 2010 | 2009 | |||||||||
|
Current assets
|
$ | 280 | $ | 232 | ||||||
|
Non-current assets
|
554 | 583 | ||||||||
|
Current liabilities
|
(12 | ) | (36 | ) | ||||||
|
Other non-current liabilities
|
(52 | ) | (54 | ) | ||||||
| $ | 770 | $ | 725 | |||||||
As of
December 31, 2010, we have not provided for deferred taxes
on the excess of financial reporting over the tax basis of
investments in certain foreign subsidiaries in the amount of
$1,865 because we plan to reinvest such earnings indefinitely
outside the United States. While the amount of federal income
taxes, if such earnings are distributed in the future, cannot be
determined, such taxes may be reduced by tax credits and other
deductions.
We have the
following attributes available for utilization:
| ATTRIBUTE | AMOUNT | FIRST YEAR OF EXPIRATION | ||||||||
|
U.S. net operating losses
|
$ | 24 | December 31, 2020 | |||||||
|
State net operating losses
|
2,486 | December 31, 2011 | ||||||||
|
Federal and state capital losses
|
29 | December 31, 2012 | ||||||||
|
U.S. tax credits
|
22 | December 31, 2012 | ||||||||
|
Foreign net operating losses
|
343 | December 31, 2011 | ||||||||
As of
December 31, 2010, a valuation allowance of approximately
$116 had been established to reduce the deferred income tax
asset related to certain U.S. state and foreign net
operating losses and U.S. capital loss carryforwards.
During 2010, the valuation allowance decreased by $34 resulting
from the following: a decrease of $34 attributable to
U.S. federal capital loss carryforwards that were utilized
in 2010, a decrease of $12 attributable to state net operating
loss and credit carryforwards, and an increase of $12
attributable to foreign net operating loss carryforwards and
foreign investments.
Shareholders’
equity at December 31, 2010 and 2009 reflects excess tax
benefits related to stock-based compensation in 2010 and 2009 of
approximately $9 and $3, respectively.
Uncertain Tax
Positions
We recognize tax
benefits from uncertain tax positions only if it is more likely
than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the Consolidated
Financial Statements from such positions are measured based on
the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement.
A reconciliation of
the beginning and ending amount of unrecognized tax benefits as
of December 31, 2010 and 2009 is as follows:
| 2010 | 2009 | 2008 | |||||||||||||
|
Unrecognized tax benefits – 1/1
|
$ | 171 | $ | 145 | $ | 103 | |||||||||
|
Additions for:
|
|||||||||||||||
|
Current year tax positions
|
48 | 5 | 7 | ||||||||||||
|
Prior year tax positions
|
17 | 28 | 66 | ||||||||||||
|
Purchase accounting
|
5 | – | 2 | ||||||||||||
|
Reductions for:
|
|||||||||||||||
|
Prior year tax positions
|
(37 | ) | (6 | ) | (13 | ) | |||||||||
|
Purchase accounting
|
– | – | (2 | ) | |||||||||||
|
Settlements
|
(12 | ) | (1 | ) | (15 | ) | |||||||||
|
Lapse of statute of limitations
|
– | – | (3 | ) | |||||||||||
|
Unrecognized tax benefits – 12/31
|
$ | 192 | $ | 171 | $ | 145 | |||||||||
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As of
December 31, 2010, $90 of the unrecognized tax benefits
would affect the effective tax rate if realized. Included in the
balance at December 31, 2010 are tax positions of $96,
which, because of deferred tax accounting would not impact the
annual effective rate, but could accelerate the payment of cash
to the taxing authority. In addition, tax positions of $6
attributable to discontinued operations would not impact the
annual effective tax rate.
We do not believe
that the uncertain tax positions will significantly change
within twelve months of the reporting date.
In many cases,
uncertain tax positions are related to tax years that remain
subject to examination by the relevant taxing
authorities.
The
following table summarizes the earliest open tax years by major
jurisdiction:
| JURISDICTION | EARLIEST OPEN YEAR | ||||
|
Austria
|
2004 | ||||
|
Canada
|
2006 | ||||
|
Germany
|
2000 | ||||
|
Italy
|
2005 | ||||
|
Netherlands
|
2006 | ||||
|
Sweden
|
2005 | ||||
|
United Kingdom
|
2008 | ||||
|
United States
|
2007 | ||||
We classify interest
relating to tax matters as a component of interest expense and
tax penalties as a component of income tax expense in our
Consolidated Income Statement. During 2010, we recognized less
than $1 in net interest expense related to tax matters. During
2009, we recognized net interest income of $3 primarily due to
an interest settlement claim with the IRS. We had $23 of
interest accrued as of December 31, 2010 and 2009.
NOTE 7
Earnings
Per Share
A reconciliation of
the data used in the calculation of basic and diluted earnings
per share computations for income from continuing operations is
as follows:
| 2010 | 2009 | 2008 | |||||||||||||
|
Income from continuing operations
|
$ | 654 | $ | 641 | $ | 768 | |||||||||
|
Weighted average common shares outstanding
|
182.3 | 181.0 | 180.7 | ||||||||||||
|
Add: Weighted average restricted stock awards
outstanding(a)
|
1.6 | 1.5 | 1.2 | ||||||||||||
|
Basic weighted average common shares outstanding
|
183.9 | 182.5 | 181.9 | ||||||||||||
|
Add: Dilutive impact of stock options
|
1.4 | 1.4 | 2.1 | ||||||||||||
|
Diluted weighted average common shares outstanding
|
185.3 | 183.9 | 184.0 | ||||||||||||
|
Basic earnings per share
|
$ | 3.55 | $ | 3.51 | $ | 4.22 | |||||||||
|
Diluted earnings per share
|
$ | 3.53 | $ | 3.49 | $ | 4.17 | |||||||||
| (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. |
Shares underlying
stock options excluded from the computation of diluted earnings
per share because they were anti-dilutive were as follows:
| 2010 | 2009 | 2008 | |||||||||||||
|
Anti-dilutive stock options
|
2.1 | 1.7 | 4.1 | ||||||||||||
|
Average exercise price
|
$ | 54.37 | $ | 54.49 | $ | 49.29 | |||||||||
|
Years of expiration
|
2012- | 2012- | 2012- | ||||||||||||
| 2020 | 2016 | 2015 | |||||||||||||
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NOTE 8
Receivables,
Net
| 2010 | 2009 | |||||||||
|
Trade accounts receivable
|
$ | 1,579 | $ | 1,379 | ||||||
|
Unbilled contract receivable
|
367 | 373 | ||||||||
|
Other
|
47 | 56 | ||||||||
|
Receivables, gross
|
1,993 | 1,808 | ||||||||
|
Allowance for doubtful accounts
|
(42 | ) | (48 | ) | ||||||
|
Allowance for cash discounts
|
(7 | ) | (6 | ) | ||||||
|
Receivables, net
|
$ | 1,944 | $ | 1,754 | ||||||
Unbilled contract
receivables represent revenue recognized on long-term contracts
that arise based on performance attainment which, though
appropriately recognized, cannot be billed as of the balance
sheet date. We expect to bill and collect substantially all of
the December 31, 2010 unbilled contract receivables during
2011 as scheduled performance milestones are completed or units
are delivered.
Our outstanding
trade accounts receivable balance from the U.S. Government
was $491 and $327 as of December 31, 2010 and 2009,
respectively.
The following table
displays an aggregate rollforward of the allowance for doubtful
accounts, for the years ended December 31, 2010 and 2009.
| 2010 | 2009 | |||||||||
|
Allowance for doubtful accounts – 1/1
|
$ | 48 | $ | 33 | ||||||
|
Additions charged to expense
|
5 | 24 | ||||||||
|
Write-offs
|
(9 | ) | (8 | ) | ||||||
|
Foreign currency and other
|
(2 | ) | (1 | ) | ||||||
|
Allowance for doubtful accounts – 12/31
|
$ | 42 | $ | 48 | ||||||
NOTE 9
Inventories,
Net
| 2010 | 2009 | |||||||||
|
Finished goods
|
$ | 231 | $ | 176 | ||||||
|
Work in process
|
88 | 57 | ||||||||
|
Raw materials
|
317 | 253 | ||||||||
| 636 | 486 | |||||||||
|
Inventoried costs related to long-term contracts
|
296 | 391 | ||||||||
|
Less — progress payments
|
(76 | ) | (75 | ) | ||||||
|
Inventoried costs related to long-term contracts, net
|
220 | 316 | ||||||||
|
Inventories, net
|
$ | 856 | $ | 802 | ||||||
NOTE 10
Other
Current and Non-Current Assets
| 2010 | 2009 | |||||||||
|
Current deferred income taxes
|
$ | 280 | $ | 232 | ||||||
|
Asbestos-related current assets
|
105 | 62 | ||||||||
|
Assets of discontinued operations
|
– | 141 | ||||||||
|
Other
|
177 | 144 | ||||||||
|
Other current assets
|
$ | 562 | $ | 579 | ||||||
|
Other employee benefit-related assets
|
$ | 106 | $ | 87 | ||||||
|
Capitalized software costs
|
118 | 65 | ||||||||
|
Other
|
88 | 100 | ||||||||
|
Other non-current assets
|
$ | 312 | $ | 252 | ||||||
ITT recorded sales
to unconsolidated affiliates during 2010, 2009 and 2008 totaling
$51, $44 and $20, respectively. Additionally, ITT purchased $22
and $15 of products from unconsolidated affiliates during 2010
and 2009, respectively.
NOTE 11
Plant,
Property and Equipment, Net
| 2010 | 2009 | |||||||||
|
Land and improvements
|
$ | 59 | $ | 57 | ||||||
|
Buildings and improvements
|
642 | 609 | ||||||||
|
Machinery and equipment
|
1,809 | 1,688 | ||||||||
|
Equipment held for lease or rental
|
132 | 72 | ||||||||
|
Furniture, fixtures and office equipment
|
231 | 220 | ||||||||
|
Construction work in progress
|
160 | 157 | ||||||||
|
Other
|
29 | 22 | ||||||||
|
Plant, property and equipment, gross
|
3,062 | 2,825 | ||||||||
|
Less — accumulated depreciation
|
(1,857 | ) | (1,775 | ) | ||||||
|
Plant, property and equipment, net
|
$ | 1,205 | $ | 1,050 | ||||||
Depreciation expense
of $190, $173 and $179 was recognized in 2010, 2009 and 2008,
respectively.
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ITT CORPORATION AND
SUBSIDIARIES
NOTE 12
Goodwill
and Other Intangible Assets, Net
Goodwill
Changes in the
carrying amount of goodwill for the years ended
December 31, 2010 and 2009 by business segment are as
follows:
|
MOTION & |
|||||||||||||||||||
| DEFENSE | FLUID | FLOW | TOTAL | ||||||||||||||||
|
Goodwill — 1/1/2009
|
$ | 2,134 | $ | 1,122 | $ | 499 | $ | 3,755 | |||||||||||
|
Goodwill acquired
|
– | 17 | – | 17 | |||||||||||||||
|
Foreign currency
|
– | 26 | 2 | 28 | |||||||||||||||
|
Other
|
(2 | ) | – | (10 | ) | (12 | ) | ||||||||||||
|
Goodwill — 12/31/2009
|
$ | 2,132 | $ | 1,165 | $ | 491 | $ | 3,788 | |||||||||||
|
Goodwill acquired
|
24 | 495 | – | 519 | |||||||||||||||
|
Foreign currency
|
– | (25 | ) | (6 | ) | (31 | ) | ||||||||||||
|
Other
|
– | 1 | – | 1 | |||||||||||||||
|
Goodwill — 12/31/2010
|
$ | 2,156 | $ | 1,636 | $ | 485 | $ | 4,277 | |||||||||||
Goodwill of $76 was
disposed of during 2010 related to the sale of CAS on
September 8, 2010. See Note 4, “Discontinued
Operations” for further information.
Goodwill acquired
during 2010 primarily relates to the Nova and Godwin
acquisitions. Goodwill acquired during 2009 primarily relates to
the Laing acquisition. Amounts reported as “Other”
relate primarily to the write-off of goodwill associated with
various immaterial business divestitures occurring during 2009.
Based on the results
of its annual impairment tests, we determined that no impairment
of goodwill existed as of the measurement date in 2010 or 2009.
However, future goodwill impairment tests could result in a
charge to earnings. We will continue to evaluate goodwill on an
annual basis as of the beginning of our fourth fiscal quarter
and whenever events and changes in circumstances indicate there
may be a potential impairment.
Other
Intangible Assets
Information
regarding our other intangible assets is as follows:
|
GROSS |
|||||||||||||||
|
CARRYING |
ACCUMULATED |
NET |
|||||||||||||
| AMOUNT | AMORTIZATION | INTANGIBLES | |||||||||||||
|
Customer and distributor relationships
|
$ | 855 | $ | (312 | ) | $ | 543 | ||||||||
|
Proprietary technology
|
109 | (35 | ) | 74 | |||||||||||
|
Trademarks
|
35 | (10 | ) | 25 | |||||||||||
|
Patents and other
|
32 | (18 | ) | 14 | |||||||||||
|
Indefinite-lived intangibles
|
110 | — | 110 | ||||||||||||
|
Intangibles – 12/31/2010
|
$ | 1,141 | $ | (375 | ) | $ | 766 | ||||||||
|
Customer and distributor relationships
|
$ | 625 | $ | (236 | ) | $ | 389 | ||||||||
|
Proprietary technology
|
84 | (29 | ) | 55 | |||||||||||
|
Trademarks
|
35 | (8 | ) | 27 | |||||||||||
|
Patents and other
|
27 | (15 | ) | 12 | |||||||||||
|
Indefinite-lived intangibles
|
18 | – | 18 | ||||||||||||
|
Intangibles – 12/31/2009
|
$ | 789 | $ | (288 | ) | $ | 501 | ||||||||
Indefinite-lived
intangibles consist of brands and trademarks. Based on the
results of its annual impairment tests, we determined that no
impairment of the indefinite-lived intangibles existed as of the
measurement date in 2010 or 2009. However, future impairment
tests could result in a charge to earnings. We will continue to
evaluate the indefinite-lived intangible assets on an annual
basis as of the beginning of our fourth fiscal quarter and
whenever events and changes in circumstances indicate there may
be an indicator of potential impairment.
Customer and
distributor relationships, proprietary
71
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ITT CORPORATION AND
SUBSIDIARIES
technology,
trademarks, and patents and other are amortized over weighted
average lives of approximately nine years, 17 years,
15 years and 11 years, respectively.
Amortization expense
related to intangible assets for 2010, 2009 and 2008 was $90,
$101 and $96, respectively.
Estimated
amortization expense for each of the five succeeding years is as
follows:
| 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
|
$87
|
$ | 77 | $ | 60 | $ | 55 | $ | 52 | ||||||||||||
NOTE 13
Accrued
Liabilities and Other Non-Current Liabilities
| 2010 | 2009 | |||||||||
|
Compensation and other employee-benefits
|
$ | 604 | $ | 578 | ||||||
|
Asbestos-related liability
|
117 | 66 | ||||||||
|
Customer-related liabilities
|
91 | 55 | ||||||||
|
Accrued warranty costs
|
72 | 67 | ||||||||
|
Accrued income taxes
|
63 | 103 | ||||||||
|
Environmental and other legal matters
|
33 | 44 | ||||||||
|
Accrued restructuring costs
|
32 | 53 | ||||||||
|
Deferred income tax liability
|
12 | 36 | ||||||||
|
Liabilities of discontinued operations
|
– | 44 | ||||||||
|
Other accrued liabilities
|
238 | 230 | ||||||||
|
Accrued liabilities
|
$ | 1,262 | $ | 1,276 | ||||||
|
Deferred income taxes and other tax-related accruals
|
$ | 179 | $ | 174 | ||||||
|
Environmental
|
128 | 128 | ||||||||
|
Compensation and other employee-related benefits
|
117 | 123 | ||||||||
|
Product liability, guarantees and other legal matters
|
52 | 63 | ||||||||
|
Other
|
66 | 53 | ||||||||
|
Other non-current liabilities
|
$ | 542 | $ | 541 | ||||||
NOTE 14
Leases
and Rentals
ITT leases certain
offices, manufacturing buildings, land, machinery, automobiles,
aircraft, computers and other equipment. Such leases expire at
various dates through 2023 and may include renewal and payment
escalation clauses. ITT often pays maintenance, insurance and
tax expense related to leased assets. Rental expenses under
operating leases were $132, $139 and $131 for 2010, 2009 and
2008, respectively. Future minimum operating lease payments
under non-cancellable operating leases with an initial term in
excess of one year as of December 31, 2010 are shown below.
|
2011
|
$ | 143 | |||
|
2012
|
115 | ||||
|
2013
|
90 | ||||
|
2014
|
70 | ||||
|
2015
|
53 | ||||
|
2016 and thereafter
|
183 | ||||
|
Total minimum lease payments
|
$ | 654 | |||
NOTE 15
Debt
| 2010 | 2009 | |||||||||
|
Commercial paper
|
$ | – | $ | 55 | ||||||
|
Short-term loans
|
1 | 10 | ||||||||
|
Current maturities of long-term debt and other
|
10 | 10 | ||||||||
|
Short-term debt and current maturities of long-term debt
|
11 | 75 | ||||||||
|
Non-current maturities of long-term debt
|
1,314 | 1,392 | ||||||||
|
Non-current capital leases
|
3 | 4 | ||||||||
|
Deferred gain on interest rate swaps
|
45 | 50 | ||||||||
|
Unamortized discounts and debt issuance costs
|
(8 | ) | (15 | ) | ||||||
|
Long-term debt
|
1,354 | 1,431 | ||||||||
|
Total debt
|
$ | 1,365 | $ | 1,506 | ||||||
Principal payments
required per year on our outstanding long-term notes and
debentures for the next five years and thereafter are $11, $11,
$13, $538, $1 and $754, respectively. The book value of assets
pledged as collateral amounted to $63 as of December 31,
2010.
Commercial
Paper
The weighted average
interest rate for outstanding commercial paper was 0.21% at
December 31, 2009. Our commercial paper program is
supported by a revolving credit agreement with the intended
purposes of providing additional liquidity, if needed. In August
2010, we replaced a $1.75 billion revolving credit
agreement with a new three-year $1.5 billion revolving
credit agreement (August 2010 Credit Facility). The interest
rate for borrowings under these agreements is generally based on
the London Interbank Offered Rate (LIBOR), plus a spread, which
reflects ITT’s debt rating. The commitment fee on the
August 2010 Credit Facility is 0.225% of the total commitment.
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ITT CORPORATION AND
SUBSIDIARIES
The provisions of
this agreement require that we maintain an adjusted EBITDA
(Earnings Before Interest, Tax, Depreciation, and Amortization)
to interest expense ratio greater than 3.5:1. At
December 31, 2010 and 2009, we were in compliance with our
debt covenants.
Long-Term
Debt
The following table
summarizes the carrying and fair value of our long-term
outstanding notes and debentures by maturity date for both
December 31, 2010 and 2009. The fair value of our
outstanding commercial paper and short-term loans approximates
carrying value.
| 2010 | 2009 | |||||||||||||||||||||
|
Interest |
Carrying |
Fair |
Carrying |
Fair |
||||||||||||||||||
| Rate | Value | Value | Value | Value | ||||||||||||||||||
|
MATURITY DATE:
|
||||||||||||||||||||||
|
May 2011
|
6.50 | % | $ | – | $ | – | $ | 32 | $ | 32 | ||||||||||||
|
July 2011
|
7.50 | % | – | – | 37 | 40 | ||||||||||||||||
|
May 2014
|
4.90 | % | 500 | 538 | 500 | 515 | ||||||||||||||||
|
May 2019
|
6.125 | % | 500 | 553 | 500 | 521 | ||||||||||||||||
|
November 2025
|
7.40 | % | 250 | 311 | 250 | 285 | ||||||||||||||||
|
August 2048
|
(a | ) | 1 | 1 | 1 | 1 | ||||||||||||||||
|
December 2010 – 2014
|
4.70 | % | 66 | 69 | 74 | 76 | ||||||||||||||||
|
Various 2010 – 2022
|
(b | ) | 11 | 11 | 12 | 12 | ||||||||||||||||
| $ | 1,328 | $ | 1,483 | $ | 1,406 | $ | 1,482 | |||||||||||||||
| (a) | Variable rate debt with an interest rate of 0.19% as of December 31, 2010 and 0.16% as of December 31, 2009. |
| (b) | Includes individually immaterial notes, bonds and capital leases. The weighted average interest rate was 4.86% and 5.24% at December 31, 2010 and 2009, respectively. |
May 2014 and May
2019 Senior Notes
In May 2009, the
Company issued $500 of 4.9% Senior Notes due May 1,
2014 and $500 of 6.125% Senior Notes due May 1, 2019
(collectively referred to as the Notes). The issuance resulted
in gross proceeds of $998, offset by $6 in debt issuance costs.
We may redeem the Notes in whole or in part at any time at a
redemption price equal to the greater of (i) 100% of the
principal amount of such Notes and (ii) the sum of the
present value of the remaining scheduled payments of principal
and interest thereon (exclusive of interest accrued to the date
of redemption) discounted to the redemption date on a semiannual
basis at the Treasury Rate plus 50 basis points, plus in
each case accrued and unpaid interest to the date of redemption.
The Notes are senior unsecured obligations and rank equally with
all existing and future senior unsecured indebtedness.
November 2025
Senior Notes
In November 1995,
the Company issued $250 of 7.4% Senior Notes due
November 15, 2025 (1995 Senior Notes). We may redeem the
1995 Senior Notes in whole or in part at any time at a
redemption price equal to the greater of (i) 100% of the
principal amount of such 1995 Senior Notes and (ii) the sum
of the present value of the remaining scheduled payments of
principal and interest thereon discounted to the redemption date
on a semiannual basis at the Treasury Rate plus 20 basis
points, plus in each case accrued interest to the date of
redemption. The 1995 Senior Notes are senior unsecured
obligations and rank equally with all existing and future senior
unsecured indebtedness.
Other
As of
December 31, 2010, ITT had a $66 obligation associated with
a ten-year agreement involving the sale and the subsequent lease
back of certain properties. Under the terms of the agreement, we
are required to make annual payments of principal and interest.
At the end of the agreement in 2014, ITT has the option to
repurchase the applicable properties for a nominal fee. This
transaction is reflected as debt.
Long-term debt
includes the unamortized portion of a deferred gain on a
terminated interest rate swap that will be amortized into
earnings through 2025.
NOTE 16
Postretirement
Benefit Plans
Defined
Contribution Plans
ITT sponsors
numerous defined contribution savings plans, which allow
employees to contribute a portion of their pre-tax
and/or
after-tax income in accordance with specified guidelines.
Several of the plans require us to match a percentage of the
employee contributions up to certain limits. Matching
contributions charged to income amounted to $64, $44 and $47 for
2010, 2009 and 2008, respectively.
The ITT Stock Fund,
an investment option under the ITT Salaried Investment and
Savings Plan, is considered an Employee Stock Ownership Plan
and, as a result, participants in the ITT Stock Fund may receive
dividends in cash or may reinvest such dividends into the ITT
Stock Fund. The ITT Stock Fund held approximately
8.3 shares of ITT common stock at December 31, 2010.
Defined Benefit
Plans
ITT sponsors
numerous defined benefit pension plans. As of December 31,
2010, of our total projected benefit obligation, the
U.S. Salaried Retirement Plan (U.S. SRP) represented
76%, other U.S. plans represented 14% and international
pension plans represented 10%. We fund the U.S. SRP as
required by statutory regulations or through discretionary
contributions. In addition, we fund certain of our international
pension plans in countries where funding is allowable and
tax-effective.
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ITT CORPORATION AND
SUBSIDIARIES
ITT also provides
health care and life insurance benefits for certain eligible
U.S. employees upon retirement. We have funded a portion of
the health care and life insurance obligations, where such
funding can be accomplished on a tax-effective basis.
Balance Sheet
Information
Amounts recognized
in the Consolidated Balance Sheets for pension and other
employee-related benefit plans (collectively, postretirement
benefit plans) reflect the funded status of the postretirement
benefit plans. The following table provides a summary of the
funded status of our postretirement benefit plans and the
presentation of such balances within our Consolidated Balance
Sheet as of December 31, 2010 and 2009.
| 2010 | 2009 | |||||||||||||||||||||||||||
|
Other |
Other |
|||||||||||||||||||||||||||
| Pension | Benefits | Total | Pension | Benefits | Total | |||||||||||||||||||||||
|
Fair value of plan assets
|
$ | 4,622 | $ | 275 | $ | 4,897 | $ | 4,308 | $ | 247 | $ | 4,555 | ||||||||||||||||
|
Projected benefit obligation
|
(5,960 | ) | (722 | ) | (6,682 | ) | (5,700 | ) | (701 | ) | (6,401 | ) | ||||||||||||||||
|
Funded status
|
$ | (1,338 | ) | $ | (447 | ) | $ | (1,785 | ) | $ | (1,392 | ) | $ | (454 | ) | $ | (1,846 | ) | ||||||||||
|
Amounts reported within:
|
||||||||||||||||||||||||||||
|
Other non-current assets
|
$ | 20 | $ | – | $ | 20 | $ | 16 | $ | – | $ | 16 | ||||||||||||||||
|
Accrued liabilities
|
(24 | ) | (48 | ) | (72 | ) | (25 | ) | (49 | ) | (74 | ) | ||||||||||||||||
|
Non-current liabilities
|
(1,334 | ) | (399 | ) | (1,733 | ) | (1,383 | ) | (405 | ) | (1,788 | ) | ||||||||||||||||
A portion of our
projected benefit obligation includes amounts that have not yet
been recognized as expense in our results of operations. Such
amounts are recorded within accumulated other comprehensive loss
until they are amortized as a component of net periodic
postretirement cost. The following table provides a summary of
amounts recorded within accumulated other comprehensive loss at
December 31, 2010 and 2009.
| 2010 | 2009 | |||||||||||||||||||||||||||
|
Other |
Other |
|||||||||||||||||||||||||||
| Pension | Benefits | Total | Pension | Benefits | Total | |||||||||||||||||||||||
|
Net actuarial loss
|
$ | 1,986 | $ | 162 | $ | 2,148 | $ | 2,034 | $ | 162 | $ | 2,196 | ||||||||||||||||
|
Prior service cost (benefit)
|
29 | (6 | ) | 23 | 29 | (8 | ) | 21 | ||||||||||||||||||||
|
Total
|
2,015 | 156 | 2,171 | $ | 2,063 | $ | 154 | $ | 2,217 | |||||||||||||||||||
The following table
provides a rollforward of the projected benefit obligations for
our U.S. and international pension plans for the years
ended 2010 and 2009.
| 2010 | 2009 | |||||||||||||||||||||||||||
| U.S. | Int’l | Total | U.S. | Int’l | Total | |||||||||||||||||||||||
|
Change in benefit obligation
|
||||||||||||||||||||||||||||
|
Benefit obligation – 1/1
|
$ | 5,173 | $ | 527 | $ | 5,700 | $ | 4,886 | $ | 437 | $ | 5,323 | ||||||||||||||||
|
Service cost
|
108 | 15 | 123 | 88 | 11 | 99 | ||||||||||||||||||||||
|
Interest cost
|
299 | 29 | 328 | 302 | 27 | 329 | ||||||||||||||||||||||
|
Amendments / other
|
4 | – | 4 | 2 | 1 | 3 | ||||||||||||||||||||||
|
Actuarial loss
|
133 | 31 | 164 | 247 | 40 | 287 | ||||||||||||||||||||||
|
Benefits paid
|
(353 | ) | (27 | ) | (380 | ) | (352 | ) | (31 | ) | (383 | ) | ||||||||||||||||
|
Liabilities assumed through acquisition
|
– | 29 | 29 | – | – | – | ||||||||||||||||||||||
|
Foreign currency translation
|
– | (8 | ) | (8 | ) | – | 42 | 42 | ||||||||||||||||||||
|
Benefit obligation – 12/31
|
$ | 5,364 | $ | 596 | $ | 5,960 | $ | 5,173 | $ | 527 | $ | 5,700 | ||||||||||||||||
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The following table
provides a rollforward of the projected benefit obligations for
our other employee-related benefit plans for the years ended
2010 and 2009.
| 2010 | 2009 | |||||||||
|
Change in benefit obligation
|
||||||||||
|
Benefit obligation – 1/1
|
$ | 701 | $ | 703 | ||||||
|
Service cost
|
6 | 7 | ||||||||
|
Interest cost
|
40 | 42 | ||||||||
|
Amendments / other
|
– | (12 | ) | |||||||
|
Actuarial loss
|
22 | 7 | ||||||||
|
Benefits paid
|
(47 | ) | (46 | ) | ||||||
|
Benefit obligation – 12/31
|
$ | 722 | $ | 701 | ||||||
The following table
provides a rollforward of the pension plan assets and the ending
funded status for our U.S. and international pension plans
for the years ended 2010 and 2009.
| 2010 | 2009 | |||||||||||||||||||||||||||
| U.S. | Int’l | Total | U.S. | Int’l | Total | |||||||||||||||||||||||
|
Change in plan assets
|
||||||||||||||||||||||||||||
|
Plan assets – 1/1
|
$ | 4,011 | $ | 297 | $ | 4,308 | $ | 3,392 | $ | 219 | $ | 3,611 | ||||||||||||||||
|
Actual return on plan assets
|
525 | 25 | 550 | 772 | 52 | 824 | ||||||||||||||||||||||
|
Employer contributions
|
58 | 18 | 76 | 150 | 11 | 161 | ||||||||||||||||||||||
|
Employee contributions
|
– | 1 | 1 | – | 2 | 2 | ||||||||||||||||||||||
|
Benefits paid
|
(322 | ) | (5 | ) | (327 | ) | (303 | ) | (16 | ) | (319 | ) | ||||||||||||||||
|
Assets acquired through acquisition
|
– | 21 | 21 | – | – | – | ||||||||||||||||||||||
|
Foreign currency translation
|
– | (7 | ) | (7 | ) | – | 29 | 29 | ||||||||||||||||||||
|
Plan assets – 12/31
|
$ | 4,272 | $ | 350 | $ | 4,622 | $ | 4,011 | $ | 297 | $ | 4,308 | ||||||||||||||||
|
Funded status at end of year
|
$ | (1,092 | ) | $ | (246 | ) | $ | (1,338 | ) | $ | (1,162 | ) | $ | (230 | ) | $ | (1,392 | ) | ||||||||||
The following table
provides a rollforward of the other employee-related benefit
plan assets and the ending funded status for the years ended
2010 and 2009.
| 2010 | 2009 | ||||||||||||||
|
Change in plan assets
|
|||||||||||||||
|
Plan assets – 1/1
|
$ | 247 | $ | 205 | |||||||||||
|
Actual return on plan assets
|
33 | 47 | |||||||||||||
|
Benefits paid
|
(5 | ) | (5 | ) | |||||||||||
|
Plan assets – 12/31
|
$ | 275 | $ | 247 | |||||||||||
|
Funded status at end of year
|
$ | (447 | ) | $ | (454 | ) | |||||||||
The accumulated
benefit obligation for all defined benefit pension plans was
$5,644 and $5,378 at December 31, 2010 and 2009,
respectively. The following table provides information for
pension plans with an accumulated benefit obligation in excess
of plan assets.
| 2010 | 2009 | ||||||||||||||
|
Projected benefit obligation
|
$ | 5,683 | $ | 5,465 | |||||||||||
|
Accumulated benefit obligation
|
5,381 | 5,171 | |||||||||||||
|
Fair value of plan assets
|
4,325 | 4,058 | |||||||||||||
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Income Statement
Information
The following table
provides the components of net periodic benefit cost and other
amounts recognized in other comprehensive income for the years
2010, 2009 and 2008, as they pertain to our defined benefit
pension plans.
| 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||||||||||
| U.S. | Int’l | Total | U.S. | Int’l | Total | U.S. | Int’l | Total | |||||||||||||||||||||||||||||||||||
|
Net periodic benefit cost
|
|||||||||||||||||||||||||||||||||||||||||||
|
Service cost
|
$ | 108 | $ | 15 | $ | 123 | $ | 88 | $ | 11 | $ | 99 | $ | 85 | $ | 14 | $ | 99 | |||||||||||||||||||||||||
|
Interest cost
|
299 | 29 | 328 | 302 | 27 | 329 | 294 | 31 | 325 | ||||||||||||||||||||||||||||||||||
|
Expected return on plan assets
|
(414 | ) | (24 | ) | (438 | ) | (412 | ) | (21 | ) | (433 | ) | (421 | ) | (24 | ) | (445 | ) | |||||||||||||||||||||||||
|
Amortization of net actuarial loss
|
72 | 3 | 75 | 46 | 2 | 48 | 14 | 3 | 17 | ||||||||||||||||||||||||||||||||||
|
Amortization of prior service cost
|
4 | – | 4 | 4 | – | 4 | 4 | – | 4 | ||||||||||||||||||||||||||||||||||
|
Net periodic benefit cost (income)
|
69 | 23 | 92 | 28 | 19 | 47 | (24 | ) | 24 | – | |||||||||||||||||||||||||||||||||
|
Effect of curtailment
|
1 | – | 1 | 3 | – | 3 | – | – | – | ||||||||||||||||||||||||||||||||||
|
Total net periodic benefit cost (income)
|
70 | 23 | 93 | 31 | 19 | 50 | (24 | ) | 24 | – | |||||||||||||||||||||||||||||||||
| Other changes in plan assets and benefit obligations recognized in other comprehensive income | |||||||||||||||||||||||||||||||||||||||||||
|
Net loss (gain)
|
8 | 19 | 27 | (151 | ) | 13 | (138 | ) | 2,018 | 41 | 2,059 | ||||||||||||||||||||||||||||||||
|
Prior service cost
|
4 | – | 4 | 6 | 1 | 7 | – | – | – | ||||||||||||||||||||||||||||||||||
|
Amortization of net actuarial loss
|
(72 | ) | (3 | ) | (75 | ) | (46 | ) | (2 | ) | (48 | ) | (14 | ) | (3 | ) | (17 | ) | |||||||||||||||||||||||||
|
Amortization of prior service cost
|
(4 | ) | – | (4 | ) | (4 | ) | – | (4 | ) | (4 | ) | – | (4 | ) | ||||||||||||||||||||||||||||
|
Total change recognized in other comprehensive income
|
(64 | ) | 16 | (48 | ) | (195 | ) | 12 | (183 | ) | 2,000 | 38 | 2,038 | ||||||||||||||||||||||||||||||
|
Total impact from net periodic benefit cost and changes in other
comprehensive income
|
$ | 6 | $ | 39 | $ | 45 | $ | (164 | ) | $ | 31 | $ | (133 | ) | $ | 1,976 | $ | 62 | $ | 2,038 | |||||||||||||||||||||||
76
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ITT CORPORATION AND
SUBSIDIARIES
The following table
provides the components of net periodic benefit cost and other
amounts recognized in other comprehensive loss for the years
2010, 2009 and 2008, as they pertain to other employee-related
benefit plans.
| 2010 | 2009 | 2008 | ||||||||||||||||
|
Net periodic benefit cost
|
||||||||||||||||||
|
Service cost
|
$ | 6 | $ | 7 | $ | 8 | ||||||||||||
|
Interest cost
|
40 | 42 | 42 | |||||||||||||||
|
Expected return on plan assets
|
(22 | ) | (18 | ) | (28 | ) | ||||||||||||
|
Amortization of net actuarial loss
|
11 | 15 | 4 | |||||||||||||||
|
Amortization of prior service (credit) cost
|
(2 | ) | 4 | 3 | ||||||||||||||
|
Net periodic benefit cost
|
33 | 50 | 29 | |||||||||||||||
|
Effect of curtailment
|
— | (1 | ) | — | ||||||||||||||
|
Total net periodic benefit cost
|
33 | 49 | 29 | |||||||||||||||
|
Other changes in plan assets and benefit obligations recognized
in other comprehensive income
|
||||||||||||||||||
|
Net loss (gain)
|
11 | (23 | ) | 90 | ||||||||||||||
|
Prior service credit
|
— | (10 | ) | (3 | ) | |||||||||||||
|
Amortization of net actuarial loss
|
(11 | ) | (15 | ) | (4 | ) | ||||||||||||
|
Amortization of prior service credit (cost)
|
2 | (4 | ) | (3 | ) | |||||||||||||
|
Total changes recognized in other comprehensive income
|
2 | (52 | ) | 80 | ||||||||||||||
|
Total impact from net periodic benefit cost and changes in other
comprehensive income
|
$ | 35 | $ | (3 | ) | $ | 109 | |||||||||||
The following table
provides the estimated net actuarial loss and prior service cost
that will be amortized from accumulated other comprehensive loss
into net periodic benefit cost during 2011.
|
Other |
||||||||||||||||||
| Pension | Benefits | Total | ||||||||||||||||
|
Net actuarial loss
|
$ | 118 | $ | 12 | $ | 130 | ||||||||||||
|
Prior service cost (credit)
|
4 | (2 | ) | 2 | ||||||||||||||
|
Total
|
122 | 10 | 132 | |||||||||||||||
Postretirement
Plan Assumptions
The following table
provides the weighted-average assumptions used to determine
projected benefit obligations and net periodic benefit cost, as
they pertain to our defined benefit pension plans.
| 2010 | 2009 | |||||||||||||||||
| U.S. | Int’l | U.S. | Int’l | |||||||||||||||
|
Obligation Assumptions:
|
||||||||||||||||||
|
Discount rate
|
5.73 | % | 5.47 | % | 6.00 | % | 5.79 | % | ||||||||||
|
Rate of future compensation increase
|
4.00 | % | 3.26 | % | 4.00 | % | 3.87 | % | ||||||||||
|
Cost Assumptions:
|
||||||||||||||||||
|
Discount rate
|
6.00 | % | 5.79 | % | 6.25 | % | 6.14 | % | ||||||||||
|
Expected return on plan assets
|
9.00 | % | 7.33 | % | 9.00 | % | 7.29 | % | ||||||||||
|
Rate of future compensation increase
|
4.00 | % | 3.84 | % | 4.00 | % | 3.64 | % | ||||||||||
77
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ITT CORPORATION AND
SUBSIDIARIES
The following table
provides the weighted-average assumptions used to determine
projected benefit obligations and net periodic benefit cost, as
they pertain to other employee-related benefit plans.
| 2010 | 2009 | ||||||||
|
Obligation Assumptions:
|
|||||||||
|
Discount rate
|
5.50 | % | 6.00 | % | |||||
|
Rate of future compensation increase
|
4.00 | % | 4.00 | % | |||||
|
Cost Assumptions:
|
|||||||||
|
Discount rate
|
6.00 | % | 6.25 | % | |||||
|
Expected return on plan assets
|
9.00 | % | 9.00 | % | |||||
|
Rate of future compensation increase
|
4.00 | % | 4.00 | % | |||||
Management develops
each assumption using relevant company experience in conjunction
with market-related data for each individual country in which
such plans exist. Assumptions are reviewed annually and adjusted
as necessary.
The expected
long-term rate of return on assets reflects the expected returns
for each major asset class in which the plans invest, the weight
of each asset class in the target mix, the correlations among
asset classes and their expected volatilities. Our expected
return on plan assets is estimated by evaluating both historical
returns and estimates of future returns. Specifically, we
analyze the plan’s actual historical annual return on
assets, net of fees, over the past 15, 20 and 25 years;
estimate future returns based on independent estimates of asset
class returns; and evaluate historical broad market returns over
long-term timeframes based on our asset allocation range. Based
on this approach, our estimate of the long-term annual rate of
return on assets for domestic pension plans is 9.0%. For
reference, our actual geometric average annual return on plan
assets for domestic pension plans as of December 31, 2010
was 8.8%, 10.1% and 10.3%, for the past 15, 20, and 25 year
periods, respectively.
The table below
provides the actual rate of return generated on plan assets
during each of the years presented, as they compare to the
expected long-term return utilized in calculating the net
periodic benefit costs, as they pertain to our U.S. pension
plans.
| 2010 | 2009 | 2008 | ||||||||||||||||
|
Expected rate of return on plan assets
|
9.0 | % | 9.0 | % | 9.0 | % | ||||||||||||
|
Actual rate of return on plan assets
|
14.1 | % | 24.1 | % | (31.2 | )% | ||||||||||||
The assumed rate of
future increases in the per capita cost of health care (the
health care trend rate) is 7.8% for 2011, decreasing ratably to
5.0% in 2019. Increasing the health care trend rates by one
percent per year would have the effect of increasing the benefit
obligation by $36 and the aggregate annual service and interest
cost components by $3. A decrease of one percent in the health
care trend rate would reduce the benefit obligation by $30 and
the aggregate annual service and interest cost components by $2.
To the extent that actual experience differs from these
assumptions, the effect will be amortized over the average
future service of the covered active employees.
The determination of
the assumptions shown in the table above and the discussion of
health care trend rates are based on the provisions of the
applicable accounting pronouncements, the review of various
market data and discussion with our actuaries. Changes in these
assumptions could materially affect the financial position and
results of operations.
Investment
Policy
The investment
strategy for managing worldwide postretirement benefit plan
assets is to seek an optimal rate of return relative to an
appropriate level of risk for each plan. Investment strategies
vary by plan, depending on the specific characteristics of the
plan, such as plan size and design, funded status, liability
profile and legal requirements.
Substantially all of
the postretirement benefit plan assets are attributable to the
Company’s U.S. SRP, which are managed on a commingled
basis in a master investment trust. With respect to the master
investment trust, the Company allows itself broad discretion to
invest tactically to respond to changing market conditions,
while staying reasonably within the asset allocation ranges
prescribed by its investment guidelines. In making these asset
allocation decisions, the Company takes into account recent and
expected returns and volatility of returns for each asset class,
the expected correlation of returns among the different
investments, as well as anticipated funding and cash flows. To
enhance returns and mitigate risk, the Company diversifies its
investments by strategy, asset class, geography and sector. The
Company engages a large number of managers to gain broad
exposure to the markets, while generating
excess-of-market
returns and mitigating manager-concentration risk.
78
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ITT CORPORATION AND
SUBSIDIARIES
The following table
provides the actual asset allocations of these U.S. plans,
as of December 31, 2010 and 2009, and the related asset
allocation ranges by asset category.
|
Allocation |
|||||||||||||||
| 2010 | 2009 | Range | |||||||||||||
|
Domestic equities
|
25 | % | 25 | % | 25%-75% | ||||||||||
|
Alternative investments
|
47 | 47 | 20%-45% | ||||||||||||
|
International equities
|
18 | 17 | 10%-45% | ||||||||||||
|
Fixed income
|
2 | 4 | 0%-60% | ||||||||||||
|
Cash and other
|
8 | 7 | 0%-30% | ||||||||||||
The strategies and
allocations of plan assets outside of the U.S. are managed
locally and may differ significantly from those in the
U.S. In general and as of December 31, 2010,
non-U.S. plans
are managed closely to their strategic allocations.
Fair Value of
Plan Assets
In measuring plan
assets at fair value, a fair value hierarchy is applied which
categorizes and prioritizes the inputs used to estimate fair
value into three levels. The fair value hierarchy is based on
maximizing the use of observable inputs and minimizing the use
of unobservable inputs when measuring fair value. Classification
within the fair value hierarchy is based on the lowest level
input that is significant to the fair value measurement. The
three levels of the fair value hierarchy are defined as follows:
| n | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. | |
| n | Level 2 inputs are other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices (in non-active markets or in active markets for similar assets or liabilities), inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or other means. | |
| n | Level 3 inputs are unobservable inputs for the assets or liabilities. |
In certain
instances, fair value is estimated using quoted market prices
obtained from external pricing services. In obtaining such data
from the pricing service, the Company has evaluated the
methodologies used to develop the estimate of fair value in
order to assess whether such valuations are representative of
fair value, including net asset value (NAV). Additionally, in
certain circumstances, the Company may adjust NAV reported by an
asset manager when sufficient evidence indicates NAV is not
representative of fair value.
The following is a
description of the valuation methodologies and inputs used to
measure fair value for major categories of investments.
| n | Equity securities – Equities (including common and preferred shares, domestic listed and foreign listed, closed end mutual funds and exchange traded funds) are generally valued at the closing price reported on the major market on which the individual securities are traded at the measurement date. As all equity securities held by the Company are publicly traded in active markets, the securities are classified within Level 1 of the fair value hierarchy. | |
| n | Open ended mutual funds, collective trusts and commingled funds – Open ended mutual funds, collective trusts and commingled funds are measured at NAV. These funds are generally classified within Level 2 of the fair value hierarchy. | |
| n | Private equity – The valuation of limited partnership interests in private equity funds may require significant management judgment. The NAV reported by the asset manager is adjusted when management determines that NAV is not representative of fair value. In making such an assessment, a variety of factors are reviewed by management, including, but not limited to, the timeliness of NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported by the asset manager. These funds are generally classified within Level 3 of the fair value hierarchy. | |
| n | Absolute return (hedge funds) – The valuation of limited partnership interests in hedge funds may require significant management judgment. The NAV reported by the asset manager is adjusted when management determines that NAV is not representative of fair value. In making such an assessment, a variety of factors are reviewed by management, including, but not limited to, the timeliness of NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported by the asset manager. Depending on how quickly ITT can redeem these investments and the extent of any adjustments to NAV, hedge funds are classified within either Level 2 (redeemable within 90 days) or Level 3 (redeemable beyond 90 days) of the fair value hierarchy. | |
| n | Fixed income – U.S. government securities are generally valued using quoted prices of securities with similar characteristics. Corporate bonds and notes are generally valued by using pricing models (e.g. discounted cash flows), quoted prices of securities with similar characteristics or broker quotes. Fixed income securities are generally classified in Level 2 of the fair value hierarchy. |
79
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ITT CORPORATION AND
SUBSIDIARIES
The following table
provides the fair value of plan assets held by our
postretirement benefit plans, at December 31, 2010 and
2009, by asset class.
| 2010 | 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension | Other Benefits | Pension | Other Benefits | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Asset Category
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Equities Securities:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Domestic
|
$ | 1,026 | $ | 775 | $ | 154 | $ | 97 | $ | 81 | $ | 68 | $ | 8 | $ | 5 | $ | 957 | $ | 737 | $ | 142 | $ | 78 | $ | 75 | $ | 63 | $ | 8 | $ | 4 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Developed markets
|
495 | 364 | 19 | 112 | 19 | 13 | — | 6 | 455 | 339 | 23 | 93 | 15 | 10 | — | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Emerging markets
|
447 | 194 | 217 | 36 | 24 | 10 | 12 | 2 | 397 | 158 | 211 | 28 | 20 | 8 | 11 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
ITT Stock
|
52 | 52 | — | — | 3 | 3 | — | — | 49 | 49 | — | — | 2 | 2 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Subtotal – equity securities
|
2,020 | 1,385 | 390 | 245 | 127 | 94 | 20 | 13 | 1,858 | 1,283 | 376 | 199 | 112 | 83 | 19 | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Private equity:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Buyout
funds(a)
|
989 | — | 154 | 835 | 53 | — | 8 | 45 | 884 | — | 1 | 883 | 44 | — | — | 44 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Distressed
funds(b)
|
230 | — | — | 230 | 12 | — | — | 12 | 181 | — | — | 181 | 9 | — | — | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Venture/growth equity
funds(c)
|
45 | — | — | 45 | 2 | — | — | 2 | 33 | — | — | 33 | 2 | — | — | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Mezzanine
funds(d)
|
33 | — | — | 33 | 2 | — | — | 2 | 28 | — | — | 28 | 1 | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Subtotal – private equity
|
1,297 | — | 154 | 1,143 | 69 | — | 8 | 61 | 1,126 | — | 1 | 1,125 | 56 | — | — | 56 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Absolute return (hedge funds):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Fund of
funds(e)
|
290 | — | 58 | 232 | 15 | — | 2 | 13 | 319 | — | 57 | 262 | 15 | — | 2 | 13 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Fixed
income/multi-strat(f)
|
354 | — | 162 | 192 | 19 | — | 9 | 10 | 319 | — | 146 | 173 | 16 | — | 7 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Equity
long/short(g)
|
128 | — | 80 | 48 | 7 | — | 4 | 3 | 120 | — | 80 | 40 | 6 | — | 4 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Macro(h)
|
12 | — | 12 | — | 1 | — | 1 | — | 38 | — | 38 | — | 2 | — | 2 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Subtotal – absolute return
|
784 | — | 312 | 472 | 42 | — | 16 | 26 | 796 | — | 321 | 475 | 39 | — | 15 | 24 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Fixed Income:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Fixed income
|
184 | 8 | 176 | — | 18 | — | 10 | 8 | 231 | 13 | 218 | — | 23 | 1 | 14 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Other:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Commodities
|
233 | — | 200 | 33 | 13 | — | 11 | 2 | 179 | — | 153 | 26 | 9 | — | 8 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Cash and other, net
|
104 | 4 | 74 | 26 | 6 | 1 | 4 | 1 | 118 | 109 | (6 | ) | 15 | 8 | 7 | (1 | ) | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Subtotal – other
|
337 | 4 | 274 | 59 | 19 | 1 | 15 | 3 | 297 | 109 | 147 | 41 | 17 | 7 | 7 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 4,622 | $ | 1,397 | $ | 1,306 | $ | 1,919 | $ | 275 | $ | 95 | $ | 69 | $ | 111 | $ | 4,308 | $ | 1,405 | $ | 1,063 | $ | 1,840 | $ | 247 | $ | 91 | $ | 55 | $ | 101 | ||||||||||||||||||||||||||||||||||||||||||||||
| (a) | Private equity buyout funds, included within postretirement benefit plan assets, are partnership investment vehicles that take a controlling interest primarily in private companies with the intent of developing them for future sale at a higher price to a strategic or financial buyer or through an initial public offering. These investments include $499 where ownership of the partnership interest is directly held and $442 invested through funds of private equity funds. |
| (b) | Private equity distressed funds are partnership investment vehicles that purchase debt or preferred equity instruments of companies that are distressed, near bankrupt or bankrupt. | |
| (c) | Venture and growth equity private equity funds are partnership investment vehicles that provide seed or growth capital to start-ups and early stage companies, usually in high-growth industries, such as information and clean technology, health care and biotechnology. | |
| (d) | Mezzanine private equity funds provide mezzanine loans to companies that need capital but do not want to sell or dilute their equity interests. Mezzanine loans are subordinated debt or preferred equity securities that represent a claim on the borrower’s assets which is senior to the common equity but subordinate to senior secured and unsecured debt. | |
| (e) | Absolute return fund of funds include partnership investment vehicles that invest in a diversified portfolio of other hedge funds that employ a range of investment strategies. | |
| (f) | Fixed income/multi-strat absolute return funds are partnership investment vehicles that invest in multiple investment strategies, such as macro, equity long/short, convertible arbitrage and event driven, often with the intent to diversify risk and reduce volatility. | |
| (g) | Equity long/short absolute return funds include partnership investment vehicles that can purchase both long and short positions of publicly traded equities. Management of the fund has the ability to shift investments from value to growth strategies, from small to large capitalization companies, and from a net long position to a net short position. | |
| (h) | Macro absolute return funds include partnership investment vehicles that make investments predicated on the managers views, either fundamentally or quantitatively derived, on different global factors, such as asset allocation (e.g., stocks vs. bonds) interest rates, currency, sovereign risk and commodities over a span of different time frames. |
80
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ITT CORPORATION AND
SUBSIDIARIES
The following table
presents a reconciliation of the beginning and ending balances
of fair value measurement within our pension plans using
significant unobservable inputs (Level 3).
|
Equity |
Private |
Absolute |
Fixed |
|||||||||||||||||||||||||
| Securities | Equity | Returns | Income | Other | Total | |||||||||||||||||||||||
|
Level 3 balance – 12/31/08
|
$ | 274 | $ | 988 | $ | 783 | $ | 40 | $ | 126 | $ | 2,211 | ||||||||||||||||
|
Realized gains (losses), net
|
(1 | ) | 26 | 3 | – | 1 | 29 | |||||||||||||||||||||
|
Unrealized gains (losses), net
|
70 | 20 | 84 | – | 2 | 176 | ||||||||||||||||||||||
|
Purchases/(sales), net
|
5 | 89 | (186 | ) | – | 8 | (84 | ) | ||||||||||||||||||||
|
Transfers in (out), net
|
(149 | ) | (1 | ) | (209 | ) | (40 | ) | (96 | ) | (495 | ) | ||||||||||||||||
|
Foreign currency translation
|
– | 3 | – | – | – | 3 | ||||||||||||||||||||||
|
Level 3 balance – 12/31/09
|
199 | 1,125 | 475 | – | 41 | 1,840 | ||||||||||||||||||||||
|
Realized gains (losses), net
|
– | 85 | 8 | – | – | 93 | ||||||||||||||||||||||
|
Unrealized gains (losses), net
|
41 | 46 | 30 | – | 2 | 119 | ||||||||||||||||||||||
|
Purchases/(sales), net
|
4 | 13 | (41 | ) | – | 17 | (7 | ) | ||||||||||||||||||||
|
Transfers in (out), net
|
– | (124 | ) | – | – | – | (124 | ) | ||||||||||||||||||||
|
Foreign currency translation
|
1 | (2 | ) | – | – | (1 | ) | (2 | ) | |||||||||||||||||||
|
Level 3 balance – 12/31/10
|
$ | 245 | $ | 1,143 | $ | 472 | $ | – | $ | 59 | $ | 1,919 | ||||||||||||||||
The following table
presents a reconciliation of the beginning and ending balances
of fair value measurement within our other employee-related
benefit plans using significant unobservable inputs
(Level 3):
|
Equity |
Private |
Absolute |
Fixed |
|||||||||||||||||||||||||
| Securities | Equity | Returns | Income | Other | Total | |||||||||||||||||||||||
|
Level 3 balance – 12/31/08
|
$ | 14 | $ | 50 | $ | 40 | $ | 10 | $ | 6 | $ | 120 | ||||||||||||||||
|
Realized gains (losses), net
|
– | 1 | – | 1 | – | 2 | ||||||||||||||||||||||
|
Unrealized gains (losses), net
|
4 | 1 | 4 | – | – | 9 | ||||||||||||||||||||||
|
Purchases/(sales), net
|
– | 4 | (9 | ) | (1 | ) | 1 | (5 | ) | |||||||||||||||||||
|
Transfers in (out), net
|
(8 | ) | – | (11 | ) | (2 | ) | (4 | ) | (25 | ) | |||||||||||||||||
|
Level 3 balance – 12/31/09
|
10 | 56 | 24 | 8 | 3 | 101 | ||||||||||||||||||||||
|
Realized gains (losses), net
|
– | 5 | – | – | – | 5 | ||||||||||||||||||||||
|
Unrealized gains (losses), net
|
3 | 6 | 4 | – | – | 13 | ||||||||||||||||||||||
|
Purchases/(sales), net
|
– | 1 | (2 | ) | – | – | (1 | ) | ||||||||||||||||||||
|
Transfers in (out), net
|
– | (7 | ) | – | – | – | (7 | ) | ||||||||||||||||||||
|
Level 3 balance – 12/31/10
|
$ | 13 | $ | 61 | $ | 26 | $ | 8 | $ | 3 | $ | 111 | ||||||||||||||||
Contributions
Funding requirements
under Internal Revenue Service rules are a major consideration
in making contributions to our post-retirement plans. With
respect to qualified pension plans, we intend to contribute
annually not less than the minimum required by applicable law
and regulations. We made contributions of $76 and $161 to
pension plans during 2010 and 2009, respectively, including
voluntary contributions to the U.S. SRP of $50 and $100
during the fourth quarter of 2010 and 2009, respectively. We
currently anticipate making contributions to our pension plans
in the range of $90 to $110 during 2011, of which $20 is
expected to be made in the first quarter.
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Estimated Future
Benefit Payments
The following table
provides the projected timing of payments for benefits earned to
date and the expectation that certain future service will be
earned by current active employees for our pension and other
employee-related benefit plans.
|
Other |
||||||||||
| Pension | Benefits | |||||||||
|
2011
|
$ | 368 | $ | 53 | ||||||
|
2012
|
375 | 54 | ||||||||
|
2013
|
383 | 55 | ||||||||
|
2014
|
391 | 56 | ||||||||
|
2015
|
402 | 56 | ||||||||
|
2016 – 2020
|
2,162 | 289 | ||||||||
NOTE 17
Long-Term
Incentive Employee Compensation
Our long-term
incentive awards program 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.
The ITT Amended and
Restated 2003 Equity Incentive Plan (2003 Equity Incentive Plan)
was approved by shareholders and established in May of 2003 to
provide for the awarding of options on common shares and
restricted common shares to employees and non-employee
directors. The number of shares initially available for awards
under this plan was 12.2. As of December 31, 2010,
2.9 shares were available for future grants. ITT makes
available for the exercise of stock options or vesting of
restricted shares by purchasing shares in the open market or by
issuing shares from treasury stock.
The 2003 Equity
Incentive Plan replaced the 2002 ITT Stock Option Plan for
Non-Employee Directors, the ITT 1996 Restricted Stock Plan for
Non-Employee Directors and the 1994 ITT Incentive Stock Plan on
a prospective basis. All outstanding awards granted under these
prior plans are vested and exercisable. No future grants will be
made under these prior plans.
Long-term incentive
employee compensation costs are primarily recorded within
SG&A expenses, and are reduced by an estimated forfeiture
rate. These costs impacted our consolidated results of
operations as follows:
| 2010 | 2009 | 2008 | |||||||||||||
|
Compensation costs on equity-based awards
|
$ | 28 | $ | 29 | $ | 31 | |||||||||
|
Compensation costs on liability-based awards
|
(5 | ) | 5 | 24 | |||||||||||
|
Total compensation costs, pre-tax
|
$ | 23 | $ | 34 | $ | 55 | |||||||||
|
Future tax benefit
|
$ | 7 | $ | 10 | $ | 18 | |||||||||
At December 31,
2010, there was $43 of total unrecognized compensation cost
related to non-vested awards granted under the stock option and
restricted stock plans. This cost is expected to be recognized
ratably over a weighted-average period of 1.8 years.
Non-Qualified
Stock Options
Options generally
vest over or at the conclusion of a three-year period and are
exercisable in seven or ten-year periods, except in certain
instances of death, retirement or disability. Options granted
between 2004 and 2009 were awarded with a contractual term of
seven years. Options granted prior to 2004 and during 2010 were
awarded with a contractual term of ten years. The exercise price
per share is the fair market value of the underlying common
stock on the date each option is granted.
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A summary of the
status of our NQOs as of December 31, 2010, 2009 and 2008
and changes during the years then ended is presented below.
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||
|
WEIGHTED- |
WEIGHTED- |
WEIGHTED- |
||||||||||||||||||||||||||
|
AVERAGE |
AVERAGE |
AVERAGE |
||||||||||||||||||||||||||
|
EXERCISE |
EXERCISE |
EXERCISE |
||||||||||||||||||||||||||
| STOCK OPTIONS | SHARES | PRICE | SHARES | PRICE | SHARES | PRICE | ||||||||||||||||||||||
|
Outstanding – 1/1
|
8.1 | $ | 40.29 | 8.1 | $ | 39.83 | 8.7 | $ | 38.13 | |||||||||||||||||||
|
Granted
|
0.7 | 53.30 | 0.9 | 33.59 | 0.6 | 53.57 | ||||||||||||||||||||||
|
Exercised
|
(1.1 | ) | 31.45 | (0.8 | ) | 26.32 | (1.0 | ) | 32.82 | |||||||||||||||||||
|
Canceled or expired
|
(0.3 | ) | 48.78 | (0.1 | ) | 45.94 | (0.2 | ) | 44.31 | |||||||||||||||||||
|
Outstanding – 12/31
|
7.4 | $ | 42.54 | 8.1 | $ | 40.29 | 8.1 | $ | 39.83 | |||||||||||||||||||
|
Options exercisable – 12/31
|
5.9 | $ | 41.86 | 6.4 | $ | 39.49 | 6.8 | $ | 37.02 | |||||||||||||||||||
The intrinsic value
of options exercised (which is the amount by which the stock
price exceeded the exercise price of the options on the date of
exercise) during 2010, 2009 and 2008 was $22, $18 and $30,
respectively.
The amount of cash
received from the exercise of stock options was $35 and $20 for
2010 and 2009, respectively. The tax benefit realized during
2010 and 2009 associated with stock option exercises and lapses
of restricted stock was $14 and $11, respectively. We classify,
as a financing activity, the cash flows attributable to excess
tax benefits arising from stock option exercises and restricted
stock lapses. Cash provided by operating activities decreased
and cash provided by financing activities increased by $6, $3
and $7 for 2010, 2009 and 2008, respectively.
The
following table summarizes information about ITT’s stock
options at December 31, 2010:
| OPTIONS OUTSTANDING | OPTIONS EXERCISABLE | |||||||||||||||||||||||||||||||||||||||
|
WEIGHTED- |
WEIGHTED- |
|||||||||||||||||||||||||||||||||||||||
|
AVERAGE |
WEIGHTED- |
AVERAGE |
WEIGHTED- |
|||||||||||||||||||||||||||||||||||||
|
REMAINING |
AVERAGE |
AGGREGATE |
REMAINING |
AVERAGE |
AGGREGATE |
|||||||||||||||||||||||||||||||||||
|
RANGE OF EXERCISE |
CONTRACTUAL |
EXERCISE |
INTRINSIC |
CONTRACTUAL |
EXERCISE |
INTRINSIC |
||||||||||||||||||||||||||||||||||
| PRICES | NUMBER | LIFE (IN YEARS) | PRICE | VALUE | NUMBER | LIFE (IN YEARS) | PRICE | VALUE | ||||||||||||||||||||||||||||||||
| $ | 10-$20 | 0.1 | – | $ | 18.44 | $ | 3 | 0.1 | – | $ | 18.44 | $ | 3 | |||||||||||||||||||||||||||
| $ | 20-$30 | 0.4 | 1.0 | 25.37 | 12 | 0.4 | 1.0 | 25.37 | 11 | |||||||||||||||||||||||||||||||
| $ | 30-$40 | 2.6 | 3.4 | 34.43 | 45 | 2.0 | 2.9 | 34.79 | 34 | |||||||||||||||||||||||||||||||
| $ | 40-$50 | 2.2 | 1.6 | 45.05 | 16 | 2.2 | 1.5 | 45.03 | 16 | |||||||||||||||||||||||||||||||
| $ | 50-$60 | 2.0 | 5.0 | 54.18 | – | 1.2 | 2.9 | 54.77 | – | |||||||||||||||||||||||||||||||
| $ | 60-$70 | 0.1 | 4.0 | 66.83 | – | – | (a) | 3.9 | 67.16 | – | ||||||||||||||||||||||||||||||
| 7.4 | 3.1 | 42.54 | $ | 76 | 5.9 | 2.2 | 41.86 | $ | 64 | |||||||||||||||||||||||||||||||
| (a) | Amount rounds to less than 0.1 |
The aggregate
intrinsic value in the preceding table represents the total
pre-tax intrinsic value, based on ITT’s closing stock price
of $52.11 as of December 31, 2010, which would have been
received by the option holders had all option holders exercised
their options as of that date. The number of options
“out-of-the-money”
as of December 31, 2010, included as exercisable in the
preceding table was 2.1.
As of
December 31, 2010, the total number of stock options
expected to vest (including those that have already vested) was
7.3. These stock options have a weighted-average exercise price
of $42.46, an aggregate intrinsic value of $75 and a
weighted-average remaining contractual life of 3.0 years.
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The fair value of
each option grant was estimated on the date of grant using the
binomial lattice pricing model which incorporates multiple and
variable assumptions over time, including assumptions such as
employee exercise patterns, stock price volatility and changes
in dividends.
The
following are weighted-average assumptions for 2010, 2009 and
2008:
| 2010 | 2009 | 2008 | ||||||||||||
|
Dividend yield
|
1.88 | % | 2.54 | % | 1.31 | % | ||||||||
|
Expected volatility
|
27.06 | % | 38.77 | % | 28.69 | % | ||||||||
|
Expected life (in years)
|
7.0 | 4.7 | 4.7 | |||||||||||
|
Risk-free rates
|
3.06 | % | 2.20 | % | 2.31 | % | ||||||||
|
Weighted-average grant date fair value
|
$ | 14.50 | $ | 9.60 | $ | 13.46 | ||||||||
Expected
volatilities are based on ITT’s stock price history,
including implied volatilities from traded options on our stock.
ITT uses historical data to estimate option exercise and
employee termination 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.
Restricted
Stock
Restricted stock
typically vests three years from the date of grant. Holders of
restricted stock have the right to receive dividends and vote on
the shares. If an employee leaves the Company prior to vesting,
whether through resignation or termination for cause, the
restricted stock is forfeited. If an employee retires or is
terminated other than for cause, a pro rata portion of the
restricted stock may vest. Included within restricted stock
outstanding are 0.2 vested shares that have been deferred until
termination of service per individual award agreements. As of
December 31, 2010, the total number of restricted stock
expected to vest was 1.4.
The table below
provides a rollforward of outstanding restricted stock for each
of the previous three years ended.
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||
|
WEIGHTED |
WEIGHTED |
WEIGHTED |
||||||||||||||||||||||||||
|
AVERAGE |
AVERAGE |
AVERAGE |
||||||||||||||||||||||||||
|
GRANT |
GRANT |
GRANT |
||||||||||||||||||||||||||
|
DATE |
DATE |
DATE |
||||||||||||||||||||||||||
| RESTRICTED STOCK | SHARES | FAIR VALUE | SHARES | FAIR VALUE | SHARES | FAIR VALUE | ||||||||||||||||||||||
|
Outstanding – 1/1
|
1.7 | $ | 44.36 | 1.5 | $ | 51.96 | 1.3 | $ | 50.93 | |||||||||||||||||||
|
Granted
|
0.5 | 53.25 | 0.7 | 33.88 | 0.4 | 53.57 | ||||||||||||||||||||||
|
Lapsed
|
(0.4 | ) | 54.44 | (0.4 | ) | 52.83 | (0.1 | ) | 45.76 | |||||||||||||||||||
|
Canceled
|
(0.1 | ) | 44.75 | (0.1 | ) | 54.94 | (0.1 | ) | 55.89 | |||||||||||||||||||
|
Outstanding – 12/31
|
1.7 | $ | 44.81 | 1.7 | $ | 44.36 | 1.5 | $ | 51.96 | |||||||||||||||||||
The outstanding
restricted shares include 0.1 shares issued to non-employee
directors in payment for part of their annual retainer. This
cost is expected to be recognized ratably over a weighted
average period of 0.6 years.
Total Shareholder
Return Awards
The TSR award plan
is a performance-based cash award incentive program provided to
key employees of ITT. TSR awards are accounted for under
stock-compensation principles of accounting as liability-based
awards. The fair value of outstanding awards is determined at
the conclusion of the three-year performance period by measuring
ITT’s total shareholder return percentage against the total
shareholder return performance of other stocks generally
comprising the S&P Industrials Index. The number of
companies included in the applicable benchmark group range from
312 to 365 as of December 31, 2010. We reassess the fair
value of our TSR awards on a quarterly basis at the end of each
reporting period using actual total shareholder return data over
the elapsed performance period as well as a Monte Carlo
simulation. The fair value of the outstanding awards at
December 31, 2010 and 2009 was $2 and $27, respectively.
Payment, if any, is
based on the TSR performance comparison measured against targets
established at the time of the award. The total cash paid to
settle the TSR liability was $18, $21 and $19, during the years
ended 2010, 2009 and 2008, respectively. At December 31,
2010, total unrecognized compensation costs projected to be
incurred, based on current performance measurements, over the
remaining vesting period
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is $4. This cost is
expected to be recognized ratably over a weighted-average period
of 2.0 years.
NOTE 18
Capital
Stock
ITT has authority to
issue an aggregate of 550 shares of capital stock, of which
500 shares have been designated as “Common Stock”
having a par value of $1 per share and 50 shares have been
designated as “Preferred Stock” not having any par or
stated value. There was no Preferred Stock outstanding as of
December 31, 2010 and 2009.
The stockholders of
ITT common stock are entitled to receive dividends when and as
declared by ITT’s Board of Directors. Dividends are paid
quarterly. Dividends declared were $1.00, $0.85 and $0.70 per
common share in 2010, 2009, and 2008, respectively.
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. Through December 2008, we had
repurchased 7.1 million shares for $431, including
commission fees, under the $1 billion share repurchase
program. No shares were repurchased in 2010 or 2009.
We make available
for the exercise of stock options and vesting of restricted
stock by purchasing shares in the open market or by issuing
shares from treasury stock. During 2010, we issued
1.4 shares from our treasury account related to equity
compensation arrangements. As of December 31, 2010 and
2009, 22.9 and 24.0 shares of Common Stock were held in our
treasury account, respectively.
NOTE 19
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 asbestos liabilities, environmental
liabilities, intellectual property matters, copyright
infringement, personal injury claims, employment and pension
matters, government contract issues and commercial or
contractual disputes, sometimes related to acquisitions or
divestitures. 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 on a consolidated basis in the foreseeable
future, 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
December 31, 2010, there were 103,575 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:
| 2010(b) | 2009 | |||||||||
|
Pending
claims(a) –
1/1
|
104,679 | 103,006 | ||||||||
|
New claims
|
5,865 | 4,274 | ||||||||
|
Settlements
|
(991 | ) | (1,081 | ) | ||||||
|
Dismissals
|
(6,469 | ) | (4,728 | ) | ||||||
|
Adjustment(c)
|
491 | 3,208 | ||||||||
|
Pending
claims(a) –
12/31
|
103,575 | 104,679 | ||||||||
| (a) | We had previously indicated that 34,869 claims related to maritime actions, almost all of which were filed in the United States District Court for the Northern District of Ohio, were not included in the count of asserted claims because the Company believed they would not be litigated. In August 2010, these cases were dismissed. |
| (b) | 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. Excluded from the table above is claim activity associated with the amended cost-sharing agreement for claims that were not filed against ITT. |
| (c) | Reflects an adjustment to increase the number of open claims as a result of transitioning claims data from our primary insurance companies to an internal database. |
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 103,575 pending claims against the Company, the plaintiffs
are unable to demonstrate any injury. Many of those claims have
been placed on inactive dockets (including 39,985 claims in
Mississippi). Our experience to date
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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 103,575 open claims have little or
no value. The average cost per claim resolved in 2010 and 2009
was $16 thousand and $12 thousand, respectively. Because claims
are sometimes dismissed in large groups, the average cost per
resolved claim as well as the number of open claims can
fluctuate significantly from period to period.
Beginning in the
third quarter of 2009, the Company recorded an undiscounted
asbestos liability, including legal fees, for costs that the
Company is estimated to incur to resolve all pending claims, as
well as unasserted claims estimated to be filed over the next
10 years. Prior to the third quarter of 2009, we only
recognized a liability for pending claims. While it was probable
that we would incur additional costs for future claims to be
filed against the Company, a liability for potential future
claims was not reasonably estimable at that time due to a number
of factors. To begin with, our primary insurance carriers
managed and paid all settlement and legal costs directly. This
was compounded by the fact that, as part of their claims
administration processes, the insurance companies maintained
limited claims information and insufficient detail critical to
estimate a potential liability for future claims, such as
disease type. Lastly, the insurers restricted our access to
claim filings and related information.
Over the past
several years, we have negotiated
coverage-in-place
agreements with several of our insurers under which we have
assumed responsibility for administering the asbestos claims.
Since taking over the claims administration process, we have,
over time, gained considerable knowledge of the claims. In
addition, at the end of 2008 we engaged an outside consultant to
construct a comprehensive database of claims filed against the
Company. With the completion of this work in early third quarter
of 2009, we were able to develop and analyze key data, such as
settlements and dismissals by disease type, necessary to
estimate our exposure to potential future asbestos claims. In
the third quarter of 2009 and 2010, we engaged a leading
consultant of asbestos-related professional services to assist
us in estimating our asbestos liability for both pending and
unasserted claims. This firm reviewed information provided by
the Company concerning claims filed, settled and dismissed,
amounts paid in settlements, and relevant claim information such
as the nature of the asbestos-related disease asserted by the
claimant and the time lag from filing to disposition of claims.
The methodology used
to estimate our total liability for pending and unasserted
future asbestos claims relies on and includes the following key
factors:
| n | interpretation of a widely accepted forecast of the population likely to have been occupationally exposed to asbestos; | |
| n | widely accepted epidemiological studies estimating the number of people likely to develop mesothelioma and lung cancer from exposure to asbestos; | |
| n | the Company’s historical experience with the filing of non-malignant claims against it and the historical relationship between non-malignant and malignant claims filed against the Company; | |
| n | analysis of the number of likely asbestos personal injury claims to be filed against the Company based on such epidemiological and historical data and the Company’s most recent claims experience history; | |
| n | an analysis of the Company’s pending cases, by disease type; | |
| n | an analysis of the Company’s most recent history to determine the average settlement and resolution value of claims, by disease type; | |
| n | an analysis of the Company’s defense costs in relation to its settlement costs and resolved claims; | |
| n | an adjustment for inflation in the future average settlement value of claims and defense costs; and | |
| n | an analysis of the time over which the Company is likely to resolve asbestos claims. |
Our methodology
determines a point estimate based on our assessment of the value
of each underlying assumption, rather than a range of reasonably
possible outcomes. Projecting future asbestos costs is subject
to numerous variables and uncertainties that are inherently
difficult to predict. In addition to the uncertainties
surrounding the key factors discussed above, other factors
include the long latency period prior to the manifestation of
the asbestos-related disease, costs of medical treatment, the
impact of bankruptcies of other companies that are
co-defendants, uncertainties surrounding the litigation process
from jurisdiction to jurisdiction and from case to case, and the
impact of potential legislative or judicial changes.
Furthermore, any predictions with respect to the variables
impacting the estimate of the asbestos liability are subject to
even greater uncertainty as the projection period lengthens. In
light of the uncertainties and variables inherent in the
long-term projection of the Company’s total asbestos
liability, although it is probable that the Company will incur
additional costs for asbestos claims filed beyond the next
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10 years, we do
not believe there is a reasonable basis for estimating those
costs at this time.
We record an asset
that represents our best estimate of probable recoveries from
insurers and other responsible parties for the estimated
asbestos liabilities. In developing this estimate, the Company
considers
coverage-in-place
and other settlement agreements with its insurers and
contractual agreements with other responsible parties, as well
as a number of additional factors. These additional factors
include current levels of recovery experience, the financial
viability of the insurance companies or other responsible
parties, the method by which losses will be allocated to the
various insurance policies and the years covered by those
policies, and interpretation of the various policy and contract
terms and limits and their interrelationships. The timing and
amount of reimbursements will vary due to differing policy terms
and certain gaps in coverage as a result of some insurer
insolvencies. In addition, the Company retains an insurance
consulting firm to assist management in estimating probable
recoveries for pending asbestos claims and for claims estimated
to be filed over the next 10 years based on the analysis of
policy terms, the likelihood of recovery provided by our legal
counsel assuming the continued viability of those insurance
carriers and other responsible parties which are currently
solvent and incorporating risk mitigation judgments where policy
terms or other factors were not certain.
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. 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.
2010
Charge
In the third quarter
of 2010, we conducted our annual detailed study with the
assistance of outside consultants to review and update the
underlying assumptions used in our liability and asset
estimates. During this study, the underlying assumptions were
updated based on our actual experience since our last detailed
review in the third quarter of 2009, a reassessment of the
appropriate reference period of years of experience used in
determining each assumption and our expectations regarding
future conditions, including inflation. Based on the results of
this study, we increased our estimated undiscounted asbestos
liability, including legal fees, by $691, reflecting costs that
the Company is estimated to incur to resolve all pending claims,
as well as unasserted claims estimated to be filed over the next
10 years. The increase in our estimated liability is a
result of several developments, including higher settlement
costs and significantly increased activity in several
higher-cost jurisdictions, increasing the number of cases to be
adjudicated and the expected legal costs.
Further, in the
third quarter of 2010, the Company recorded a $372 increase in
its asbestos-related assets based on the results of this study.
These assets comprise an insurance asset, as well as receivables
from other responsible parties. See discontinued operations
discussion below for further information about receivables from
parties other than insurers.
For the full year
2010 and 2009, the net asbestos charge can be summarized as
follows:
| 2010 | 2009 | |||||||||||||||||
| Pre-tax | After-tax | Pre-tax | After-tax | |||||||||||||||
|
Continuing operations
|
$ | 385 | $ | 247 | $ | 238 | $ | 148 | ||||||||||
|
Discontinued operations
|
(10 | ) | (6 | ) | 9 | 6 | ||||||||||||
|
Total
|
$ | 375 | $ | 241 | $ | 247 | $ | 154 | ||||||||||
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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 $642 and $267 as of
December 31, 2010 and 2009, respectively.
The
following table provides a rollforward of the estimated total
asbestos liability and related assets for the years ended
December 31, 2010 and 2009, respectively.
| 2010 | 2009 | |||||||||||||||||||||||||
| Liability | Asset | Net | Liability | Asset | Net | |||||||||||||||||||||
|
Balance as of January 1
|
$ | 933 | $ | 666 | $ | 267 | $ | 228 | $ | 201 | $ | 27 | ||||||||||||||
|
Changes in estimate during the period:
|
||||||||||||||||||||||||||
|
Continuing operations
|
591 | 206 | 385 | 700 | 462 | 238 | ||||||||||||||||||||
|
Discontinued operations
|
217 | 227 | (10 | ) | 67 | 58 | 9 | |||||||||||||||||||
|
Net cash activity
|
(54 | ) | (54 | ) | — | (62 | ) | (55 | ) | (7 | ) | |||||||||||||||
|
Other adjustments
|
(11 | ) | (11 | ) | — | — | — | — | ||||||||||||||||||
|
Balance as of December 31
|
$ | 1,676 | $ | 1,034 | $ | 642 | $ | 933 | $ | 666 | $ | 267 | ||||||||||||||
The total asbestos
liability and related assets as December 31, 2010 and 2009
includes $117 and $66 presented within accrued liabilities and
$105 and $62 presented within other current assets on our
Consolidated 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.
Discontinued
Operations:
At December 31,
2010 and 2009, $292 and $75 of the liability and $285 and $64 of
the asset, respectively, related to a business which we disposed
of a number of years ago that is reported as a discontinued
operation. The increase in the liability and asset resulted from
an amended cost-sharing agreement executed in September 2010
with the entity that acquired the disposed business. The amended
agreement provided for a sharing of the claims settled between
2010 and 2019 naming ITT or the entity which acquired the
disposed business. In future years, the liability for sharing
the claims gradually transitions away from ITT, such that ITT
will have no responsibility for claims resolved in 9 to
10 years. Under the prior cost-sharing agreement, costs
were shared equally. The amended cost-sharing agreement also
provides for the sharing of certain insurance policies. Prior to
executing the amended cost-sharing agreement in September 2010,
we recorded a liability for this discontinued operation based on
pending claims and unasserted claims estimated to be filed over
the next 10 years against ITT. As part of amending the
cost-sharing agreement, ITT was provided with the key data
necessary to estimate the exposure related to the shared pending
and estimated future claims. The estimate of the additional
liability and asset recorded as a result of the amended
cost-sharing agreement were calculated in a manner consistent
with the approach used to estimate ITT’s stand-alone
asbestos liabilities and assets.
Future Cash
Flows:
We have estimated
that we will be able to recover 62% of the asbestos settlement
and defense costs for pending claims as well as unasserted
claims estimated to be filed over the next 10 years from
our insurers or other responsible parties. However, because
there are gaps in our insurance coverage, reflecting the
insolvency of certain insurers and prior insurance settlements,
and we expect that certain policies from some of our insurers
will exhaust within the next 10 years, the recovery
percentage is expected to decline for potential additional
asbestos liabilities. Insurance coverage in the tenth year of
our estimate of the asbestos claims liability is currently
projected to be approximately 25%. Future recoverability rates
may also be impacted by other factors, such as future insurance
settlements, insolvencies and judicial determinations relevant
to our coverage program, which are difficult to predict. Subject
to the qualifications regarding uncertainties previously
described, it is expected that future annual cash payments, net
of recoveries related to pending claims and unasserted claims to
be filed within the next 10 years, will extend through
approximately 2022 due to the time lag between the filing of a
claim and its
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ITT CORPORATION AND
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resolution. These
annual net cash outflows are projected to average $25 over the
next five years, as compared to an average of approximately $10
to $15 in the past three years, and increase to an average of
approximately $50 to $60 over the remainder of the projection
period.
Environmental
In the ordinary
course of business, we are subject to federal, state, local, and
foreign environmental laws and regulations. We are responsible,
or are alleged to be responsible, for ongoing environmental
investigation and remediation of sites in various countries.
These sites are in various stages of investigation
and/or
remediation and in many of these proceedings our liability is
considered de minimis. We have received notification from the
U.S. Environmental Protection Agency, and from similar
state and foreign environmental agencies, that a number of sites
formerly or currently owned
and/or
operated by ITT, and other properties or water supplies that may
be or have been impacted from those operations, contain disposed
or recycled materials or wastes and require environmental
investigation
and/or
remediation. These sites include instances where we have been
identified as a potentially responsible party under federal and
state environmental laws and regulations.
Accruals for
environmental matters are recorded on a site by site basis when
it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated, based on current
law and existing technologies. Our accrued liabilities for these
environmental matters represent the best estimates related to
the investigation and remediation of environmental media such as
water, soil, soil vapor, air and structures, as well as related
legal fees. These estimates, and related accruals, are reviewed
periodically and updated for progress of investigation and
remediation efforts and changes in facts and legal
circumstances. Liabilities for these environmental expenditures
are recorded on an undiscounted basis.
It is difficult to
estimate the final costs of investigation and remediation due to
various factors, including incomplete information regarding
particular sites and other potentially responsible parties,
uncertainty regarding the extent of investigation or remediation
and our share, if any, of liability for such conditions, the
selection of alternative remedial approaches, and changes in
environmental standards and regulatory requirements. In our
opinion, the total amount accrued is appropriate based on
existing facts and circumstances. We do not anticipate these
liabilities will have a material adverse effect on our
consolidated financial position, results of operations or cash
flows.
The following table
illustrates the activity related to our accrued liabilities for
these environmental matters.
| 2010 | 2009 | |||||||||
|
Environmental liability – 1/1
|
$ | 140 | $ | 135 | ||||||
|
Accruals added during the period
|
— | 1 | ||||||||
|
Change in estimates for pre-existing accruals
|
14 | 18 | ||||||||
|
Payments
|
(15 | ) | (14 | ) | ||||||
|
Environmental liability – 12/31
|
$ | 139 | $ | 140 | ||||||
The following table
illustrates the reasonably possible low- and high end range of
estimated liability, and number of active sites for these
environmental matters.
| 2010 | 2009 | |||||||||
|
Low-end range
|
$ | 117 | $ | 113 | ||||||
|
High end range
|
$ | 251 | $ | 249 | ||||||
|
Number of active environmental investigation and remediation
sites
|
99 | 98 | ||||||||
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 back before the Superior Court and the parties
are engaged in further discovery.
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. We are prepared to
pursue legal remedies against the remaining defendants where
reasonable negotiations are not productive.
ITT provides an
indemnity to U.S. Silica Company (USS) for silica personal
injury suits filed prior to September 12, 2005 against our
former subsidiary Pennsylvania Glass Sand (PGS). ITT sold the
stock of PGS to U.S. Silica Company in 1985. Over the
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ITT CORPORATION AND
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past several years,
the majority of the silica cases involving PGS have been
dismissed without payment. Currently there are approximately
3,000 cases pending against PGS. The Company expects that the
majority of the remaining cases will also be dismissed. In
addition, USS is currently filing insurance claims directly with
our insurer, and that insurer has been paying the claims. We
will continue to seek past defense costs for these cases from
our insurers. We believe that these matters will not have a
material adverse effect on our consolidated financial position,
results of operations or cash flows. All silica-related costs,
net of expected insurance recoveries, are shared with certain
previously wholly-owned subsidiaries.
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. Management believes that these matters
will not have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
On April 17,
2007, ITT’s Board of Directors received a letter on behalf
of a shareholder requesting that the Board take appropriate
action against the employees responsible for the violations at
our Night Vision facility described above. During 2007 and 2008,
the Company also received notice of four shareholder derivative
actions each filed in the U.S. District Court for the
Southern District of New York. On July 10, 2010, the Court
granted the Defendants’ Motion to Terminate the
proceedings. The matter is now concluded.
NOTE 20
Guarantees,
Indemnities and Warranties
Indemnities
Since ITT’s
incorporation in 1920, we have acquired and disposed of numerous
entities. The related acquisition and disposition agreements
contain various representation and warranty clauses and may
provide indemnities for a misrepresentation or breach of the
representations and warranties by either party. The indemnities
address a variety of subjects; the term and monetary amounts of
each such indemnity are defined in the specific agreements and
may be affected by various conditions and external factors. Many
of the indemnities have expired either by operation of law or as
a result of the terms of the agreement. We do not have a
liability recorded for these indemnifications and are not aware
of any claims or other information that would give rise to
material payments under such indemnities.
Guarantees
We have a number of
guarantees outstanding at December 31, 2010, the
substantial majority of which pertain to our performance under
long-term sales contracts. We did not have any recorded loss
contingencies under these performance guarantees as of
December 31, 2010 and 2009 as the likelihood of ITT
nonperformance by ITT or ITT’s subsidiaries is considered
remote. We also have certain third-party guarantees that may be
affected by various conditions and external factors, some of
which could require that payments be made under such guarantees.
We do not consider the maximum exposure or current recorded
liabilities under our third-party guarantees to be material
either individually or in the aggregate. We do not believe such
payments would have a material adverse impact on the financial
position, results of operations or cash flows on a consolidated
basis.
In December 2007, we
entered into a sale leaseback agreement for our corporate
aircraft, with the aircraft leased to ITT under a five-year
operating lease. We have provided a residual value guarantee to
the lessor for the future value of the aircraft with a maximum
payment of $42. At expiration of the lease, however, if the fair
value of the aircraft is less than $50, payment under the
residual value guarantee would be equal to the difference
between the fair value of the aircraft at expiration of the
lease and $50, provided that such payment shall not exceed $42.
At December 31, 2010, the projected fair value of the
aircraft at expiration of the lease is estimated to be $22 less
than the guaranteed amount. As this estimated loss exceeds the
$5 gain we realized and deferred from the sale of the aircraft
as a loss contingency, we have recorded an additional accrual of
$17 during 2010 in our Consolidated Financial Statements.
Warranties
ITT warrants
numerous products, the terms of which vary widely. In general,
ITT warrants its products against defect and specific
non-performance. In the automotive businesses, liability for
product defects could extend beyond the selling price of the
product and could be significant if the defect interrupts
production or results in a recall.
The
table included
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ITT CORPORATION AND
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below provides
changes in the product warranty accrual for December 31,
2010 and 2009.
| 2010 | 2009 | |||||||
|
Warranty accrual – 1/1
|
$ | 67 | $ | 57 | ||||
|
Warranty expense
|
43 | 38 | ||||||
|
Payments
|
(39 | ) | (29 | ) | ||||
|
Other
|
1 | 1 | ||||||
|
Warranty accrual – 12/31
|
$ | 72 | $ | 67 | ||||
NOTE 21
Business
Segment Information
The Company’s
business segments are reported on the same basis used internally
for evaluating performance and for allocating resources. Our
three reporting segments are referred to as: Defense
Electronics & Services (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 asbestos and
environmental liabilities, 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 includes 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 86%
of Defense segment revenue.
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.
| 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||||
|
PRODUCT |
SERVICE |
TOTAL |
PRODUCT |
SERVICE |
TOTAL |
PRODUCT |
SERVICE |
TOTAL |
|||||||||||||||||||||||||||||
| REVENUE | REVENUE | REVENUE | REVENUE | REVENUE | REVENUE | REVENUE | REVENUE | REVENUE | |||||||||||||||||||||||||||||
|
Defense
|
$ | 3,602 | $ | 2,295 | $ | 5,897 | $ | 3,788 | $ | 2,279 | $ | 6,067 | $ | 3,925 | $ | 2,139 | $ | 6,064 | |||||||||||||||||||
|
Fluid
|
3,475 | 195 | 3,670 | 3,220 | 143 | 3,363 | 3,693 | 148 | 3,841 | ||||||||||||||||||||||||||||
|
Motion & Flow
|
1,430 | 11 | 1,441 | 1,245 | 8 | 1,253 | 1,575 | 8 | 1,583 | ||||||||||||||||||||||||||||
|
Eliminations
|
(13 | ) | — | (13 | ) | (9 | ) | — | (9 | ) | (12 | ) | — | (12 | ) | ||||||||||||||||||||||
|
Total
|
$ | 8,494 | $ | 2,501 | $ | 10,995 | $ | 8,244 | $ | 2,430 | $ | 10,674 | $ | 9,181 | $ | 2,295 | $ | 11,476 | |||||||||||||||||||
| OPERATING INCOME | OPERATING MARGIN | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||||
|
Defense
|
$ | 752 | $ | 761 | $ | 715 | 12.8 | % | 12.5 | % | 11.8 | % | |||||||||||||
|
Fluid
|
479 | 393 | 469 | 13.1 | % | 11.7 | % | 12.2 | % | ||||||||||||||||
|
Motion & Flow
|
179 | 118 | 192 | 12.4 | % | 9.4 | % | 12.1 | % | ||||||||||||||||
|
Corporate and Other
|
(510 | ) | (378 | ) | (178 | ) | — | — | — | ||||||||||||||||
|
Total
|
$ | 900 | $ | 894 | $ | 1,198 | 8.2 | % | 8.4 | % | 10.4 | % | |||||||||||||
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|
PLANT, PROPERTY |
DEPRECIATION AND |
||||||||||||||||||||||||||||||||||||||||
| TOTAL ASSETS | & EQUIPMENT, NET | CAPITAL EXPENDITURES | AMORTIZATION | ||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||
|
Defense
|
$ | 4,149 | $ | 4,153 | $ | 434 | $ | 402 | $ | 107 | $ | 115 | $ | 87 | $ | 134 | $ | 154 | $ | 147 | |||||||||||||||||||||
|
Fluid
|
4,077 | 2,930 | 518 | 393 | 109 | 74 | 81 | 100 | 73 | 69 | |||||||||||||||||||||||||||||||
|
Motion & Flow
|
1,350 | 1,323 | 230 | 235 | 52 | 56 | 64 | 53 | 57 | 56 | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
2,862 | 2,723 | 23 | 20 | 60 | 26 | 16 | 10 | 5 | 2 | |||||||||||||||||||||||||||||||
|
Total
|
$ | 12,438 | $ | 11,129 | $ | 1,205 | $ | 1,050 | $ | 328 | $ | 271 | $ | 248 | $ | 297 | $ | 289 | $ | 274 | |||||||||||||||||||||
|
PLANT, PROPERTY |
|||||||||||||||||||||
| REVENUE(a) | & EQUIPMENT, NET | ||||||||||||||||||||
| Geographic Information | 2010 | 2009 | 2008 | 2010 | 2009 | ||||||||||||||||
|
United States
|
$ | 7,305 | $ | 7,362 | $ | 7,779 | $ | 739 | $ | 603 | |||||||||||
|
Western Europe
|
1,970 | 1,814 | 2,098 | 305 | 317 | ||||||||||||||||
|
Asia Pacific
|
663 | 577 | 604 | 70 | 65 | ||||||||||||||||
|
Other
|
1,057 | 921 | 995 | 91 | 65 | ||||||||||||||||
|
Total
|
$ | 10,995 | $ | 10,674 | $ | 11,476 | $ | 1,205 | $ | 1,050 | |||||||||||
| (a) | Revenue to external customers is attributed to individual regions based upon the destination of product or service delivery. |
The following table
provides revenue by product category, net of intercompany
balances.
| 2010 | 2009 | 2008 | ||||||||||||
|
Defense segment:
|
||||||||||||||
|
Defense products
|
$ | 3,600 | $ | 3,785 | $ | 3,924 | ||||||||
|
Defense services
|
2,295 | 2,279 | 2,139 | |||||||||||
|
Fluid segment:
|
||||||||||||||
|
Pumps & complementary products and services
|
3,667 | 3,363 | 3,840 | |||||||||||
|
Motion & Flow segment:
|
||||||||||||||
|
Automotive and rail equipment
|
552 | 495 | 567 | |||||||||||
|
Connectors equipment
|
405 | 335 | 445 | |||||||||||
|
Aerospace products
|
127 | 117 | 134 | |||||||||||
|
Other products
|
349 | 300 | 427 | |||||||||||
|
Total
|
$ | 10,995 | $ | 10,674 | $ | 11,476 | ||||||||
NOTE 22
Subsequent
Events
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 distinct, publicly traded companies.
Following completion of the transaction, 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. Under the plan,
ITT shareholders will own shares in all three corporations
following the completion of the transaction. The transaction is
anticipated to be completed by the end of 2011.
Under the plan, ITT
would execute tax-free spinoffs to shareholders of its
water-related businesses and its Defense & Information
Solutions segment. The water-related business will include the
Water & Wastewater division and the
Residential & Commercial Water division, as well as
the Flow Control division that is currently reported within the
Motion & Flow Control segment. The Industrial Process
division, which is currently reported within the Fluid segment,
will continue to operate as a subsidiary of the new ITT
Corporation.
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SUPPLEMENTAL
FINANCIAL DATA
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
| 2010 QUARTERS | 2009 QUARTERS(a) | ||||||||||||||||||||||||||||||||
| FIRST(a) | SECOND | THIRD | FOURTH | FIRST | SECOND | THIRD | FOURTH | ||||||||||||||||||||||||||
|
Revenue
|
$ | 2,578 | $ | 2,739 | $ | 2,643 | $ | 3,035 | $ | 2,506 | $ | 2,719 | $ | 2,640 | $ | 2,809 | |||||||||||||||||
|
Gross profit
|
718 | 781 | 768 | 908 | 660 | 769 | 760 | 835 | |||||||||||||||||||||||||
|
Income from continuing operations(b)
|
144 | 226 | 12 | 272 | 184 | 200 | 64 | 193 | |||||||||||||||||||||||||
|
Net income
|
146 | 238 | 145 | 269 | 185 | 201 | 59 | 199 | |||||||||||||||||||||||||
|
Basic earnings per share:
|
|||||||||||||||||||||||||||||||||
|
Continuing operations
|
$ | 0.78 | $ | 1.23 | $ | 0.07 | $ | 1.47 | $ | 1.01 | $ | 1.09 | $ | 0.35 | $ | 1.06 | |||||||||||||||||
|
Net income
|
$ | 0.80 | $ | 1.29 | $ | 0.79 | $ | 1.45 | $ | 1.01 | $ | 1.10 | $ | 0.32 | $ | 1.09 | |||||||||||||||||
|
Diluted earnings per share:
|
|||||||||||||||||||||||||||||||||
|
Continuing operations
|
$ | 0.78 | $ | 1.22 | $ | 0.07 | $ | 1.46 | $ | 1.01 | $ | 1.09 | $ | 0.35 | $ | 1.05 | |||||||||||||||||
|
Net income
|
$ | 0.79 | $ | 1.28 | $ | 0.78 | $ | 1.44 | $ | 1.01 | $ | 1.10 | $ | 0.32 | $ | 1.08 | |||||||||||||||||
|
Common stock price per share:
|
|||||||||||||||||||||||||||||||||
|
High
|
$ | 55.61 | $ | 57.99 | $ | 50.79 | $ | 53.24 | $ | 51.42 | $ | 46.91 | $ | 52.71 | $ | 56.95 | |||||||||||||||||
|
Low
|
$ | 47.41 | $ | 44.17 | $ | 42.05 | $ | 45.06 | $ | 31.94 | $ | 37.26 | $ | 41.15 | $ | 48.43 | |||||||||||||||||
|
Close
|
$ | 53.61 | $ | 44.92 | $ | 46.83 | $ | 52.11 | $ | 38.47 | $ | 44.50 | $ | 52.15 | $ | 49.74 | |||||||||||||||||
|
Dividends per share
|
$ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.2125 | $ | 0.2125 | $ | 0.2125 | $ | 0.2125 | |||||||||||||||||
(a) Results
have been restated to reflect the sale of CAS Inc. as a
discontinued operation.
| (b) | Third quarter 2010 and 2009 results include a $205 and $131 net after-tax charge to income from continuing operations, respectively, primarily associated with the reassessment and initial establishment of an estimated asbestos-related liability, net of expected recoveries, for claims projected to be filed against the company over the next ten years. See Note 19, “Commitments and Contingencies” for further information. |
| Note: | Earnings per share is computed using the weighted-average number of shares outstanding during that quarter, while earnings per share for the fiscal year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the earnings per share for each of the four quarters may not equal earnings per share for the fiscal year. |
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SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) 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)
(Registrant)
| By: |
/s/ Janice
M.
Klettner
|
Janice M.
Klettner
Vice President
and Chief Accounting Officer
(Principal
accounting officer)
February
24, 2011
II-1
Table of Contents
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
| SIGNATURE | TITLE | DATE | ||||
|
/s/ Steven
R. Loranger Steven R. Loranger (Principal executive officer) |
Chairman, President and Chief Executive Officer and Director |
February 24, 2011 | ||||
|
/s/ Denise
L. Ramos Denise L. Ramos (Principal financial officer) |
Senior Vice President and Chief Financial Officer |
February 24, 2011 | ||||
|
/s/ Janice
M. Klettner Janice M. Klettner (Principal accounting officer) |
Vice President and Chief Accounting Officer |
February 24, 2011 | ||||
|
/s/ Curtis
J. Crawford Curtis J. Crawford |
Director | February 24, 2011 | ||||
|
/s/ Christina
A. Gold Christina A. Gold |
Director | February 24, 2011 | ||||
|
/s/ Ralph
F. Hake Ralph F. Hake |
Director | February 24, 2011 | ||||
|
/s/ John
J. Hamre John J. Hamre |
Director | February 24, 2011 | ||||
|
/s/ Paul
J. Kern Paul J. Kern |
Director | February 24, 2011 | ||||
|
/s/ Frank
T. MacInnis Frank T. MacInnis |
Director | February 24, 2011 | ||||
|
/s/ Surya
N. Mohapatra Surya N. Mohapatra |
Director | February 24, 2011 | ||||
|
/s/ Linda
S. Sanford Linda S. Sanford |
Director | February 24, 2011 | ||||
|
/s/ Markos
I. Tambakeras Markos I. Tambakeras |
Director | February 24, 2011 | ||||
II-2
Table of Contents
EXHIBIT INDEX
|
EXHIBIT |
||||||
| NUMBER | DESCRIPTION | LOCATION | ||||
| (3 | ) | (a) ITT Corporation’s Articles of Amendment of the Restated Articles of Incorporation, effective as of May 13, 2008 | Incorporated by reference to Exhibit 3.1 of ITT Corporation’s Form 8-K Current Report dated May 14, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (b) ITT Corporation’s By-laws, as amended July 15, 2009 | Incorporated by reference to Exhibit 3.1 of ITT Corporation’s Form 8-K Current Report dated July 15, 2009 (CIK No. 216228, File No. 1-5672). | |||||
| (4 | ) | Instruments defining the rights of security holders, including indentures | Not required to be filed. The Registrant hereby agrees to file with the Commission a copy of any instrument defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries upon request of the Commission. | |||
| (10 | ) | Material contracts | ||||
| (10.2 | )* | Employment Agreement dated as of June 28, 2004 between ITT Industries, Inc. and Steven R. Loranger (amended as of December 18, 2008) | Incorporated by reference to Exhibit 99.1 of ITT Corporation’s Form 8-K dated December 19, 2008. (CIK No. 216228, File No. 1-5672). | |||
| (10.3 | )* | Form of Non-Qualified Stock Option Award Agreement for Band A Employees | Incorporated by reference to Exhibit 10.3 of ITT Industries’ Form 10-K for the year ended December 31, 2004 (CIK No. 216228, File No. 1-5672). | |||
| (10.4 | )* | Form of Non-Qualified Stock Option Award Agreement for Band B Employees | Incorporated by reference to Exhibit 10.4 of ITT Industries’ Form 10-K for the year ended December 31, 2004 (CIK No. 216228, File No. 1-5672). | |||
| (10.5 | )* | ITT 2003 Equity Incentive Plan, amended and restated as of February 15, 2008 and approved by shareholders on May 13, 2008 (previously amended and restated as of July 13, 2004 and subsequently amended as of December 18, 2006) and previously known as ITT Industries, Inc. 2003 Equity Incentive Plan | Incorporated by reference to Exhibit 10.5 of ITT Corporation’s Form 10-Q for the quarter ended June 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.6 | )* | ITT Corporation 1997 Long-Term Incentive Plan, amended and restated as of February 15, 2008 and approved by shareholders on May 13, 2008 (previously amended and restated as of July 13, 2004) and formerly known as ITT Industries, Inc. 1997 Long-Term Incentive Plan | Incorporated by reference to Exhibit 10.6 of ITT Corporation’s Form 10-Q for the quarter ended June 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.7 | )* | ITT Corporation Annual Incentive Plan for Executive Officers, amended and restated as of February 15, 2008 and approved by shareholders on May 13, 2008 previously known as 1997 Annual Incentive Plan for Executive Officers (amended and restated as of July 13, 2004) and also previously known as ITT Industries, Inc. 1997 Annual Incentive Plan for Executive Officers (amended and restated as of July 13, 2004) | Incorporated by reference to Exhibit 10.7 of ITT Corporation’s Form 10-Q for the quarter ended June 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.8 | )* | 1994 ITT Incentive Stock Plan (amended and restated as of July 13, 2004 and subsequently amended as of December 19, 2006) formerly known as 1994 ITT Industries Incentive Stock Plan (amended and restated as of July 13, 2004) | Incorporated by reference to Exhibit 10.8 of ITT Corporation’s Form 10-K for the year ended December 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.9 | )* | ITT Corporation Special Senior Executive Severance Pay Plan amended and restated as of December 31, 2008 (previously amended and restated as of July 13, 2004) and formerly known as ITT Industries Special Senior Executive Severance Pay Plan | Incorporated by reference to Exhibit 10.9 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.10 | )* | ITT 1996 Restricted Stock Plan for Non-Employee Directors (amended and restated as of July 13, 2004 and subsequently amended as of December 19, 2006) formerly known as ITT Industries 1996 Restricted Stock Plan for Non-Employee Directors (amended and restated as of July 13, 2004) | Incorporated by reference to Exhibit 10.10 of ITT Corporation’s Form 10-K for the year ended December 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.11 | )* | ITT Corporation Enhanced Severance Pay Plan (amended and restated as of July 13, 2004) and formerly known as ITT Industries Enhanced Severance Pay Plan (amended and restated as of July 13, 2004). Amended and restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.11 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.12 | )* | ITT Deferred Compensation Plan (Effective as of January 1, 1995 including amendments through July 13, 2004) formerly known as ITT Industries Deferred Compensation Plan (Effective as of January 1, 1995 including amendments through July 13, 2004). Amended and restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.12 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
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Table of Contents
|
EXHIBIT |
||||||
| NUMBER | DESCRIPTION | LOCATION | ||||
| (10.13 | )* | ITT 1997 Annual Incentive Plan (amended and restated as of July 13, 2004) formerly known as ITT Industries 1997 Annual Incentive Plan (amended and restated as of July 13, 2004) | Incorporated by reference to Exhibit 10.13 of ITT Industries’ Form 10-Q for the quarter ended September 30, 2004 (CIK No. 216228, File No. 1-5672). | |||
| (10.14 | )* | ITT Excess Pension Plan IA formerly known as ITT Industries Excess Pension Plan IA. Originally effective as of July 1, 1975. Amended and restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.14 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.15 | )* | ITT Excess Pension Plan IB formerly known as ITT Industries Excess Pension Plan IB. Originally effective as of January 1, 1996. Amended and restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.15 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.16 | )* | ITT Excess Pension Plan IIA formally known as ITT Excess Pension Plan II, and ITT Industries Excess Pension Plan II (as amended and restated as of July 13, 2004) originally effective as of January 1, 1988. Amended and restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.16 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.17 | )* | ITT Excess Savings Plan (as amended and restated as of July 13, 2004) formerly known as ITT Industries Excess Savings Plan (as amended and restated as of July 13, 2004). Amended and restated effective December 31, 2008 | Incorporated by reference to Exhibit 10.17 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.18 | )* | ITT Industries Excess Benefit Trust | Incorporated by reference to Exhibit 10.18 of ITT Industries’ Form 10-Q for the quarter ended September 30, 2004 (CIK No. 216228, File No. 1-5672). | |||
| (10.19 | ) | Form of indemnification agreement with directors | Incorporated by reference to Exhibit 10(h) to ITT Industries’ Form 10-K for the fiscal year ended December 31, 1996 (CIK No. 216228, File No. 1-5672). | |||
| (10.28 | )* | Form of Restricted Stock Award for Non-Employee Directors | Incorporated by reference to Exhibit 10.28 of ITT Industries’ Form 10-Q for the quarter ended September 30, 2005 (CIK No. 216228, File No. 1-5672). | |||
| (10.29 | )* | Form of Restricted Stock Award for Employees | Incorporated by reference to Exhibit 10.29 of ITT Industries’ Form 10-Q for the quarter ended September 30, 2005 (CIK No. 216228, File No. 1-5672). | |||
| (10.30 | ) | Amended and Restated 364-day Revolving Credit Agreement | Incorporated by reference to Exhibits 10.1 and 10.2 to ITT Industries’ Form 8-K dated March 28, 2005 (CIK No. 216228, File No. 1-5672). | |||
| (10.32 | )* | ITT Corporation Senior Executive Severance Pay Plan. (previously known as the ITT Industries, Inc. Senior Executive Severance Pay Plan, dated December 20, 1995, amended and restated as of December 31, 2008) | Incorporated by reference to Exhibit 10.32 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.33 | ) | Non-Employee Director Compensation Agreement | Incorporated by reference to Exhibit 10.1 to ITT Industries’ Form 8-K Current Report dated December 1, 2005 (CIK No. 216228, File No. 1-5672). | |||
| (10.34 | )* | Form of 2006 Non-Qualified Stock Option Award Agreement for Band A Employees | Incorporated by reference to Exhibit 10.34 of ITT Industries’ Form 10-Q for the quarter ended March 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.35 | )* | Form of 2006 Non-Qualified Stock Option Award Agreement for Band B Employees | Incorporated by reference to Exhibit 10.35 of ITT Industries’ Form 10-Q for the quarter ended March 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.36 | )* | Form of 2006 Restricted Stock Award Agreement for Employees | Incorporated by reference to Exhibit 10.36 of ITT Industries’ Form 10-Q for the quarter ended March 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.37 | ) | Form of 2006 Non-Qualified Stock Option Award Agreement for Non-Employee Directors | Incorporated by reference to Exhibit 10.37 of ITT Industries’ Form 10-Q for the quarter ended March 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.38 | ) | 2002 ITT Stock Option Plan for Non-Employee Directors formerly known as the 2002 ITT Industries, Inc. Stock Option Plan for Non-Employee Directors (as amended on December 19, 2006) | Incorporated by reference to Exhibit 10.38 of ITT Corporation’s Form 10-K for the year ended December 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.39 | )* | Employment Agreement dated as of May 21, 2007 and effective as of July 1, 2007 between ITT Corporation and Denise L. Ramos. | Incorporated by reference to Exhibit 99.1 to ITT Corporation Form 8-K dated July 2, 2007 (CIK No. 216228, File No. 1-5672). | |||
II-4
Table of Contents
|
EXHIBIT |
||||||
| NUMBER | DESCRIPTION | LOCATION | ||||
| (10.41 | ) | Agreement and Plan of Merger | Incorporated by reference to Exhibit 2.1 and 2.2 to ITT Corporation’s Form 8-K dated September 18, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (10.42 | ) | Accession Agreement to Five-Year Competitive Advance and Revolving Credit Facility | Incorporated by reference to Exhibit 2.03 to ITT Corporation’s Form 8-K dated November 8, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (10.43 | ) | Summary of material terms of amendments to ITT Excess Pension Plan 1A and the ITT Excess Pension Plan 1B, the ITT Excess Pension Plan II, the ITT Excess Savings Plan, the ITT Deferred Compensation Plan and the severance plans and policies of the Company and its subsidiaries and other affiliates | Incorporated by reference to Exhibit 5.02 to ITT Corporation’s Form 8-K dated December 19, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (10.44 | ) | Senior Notes Offering | Incorporated by reference to Exhibit 9.01(d) to ITT Corporations Form 8-K dated April 28, 2009 (CIK No. 216228, File No. 1-5672). | |||
| (10.45 | ) | Issuance of Commercial Paper | Incorporated by Reference to Exhibit 2.03 to ITT Corporation’s Form 8-K dated December 20, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (10.46 | ) | ITT Corporation 2003 Equity Incentive Plan Restricted Stock Unit Award Agreement – Non-Employee Director | Incorporated by reference to Exhibit 10.46 of ITT Corporation’s Form 10-Q for the quarter ended June 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.47 | ) | ITT Corporation 2003 Equity Incentive Plan Director Restricted Stock Unit Award Deferral Election Form | Incorporated by reference to Exhibit 10.47 of ITT Corporation’s Form 10-Q for the quarter ended June 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.48 | ) | ITT Corporation Deferred Compensation Plan for Non-Employee Directors | Incorporated by reference to Exhibit 10.48 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.49 | ) | ITT Corporation Deferred Compensation Plan for Non-Employee Directors Deferral Election Form for those Directors without a Specified Distribution Date for Non-Grandfathered Deferrals | Incorporated by reference to Exhibit 10.49 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.50 | ) | ITT Corporation Deferred Compensation Plan for Non-Employee Directors Deferral Election Form for those Directors with a Specified Distribution Date for Non-Grandfathered Deferrals | Incorporated by reference to Exhibit 10.50 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.51 | ) | ITT Corporation Deferred Compensation Plan for Non-Employee Directors Subsequent Election Form | Incorporated by reference to Exhibit 10.51 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.52 | ) | ITT 2003 Equity Incentive Plan Director Restricted Stock Unit Award Deferral Election Form | Incorporated by reference to Exhibit 10.52 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.53 | ) | ITT Corporation Non-Employee Director Deferred Restricted Stock Unit Award Subsequent Election Form | Incorporated by reference to Exhibit 10.53 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.54 | ) | ITT Director Consent Letter – Required Modifications to Prior Annual Retainer Deferrals. | Incorporated by reference to Exhibit 10.54 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.55 | )* | ITT Excess Pension Plan IIB. Effective as of January 1, 1988. As Amended and Restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.55 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.56 | )* | ITT Corporation Form of Non-Qualified Stock Option Agreement (Band A) | Incorporated by reference to Exhibit 10.56 of ITT Corporation’s Form 10-Q for the quarter ended March 31, 2009 (CIK No. 216228, File No. 1-5672). | |||
| (10.57 | )* | ITT Corporation Form of Non-Qualified Stock Option Agreement (Non Band A) | Incorporated by reference to Exhibit 10.57 of ITT Corporation’s Form 10-Q for the quarter ended March 31, 2009 (CIK No. 216228, File No. 1-5672). | |||
| (11 | ) | Statement re computation of per share earnings | Not required to be filed. | |||
| (12 | ) | Statement re computation of ratios | Filed herewith. | |||
II-5
Table of Contents
|
EXHIBIT |
||||||
| NUMBER | DESCRIPTION | LOCATION | ||||
| (18 | ) | Letter re change in accounting principles | Incorporated by reference to Exhibit 18 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (21 | ) | Subsidiaries of the Registrant | Filed herewith. | |||
| (22 | ) | Published report regarding matters submitted to vote of Security holders | Not required to be filed. | |||
| (23.1 | ) | Consent of Deloitte & Touche LLP | Filed herewith. | |||
| (24 | ) | Power of attorney | None | |||
| (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. | |||
| (99.1 | ) | Deferred Prosecution Agreement filed March 28, 2007 between ITT Corporation and the United States Attorney’s Office for the Western District of Virginia | Incorporated by reference to Exhibit 99.4 of ITT Corporation’s Form 8-K dated March 30, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (99.2 | ) | Administrative Compliance Agreement filed October 11, 2007 between ITT Corporation and The United States Agency (Suspensions’ Department Affiliate for the U.S. Army) on behalf of the U.S. Government | Incorporated by reference to Exhibit 99.1 of ITT Corporation’s Form 8-K dated October 12, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (101 | ) | The following materials from ITT Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Income Statements, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Shareholders’ Equity and (vi) Notes to Consolidated Financial Statements | Submitted electronically with this report. | |||
| * | Management compensatory plan |
II-6