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) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2008 | ||
|
OR
|
||
|
o
|
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 Securities
Exchange
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 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 Exchange 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, 2008 was
approximately $11.5 billion.
As of
January 31, 2009, there were outstanding 181.8 million
shares of common stock, $1 par value, of the registrant.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the
registrant’s definitive proxy statement filed or to be
filed with the Securities and Exchange Commission pursuant to
Regulation 14A involving the election of directors at the
annual meeting of the shareholders of the registrant scheduled
to be held on May 12, 2009, are incorporated by reference
in 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. | BUSINESS |
(In millions,
except per share amounts, unless otherwise stated)
GENERAL
ITT Corporation,
with 2008 sales and revenues of $11.7 billion, is a global
multi-industry leader in high-technology engineering and
manufacturing engaged directly and through its subsidiaries. We
generate revenue and cash through the design, manufacture, and
sale of a wide-range of engineered products and the provision of
services.
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 Industries, Inc. was incorporated on
September 5, 1995 in Indiana. On July 1, 2006, ITT
Industries, Inc. changed its name to ITT Corporation. Reference
is made to “– COMPANY HISTORY AND CERTAIN
RELATIONSHIPS.”
Our World
Headquarters is located at 1133 Westchester Avenue, White
Plains, NY 10604. Our telephone number is
(914) 641-2000.
BUSINESS
SEGMENTS
For financial
reporting purposes our three principal business segments are
referred to as Defense Electronics & Services, Fluid
Technology, and Motion & Flow Control.
The table below
shows, in percentage terms, consolidated sales and revenues and
operating income attributable to each of our business segments
for the last three years.
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Sales and Revenues
|
|||||||||||||||
|
Defense Electronics & Services
|
54 | % | 46 | % | 47 | % | |||||||||
|
Fluid Technology
|
33 | 39 | 39 | ||||||||||||
|
Motion & Flow Control
|
13 | 15 | 14 | ||||||||||||
| 100 | % | 100 | % | 100 | % | ||||||||||
|
Operating Income
|
|||||||||||||||
|
Defense Electronics & Services
|
60 | % | 52 | % | 50 | % | |||||||||
|
Fluid Technology
|
39 | 44 | 46 | ||||||||||||
|
Motion & Flow Control
|
16 | 19 | 19 | ||||||||||||
|
Corporate and Other
|
(15 | ) | (15 | ) | (15 | ) | |||||||||
| 100 | % | 100 | % | 100 | % | ||||||||||
Defense
Electronics & Services
Defense
Electronics & Services develops, manufactures, and
supports high-technology electronic systems and components for
worldwide defense and commercial markets, and provides
communications systems and engineering and applied research.
Principal
manufacturing facilities are located in the United Kingdom
and United States of America.
Defense
Electronics & Services consists of two major areas
(i) Systems and Services and (ii) Defense Electronics.
Systems and Services consists of our Systems and Advanced
Engineering & Sciences Divisions. Defense Electronics
consists of our Electronic Systems, Communications Systems,
Space Systems, Night Vision, Electronic Systems, and
Intelligence & Information Warfare Divisions.
Systems and
Services
The Systems Division
provides 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. The Systems Division also
provides total systems support solutions for combat equipment,
tactical information systems and facilities management.
The Advanced
Engineering & Sciences Division provides a wide range
of research, technologies and engineering support services to
government, industrial and commercial customers. In addition,
the division provides products and services for information
collection, information processing and control, information
security, homeland defense, and telecommunications systems. The
division will also lead the air traffic control modernization
program for the U.S. Federal Aviation Administration
(“FAA”).
Defense
Electronics
The Electronic
Systems Division (“ESD”) produces a broad range of
next generation information, situational awareness and
Electronic Warfare (“EW”) systems for mission success
and survivability for multiple military aircraft, surface ships,
submarines, and ground vehicles. These systems include the
Advanced Integrated Digital Electronic Warfare System for F-16,
Suite of Integrated Radio Frequency Countermeasures for the
U.S. Army and Special Operations Forces, and the Integrated
Defensive Electronic Countermeasures system for the
U.S. Navy’s fixed-wing
F/A-18 E/F
fighter aircraft. The ESD products and technologies include
integrated EW systems for self-protection, reconnaissance and
surveillance, Counter Improvised Explosive Devices
(“CIEDs”) for vehicles, mine defense, naval
command/sonar applications, and submarine communication and
tracking. This includes the CREW Vehicle Receiver Jammer CIED
system (“CREW”) delivered to the U.S. Navy in
support of ongoing military operations. In addition, ESD
produces aircraft armament suspension/release equipment for
front line fighters such as the U.S. Air Force F-22 Raptor,
Joint Strike Fighter and the U.S. Navy’s
F/A-18E/F,
electronic
2
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weapons interface
systems, and advanced composite structures for the
U.S. Marine Corp MH-53K helicopter and other aircraft
subsystems, as well as Gilfillan mobile, ship and land-based
precision landing and air traffic systems for landing assistance
in extreme physical environments.
The Communications
Systems Division (“CSD”) develops wireless networking
systems for tactical military and government systems. CSD is the
world’s largest provider of military VHF radios, including
the Single Channel Ground and Airborne Radio System
(“SINCGARS”) and Advanced Tactical Communications
Systems. CSD is developing new technologies such as Soldier
Radio Waveform, the U.S. next-generation capability to
support network centric-operations, and already provides many
similar capabilities through its SpearNet systems for the
individual soldier. CSD’s latest fully programmable radio
systems, including the SINCGARS SideHat, Soldier Radios and
Sensor Radios, are supporting transformational experimentation
by the U.S. Army. In addition, CSD provides highly reliable
radio systems to the FAA for air traffic control, including the
newest ground-to-air radios, complete border control security
systems, and reference class Global Positioning System
(“GPS”) receivers.
The Space Systems
Division (“SSD”) provides innovative remote sensing
and navigation solutions to customers in the defense,
intelligence, space science, and commercial aerospace
communities. SSD solutions include intelligence, surveillance
and reconnaissance, high-resolution commercial imaging, earth
and space science, climate and environmental monitoring, GPS
navigation, image and data processing and dissemination, and
space control and missile defense.
The Night Vision
Division (“NVD”) supplies the night vision equipment
available to U.S. and allied military forces. The equipment
includes night vision goggles for fixed and rotary-wing
aviators, night vision goggles, monoculars and weapon sights for
ground forces, and image intensifier tubes required for all of
these systems. NVD is developing advanced technology for the
digital battlefield that will allow improved mobility and
situational awareness. NVD is also supplying high-performance
night vision devices to federal, state and local law enforcement
officers in support of homeland security.
The
Intelligence & Information Warfare Division
(“IIW”) designs, develops, manufactures, tests, and
deploys hardware and software for the U.S. Government, law
enforcement agencies, and commercial use. IIW products are
utilized in numerous applications, including protecting soldiers
in the field, detecting illegal activity in prisons and secured
facilities, and providing high-technology means of
communication. IIW products include field-proven protection
technologies such as the Mobile Multi-Band Jammer 2.1 and the
Multi-User Panoramic Synthetic Vision System, detection and
surveillance solutions products such as the Cell Hound
tm,
which detects and locates all active cell phones within or near
a facility, and The
Guard-Zonetm
Surveillance System, which provides a complete 360° radar
image for surveillance and automated sensing and tracking of
intruders. IIW also provides high-tech communications solutions
that support tactical field devices and Mission Operations
Centers over a secure web-based portal for remote monitoring and
administration of devices.
Sales and revenues
for the Defense Electronics & Services business
segment were $6.3 billion, $4.2 billion, and
$3.7 billion for 2008, 2007 and 2006, respectively. Funded
order backlog was $5.2 billion at the end of 2008 and 2007,
and $3.9 billion in 2006.
The following table
illustrates the percentage of sales and revenues for the listed
categories for the periods specified:
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Systems and Services
|
|||||||||||||||
|
Systems
|
22 | % | 32 | % | 32 | % | |||||||||
|
Advanced Engineering & Sciences
|
15 | 12 | 9 | ||||||||||||
|
Defense Electronics
|
|||||||||||||||
|
Electronic Systems
|
24 | 11 | 10 | ||||||||||||
|
Communications Systems
|
18 | 19 | 21 | ||||||||||||
|
Space Systems
|
10 | 14 | 17 | ||||||||||||
|
Night Vision
|
8 | 12 | 11 | ||||||||||||
|
Intelligence & Information Warfare
|
3 | – | – | ||||||||||||
| 100 | % | 100 | % | 100 | % | ||||||||||
Defense
Electronics & Services sells its products to a wide
variety of governmental and non-governmental entities located
throughout the world. A substantial portion of the work of
Defense Electronics & Services 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.
Certain products sold by Defense Electronics &
Services have particular commercial application, including night
vision devices. The following table illustrates the percentage
of sales and revenues for the Defense Electronics &
Services customer base:
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
U.S. Government
|
94 | % | 94 | % | 89 | % | |||||||||
|
International governments
|
3 | 4 | 7 | ||||||||||||
|
Commercial
|
3 | 2 | 4 | ||||||||||||
| 100 | % | 100 | % | 100 | % | ||||||||||
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The level of
activity in Defense Electronics & Services is affected
by overall defense budgets, the portion of those budgets devoted
to products and services of the type provided by Defense
Electronics & Services, our ability to win new
contract awards, demand and budget availability for such
products and services in areas other than defense, our ability
to obtain appropriate export licenses for international sales
and business, and other factors. See
“– COMPETITION.”
Fluid
Technology
Fluid Technology is
a leading global provider of water and wastewater treatment
systems, pumps and related technologies, and other water and
fluid control products with residential, commercial, and
industrial applications.
Major production and
assembly facilities are located in Australia, Canada, China,
France, Germany, Italy, the Netherlands, Norway, Spain, South
Korea, Sweden, United Kingdom, and the United States of America.
Principal customers
are in North America, Europe, the Middle East, Africa, Latin and
South America, and the Asia/Pacific region. Sales are made
directly to customers or through independent distributors and
representatives.
Brand names
include: A-C
Pump®,
Bell &
Gossett®,
F.B. Leopold
Company®,
Flygt®,
Flowtronex®,
Goulds
Pumps®,
Hoffman
Specialtytm,
ITT
Standard®,
Lowara®,
Marlow
Pumps®,
McDonnell &
Miller®,
Pure-Flo®,
Red Jacket Water
Products®,
Sanitaire®,
Vogel®,
and
WEDECO®.
The Fluid Technology
business segment provides goods and services to the following
markets: Water & Wastewater, Residential &
Commercial Water, and Industrial Process.
Water &
Wastewater
The principal
products and services for this market include submersible pump
systems for water and wastewater control, and biological
filtration and disinfection treatment systems for municipal,
industrial and commercial applications.
ITT’s
Flygt®
brand is the originator and largest manufacturer of submersible
pumps and mixers, which form the heart of many of the
world’s sewage and wastewater treatment facilities.
Additionally,
Flygt®
is recognized as the market leader for municipal submersible
wastewater pumps. Combining Flygt’s submersible pumps and
mixers with
Sanitaire®,
WEDECO®,
and F.B.
Leopold®
products (discussed below) provides a solution to
customers’ needs for complete wastewater transport and
treatment systems. Dry mount pumps branded A-C
Pump®
provide an alternative technical solution to submersible pumps.
Through the
Sanitaire®
brand, ITT is a leader in biological treatment systems for
municipal and industrial wastewater treatment. The broad range
of products includes ceramic and membrane fine bubble diffusers,
and stainless steel coarse bubble diffusers. ITT also provides
advanced membrane filtration engineered systems, reverse osmosis
systems, and portable filtration technology.
WEDECO®
is a leading provider of ultraviolet disinfection and ozone
oxidation systems with both municipal and industrial
applications. F.B.
Leopold®
is a leading provider of water and wastewater treatment products
with municipal and industrial applications, including
clarification and gravity filtration technologies.
Residential &
Commercial Water
The principal
products and services for this market include pumps, systems,
controls and accessories for water wells, pressure boosters,
agricultural and irrigation applications, heating, ventilation
and air conditioning systems, boiler controls, flood control and
fire protection pumps with residential, commercial, light
industrial, and agriculture and turf irrigation applications.
These products are offered under the Goulds
Pumps®,
Bell &
Gossett®,
Flowtronex®,
Lowara®,
Red Jacket Water
Products®,
Marlow
Pumps®
and
Vogel®
brand names.
Leading product
brands, such as Bell &
Gossett®,
McDonnell &
Miller®,
and Hoffman
Specialtytm,
provide a broad variety of products for environmental control in
buildings and for building service and utility applications,
including liquid-based heating and air conditioning systems,
liquid level control, and steam trap products for boiler and
steam systems. ITT services the European and Middle East
building trade markets with pressure boosting pumps under the
Lowara®
and
Vogel®
brand names.
Industrial
Process
The principal
products and services for this market include pumps and valves
with chemical, paper and pulp, oil refining and gas processing,
power, mining, and general industrial applications, and
high-purity systems with biopharmaceutical applications. In
addition, we offer a wide array of valve and turnkey systems
that are at the heart of extremely demanding manufacturing
processes. Our products are used in ultra hygiene processes
similar to those found in production of biological and
pharmaceutical compounds.
Sales and revenues
for the Fluid Technology business segment were
$3.8 billion, $3.5 billion, and $3.1 billion for
2008, 2007 and 2006, respectively. Order backlog for Fluid
Technology was $890.1 at the end of 2008, compared with $887.1
in 2007, and $702.2 in 2006.
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The following table
illustrates the percentage of sales and revenues by market for
the periods specified:
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Water & Wastewater
|
47 | % | 47 | % | 46 | % | |||||||||
|
Residential & Commercial Water
|
32 | 33 | 35 | ||||||||||||
|
Industrial Process
|
21 | 20 | 19 | ||||||||||||
| 100 | % | 100 | % | 100 | % | ||||||||||
As one of the
world’s leading producers of fluid handling equipment and
related products for treating and recycling wastewater, ITT
actively promotes more efficient use and re-use of water and
endeavors to raise the level of awareness of the need to
preserve and protect the earth’s water resources. 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 operating efficiencies.
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. Through ITT’s overarching strategic Value Based
Product Development program, we now have in place a company-wide
system for rapid development of new offerings and technologies
to augment our current offering of systems and solutions. This
strategy has guided us in our acquisitions and business
development efforts. For example, today ITT can extend its core
offering of submersible pumps and mixers with systems to control
plant operation, technologies that analyze the waste stream, and
products and systems to treat water through biological,
treatment, filtration, oxidation and disinfection processes.
In the industrial
markets, our pump systems are now equipped with intelligent
control technologies. Customers engaging in our “total
systems approach” generally experience dramatically lower
energy consumption, and reduced maintenance and operating costs.
Fluid Technology has
a global network of authorized service centers for aftermarket
customer care. Our aftermarket service capabilities include the
repair and service of all brands of pumps and rotating
equipment, engineering upgrades, as well as preventative and
routine maintenance and service.
The level of
activity in Fluid Technology is dependent upon economic
conditions in the markets served, weather conditions and, in the
case of municipal markets, the ability of municipalities to fund
projects for our products and services, and other factors. See
“– COMPETITION.”
Motion &
Flow Control
Motion &
Flow Control is comprised of a group of businesses providing
products and services for the areas of defense, aerospace,
industrial, transportation, computer, telecom and RV/marine. The
Motion & Flow Control businesses primarily serve the
high-end of their markets, with highly engineered products, high
brand recognition, and a focus on new product development and
operational excellence.
Principal
manufacturing facilities are located in Germany, Hong Kong,
Italy, the Netherlands, Japan, the United Kingdom and United
States of America.
Revenue
opportunities are balanced between original equipment
manufacturing (“OEM”) and after-market customers. In
addition to the traditional markets of the U.S. and Western
Europe, opportunities in emerging markets such as Asia are
increasing. Principal customers are located in Brazil, Canada,
France, Germany, Italy, Japan, the United Kingdom and United
States of America.
Certain
Motion & Flow Control businesses were combined during
2008 to improve our strategic alignment with end-markets, and to
better leverage our production capabilities and costs
structures. This included the consolidation of our Controls and
Aerospace Controls businesses into an aerospace-facing business
referred to as Control Technologies, and the combination of our
Koni®
shocks business with our Friction Technologies businesses (now
collectively referred to as the Motion Technologies business).
The Motion & Flow Control business segment now
consists of the Interconnect Solutions, Motion Technologies,
Flow Control, Energy Absorption and Control Technologies
businesses.
In December 2008,
oversight of the Motion & Flow Control business segment was
placed under the direction of Gretchen W. McClain, who now
serves as President, ITT Fluid and Motion Control, to facilitate
operational efficiencies and allow businesses to respond to
customer needs more quickly and with greater impact.
Motion
Technologies
Motion Technologies
designs and manufactures leading brands serving global
automotive and railway customers. Products include friction pads
and back plates for braking applications for the world’s
largest manufacturers of cars, trucks and light commercial
vehicles, and
Koni®
shocks, premier adjustable shocks with car, bus, truck, trailer,
and rail applications.
Interconnect
Solutions
Interconnect
Solutions designs and manufactures connectors, interconnects,
cable assemblies, multi-function grips, input/output card kits
and smart card systems. Markets served include the areas of
defense, aerospace, industrial, transportation, computer, and
telecom. Connector products are marketed primarily under the
Cannon®
brand name.
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Flow
Control
Flow Control is the
world’s leading producer of pumps and related products for
the marine and leisure market. Products sold worldwide under the
brand names
Jabsco®,
Rule®,
Flojet®,
and
Danforth®
also serve the recreational vehicle market. ITT, through its
Flojet®
and
Totton®
brands, is also a leading producer of pumps and components for
beverage applications. Both
Jabsco®
and
Flojet®
also produce pumps for other specialty industrial fluid
dispensing applications. The Midland-ACS and Alcon businesses
provide valve actuation control systems for harsh environments,
including oil and gas pipelines, as well as solenoid valves for
everything from petrochemical plants to drag cars.
Control
Technologies
Control Technologies
is a worldwide supplier of valves, actuators, pumps and switches
for the commercial, military, regional, business jet and general
aviation markets. Products are principally sold to Original
Equipment Manufacturers (“OEMs”) and the aftermarket
in North and South America, Europe and Asia. Control
Technologies also sells switches and regulators into the oil and
gas, fluid power, power generation, and chemical markets. In
addition, product lines in this business include
electro-mechanical actuators, servo motors, Computer Numerical
Control systems, motion controller and other components with
medical imaging, semi-conductor, machine tool, industrial
automation, metal fabrication and aircraft seating applications.
Under its
Conoflow®
brand, ITT markets pressure regulators and diaphragm seals for
industrial applications and natural gas vehicles.
Energy
Absorption
Energy Absorption
designs and manufactures a wide range of standard and custom
energy absorption and vibration isolation solutions serving the
industrial, oil and gas, rail, aviation and defense markets.
Products under the
Enidine®
brand name include shock absorbers, buffers, tow bar snubbers,
rate controls, dampers, vibration isolators and other related
products.
Sales and revenues
were $1.6 billion, $1.3 billion, and $1.1 billion
for 2008, 2007 and 2006, respectively. Order backlog for
Motion & Flow Control was $417.1 at the end of 2008,
compared with $440.4 in 2007, and $409.3 in 2006.
The following table
illustrates the percentage of sales and revenues for the listed
categories for the periods specified:
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Motion Technologies
|
35 | % | 37 | % | 37 | % | |||||||||
|
Interconnect Solutions
|
29 | 32 | 35 | ||||||||||||
|
Flow Control
|
16 | 19 | 20 | ||||||||||||
|
Control Technologies
|
11 | 9 | 8 | ||||||||||||
|
Energy Absorption
|
9 | 3 | – | ||||||||||||
| 100 | % | 100 | % | 100 | % | ||||||||||
The level of
activity for Motion & Flow Control is affected by
overall economic conditions in the markets served, the
competitive position with respect to price, quality, technical
expertise, and customer service, as well as weather conditions
and natural disasters. See “– COMPETITION.”
See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Note 21,
“Business Segment Information,” in the Notes to
Consolidated Financial Statements for further details with
respect to business segments.
Acquisitions,
Divestitures, and Restructuring
We have been
involved in an ongoing program of acquiring businesses that
provide a strategic fit with businesses we presently conduct and
divesting businesses that do not enhance that fit. ITT did not
acquire or dispose of any significant businesses during 2008.
See Note 3,
“Acquisitions,” in the Notes to Consolidated Financial
Statements for further information regarding these acquisitions.
See Note 5,
“Discontinued Operations,” in the Notes to
Consolidated Financial Statements for further information
regarding discontinued operations.
See Note 4,
“Restructuring and Asset Impairment Charges,” in the
Notes to Consolidated Financial Statements regarding
restructuring matters. See also “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations – Restructuring and Asset Impairment
Charges.”
6
Table of Contents
Geographic
Markets
Net sales to
external customers by geographic market for the year ended
December 31, 2008 were as follows:
|
DEFENSE |
MOTION |
|||||||||||||||||||
|
ELECTRONICS |
FLUID |
& FLOW |
ITT |
|||||||||||||||||
| & SERVICES | TECHNOLOGY | CONTROL | CONSOLIDATED | |||||||||||||||||
|
United States
|
96 | % | 37 | % | 35 | % | 68 | % | ||||||||||||
|
Western Europe
|
2 | 32 | 46 | 18 | ||||||||||||||||
|
Asia Pacific
|
1 | 11 | 9 | 5 | ||||||||||||||||
|
Other
|
1 | 20 | 10 | 9 | ||||||||||||||||
|
Total Segments
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
See Note 21,
“Business Segment Information,” in the Notes to
Consolidated Financial Statements for further geographical
information concerning sales and revenues and long-lived assets.
Competition
Substantially all of
our operations are in highly competitive businesses. The nature
of the competition varies across all business segments. A number
of large companies engaged in the manufacture and sale of
similar lines of products and the provision of similar services
are included in the competition, as are many small enterprises
with only a few products or services. Technological innovation,
price, quality, reliability, and service are primary factors in
the markets served by the various segments of our businesses.
Our many products and services go to market collectively linked
by the ITT brand, the engineered blocks symbol, and the tagline
“Engineered for life.” The brand has been enhanced and
strengthened over the years through a coordinated effort that
includes advertising, public relations activities, trade
exhibits, and point-of-sale material.
Our Defense
Electronics & Services business segment operates in an
environment that has changed as a result of business
consolidations. We have adjusted to these changes by focusing on
the defense electronics and services markets, by making process
improvements, and through capacity rationalization. In most of
the markets served by Defense Electronics & Services,
competition is based primarily upon price, quality,
technological expertise, cycle time, and service.
The Fluid Technology
business segment is affected by strong competition, changing
economic conditions, periodic industry overcapacity that leads
to intense pricing pressures, and public bidding in some
markets. We respond to competitive pressures by utilizing strong
distribution networks, strong brand names, broad product lines
focused on market niches, a global customer base, a continuous
stream of new products developed from a strong technology base,
a focus on quality and customer service, and through continuous
cost improvement programs and life cycle cost initiatives.
In
Motion & Flow Control, competition is a significant
factor, which has resulted in increased pressure to reduce
prices and, therefore, costs. Product capability, quality,
engineering support, and experience are also important
competitive factors. We are focused on differentiated new
product development and maintenance of strong customer
relationships, with emphasis on continuous improvement, striving
to maintain our competitive advantage.
Exposure to
Currency Fluctuations
We conduct
operations worldwide; therefore, are exposed to the effects of
fluctuations in relative currency values. Although we engage,
from time to time, in various hedging strategies with respect to
our foreign currency exposure where appropriate, it is not
possible to hedge all such exposure. Accordingly, our operating
results may be impacted by fluctuations in relative currency
values.
Cyclicality
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, marine, transportation, automotive and aerospace
industries.
Governmental
Regulation and Related Matters
A number of our
businesses are subject to governmental regulation by law or
through contractual arrangements. Our Defense
Electronics & Services businesses perform work under
contracts with the United States Department of Defense or other
agencies of the United States government and similar agencies in
certain other countries. These contracts are subject to security
and facility clearances under applicable governmental
regulations, including the requirement of background
investigations for high-level security clearances for our
executive officers. Most of such contracts are subject to
termination by the respective governmental parties on various
grounds, although such terminations generally are rare.
A portion of our
business is classified by the 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.
Environmental
Matters
We are subject to
stringent environmental laws and regulations concerning air
emissions, water discharges and waste disposal.
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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. Management believes that our companies closely
monitor all of their respective environmental responsibilities,
together with trends in environmental laws. 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. In addition, we have purchased insurance protection
against certain unknown risks.
See “Legal
Proceedings” and “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations – Contingent Liabilities.”
Raw
Materials
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 long-term purchasing and various
other programs. There have been no raw materials shortages that
have had a material adverse impact on our business as a whole.
Research and
Development
Our businesses
require substantial commitment of resources for research and
development activities to maintain significant positions in the
markets we serve. Such activities are conducted in laboratory
and engineering facilities at several of our major manufacturing
locations. Research and development activities are important in
all of our business segments. During 2008, 2007 and 2006, we
spent $244.3, $182.3, and $160.9, respectively, on research and
development. We also spent $935.2, $708.9 and $499.3, in 2008,
2007, and 2006, respectively, on research and development
pursuant to customer contracts.
Intellectual
Property
While we own and
control a 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, is not materially dependent upon any
one intellectual property or related group of such properties.
We are licensed to use certain patents, technology, and other
intellectual property rights owned and controlled by others,
and, similarly, other companies are licensed to use certain
patents, technology, and other intellectual property rights
owned and controlled by us.
Patents, patent
applications, and license agreements will expire or terminate
over time by operation of law, in accordance with their terms or
otherwise. Such expiration or termination of patents, patent
applications, and license agreements is not expected by our
management to have a material adverse effect on our financial
position, results of operations or cash flows.
At the time of the
Distribution (see – “Company History and Certain
Relationships”), we obtained from ITT Destinations certain
exclusive rights and licenses to use the “ITT” name,
mark, and logo. In 1999, we acquired all rights, title, and
interest in and to the “ITT” name, mark, and logo and
an assignment of certain agreements granting The Hartford and
ITT Educational Services, Inc. (ESI) limited rights to use the
“ITT” name, mark, and logo in their businesses. These
agreements are perpetual, and the licenses are subject to
maintenance of certain quality standards by both The Hartford
and ESI.
Employees
As of
December 31, 2008, ITT employed approximately
40,800 people. Approximately 24,100 are employed in the
United States, of whom approximately 18% are represented by
labor unions. Generally, labor relations have been maintained in
a normal and satisfactory manner.
Company History
and Certain Relationships
ITT Corporation is
an Indiana corporation incorporated on September 5, 1995 as
ITT Indiana, Inc. It is the successor pursuant to a statutory
merger of ITT Corporation, a Delaware corporation (“ITT
Delaware”), into ITT Indiana, Inc. effective
December 20, 1995, whereupon its name became ITT
Industries, Inc. ITT Delaware, originally incorporated in
Maryland in 1920 as International Telephone and Telegraph
Corporation, was reincorporated in Delaware in 1968. It changed
its name to ITT Corporation in 1983. On December 19, 1995,
ITT Delaware made a distribution (the “Distribution”)
to its stockholders consisting of all the shares of common stock
of ITT Destinations, Inc., a Nevada corporation (“ITT
Destinations”), and all the shares of common stock of ITT
Hartford Group, Inc., a Delaware corporation (now known as The
Hartford Financial Services Group, Inc. or “The
Hartford”), both of which were wholly-owned subsidiaries of
ITT Delaware. In connection with the Distribution, ITT
Destinations changed its name to ITT
8
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Corporation. On
February 23, 1998, ITT Corporation was acquired by Starwood
Hotels & Resorts Worldwide, Inc. On July 1, 2006
ITT Industries, Inc. changed its name to ITT Corporation.
ITT Delaware, ITT
Destinations, and The Hartford entered into a Distribution
Agreement (the “Distribution Agreement”) providing
for, among other things, certain corporate transactions required
to effect the Distribution and other arrangements among the
three parties subsequent to the Distribution.
The Distribution
Agreement provides for, among other things, assumptions of
liabilities and cross-indemnities generally designed to allocate
the financial responsibility for the liabilities arising out of
or in connection with (i) the former Automotive,
Defense & Electronics, and Fluid Technology segments
to ITT Industries, Inc. (now ITT Corporation) and its
subsidiaries, (ii) the hospitality, entertainment, and
information services businesses to ITT Destinations and its
subsidiaries, and (iii) the insurance businesses to The
Hartford and its subsidiaries. The Distribution Agreement also
provides for the allocation of the financial responsibility for
the liabilities arising out of or in connection with former and
present businesses not described in the immediately preceding
sentence to or among ITT Industries, Inc., ITT Destinations, and
The Hartford on a shared basis. The Distribution Agreement
provides that neither ITT Industries, Inc. (now ITT
Corporation), ITT Destinations nor The Hartford will take any
action that would jeopardize the intended tax consequences of
the Distribution.
ITT Industries, Inc.
(now ITT Corporation), ITT Destinations, and The Hartford also
entered into agreements in connection with the Distribution
relating to intellectual property, tax, and employee benefit
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 (the
“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.
See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Forward-Looking
Statements” for information regarding forward-looking
statements and cautionary statements relating thereto.
| 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 securities. We believe the risks discussed
below are currently the most significant, although additional
risks not presently known to us or that we currently deem less
significant may also materially impact our business, financial
condition and results of operations. 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.
Adverse
macroeconomic and business conditions, particularly in the local
economies of the countries or regions in which we sell our
products, may significantly and negatively affect our revenues,
profitability and results of operations.
Economic conditions
in the United States and in foreign markets in which we operate
could substantially affect our sales and profitability. Economic
activity in the United States and throughout much of the world
has undergone a sudden, sharp economic downturn following the
recent housing downturn and subprime lending collapse. Global
credit and capital markets have experienced unprecedented
volatility and disruption. Business credit and liquidity have
tightened in much of the world. Consumer confidence and spending
are down significantly.
Changes in
governmental banking, monetary and fiscal policies to restore
liquidity and increase credit availability may not be effective
or such effects may be delayed. It is difficult to determine the
breadth and duration of the economic and financial market
problems and the many ways in which they may affect our
suppliers, customers and our business in general. Nonetheless,
continuation or further worsening of these difficult financial
and macroeconomic conditions could have a significant adverse
effect on our sales, profitability and results of operations.
Recent distress
in the financial markets has had an adverse impact on the
availability of credit and liquidity resources.
Continued market
deterioration could jeopardize certain counterparty obligations,
including those of our insurers and
9
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financial
institutions. 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.
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 their
purchases from us even if they have cash or if credit is
available to them.
Our business
could be adversely affected if we are not able to integrate
acquisitions; our acquisitions could cause financial
difficulties.
As part of our
growth strategy, we plan to pursue the acquisition of other
companies, assets and product lines that either complement or
expand our existing business. Because of restricted credit
markets, our ability to acquire new businesses may be impeded.
Further, although we conduct what we believe to be a prudent
level of investigation regarding the operating and financial
condition of the businesses we purchase, an unavoidable level of
risk remains regarding the actual operating condition of these
businesses. Until we actually assume operating control of these
business assets and their operations, we may not be able to
ascertain the actual value or understand the potential
liabilities of the acquired entities and their operations.
Acquisitions involve
a number of risks and present financial, managerial and
operational challenges, including:
| n | diversion of management attention from other businesses; | |
| n | integration of technology, operations, personnel and financial and other systems; | |
| n | potentially insufficient internal controls over financial activities or financial reporting at an acquired company that could impact us on a consolidated basis; | |
| n | the failure to realize expected synergies; | |
| n | the possibility that we have acquired substantial undisclosed liabilities; and | |
| n | the loss of key employees of the acquired businesses. |
Our integration
activities may place substantial demands on our management,
operational resources and financial internal control systems.
Customer dissatisfaction or performance problems with an
acquired business could also have a material adverse effect on
our reputation and business. In addition, any acquired business
could under-perform relative to our expectations.
If the fair value
of any of our reporting units is insufficient to recover the
carrying value of the goodwill and other intangibles of the
respective reporting unit, a material non-cash charge to
earnings could result.
We account for
goodwill and indefinite-lived intangibles in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142)”. SFAS 142 states that
goodwill and indefinite-lived intangible assets are not
amortized, but are instead reviewed for impairment annually (or
more frequently if impairment indicators arise).
We conduct annual
impairment testing to determine if we will be able to recover
all or a portion of the carrying value of goodwill and
indefinite-lived intangibles. In addition, we review goodwill
and indefinite-lived intangible assets for impairment more
frequently if impairment indicators arise. If the fair value is
insufficient to recover the carrying value of our goodwill and
indefinite-lived intangibles, we may be required to record a
material non-cash charge to earnings.
Consistent with the
requirements of SFAS 142, the fair values of our reporting
units generally are based on discounted cash flow projections
that are believed to be reasonable under current and forecasted
circumstances, the results of which form the basis for making
judgments about carrying values of the reported net assets of
our reporting units. Any significant change in market conditions
and estimates or judgments used to determine expected future
cash flows that indicate a reduction in carrying value may give
rise to impairment in the period that the change becomes known.
Our Fluid
Technology and Motion & Flow Control business segments
are subject to certain industry risks, which could have adverse
effects on the results of our operations.
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.
10
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Our Fluid Technology
business segment depends upon the ability of municipal markets
to fund projects involving our products and services. A
significant decline or delay in this funding would have an
adverse effect on the results of our business.
Industry
overcapacity in the pump and valve market could have an adverse
impact on the results of our Fluid Technology business segment.
Weather conditions
including drought, natural disasters, and excessive rains may
negatively affect our Fluid Technology and Motion &
Flow Control business segments.
Decrease in demand
for replacement parts and services would adversely affect our
Fluid Technology and Motion & Flow Control business
segments.
Our Defense
Electronics & Services business segment is subject to
certain risks, including defense budgets and government contract
requirements and regulations, which could have adverse effects
on the results of our operations.
Because 94% of our
Defense Electronics & Services sales and revenues are
to the U.S. Government, changes in the portion of the
U.S. Defense budget devoted to products and services of the
types of products provided by ITT, and our present ability to
receive awards of U.S. Government contracts, could
adversely impact our business. This includes U.S. Defense
programs impacted as a result of program evaluations to be
conducted in 2009 under the new U.S. Administration.
Our Defense
Electronics & Services business segment records
billions of dollars of orders on an annual basis, and we have
anticipated that our overall performance will benefit from sales
and revenues to certain international markets. Variability of
timing and size of certain key orders could negatively impact
the performance of these businesses.
Many of our
government contracts are subject to profit limitations, which
limit our upside potential on a per contract basis, and all are
subject to termination by our customers. Termination of key
government contracts or a significant number of government
contracts would have a negative impact on our business.
Many Defense
Electronics & Services 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
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 revenues and
profitability could be negatively impacted as a result of
competition.
We operate in highly
competitive industries. Our failure to compete effectively could
harm our business. Competitive pressures in all our businesses
include product capability, technological innovation, cycle
time, price, quality and the reliability of services we offer.
In our Defense Electronics & Services and Fluid
Technology business segments, competition includes public
bidding on many contracts.
Our manufacturing
operations are dependent upon third-party suppliers.
We obtain materials
from third-party 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 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.
Our business
could be adversely affected if we are not able to execute our
restructuring actions or other cost-saving
initiatives.
Our restructuring
activities may place substantial demands on our management,
which could lead to the diversion of management’s attention
from other business priorities and lack of customer focus. In
addition, we strive for and expect to achieve cost savings in
connection with certain initiatives, including:
(i) manufacturing process and supply chain rationalization;
(ii) streamlining redundant administrative overhead and
support activities; and (iii) restructuring and
repositioning organizations. Cost savings expectations are
inherently estimates that are difficult to predict and are
necessarily speculative in nature, and we cannot assure you that
we will achieve expected, or any, cost savings.
Interest and
foreign currency exchange rate and commodity price fluctuations
may adversely affect our results.
We are exposed to
the risks associated with changes in interest rates, currency
exchange rates, and commodity prices. From time to time, we
engage in hedging strategies to limit the risks from such
fluctuations, but it is not possible to hedge against all
eventualities.
We are subject to
laws, regulations and potential liability relating to claims,
complaints and proceedings,
11
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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, such as the Foreign Corrupt Practices Act, 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 governmental policies 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.
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.
Changes in fair
value of our benefit plan assets and other factors may have a
material adverse effect on the valuation of pension plan
obligations, the funded status of pension plans and our pension
cost.
A substantial
portion of our current and retired employee population is
covered by pension and other employee-related benefit plans. The
cost of our these plans is incurred over long periods of time
and involve various factors and uncertainties during those
periods of time, including the value of plan assets, the
expected rates of return on plan assets, discount rates for
future payment obligations and trends for future costs. In
addition, funding requirements for employee benefit plans are
subject to legislative and other government regulatory actions.
Financial market volatility during the fourth quarter of 2008
resulted in substantial a decline in the fair market value of
our employee pension plan assets. This decline translated into a
significant reduction in our shareholders’ equity and a
comprehensive loss for the year ended December 31, 2008.
Continued deterioration in this asset pool or other adverse
changes to our overall pension and other employee-related
benefit plans, including material declines in the fair value of
our pension plan assets, could adversely affect our financial
position and results of operations and could require us to make
significant funding contributions.
We face
heightened legal challenges with respect to intellectual
property.
We have developed
and actively pursue developing proprietary technology in the
industries in which we operate, and rely on intellectual
property laws and a number of patents to protect such
technology. In doing so, we incur ongoing costs to enforce and
defend our intellectual property. Our inability to protect our
intellectual property could have a material adverse effect on
our business. In addition, third parties may claim that we
infringe on their intellectual property, and we could suffer
significant litigation or licensing expense as a result.
Our future
success will depend on, among other factors, our key
employees.
Our ability to
operate our business and implement our strategies depends, in
part, on the efforts of our executive officers and other key
personnel. Our future success will depend on, among other
factors, our ability to develop key employee succession plans.
The loss of the services of any of our key employees,
domestically or abroad, could have a material adverse effect on
our business or business prospects.
We are a
decentralized company, which presents certain risks.
We are a
decentralized company, which presents certain risks. While we
believe this practice has catalyzed our growth and enabled us to
remain responsive to opportunities and to our customers’
needs, it necessarily places significant control and
decision-making powers in the hands of local management. This
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 in a more centralized environment. In
addition, it means that “company-wide” business
initiatives, such as the integration of information technology
systems, 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.
These risk factors
are discussed in more detail under the captions
“BUSINESS – Competition; – Exposure to
Currency Fluctuations; – Cyclicality;
– Governmental Regulations and Related
Matters; – Environmental Matters; – Raw
Materials; – Intellectual Property” –
“LEGAL PROCEEDINGS” and “CONTROLS AND
PROCEDURES.”
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
12
Table of Contents
| ITEM 2. | PROPERTIES |
Our principal
executive offices are in leased premises located in White
Plains, NY. 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. These properties are located in several states in the
United States, as well as in numerous countries throughout the
world. See “BUSINESS” for further information with
respect to properties in each of our business segments. See also
Note 13, “Leases and Rentals,” in the Notes to
Consolidated Financial Statements for further information.
| ITEM 3. | LEGAL PROCEEDINGS |
ITT Corporation and
its subsidiaries from time to time are involved in legal
proceedings that are incidental to the operation of their
businesses. Some of these proceedings allege damages relating to
environmental liabilities, intellectual property matters,
copyright infringement, personal injury claims, employment and
pension matters, government contract issues and commercial or
contractual disputes, sometimes related to acquisitions or
divestitures.
See Note 19
“Commitments and Contingencies” in the Notes to
Consolidated Financial Statements for further information.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matter was
submitted to a vote of our shareholders during the fourth
quarter of the fiscal year covered by this report.
13
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 to serve at the pleasure of the Company’s Board of
Directors.
|
AGE AT |
|||||||||||
| NAME | 2/1/09 | CURRENT TITLE | OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS | ||||||||
|
Angela A. Buonocore
|
50 | 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
|
47 | Senior Vice President and Director of Strategy and Corporate Development (2008) | Vice President, Director of Strategy and Corporate Development, ITT (2006); Vice President, Business and Corporate Development, American Standard, Inc. (2000) | ||||||||
|
Scott A. Crum
|
52 | Senior Vice President and Director, Human Resources (2002) | |||||||||
|
Donald E. Foley
|
57 | Senior Vice President and Treasurer (2003) | |||||||||
|
Janice M. Klettner
|
48 | Vice President, ITT (2008), Chief Accounting Officer and Assistant Secretary (2006) | Vice President, Corporate Controller, Avon Products (1998) | ||||||||
|
Steven R. Loranger
|
56 | Chairman, President and Chief Executive Officer and Director (2004) | Executive Vice President and Chief Operating Officer of Textron, Inc. (2002) | ||||||||
|
Vincent A. Maffeo
|
58 | Senior Vice President and General Counsel (1995) | |||||||||
|
David F. Melcher
|
54 | Vice President, ITT (2008), President, ITT Defense Electronics & Services | Vice President, Strategy and Business Development, ITT Defense Electronics & Services (2008); Lieutenant General, U.S. Army, Deputy Chief of Staff, Military Deputy for Budget (2006-2008); Deputy Chief of Staff, Programs (2004-2006); Director, Program Analysis and Evaluation, (2002-2004) | ||||||||
|
Gretchen W. McClain
|
46 | Senior Vice President, ITT (2008), President, ITT Fluid and Motion Control, (2008) | Vice President, President, ITT Fluid Technology (2007); President ITT Residential & Commercial Water (2005); Vice President, Honeywell Aerospace (2004) and Honeywell Engines & Systems (2003) | ||||||||
|
Robert J. Pagano
|
46 | Vice President, Finance (2006) | Vice President, Corporate Controller (2004) President; ITT Fluid Technology Industrial Products Group (2002) | ||||||||
|
Denise L. Ramos
|
52 | Senior Vice President and Chief Financial Officer (2007) | Chief Financial Officer, Furniture Brands International (2005); Chief Financial Officer, KFC (2002) | ||||||||
Note:
Date in parentheses indicates the year in which the position was
assumed.
14
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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
| 2008 | 2007 | |||||||||||||||||||
| HIGH | LOW | HIGH | LOW | |||||||||||||||||
|
Three Months Ended
|
||||||||||||||||||||
|
March 31
|
$ | 66.01 | $ | 50.94 | $ | 62.33 | $ | 56.30 | ||||||||||||
|
June 30
|
67.62 | 52.05 | 70.44 | 60.02 | ||||||||||||||||
|
September 30
|
69.73 | 52.25 | 73.44 | 58.09 | ||||||||||||||||
|
December 31
|
56.15 | 34.75 | 69.96 | 60.05 | ||||||||||||||||
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, 2009 through
January 31, 2009, the high and low reported market prices
of our common stock were $50.80 and $44.36, respectively.
We declared
dividends of $0.175 and $0.14 per share of common stock in each
of the four quarters of 2008 and 2007, respectively. In the
first quarter of 2009, we declared a dividend of $0.2125 per
share for shareholders of record on March 4, 2009.
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 21,381
holders of record of our common stock on January 31, 2009.
ITT common stock is
listed on the New York Stock Exchange and Euronext Exchange.
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
|
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) | ||||||||||||||||
|
10/1/08–10/31/08
|
– | $ | – | – | $ | 569.2 | ||||||||||||||
|
11/1/08–11/30/08
|
– | $ | – | – | $ | 569.2 | ||||||||||||||
|
12/1/08–12/31/08
|
– | $ | – | – | $ | 569.2 | ||||||||||||||
(1) Average
price paid per share is calculated on a settlement basis and
excludes commission.
| (2) | On October 27, 2006, we announced a three-year $1 billion share repurchase program. On December 16, 2008, we announced that the ITT Board of Directors had approved the elimination of the expiration date with respect to the repurchase program. This program replaces our previous practice of covering shares granted or exercised in the context of ITT’s performance incentive plans. The program is consistent with our capital allocation process, which is 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, pay dividends, repay debt, complete strategic acquisitions, and repurchase common stock. As of December 31, 2008, we had repurchased 7.1 million shares for $430.8, including commission fees, under our $1 billion share repurchase program. |
15
Table of Contents
PERFORMANCE
GRAPH
CUMULATIVE
TOTAL RETURN
Based upon an
initial investment of $100 on December 31, 2003
with dividends reinvested
with dividends reinvested
| 12/31/03 | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | |||||||||||||||||||||||||
|
ITT Corporation
|
$ | 100.00 | $ | 114.79 | $ | 140.80 | $ | 156.92 | $ | 184.00 | $ | 129.81 | ||||||||||||||||||
|
S&P 500
|
$ | 100.00 | $ | 110.88 | $ | 116.32 | $ | 134.69 | $ | 142.09 | $ | 89.52 | ||||||||||||||||||
|
S&P 500 Industrials Index
|
$ | 100.00 | $ | 118.03 | $ | 120.77 | $ | 136.82 | $ | 153.29 | $ | 92.10 | ||||||||||||||||||
Information
provided in the Performance Graph shall not be deemed filed with
the SEC.
16
Table of Contents
| ITEM 6. | SELECTED FINANCIAL DATA |
| (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) | 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||||
|
Results and Position
|
|||||||||||||||||||||||||
|
Sales and revenues
|
$ | 11,694.8 | $ | 9,003.3 | $ | 7,807.9 | $ | 7,040.8 | $ | 5,965.5 | |||||||||||||||
|
Operating income
|
1,210.1 | 977.2 | 801.0 | 725.5 | 587.8 | ||||||||||||||||||||
|
Income from continuing operations
|
775.2 | 633.0 | 499.7 | 528.8 | 408.2 | ||||||||||||||||||||
|
Net income
|
794.7 | 742.1 | 581.1 | 359.5 | 432.3 | ||||||||||||||||||||
|
Additions to plant, property and equipment
|
248.7 | 239.3 | 177.1 | 164.4 | 126.1 | ||||||||||||||||||||
|
Depreciation and amortization
|
278.3 | 185.4 | 171.6 | 174.4 | 153.0 | ||||||||||||||||||||
|
Total assets
|
10,480.2 | 11,552.7 | 7,400.6 | 7,071.9 | 7,291.3 | ||||||||||||||||||||
|
Long-term debt
|
467.9 | 483.0 | 500.4 | 516.0 | 542.3 | ||||||||||||||||||||
|
Total debt
|
2,146.9 | 3,566.0 | 1,097.4 | 1,266.9 | 1,269.7 | ||||||||||||||||||||
|
Cash dividends declared per common share
|
0.70 | 0.56 | 0.44 | 0.36 | 0.34 | ||||||||||||||||||||
|
Earnings Per Share
|
|||||||||||||||||||||||||
|
Income from continuing operations
|
|||||||||||||||||||||||||
|
Basic
|
$ | 4.29 | $ | 3.51 | $ | 2.71 | $ | 2.86 | $ | 2.21 | |||||||||||||||
|
Diluted
|
$ | 4.23 | $ | 3.44 | $ | 2.67 | $ | 2.80 | $ | 2.16 | |||||||||||||||
|
Net income
|
|||||||||||||||||||||||||
|
Basic
|
$ | 4.40 | $ | 4.11 | $ | 3.15 | $ | 1.95 | $ | 2.34 | |||||||||||||||
|
Diluted
|
$ | 4.33 | $ | 4.03 | $ | 3.10 | $ | 1.91 | $ | 2.29 | |||||||||||||||
17
Table of Contents
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In millions,
except per share amounts, unless otherwise stated)
BUSINESS
OVERVIEW
ITT is a global
multi-industry leader in high-technology engineering and
manufacturing engaged directly and through its subsidiaries. We
generate revenue and cash through the design, manufacture, and
sale of a wide range of engineered products and the provision of
related services. For financial reporting purposes our
businesses are aggregated and organized into three principal
business segments, Defense Electronics & Services,
Fluid Technology, and Motion & Flow Control.
Our growth strategy
is centered on both organic and acquisition growth. Our ability
to grow organically stems from our value-based product
development process, new and existing technologies, distribution
capabilities, customer relationships and strong market
positions. In addition to our growth initiatives, we have a
number of strategic initiatives within the framework of the ITT
Management System aimed at enhancing our operational
performance. These include global sourcing, footprint
rationalization and realignment, Six Sigma and lean fulfillment.
Key Performance
Indicators and Non-GAAP Measures
Management reviews
key performance metrics including sales and revenues, segment
operating income and margins, earnings per share, orders growth,
and backlog, among others.
In addition, we
consider the following non-GAAP measures to be key performance
indicators:
| n | “organic sales and revenues”, “organic orders”, and “organic operating income” defined as sales and revenues, orders, and operating income, respectively, excluding the impact of foreign currency fluctuations and contributions from acquisitions and divestitures. | |
| n | “free cash flow” defined as cash flow from operations less capital expenditures. |
Management believes
that these metrics are useful to investors evaluating our
operating performance for the periods presented, and provide a
tool for evaluating our ongoing operations and our management of
assets held from period to period. These metrics, however, are
not a measures of financial performance under accounting
principles generally accepted in the United States
(“GAAP”) and should not be considered a substitute for
sales and revenue growth (decline), or cash flows from
operating, investing and financing activities as determined in
accordance with GAAP and may not be comparable to similarly
titled measures reported by other companies.
EXECUTIVE
SUMMARY
Despite challenging
market conditions during the fourth quarter, we achieved record
revenue and earnings during 2008. Sales and revenues for the
full year ended December 31, 2008 were $11.7 billion,
an increase of 29.9% over 2007. Income from continuing
operations increased 22.5% in 2008 over 2007 to $4.23 per
diluted share, reflecting net cost productivity, contributions
from acquisitions such as EDO and IMC, organic revenue growth
and lower pension expense, which more than offset additional
restructuring and realignment costs and strategic growth
investments.
Financial highlights
for the year ended December 31, 2008 include:
| n | Sales and revenues for the Defense Electronics & Services business segment of $6.3 billion, an increase of 50.4% over 2007, attributable to organic revenue growth and the successful integration of the EDO acquisition. Operating income for the segment was $727.0, a 44.6% increase year-over-year. | |
| n | Sales and revenue growth for the Fluid Technology business segment of 9.4% year-over-year to $3.8 billion, primarily driven by organic revenue growth. Operating income of $468.7 increased 8.3% year-over-year. | |
| n | Sales and revenues for the Motion & Flow Control business segment of $1.6 billion, up 18.8% over 2007, primarily attributable to the IMC acquisition. For the year, operating income grew 2.3% on a comparable basis to $191.7. | |
| n | Generation of $870.9 of free cash flow, a 112.3% conversion of income from continuing operations. |
Other significant
highlights for the year ended December 31, 2008 include:
| n | Successful integration of our EDO and IMC acquisitions, which contributed more than $2 billion of sales and revenues in 2008. | |
| n | Investments in attractive markets served by both our Motion & Flow Control and Fluid Technology business segments through the opening of new plants, including plants in China, India and the Czech Republic. | |
| n | Participation in the development of the next generation Joint Tactical Radio System by our Defense Electronics & Services business segment, which also became the sole provider of enhanced night vision goggles to the U.S. Army, and commenced delivery of the FAA’s next generation air traffic control program. | |
| n | An investment of approximately $94.0 in restructuring, asset impairment and realignment actions, including facility consolidations and headcount reductions, during the fourth quarter of 2008 to better position certain businesses for 2009. |
18
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| n | The combination of certain Motion & Flow Control businesses to improve our strategic alignment with end-markets and to better leverage our production capabilities and cost structures. |
Further details
related to these results are contained in the following
Consolidated Financial Results and Segment Review sections.
2009
OUTLOOK
Recent changes in
the global economic environment, including disruptions in global
financial markets and global currency fluctuations, will create
difficult 2009 market conditions. In this environment, our
strategy is to focus on the current needs of our customers,
deploy our capital in a disciplined manner, focus on cost
controls, and execute on our operational initiatives.
We are going to
focus on our customers by aligning our activities, including our
vital service and maintenance offerings, with their needs. We
plan to improve product life cycle costs by making our products
more energy efficient and by reducing the total cost of
ownership.
We are focused on
protecting our financial position through continued high free
cash flow generation coupled with a balanced capital deployment
approach, including the preservation of liquidity, a dividend
increase and the elimination of the expiration date of our share
repurchase program.
We are proactively
reducing costs and leveraging our business and functional
strength to achieve competitive advantages. We will continue
strategic initiatives within the framework of the ITT Management
System aimed at enhancing our operational performance. We are
now planning approximately $50 of new restructuring actions in
2009 and are developing contingency plans that are reactive to
any volume declines beyond our expectations for 2009. Other cost
and productivity actions include discretionary cost controls,
and driving incremental supply chain savings through our
integrated global strategic sourcing group.
We continue to plan
for the long-term by supporting strategic growth investments,
including research and development activities, significant
capital investments to support our strategic initiatives,
including our position on the FAA next generation air traffic
control program, emerging market expansion, and investing in new
information technology systems.
Current global
economic conditions could have a negative impact on our 2009
performance, particularly within our Fluid Technology and
Motion & Flow Control business segments. However, we
expect that our Defense Electronics & Services
business segment will provide a stable base for 2009 due in part
to a strong funded backlog position and a winning program track
record.
Factors impacting
our 2009 performance, compared to 2008, include revenue declines
in our Fluid Technology and Motion & Flow Control
business segments, higher pension and other employee
benefit-related costs, lower restructuring actions, and benefits
from productivity and cost containment initiatives. We also
anticipate that foreign currency fluctuations will have a
negative impact on our 2009 results of operations.
KNOWN TRENDS AND
UNCERTAINTIES
The following list
represents a summary of trends and uncertainties, which could
have a significant impact on our results of operations,
financial position
and/or cash
flows from operating, investing and financing activities.
| n | Organic revenues grew 4.9% during the fourth quarter of 2008 compared to the prior year, lower than our full year 2008 growth rate of 7.2%. Additionally, organic orders declined 22.0% and 5.2% during the fourth quarter of 2008 at our Motion & Flow Control and Fluid Technology business segments, respectively. This reflects, in part, the impact of the recent economic downturn. It is difficult to determine the breadth and duration of the recent economic and financial market decline and the many ways in which it may affect our suppliers, customers and our business in general. Continuation or further worsening of these difficult financial and macroeconomic conditions could have a significant adverse effect on our sales, profitability and results of operations. | |
| n | The real estate market has suffered greatly over the last year, particularly within the United States and Europe. Continued decline in demand would result in further negative impacts to those portions of our Fluid Technology business segment which sell products with residential and commercial market applications. | |
| n | Recent declines in economic conditions could cause certain municipalities to cancel certain projects or delay their related funding, which could have an adverse effect on the results of our Fluid Technology business segment. A portion of our Fluid Technology business segment provides products to end markets such as oil and gas, power, chemical and mining. We expect to see some level of order delays and/or cancellations during 2009 as a result of declining economic conditions and the impact on these end markets. | |
| n | The International Air Transport Association recently reported cargo traffic and passenger traffic declines of approximately 23% and 5%, respectively. Continued declines could negatively impact a portion of our Motion & Flow Control businesses segment. | |
| n | A portion of our Motion & Flow Control business segment is sensitive to trends within the connector industry. A recent Bishop Report, a publication for the connector industry, forecasts a 2009 decline in sales of approximately 15%. |
19
Table of Contents
| n | The global automotive and marine markets have declined significantly over the last year. OEM production has contracted over the same period. These markets are expected to be challenged during 2009, and as a result, portions of our Motion & Flow Control business segment could be adversely impacted. | |
| n | U.S. Defense programs could be impacted as a result of program evaluations to be conducted during 2009. Changes in the portion of the U.S. Defense budget devoted to these programs could adversely impact our business. In addition, we have anticipated that our overall performance will benefit from certain international markets. Variability of timing and size of key orders could negatively impact our future results. | |
| n | We expect to incur approximately $40.6 of net periodic pension cost in 2009. Changes to our overall pension and other employee-related benefit plans, including material declines in the fair value of our pension plan assets among others, could adversely affect our results of operations beyond 2009, as well as require us to make significant funding contributions. | |
| n | Recent distress in the financial markets has had an adverse impact on the availability of credit and liquidity resources. Short-term and long-term interest rates increased significantly during the fourth quarter of 2008, including rates on our commercial paper. Volatility in these markets and their impact on interest rates have been somewhat less predictable than in years past. Higher rates would negatively impact our results of operations. |
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.
BUSINESS SEGMENT
OVERVIEW
Summarized below is
information on each of our three business segments, including
markets served, goods and services provided, relevant factors
that could impact results, business challenges, and areas of
focus.
Defense
Electronics & Services
Our Defence
Electronics & Services business segment is designed to
serve future needs around safety, security, intelligence and
communication. Management believes that the Defense
Electronics & Services business segment is well
positioned with products and services that support our
customers’ needs. In addition, we expect new product
development to continue to contribute to future growth.
The following
provides a summary of the Defense Electronics &
Services businesses and the goods and services each provides to
its respective end-markets.
Advanced
Engineering & Services
Data analysis and
research on homeland defense, telecommunications systems and
information technology
Communications
Systems
Voice and data
systems, and battlefield communication technology
Electronic
Systems
Force protection,
integrated electronic warfare systems, reconnaissance and
surveillance, radar and undersea systems, aircraft armament
suspension-and-release systems and advanced composite structures
Intelligence &
Information Warfare
Intelligence systems
and analysis, information warfare solutions and data acquisition
and storage
Night
Vision
Image intensifier
technology, military and commercial night vision equipment
Space
Systems
Satellite imaging
systems, meteorological and navigation payloads, related
information solutions and systems
Systems
Division
Systems integration,
communications engineering and technical support solutions
Factors that could
impact Defense Electronics & Services’ financial
results include, the level of defense funding by domestic and
foreign governments, our ability to receive contract awards, the
ability to develop and market products and services for
customers outside of traditional markets and our ability to
obtain appropriate export licenses for international sales and
business. Primary areas of business focus include, new or
improved product offerings, new contract wins and successful
program execution.
Fluid
Technology
Our Fluid Technology
business segment provides critical products and services in
markets that are driven by population growth, increasing
environmental regulation, global security and global
infrastructure trends. Fluid Technology products include water
and wastewater treatment systems, pumps and related
technologies, and other water and fluid control products with
residential, commercial, and industrial applications. The
following provides a summary of the Fluid Technology
20
Table of Contents
businesses and the
goods and services each provides to its respective end-markets.
Water &
Wastewater
Submersible pump
systems for water and wastewater control, and biological
filtration and disinfection treatment systems for municipal,
industrial and commercial applications
Residential &
Commercial Water
Pumps, systems and
accessories for water wells, pressure boosters, agricultural and
irrigation applications, heating, ventilation and air
conditioning systems, boiler controls, flood control and fire
protection pumps, residential, commercial, light industrial, and
agriculture and turf irrigation applications
Industrial
Process
Pumps and valves for
industrial, mining, pulp and paper, chemical and petroleum
processing, and high-purity systems for biopharmaceutical
applications
Factors that could
impact Fluid Technology’s financial results include broad
economic conditions in markets served, the ability of
municipalities to fund projects, raw material prices and
continued demand for replacement parts and servicing. Primary
areas of business focus include new product development,
geographic expansion into new markets, facility rationalization
and global sourcing of direct material purchases.
Motion &
Flow Control
Our Motion &
Flow Control business segment provides highly engineered
critical components that serve the high-end of our markets.
It’s group of businesses provide products and services for
the areas of defense, aerospace, industrial, transportation,
computer, telecom and RV/marine. Revenue opportunities are
balanced between OEM and after-market customers. In addition to
its traditional markets of the U.S. and Western Europe,
opportunities in emerging markets such as Asia are increasing.
The following
provides a summary of the Motion & Flow Control
businesses and the goods and services each provides to its
respective end-markets.
Motion
Technologies
Friction pads and
back plates serving global automotive and railway customers;
Koni®
shocks, premier adjustable shocks with car, bus, truck, trailer,
and rail applications
Interconnect
Solutions
Connectors,
interconnects, cable assemblies, multi-function grips,
input/output card kits and smart card systems serving the
defense, aerospace, industrial, transportation, computer, and
telecom markets
Flow
Control
Pumps and related
products for the marine and leisure market; pumps and components
for beverage applications; pumps for other specialty industrial
fluid dispensing applications; valve actuation control systems
for harsh environments, including oil and gas pipelines, as well
as solenoid valves
Control
Technologies
Valves, actuators,
pumps, switches for the commercial, military, regional, business
and general aviation markets; switches and regulators into the
oil and gas, fluid power, power generation, and chemical
markets; electro-mechanical actuators, servo motors, Computer
Numerical Control systems, motion controller and other
components with medical imaging, semi-conductor, machine tool,
industrial automation, metal fabrication and aircraft seating
applications; pressure regulators and diaphragm seals for
industrial applications and natural gas vehicles
Energy
Absorption
Wide range of
standard and custom energy absorption and vibration isolation
solutions including shock absorbers, buffers, tow bar snubbers,
rate controls, dampers, vibration isolators and other related
products serving the industrial, oil and gas, rail, aviation and
defense markets
The
Motion & Flow Control businesses’ financial
results are driven by economic conditions in its major markets,
the cyclical nature of the transportation industry, production
levels of major auto producers, demand for marine and leisure
products, raw material prices, the success of new product
development, platform life and changes in technology. Primary
areas of business focus include expansion into adjacent markets,
new product development, manufacturing footprint optimization,
global sourcing of direct material purchases and lean
fulfillment.
21
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CONSOLIDATED
FINANCIAL RESULTS
|
2008/2007 |
2007/2006 |
||||||||||||||||||||||||
|
INCREASE |
INCREASE |
||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 |
(DECREASE) |
(DECREASE) |
|||||||||||||||||||||||
| 2008 | 2007 | 2006 | %/POINT CHANGE | %/POINT CHANGE | |||||||||||||||||||||
|
Sales and revenues
|
$ | 11,694.8 | $ | 9,003.3 | $ | 7,807.9 | 29.9 | % | 15.3 | % | |||||||||||||||
|
Costs of sales and revenues
|
8,439.4 | 6,435.0 | 5,618.4 | 31.1 | % | 14.5 | % | ||||||||||||||||||
|
Gross profit
|
3,255.4 | 2,568.3 | 2,189.5 | 26.8 | % | 17.3 | % | ||||||||||||||||||
|
Selling, general and administrative expenses
|
1,723.5 | 1,342.7 | 1,175.9 | 28.4 | % | 14.2 | % | ||||||||||||||||||
|
Research and development expenses
|
244.3 | 182.3 | 160.9 | 34.0 | % | 13.3 | % | ||||||||||||||||||
|
Restructuring and asset impairment charges, net
|
77.5 | 66.1 | 51.7 | 17.2 | % | 27.9 | % | ||||||||||||||||||
|
Operating income
|
1,210.1 | 977.2 | 801.0 | 23.8 | % | 22.0 | % | ||||||||||||||||||
|
Interest expense
|
140.8 | 114.9 | 86.2 | 22.5 | % | 33.3 | % | ||||||||||||||||||
|
Interest income
|
31.3 | 49.6 | 25.4 | (36.9 | )% | 95.3 | % | ||||||||||||||||||
|
Income tax expense
|
312.3 | 265.5 | 227.6 | 17.6 | % | 16.7 | % | ||||||||||||||||||
|
Income from continuing operations
|
775.2 | 633.0 | 499.7 | 22.5 | % | 26.7 | % | ||||||||||||||||||
|
Income from discontinued operations, net of tax
|
19.5 | 109.1 | 81.4 | (82.1 | )% | 34.0 | % | ||||||||||||||||||
|
Gross margin
|
27.8 | % | 28.5 | % | 28.0 | % | (0.7 | ) | 0.5 | ||||||||||||||||
|
Selling, general and administrative expenses as a % of sales
|
14.7 | % | 14.9 | % | 15.1 | % | (0.2 | ) | (0.2 | ) | |||||||||||||||
|
Research and development expenses as a % of sales
|
2.1 | % | 2.0 | % | 2.1 | % | 0.1 | (0.1 | ) | ||||||||||||||||
|
Operating margin
|
10.3 | % | 10.9 | % | 10.3 | % | (0.6 | ) | 0.6 | ||||||||||||||||
|
Effective tax rate
|
28.7 | % | 29.5 | % | 31.3 | % | (0.8 | ) | (1.8 | ) | |||||||||||||||
SALES AND
REVENUES
Sales and revenues
for the year ended December 31, 2008 were $11,694.8,
representing a 29.9% increase over 2007. This increase reflects
contributions from acquisitions of $1,948.7, including EDO and
IMC, and a benefit of $98.5 from foreign currency exchange
fluctuations. Despite a global economic environment that
deteriorated as the year progressed, organic revenues grew 7.2%
over the prior year primarily driven by higher volumes, price
increases and contributions from new products and programs.
During the fourth quarter of 2008, organic revenues grew 4.9%,
as portions of our business were impacted by the recent economic
downturn.
Sales and revenues
for the year ended December 31, 2007 were $9,003.3,
representing a 15.3% increase over 2006. Organic revenue growth
of 10.9% over the same period was primarily driven by higher
volumes and price increases.
The following table
illustrates the impact of organic growth, acquisitions completed
during the period, and foreign currency translation fluctuations
on sales and revenues during these periods.
|
2008/2007 |
2007/2006 |
|||||||||
| % CHANGE | % CHANGE | |||||||||
|
Organic growth
|
7.2 | % | 10.9 | % | ||||||
|
Acquisitions
|
21.6 | % | 1.9 | % | ||||||
|
Foreign currency translation
|
1.1 | % | 2.5 | % | ||||||
|
Sales and revenues
|
29.9 | % | 15.3 | % | ||||||
Orders received
during 2008 totaled $11,726.1, an increase of $2,628.3 over the
prior year, including orders attributable to acquisitions and a
favorable benefit from foreign currency exchange translation.
Organic orders increased 8.5% overall, including growth of 14.8%
and 5.6% at our Defense Electronics & Services and
Fluid Technology business segments, respectively. Our
Motion & Flow Control business segment reported a full
year organic orders decline of 3.0%. Organic orders declined at
each of our business segments during the fourth quarter of
22
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2008 compared to the
same prior year period, including 22.0% and 5.2% decreases at
our Motion & Flow Control and Fluid Technology
business segments, respectively. We believe that these order
declines, taken into consideration with the current level of
backlog attributable at our commercial businesses, indicate that
our 2009 sales and revenues could be substantially lower than
those reported in 2008.
During 2007, we
received orders of $9,097.8, an increase of $706.1 or 8.4%, over
the prior year period. Order growth in 2007 was attributable to
our Fluid Technology and Motion & Flow Control
business segments, including contributions from both existing
businesses and acquisitions.
COSTS OF SALES
AND REVENUES AND GROSS PROFIT
Costs of sales and
revenues were $8,439.4 and $6,435.0 for the years ended
December 31, 2008 and 2007, respectively. These results
represent increases of 31.1% and 14.5% over each respective
prior year, primarily reflecting the impact of acquisitions,
including EDO and IMC during 2008, higher organic sales volume
over both periods, and the negative impact of foreign currency
exchange translation.
Gross profit for the
year ended December 31, 2008 was $3,255.4, a 26.8% increase
over 2007. Gross margin of 27.8% decreased 70 basis points
for 2008, due to higher production costs, impact from the EDO
acquisition, partially offset by price increases, and benefits
from productivity and strategic initiatives, including efforts
to improve supply chain productivity and control material costs.
Gross profit for the
year ended December 31, 2007 was $2,568.3, a 17.3% increase
over 2006. Gross margin improved 50 basis points to 28.5%
for 2007. This increase was driven by our productivity and cost
savings initiatives, including continued efforts to improve
supply chain productivity and control material costs, partially
offset by unfavorable mix and foreign currency transaction costs.
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
Selling, general and
administrative expenses (“SG&A”) increased 28.4%
to $1,723.5 for the year ended December 31, 2008. The
year-over-year increase was primarily attributable to the
acquisitions of EDO and IMC, and a negative impact from foreign
currency exchange translation. In addition, we recognized
certain loss reserves as a result of realignment actions taken
during the fourth quarter of 2008 in our Fluid Technology and
Motion & Flow Control business segments.
SG&A increased
$166.8, or 14.2% in 2007. The year-over-year increase was
primarily attributable to higher levels of marketing expense at
each of our business segments in support of product campaigns
and new sales proposals. In addition, general and administrative
expense increased due to higher compensation-related costs,
investments in growth and process improvement initiatives, and
the impact of foreign currency translation.
SG&A as a
percentage of sales were 14.7%, 14.9%, and 15.1% for the three
years ended December 31, 2008, 2007 and 2006, respectively.
RESEARCH AND
DEVELOPMENT EXPENSES
Research and
development expenses (“R&D”) increased $62.0 and
$21.4 during 2008 and 2007, respectively, over each prior year
period. The 2008 increase reflects the impact of our recent
acquisitions, including EDO and IMC. R&D as a percentage of
sales were relatively consistent at 2.1%, 2.0%, and 2.1% for the
three years ended December 31, 2008, 2007 and 2006,
respectively, as we continued our efforts within each of our
business segments to support product development.
RESTRUCTURING AND
ASSET IMPAIRMENT CHARGES, NET
During 2008, 2007
and 2006, we recorded $77.5, $66.1 and $51.7, respectively, of
restructuring charges and asset impairment charges, net of
restructuring accruals reversed. These charges primarily include
facility consolidations and headcount reductions, which reflect
our efforts to streamline our operating structure. As a result
of a declining global economic environment, we accelerated
restructuring activities during the fourth quarter of 2008,
which, as a result, will better position our businesses for 2009.
See the section
entitled “Restructuring and Asset Impairment Charges”
and Note 4, “Restructuring and Asset Impairment
Charges,” in the Notes to Consolidated Financial Statements
for additional information.
OPERATING
INCOME
Operating income of
$1,210.1 for 2008 reflects a 23.8% increase over the prior year.
This increase was largely due to the impact from our EDO and IMC
acquisitions. In addition, we realized organic operating income
growth of 18.8% and 7.0% from our Defense
Electronics & Services and Fluid Technology business
segments, respectively. These contributions were primarily
attributable to higher sales volumes and new programs at the
Defense Electronics & Services business segment, and
price increases at the Fluid Technology business segment.
Operating income increased $4.3 at our Motion & Flow
Control business segment primarily due to contributions from
acquisitions, such as IMC, and a benefit from foreign currency
exchange translation, partially offset by higher production
costs.
Operating margin
decreased 60 basis points year-over-year to 10.3% for the
year ended December 31, 2008. This decrease reflects
increased SG&A, including the impact of acquisitions
(higher amortization of intangible assets), costs incurred in
23
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connection with our
fourth quarter realignment actions, higher restructuring
expense, and unfavorable foreign currency transaction costs,
partially offset by benefits from operating efficiencies and
cost savings initiatives, and lower pension expense.
Operating income of
$977.2 for 2007 reflects a 22.0% increase over the prior year.
This increase was driven by organic growth attributable to each
of our business segments and the benefit of foreign currency
exchange translation. Higher volumes coupled with price
increases and benefits from operating efficiencies and
cost-saving initiatives more than offset higher production costs
and higher SG&A expense.
INTEREST EXPENSE
AND INTEREST INCOME
During 2008, 2007
and 2006, we recognized interest expense of $140.8, $114.9, and
$86.2, respectively.
Interest expense
increased 22.5% during 2008 due to higher levels of debt,
primarily reflecting our funding for acquisitions and capital
expenditures during the periods, tax-related charges, and higher
interest rates during the fourth quarter of 2008, partially
offset by lower interest rates during the first nine months of
2008.
Interest expense
increased 33.3% during 2007 primarily due to higher average debt
levels during the year, reflecting funding for acquisitions,
stock repurchases, capital expenditures and pension plan
contributions. Partially offsetting the 2007 year-over-year
increase was a decrease of $7.0 in interest expense related to
income taxes as a result of the settlement of a tax examination
during the second quarter of 2007.
We recorded interest
income of $31.3, $49.6, and $25.4 for the years ended
December 31, 2008, 2007 and 2006. The year-over-year 2008
decrease and 2007 increase in interest income was driven by the
average balance of cash and cash equivalents held over each
respective period.
INCOME TAX
EXPENSE
Income tax expense
was $312.3 or 28.7% of income from continuing operations for the
year ended December 31, 2008, compared to $265.5 or 29.5%
during the prior year. The year-over-year decrease in the
effective tax rate was primarily attributable to a tax account
validation adjustment and the benefit from mix of earnings in
countries with differing statutory rates, partially offset by a
benefit recognized during 2007 associated with the settlement of
a tax examination.
Income tax expense
was $265.5 or 29.5% of income from continuing operations for the
year ended December 31, 2007, compared to $227.6 or 31.3%
during the prior year. The year-over-year decrease in the
effective tax rate was primarily attributable to a benefit
recognized during 2007 associated with the settlement of a tax
examination, partially offset by the impact of a penalty
recognized in 2006 associated with a Night Vision compliance
matter.
See Note 6,
“Income Taxes,” in the Notes to Consolidated Financial
Statements for additional information.
INCOME FROM
DISCONTINUED OPERATIONS, NET OF TAX
During 2007, we sold
the majority of the Switches businesses to a private equity
firm, for net proceeds of $223.2, and an after-tax gain of
$84.4. During the third quarter of 2008, we completed the sale
of the remaining component of the Switches businesses to the
same buyer, for net proceeds of $5.1. As a result, we recorded
an after-tax gain on sale of $5.4 for the year ended
December 31, 2008.
In the first quarter
of 2006, we completed the sale of FHS, our automotive brake and
fueling tubing and components business to a privately held
company for net proceeds of $187.7 and a gain of $19.0. The
business, which was a component of our Motion & Flow
Control business segment, manufactures steel and plastic tubing
for fuel and brake lines, quick-connects, and serves the
transportation industry.
During the first
quarter of 2006, we also completed the sale of Richter, our
industrial non-metallic lined pumps and valves business to a
private equity investor for net proceeds of $24.8 and a gain of
$22.2. The business, which was a component of the Fluid
Technology business segment, was a manufacturer of pumps and
valves for selected segments in the chemical, fine chemical and
pharmaceutical industries.
See Note 5,
“Discontinued Operations,” in the Notes to
Consolidated Financial Statements for additional information.
24
Table of Contents
SEGMENT
REVIEW
| REVENUE | OPERATING INCOME | OPERATING MARGIN | ||||||||||||||||||||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||
|
Defense Electronics & Services
|
$ | 6,282.3 | $ | 4,176.2 | $ | 3,659.3 | $ | 727.0 | $ | 502.7 | $ | 404.3 | 11.6 | % | 12.0 | % | 11.0 | % | ||||||||||||||||||||||||
|
Fluid Technology
|
3,840.6 | 3,509.1 | 3,070.1 | 468.7 | 432.7 | 370.6 | 12.2 | % | 12.3 | % | 12.1 | % | ||||||||||||||||||||||||||||||
|
Motion & Flow Control
|
1,583.4 | 1,332.5 | 1,092.9 | 191.7 | 187.4 | 149.7 | 12.1 | % | 14.1 | % | 13.7 | % | ||||||||||||||||||||||||||||||
|
Corporate and Other/Eliminations
|
(11.5 | ) | (14.5 | ) | (14.4 | ) | (177.3 | ) | (145.6 | ) | (123.6 | ) | – | – | – | |||||||||||||||||||||||||||
|
Total
|
$ | 11,694.8 | $ | 9,003.3 | $ | 7,807.9 | $ | 1,210.1 | $ | 977.2 | $ | 801.0 | 10.3 | % | 10.9 | % | 10.3 | % | ||||||||||||||||||||||||
Defense
Electronics & Services
Sales and revenues
for the year ended December 31, 2008 increased 50.4% over
the prior year to $6,282.3. During 2007, sales and revenues were
$4,176.2, an increase of 14.1% over 2006. The following table
illustrates the impact of organic growth, and acquisitions
completed during the period on sales and revenues.
|
2008/2007 |
2007/2006 |
|||||||||
| % Change | % Change | |||||||||
|
Organic growth
|
8.2 | % | 12.6 | % | ||||||
|
Acquisitions
|
42.3 | % | 1.5 | % | ||||||
|
Foreign currency translation
|
(0.1 | )% | – | |||||||
|
Sales and revenues
|
50.4 | % | 14.1 | % | ||||||
2008 Versus
2007
Acquisitions,
including EDO and its shipments of CREW, contributed $1,766.4 in
sales and revenues for the year ended December 31, 2008.
Organic sales increased $341.9 or 8.2%, primarily due to
contributions from the Advanced Engineering & Sciences
Division, driven by both existing and new contracts, including
classified research programs, data analysis contracts, and the
Federal Aviation Administration’s contract to build
the next generation air-traffic control system. Organic
revenue growth was also attributable to contributions from our
Communications Systems Division, driven by strength in
international Single Channel Ground and Airborne Radio sales,
and Systems Division, primarily driven by non-conflict related
programs such as SENSOR, missile defense and space control
programs. Positive contributions from the GPS Navigation and the
GeoEye projects were more than offset by declines in remote
sensing and classified government programs at our Space Systems
Division. Night Vision Division organic sales increased as a
result of contributions from new products and higher
international sales. Sales and revenues from our Electronic
Systems Division was relatively flat year-over-year, as
decreases in our radar systems offset contributions from
avionics.
Operating income
increased $224.3 or 44.6% during 2008. Acquisitions, including
EDO, contributed $129.8 during 2008, with the remaining increase
of $94.5 attributable to organic growth. The year-over-year
organic growth increase was primarily attributable to the
previously mentioned sales drivers. Operating margins decreased
40 basis points to 11.6%, reflecting higher production
costs, higher amortization of intangible assets recognized as a
result of the EDO acquisition, partially offset by benefits from
productivity improvements and supply chain initiatives.
2007 Versus
2006
The benefit of new
programs and sales growth on existing contracts, particularly at
the Advanced Engineering & Services and Systems
Divisions, drove the 2007 increase in sales and revenues. In
addition, volume declines within Space Systems business due to
lower content on certain platforms partially offset the
segment’s overall performance. Results attributable to
acquisitions during 2007 related primarily to EDO.
Operating income
increased $98.4 or 24.3% during 2007. Excluding the impact of
acquisitions, operating income increased $102.0 or 25.2%. This
increase was primarily attributable to the previously mentioned
sales drivers. Operating margins of 12.0% during 2007, reflect a
100 basis point improvement over 2006. This increase was
attributable to increased operating efficiencies, partially
offset by estimated costs to settle compliance issues in the
Defense Electronics & Services business segment.
Orders and
Backlog
The level of order
activity related to programs within the Defense
Electronics & Services business segment can be
affected by the timing of government funding authorizations and
project evaluation cycles. Year-over-year comparisons could, at
times, be impacted by these factors, among others.
We received orders
of $6,232.9 during 2008, an increase of $2,159.0 over the prior
year, primarily attributable to contributions from acquisitions
of $1,555.1, including EDO. Organic orders grew 14.8% over the
prior year. Funded order backlog was $5.2 billion at
December 31, 2008 and 2007.
We received orders
of $4,073.9 during 2007, a decrease of $44.1 compared with the
prior year. Funded order backlog was
25
Table of Contents
$5.2 billion at
December 31, 2007, compared to $3.9 billion at
December 31, 2006.
Fluid
Technology
Sales and revenues
for the year ended December 31, 2008 were $3,840.6,
reflecting an 9.4% increase over 2007. During 2007, sales and
revenues grew 14.3% over 2006 to $3,509.1. The following table
illustrates the impact of organic growth, acquisitions completed
during the period, and foreign currency translation fluctuations
on sales and revenues during these periods.
|
2008/2007 |
2007/2006 |
|||||||||
| % CHANGE | % CHANGE | |||||||||
|
Organic growth
|
7.7 | % | 8.9 | % | ||||||
|
Acquisitions
|
0.3 | % | 0.9 | % | ||||||
|
Foreign currency translation
|
1.4 | % | 4.5 | % | ||||||
|
Sales and revenues
|
9.4 | % | 14.3 | % | ||||||
2008 Versus
2007
Sales and revenues
increased $331.5 over the prior year. This increase was
primarily attributable to organic growth of 7.7%, driven by
higher volume and price, and the benefit from foreign exchange
translation. Factors driving organic sales growth were as
follows:
| Water & Wastewater |
Organic sales
increased $104.5 or 6.3% for the year ended December 31,
2008, due to strength in water/wastewater transport,
particularly within the municipal market, and dewatering,
primarily attributable to the mining market.
| Residential & Commercial Water |
Organic sales
increased $55.4 or 4.7% for the year ended December 31,
2008, respectively, due to strength in global commercial
markets; strength in the North American agriculture/irrigation
market, offset by weakness in the North American residential
market.
| Industrial Process |
Organic sales
increased by $121.9 or 17.3% for the year ended
December 31, 2008, due to strength in our industrial
operations, particularly within the chemical, oil and gas, power
and mining markets.
Operating income for
the year ended December 31, 2008 increased $36.0 or 8.3%
over prior year, with a benefit of 1.3% attributable to foreign
currency exchange translation. Organic operating income growth
of 7.0% was primarily attributable to the previously mentioned
sales drivers. Operating margins decreased 10 basis points
to 12.2% during 2008, reflecting higher production costs, as
well as costs associated with the disposition of a manufacturing
facility, partially offset by benefits from productivity
improvements and supply chain initiatives and lower pension
expense.
During 2008, we
received orders of $3,938.7, an increase of $281.6 or 7.7% over
the prior year, primarily due to organic order growth of $204.7
or 5.6%. This increase was primarily attributable to Industrial
Process, resulting from strength in large project orders and
strength in international markets. Order backlog was $890.1 at
December 31, 2008, compared to $887.1 at December 31,
2007.
2007 Versus
2006
During 2007, we
recognized sales and revenues of $3,509.1, an increase of $439.0
or 14.3% over 2006, including a $138.3 benefit from foreign
currency exchange translation. Organic revenues grew 8.9%
year-over-year due to higher prices and increased sales volume
in international markets such as Europe, the Middle East,
Africa, Central and South America and Asia/Pacific.
Water &
Wastewater
Organic sales grew
8.3%, on strength in large pump sales and the dewatering
business, partially offset by softness in the U.S. water
treatment business.
Residential &
Commercial Water
Organic sales grew
5.7%, as strength in commercial applications was partially
offset by softness in the residential market.
| Industrial Process |
Organic sales
increased by 17.3%, resulting from strength in large project
sales, particularly in the mining and oil and gas markets.
Operating income for
the year ended December 31, 2007 increased $62.1 or 16.8%
over prior year, with a benefit of 5.2% attributable to foreign
currency exchange translation. The 2007 year-over-year
organic income growth was primarily attributable to the
previously mentioned sales drivers. Operating margins increased
20 basis points to 12.3% during 2007, reflecting higher
prices, favorable sales mix, lower restructuring expense, and
benefits from productivity improvements and supply chain
initiatives, partially offset by increased production costs and
selling, general and administrative expense.
During 2007, we
received orders of $3,657.1, an increase of $513.0 or 16.3% over
the prior year. This increase was primarily attributable to
strength in water transport, particularly within the mining and
the public utility/municipal markets, and continued strength in
industrial project orders. Order backlog was $887.1 at
December 31, 2007, compared to $702.2 at December 31,
2006.
26
Table of Contents
Motion &
Flow Control
Sales and revenues
for the year ended December 31, 2008 were $1,583.4,
reflecting an 18.8% increase over 2007. During 2007, sales and
revenues grew 21.9% over 2006 to $1,332.5. The following table
illustrates the impact of organic growth, acquisitions completed
during the period, and foreign currency translation fluctuations
on sales and revenues during these periods.
|
2008/2007 |
2007/2006 |
|||||||||
| % CHANGE | % CHANGE | |||||||||
|
Organic growth
|
2.1 | % | 10.2 | % | ||||||
|
Acquisitions
|
12.9 | % | 6.3 | % | ||||||
|
Foreign currency translation
|
3.8 | % | 5.4 | % | ||||||
|
Sales and revenues
|
18.8 | % | 21.9 | % | ||||||
2008 Versus
2007
Sales and revenues
increased $250.9 over the prior year, primarily attributable to
contributions from IMC and the benefit of foreign currency
exchange translation. Organic sales and revenues grew $27.4 or
2.1%. Factors driving this increase were as follows:
Motion
Technologies
Organic sales
increased $26.9 or 5.4%. These increases were attributable to
higher volumes of OEM components (new platform wins), and
aftermarket brake pad sales. These contributions were partially
offset by a general slowdown during the second half of 2008 in
the global automotive markets.
Interconnect
Solutions
Organic sales
increased on higher volumes by $16.1 or 3.8%, primarily
attributable to the Americas and Asia markets (strength in
medical, defense, aerospace, rail and industrial markets,
particularly within the oil & gas industry).
Flow
Control
Organic sales
decreased $25.0 or 9.9%. This decrease was primarily
attributable to an overall decline in the bath, spa and
whirlpool markets, partially offset by positive contributions
from the domestic beverage market.
Control
Technologies
Organic sales
increased $12.9 or 11.0%, primarily driven by strength in
commercial/aerospace aftermarket products.
Energy
Absorption
Organic sales
decreased $2.0 or 4.8%, primarily reflecting a decline in the
global industrial market.
Operating income
increased $4.3 or 2.3% including contributions from acquisitions
and the benefit from foreign currency exchange translation.
Operating income declined $28.0 or 14.9% on an organic basis
primarily due to costs associated with the planned sale of our
Spa and Whirlpool and European Industrial Distribution business,
higher restructuring expense and production costs, partially
offset by increased sales volume, benefits from productivity
improvements and supply chain initiatives, and lower pension
expense.
Operating margins
decreased 200 basis points to 12.1% during 2008, primarily
reflecting the factors described above.
During 2008, we
received orders of $1,563.3, an increase of $184.3 or 13.4% over
the prior year. This increase was driven by contributions from
acquisitions, including IMC, and the benefit from foreign
currency exchange translation, partially offset by a decline in
organic orders of 3.0%. Order backlog was $417.1 at
December 31, 2008, compared to $440.4 at December 31,
2007.
2007 versus
2006
Sales and revenues
increased $239.6 or 21.9% over the prior year, attributable to
organic sales growth of $111.7 or 10.2%, contributions from
acquisitions, including IMC, of $69.2 and the benefit of foreign
currency exchange translation of $58.7. Significant factors
attributable to the organic sales growth are illustrated in the
table below.
Motion
Technologies
Organic sales
increased $51.1 or 12.6%. This increase were attributable to
higher volumes on new European platforms and existing programs.
Interconnect
Solutions
Organic sales
increased $34.4 or 9.0% due to higher volumes of electronic
components sales, particularly in Asia and the Americas.
Flow
Control
Organic sales
increased $10.2 or 4.5%. This increase was primarily
attributable to higher volumes in the marine, industrial and
beverage markets, partially offset by declines in the bath, spa
and whirlpool markets.
Control
Technologies
Organic sales
increased $15.6 or 18.9%, primarily due to higher sales to
commercial, military and to a lesser extent industrial markets.
Operating income
increased $37.7 or 25.2% for 2007 compared to 2006. Organic
operating income increased $26.9 or 18.0% over the same period.
The year-over-year increase was primarily driven by higher sales
volumes, cost reduction initiatives, and operating efficiencies.
These benefits were partially offset by higher material costs,
unfavorable mix, and higher SG&A expense, including
increased marketing expense,
27
Table of Contents
higher compensation
costs and the impact of foreign currency translation.
Operating margin was
14.1% and 13.7% for 2007 and 2006, respectively. The
year-over-year increase primarily reflects the factors discussed
above.
We received orders
of $1,379.0 reflecting an increase of $237.6 or 20.8% over the
prior year period. Order growth was attributable to each
business within the segment, including Motion Technologies,
driven by the previously mentioned new platforms in Europe, and
Control Technologies. Order backlog was $440.4 at
December 31, 2007, compared to $409.3 at December 31,
2006.
Corporate and
Other
Corporate expenses
of $177.3 for the year ended December 31, 2008 increased
$31.7 compared to the same prior year period, primarily
reflecting higher bonus and restructuring costs, as well as
corporate initiatives, including expanded resources and review
procedures in the tax accounting function. Corporate expenses of
$145.6 for 2007 increased $22.0 compared to the prior year,
primarily reflecting higher bonus, stock-based compensation,
pension and post-employment benefits and other
compensation-related expenses.
Restructuring and
Asset Impairment Charges
Fourth Quarter
2008 Restructuring Activities and Asset Impairment
Charges
In response to
current and anticipated market conditions, we accelerated
restructuring activities across our businesses during the fourth
quarter of 2008. These restructuring actions resulted in a net
restructuring charge of $56.3 and related payments of $9.5. We
anticipate an additional $6.2 of restructuring charges will be
incurred and payments of $47.7 will occur during 2009 related to
these actions.
Components of
Charges
| FOURTH QUARTER 2008 ACTIONS | ||||||||||||||||||||||||||||||
|
OTHER |
LEASE |
PLANNED |
||||||||||||||||||||||||||||
|
EMPLOYEE- |
CANCELLATION
& |
ASSET |
POSITION |
|||||||||||||||||||||||||||
| SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | |||||||||||||||||||||||||
|
Fluid Technology
|
$ | 24.1 | $ | 0.2 | $ | 0.4 | $ | 0.1 | $ | 24.8 | 523 | |||||||||||||||||||
|
Defense Electronics & Services
|
8.3 | 0.7 | 0.4 | – | 9.4 | 144 | ||||||||||||||||||||||||
|
Motion & Flow Control
|
19.7 | 0.3 | 0.3 | 0.8 | 21.1 | 578 | ||||||||||||||||||||||||
|
Corporate and Other
|
0.9 | 0.1 | – | – | 1.0 | 13 | ||||||||||||||||||||||||
| $ | 53.0 | $ | 1.3 | $ | 1.1 | $ | 0.9 | $ | 56.3 | 1,258 | ||||||||||||||||||||
The charges
associated with actions announced during the fourth quarter of
2008 primarily represent a reduction of structural costs in all
business segments and the planned closure of a facility within
the Motion & Flow Control business segment. Planned
position eliminations total 1,258, including 601 factory
workers, 629 office workers and 28 management employees.
The projected future
savings over a five-year horizon from restructuring actions
announced during the fourth quarter of 2008 are approximately
$63 during 2009, and $267 between 2010 and 2013.
Additionally, during
the fourth quarter of 2008, we recorded a net restructuring and
asset impairment charge of $5.3, reflecting costs of $3.9
related to prior actions and the reversal of $0.4 of
restructuring accruals that management determined would not be
required, as well as an asset impairment charge of $1.8 related
to the write-down of software due to a decision to cancel a
project as a result of an organizational realignment.
2008
Restructuring Activities
During 2008, we
recorded a net restructuring charge of $74.6, reflecting costs
of $66.9 related to new actions and $9.3 related to prior
years’ plans, as well as the reversal of $1.6 of
restructuring accruals that management determined would not be
required.
28
Table of Contents
Components of
Charges
| 2008 ACTIONS | ||||||||||||||||||||||||||||||||||||||||
|
PRIOR |
||||||||||||||||||||||||||||||||||||||||
|
OTHER |
LEASE |
PLANNED |
YEARS’
PLANS |
|||||||||||||||||||||||||||||||||||||
|
EMPLOYEE- |
CANCELLATION
& |
ASSET |
POSITION |
ADDITIONAL |
REVERSAL OF |
|||||||||||||||||||||||||||||||||||
| SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | |||||||||||||||||||||||||||||||||
|
Fluid Technology
|
$ | 30.7 | $ | 0.4 | $ | 0.9 | $ | 0.1 | $ | 32.1 | 600 | $ | 3.2 | $ | (1.0 | ) | ||||||||||||||||||||||||
|
Defense Electronics & Services
|
9.6 | 0.7 | 0.6 | – | 10.9 | 157 | 0.1 | (0.2 | ) | |||||||||||||||||||||||||||||||
|
Motion & Flow Control
|
20.5 | 0.6 | 0.4 | 0.8 | 22.3 | 589 | 6.0 | (0.4 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
1.4 | 0.1 | 0.1 | – | 1.6 | 14 | – | – | ||||||||||||||||||||||||||||||||
| $ | 62.2 | $ | 1.8 | $ | 2.0 | $ | 0.9 | $ | 66.9 | 1,360 | $ | 9.3 | $ | (1.6 | ) | |||||||||||||||||||||||||
The charges
associated with actions announced during 2008 primarily
represent a reduction of structural costs in all business
segments and the planned closure of a facility in the
Motion & Flow Control business segment and a facility
in the Defense Electronics & Services business
segment. Planned position eliminations total 1,360, including
614 factory workers, 704 office workers and 42 management
employees. The costs associated with the prior years’ plans
primarily reflect severance and lease cancellation related costs.
Payments of $16.1
were made during 2008 related to actions announced during 2008.
The projected future
savings over a five year horizon from restructuring actions
announced during 2008 are approximately $73 during 2009 (of
which $69 is incremental to savings realized in 2008), and $308
between 2010 and 2013.
2008 Asset
Impairment Charges
During 2008, we
recognized $2.9 of charges related to the impairment of
long-lived assets. During the fourth quarter of 2008, we
recognized an asset impairment charge of $1.8 related to the
write-down of software due to a decision to cancel a project as
a result of an organizational realignment. During the third
quarter of 2008, we recognized an impairment charge of $1.1
related to one of our Motion & Flow Control
businesses, reflecting the reduction of our expected future
earnings for this business.
2007
Restructuring Activities
During 2007, we
recorded a net restructuring charge of $61.1, reflecting costs
of $57.9 related to new actions and $7.4 related to prior year
plans, as well as the reversal of $4.2 of restructuring accruals
that management determined would not be required.
Components of
Charges
| 2007 ACTIONS |
PRIOR |
|||||||||||||||||||||||||||||||||||||||
|
OTHER |
LEASE |
PLANNED |
YEARS’ PLANS |
|||||||||||||||||||||||||||||||||||||
|
EMPLOYEE- |
CANCELLATION
& |
ASSET |
POSITION |
ADDITIONAL |
REVERSAL OF |
|||||||||||||||||||||||||||||||||||
| SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | |||||||||||||||||||||||||||||||||
|
Fluid Technology
|
$ | 32.7 | $ | 0.5 | $ | 1.4 | $ | 2.1 | $ | 36.7 | 410 | $ | 3.5 | $ | (1.1 | ) | ||||||||||||||||||||||||
|
Defense Electronics & Services
|
6.2 | – | 1.5 | – | 7.7 | 115 | 2.9 | (0.9 | ) | |||||||||||||||||||||||||||||||
|
Motion & Flow Control
|
9.5 | – | 0.3 | 0.4 | 10.2 | 201 | 1.0 | (0.5 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
3.3 | – | – | – | 3.3 | 3 | – | (1.7 | ) | |||||||||||||||||||||||||||||||
| $ | 51.7 | $ | 0.5 | $ | 3.2 | $ | 2.5 | $ | 57.9 | 729 | $ | 7.4 | $ | (4.2 | ) | |||||||||||||||||||||||||
The charges
associated with actions announced during 2007 represent a
reduction of structural costs in all business segments and the
planned closure of four facilities in the Fluid Technology
business segment, one facility in the Motion & Flow
Control business segment and two facilities in the Defense
Electronics & Services business segment. Planned
position eliminations total 729, including 341 factory workers,
345 office workers and 43 management employees. The costs
associated with prior years’ plans primarily reflect
additional costs related
29
Table of Contents
to an adjustment to
the write-off of leased space as well as asset write-offs and
severance costs.
Payments of $26.8
were made during 2007 related to actions announced during 2007.
The projected future
savings over a four-year horizon from restructuring actions
announced during 2007 are approximately $57 during 2009, and
$173 between 2010 and 2012.
2007 Asset
Impairment Charges
During the fourth
quarter of 2007, we recognized $5.0 of charges related to the
impairment of long-lived assets. The impairment was the result
of our determination that two businesses, one within the
Motion & Flow Control business segment and one within
the Fluid Technology business segment, were experiencing lower
than expected financial results, and as a result certain
long-lived assets of those businesses may be impaired. After
revising the earnings forecasts for those businesses to reflect
current business conditions, asset impairment charges of $4.2
and $0.8 were recorded within the Motion & Flow
Control and Fluid Technology business segments, respectively.
2006
Restructuring Activities
During 2006, we
recorded a net restructuring charge of $51.7, reflecting costs
of $52.7 related to new actions and $3.8 related to prior year
plans, as well as the reversal of $4.8 of restructuring accruals
that management determined would not be required.
Components of
Charges
| 2006 ACTIONS |
PRIOR |
|||||||||||||||||||||||||||||||||||||||
|
OTHER |
LEASE |
PLANNED |
YEARS’ PLANS |
|||||||||||||||||||||||||||||||||||||
|
EMPLOYEE- |
CANCELLATION
& |
ASSET |
POSITION |
ADDITIONAL |
REVERSAL OF |
|||||||||||||||||||||||||||||||||||
| SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | |||||||||||||||||||||||||||||||||
|
Fluid Technology
|
$ | 17.0 | $ | 2.8 | $ | 5.7 | $ | 1.2 | $ | 26.7 | 441 | $ | 0.9 | $ | (0.9 | ) | ||||||||||||||||||||||||
|
Defense Electronics & Services
|
3.2 | 0.1 | 3.9 | – | 7.2 | 113 | – | (0.9 | ) | |||||||||||||||||||||||||||||||
|
Motion & Flow Control
|
11.3 | 0.1 | 4.1 | 1.2 | 16.7 | 236 | 2.8 | (3.0 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
2.1 | – | – | – | 2.1 | 26 | 0.1 | – | ||||||||||||||||||||||||||||||||
| $ | 33.6 | $ | 3.0 | $ | 13.7 | $ | 2.4 | $ | 52.7 | 816 | $ | 3.8 | $ | (4.8 | ) | |||||||||||||||||||||||||
The charges
associated with actions announced during 2006 represent a
reduction of structural costs in all business segments and the
closure of three facilities in the Fluid Technology business
segment, two in the Motion & Flow Control business
segment and one in the Defense Electronics & Services
business segment. Planned position eliminations total 816,
including 427 factory workers, 360 office workers and
29 management employees. The costs associated with prior
years’ plans primarily reflect additional severance costs.
Payments of $20.5
were made during 2006 related to actions announced during 2006.
The projected future
savings over a three-year horizon from restructuring actions
announced during 2006 are approximately $49 during 2009, and $97
between 2010 and 2011.
Employee Benefit
Plans
Pension
Expense
We recorded $0.3 of
net periodic pension income in the Consolidated Income Statement
in 2008, compared with net periodic pension cost of $61.7 in
2007. As more fully described in Note 16, “Employee
Benefit Plans,” in the Notes to Consolidated Financial
Statements, the primary drivers behind the decrease in the net
periodic pension cost were the effect of a higher expected
return on plan assets and a decrease in the amortization of
deferred losses.
In 2009, we expect
to incur approximately $40.6 of net periodic pension cost that
will be recorded in the Consolidated Income Statement. The
increase in net periodic pension cost is primarily due to the
effect of an increase in the amortization of deferred losses
partially offset by an increase in the discount rate for the
foreign plans.
Funded Status,
Plan Contributions and Other
During the fourth
quarter of 2008, we recognized a substantial decline in the fair
market value of our employee pension plan assets, contributing
to a pre-tax charge to other comprehensive loss of
$2.1 billion and a decrease of $1.3 billion in
shareholders’ equity. Further, this decline also
contributed to a reduction in the funded status of our
U.S. Salaried Pension Plan, which represents approximately
78% of out total pension obligation.
At December 31,
2008, the U.S. Salaried Pension Plan had an unfunded
deficit of $1.1 billion. For the balance of our funded
pension plans, including foreign and affiliate plans, the
aggregate funded status decreased by $274.4 resulting in a net
unfunded balance at December 31, 2008 of $222.2. In
addition, we had $359.2 in pension plans where funding is
30
Table of Contents
not permitted or, in
foreign environments, where funding is not feasible.
Funding requirements
under IRS rules are a major consideration in making
contributions to our pension plans. With respect to qualified
pension plans, we intend to contribute annually not less than
the minimum required by applicable law and regulations. In 2008,
we contributed $24.1 to pension plans. We currently anticipate
making contributions to pension plans in the range of $20 to $25
during 2009.
The Pension
Protection Act of 2006 (the “Pension Act”) contains
funding requirements for defined benefit pension plans. The
Pension Act establishes a 100% funding target over 7 years
for plan years beginning after December 31, 2007. No
shortfall amortization payments are required if the pension plan
meets the following targets: 92% funded in 2008; 94% funded in
2009; and 96% funded in 2010. The Worker, Retiree, and Employer
Recovery Act of 2008 (“WRERA”) was passed in December
2008. WRERA provides (i) the shortfall amortization charge
will be based on the transition percentages (92% in 2008, 94% in
2009, 96% in 2010 and 100% thereafter as opposed to the original
PPA language of 100% of funding target, (ii) clarification
that the averaging method used to value assets is to be adjusted
for expected earnings which results in “asset
smoothing”, and (iii) relief from the restriction on
benefit accruals in 2009, by allowing a plan sponsor to use the
greater of the Adjusted Funding Target Attainment Percentage
from January 1, 2008 and January 1, 2009.
In 2009, we are not
required to make any mandatory contributions to our
U.S. Salaried Plan to satisfy minimum statutory funding
requirements. Further, assuming that actual plan returns are
consistent with our expected plan return of nine percent in
2009, interest rates remain constant, and there are no
additional changes to U.S. pension funding legislation, we
would not be required to make any mandatory contributions in
2010. We may, however, make voluntary contributions over the
next two years to improve the funded status of our
U.S. Salaried Plan.
Funded status at the
end of 2009, and future required contributions, will depend
primarily on the actual return on assets during the year and the
discount rate at the end of the year. Depending on these
factors, and the resulting funded status of our pension plans,
the level of future contributions could be material.
Recoverable
Pension Costs and Plan Contributions
U.S. Government
Cost Accounting Standards govern the extent to which pension
costs and plan contributions are allocable to and recoverable
under contracts with the U.S. Government. The Defense
Electronics & Services business segment represents
approximately 70% of the active U.S. Salaried Plan
participants. As a result, we have sought and would seek
reimbursement from the Department of Defense for a portion of
our pension costs and plan contributions.
Cash Flow
Summary
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Operating Activities
|
$ | 1,119.6 | $ | 798.1 | $ | 780.7 | |||||||||
|
Investing Activities
|
(502.9 | ) | (1,958.1 | ) | (46.3 | ) | |||||||||
|
Financing Activities
|
(1,407.4 | ) | 1,981.1 | (370.2 | ) | ||||||||||
|
Discontinued Operations – Operating Activities
|
(9.1 | ) | (16.2 | ) | 80.2 | ||||||||||
Operating
Activities
Cash provided by
operating activities in 2008 increased $321.5 from the prior
year. This significant increase is partially due to a $235.1
increase in income from continuing operations, excluding
non-cash increases in depreciation and amortization, combined
with a reduction in contributions to the U.S. Salaried
Pension Plan (reflected within the change of other current and
non-current assets). There were no contributions to the
U.S. Salaried Pension Plan made in 2008 as compared to
$50.0 in 2007. Working capital provided a modest increase in
cash from last year as a $123.8 reduction in the use of cash
from accounts receivable, primarily driven by improved cash
collections within the Fluid Technology business segment, was
largely offset by reduced sources of cash of $75.9 from accounts
payable and accrued expenses and $41.4 from inventories. Each of
the business segments contributed to the accounts payable and
accrued expenses impact, led by lower volumes and timing of
payments, while the change in inventories was primarily
attributable to the Defense Electronics & Services
business segment due to the ramp up of CREW units, coupled with
delayed international shipments. Additionally, EDO businesses
were a significant contribution underlying the overall operating
cash flow performance.
Cash provided by
operating activities in 2007 increased $17.4 from the prior
year. This increase is due to a $133.3 increase in income from
continuing operations, combined with a $213.2 improvement in
cash from inventories across all three business segments. These
increases in cash were partially offset by a $175.5 increased
use of cash for accounts receivable mainly due to the Fluid
Technology business segment, reflecting higher volumes overall,
including increased sales in Europe, which have longer payment
terms, and the Defense Electronics & Services business
segment primarily due to higher overall volumes, and the
increase in EDO receivables since the acquisition date. Also,
accounts payable and accrued expenses were a reduced source of
cash totaling $109.2, primarily due to contract reserve
adjustments as well as a payment of $30.0 towards $50.0 in
fines, forfeitures and penalties we agreed to in
31
Table of Contents
conjunction with our
settlement with the U.S. Government relating to an Night
Vision Division compliance matter. See Note 19,
“Commitments and Contingencies,” in the Notes to
Consolidated Financial Statements for further discussion of the
Night Vision matter. Additionally, accrued and deferred taxes
mitigated the increase in cash by $64.4, primarily related to
increased tax payments of $116.3, partially offset by increased
accrued and deferred tax liabilities.
Investing
Activities
Additions to
Plant, Property and Equipment:
Capital expenditures
during 2008 were $248.7, an increase of $9.4 as compared to
2007. The increase is driven by higher spending of $30.3 in the
Defense Electronics & Services business segment
primarily due to the acquisition of EDO at the end of 2007, an
$18.5 increase in the Motion & Flow Control business
segment as a result of the purchase of a manufacturing facility
in Mexico, combined with timing of investments as compared to
last year. These increases were offset by net reductions of
$39.4 largely reflecting the absence of a prior year cash
payment of $44.8 related to the renewal of the sale leaseback
arrangement for ITT’s corporate aircraft whose term expired
in December 2007 (see Note 20, “Guarantees,
Indemnities and Warranties,” in the Notes to Consolidated
Financial Statements for further discussion). This was partially
offset by payments related to the leasehold improvements for
ITT’s new headquarters that consolidates its corporate
headquarters and the headquarters operations of its Fluid
Technology and Motion & Flow Control business segments.
Capital expenditures
during 2007 were $239.3, an increase of $62.2 from 2006. The
Fluid Technology business segment increased its capital
expenditures by $21.4, largely related to incremental
investments in facilities in Asia and Eastern Europe. Also
reflected in 2007 capital expenditures was a cash payment of
$44.8 related to the renewal of the sale leaseback arrangement
for ITT’s corporate aircraft whose term expired in December
2007 (see Note 20, “Guarantees, Indemnities and
Warranties,” in the Notes to Consolidated Financial
Statements for further discussion).
Acquisitions:
2008
Acquisitions
During 2008, we
spent $226.5 related to additional costs for 2007 acquisitions
including, the EDO acquisition within the Defense
Electronics & Services business segment, largely for
repayment of debt acquired. We also spent $49.2 on acquisitions
of several other smaller companies, including two companies in
Motion & Flow Control and two companies in Fluid
Technology, as well as other acquisition-related costs.
2007
Acquisitions
During 2007, we
spent $2,009.2 for the acquisition of six companies. The
acquisitions of EDO for $1,598.7 within our Defense
Electronics & Services business segment and of IMC for
$390.5 within our Motion & Flow Control business
segment comprised most of the total spending. Of the other
acquisitions, one was in the Defense Electronics &
Services business segment and three were in the Fluid Technology
business segment.
2006
Acquisitions
During 2006, we
spent $89.5, primarily for the acquisition of three entities,
one within the Fluid Technology business segment, one in the
Defense Electronics & Services business segment and
one in the Motion & Flow Control business segment.
Proceeds from
Sale of Assets and Businesses:
During 2008, we
completed the sale of the remaining component of the Switches
businesses, for net proceeds of $5.1. In 2007, we had sold the
substantial part of our Switches businesses for net proceeds of
$223.2, with the buyer to acquire the remainder once asset
transfer issues were resolved.
Additionally, as
part of ITT’s renewal of its corporate aircraft sale
leaseback, in 2007 we received a cash payment of $50.2 for the
sale of the aircraft to the lessor (see Note 20,
“Guarantees, Indemnities and Warranties,” in the Notes
to Consolidated Financial Statements for further discussion).
In the first quarter
of 2006, we completed the sale of Fluid Handling Systems and
Richter for net proceeds of $212.5.
Financing
Activities
Short-term
debt:
During 2008, our use
of cash related to short-term debt increased $3,540.9 over the
prior year, reflecting net payments of $1,229.0 in 2008
primarily related to the financing of the EDO acquisition as
compared to net short-term borrowings of $2,311.9 in 2007.
During 2007, our net
short-term borrowings provided a $2,467.5 increased source of
cash as compared to the prior year largely due to debt used to
finance the EDO acquisition.
Share
Repurchases:
In 2008, we spent
$75.0, including commission fees, on the repurchase of common
stock. As of December 31, 2008, we had repurchased
7.1 shares for $430.8, including commission fees, under our
$1 billion share repurchase program.
In 2007, we spent
$299.1, including commission fees, on the repurchase of common
stock. Of this amount, $48.6 relates to 0.9 shares which
were acquired at the end of 2006 and settled in January 2007.
The remaining $250.5 relates to 4.1 shares repurchased in
2007.
32
Table of Contents
In December 2006, we
purchased 1.9 shares for $105.3, including commission fees.
Of this activity, 0.9 shares were acquired at the end of
2006 and settled in January 2007 for $48.6. This activity was
part of a $1 billion share repurchase program announced
during the fourth quarter of 2006, which replaces our previous
practice of covering shares granted or exercised in the context
of ITT’s performance incentive plans. Additionally, in
2006, we repurchased 2.8 shares for $153.4 to offset the
dilutive effect of exercised stock options and restricted stock
issuances.
Dividends:
In 2008, we made
$120.9 of dividend payments to shareholders, a 25% increase over
2007.
In 2007, we made
$96.6 of dividend payments to shareholders, a 25% increase over
2006.
Discontinued
Operations – Operating Activities
During 2008, cash
used in operating activities of discontinued operations declined
$7.1 from the prior year primarily due to a decrease in cash
used by our Switches businesses as a result of the disposition
of substantially all of the businesses during third quarter of
2007.
During 2007, cash
from operating activities of discontinued operations declined
$96.4 due to a use of cash of $16.2 in the current year as
compared to an $80.2 source in the prior year. The primary
driver of the decrease in cash flow was the absence of operating
cash flows from our Switches businesses (sold in the third
quarter of 2007) and our FHS and Richter businesses (sold
in the first quarter of 2006).
Liquidity and
Capital Resources
Our principal source
of liquidity is operating cash flows, and we have demonstrated
the ability to meet our additional funding requirements through
the issuance of commercial paper. Our funding needs are
monitored and strategies are executed to meet overall cash
requirements, including the management of our capital structure
on a short and long-term basis. Significant factors that affect
our overall management of liquidity include the adequacy of
commercial paper and bank lines of credit, and the ability to
attract long-term capital at 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 advantageous to do so.
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
have and will continue to transfer cash from those subsidiaries
to U.S. and to other international subsidiaries when it is
cost effective to do so.
We believe that
available cash, committed credit facilities and access to the
public debt markets provide adequate short-term and long-term
liquidity.
Recent declines in
the worldwide debt and equity markets have had an adverse impact
on market participants including, among other things, volatility
in security prices, diminished liquidity, and limited access to
funding. We have assessed the implications of these factors on
our current business and determined that there has not been a
significant impact to our financial position, results of
operations, or liquidity during 2008. If our access to the
commercial paper market is adversely affected, we believe that
alternative sources of liquidity, including available cash and
existing committed credit facilities, would be sufficient to
meet our short-term funding requirements.
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
increased dividends and share repurchases.
| DECEMBER 31, | 2008 | 2007 | ||||||||
|
Cash and cash equivalents
|
$ | 964.9 | $ | 1,840.0 | ||||||
|
Short-term debt and current maturities of long-term debt
|
$ | 1,679.0 | $ | 3,083.0 | ||||||
|
Long-term debt
|
467.9 | 483.0 | ||||||||
|
Total debt
|
2,146.9 | 3,566.0 | ||||||||
|
Total shareholders’ equity
|
3,059.9 | 3,944.8 | ||||||||
|
Total capitalization (debt plus equity)
|
$ | 5,206.8 | $ | 7,510.8 | ||||||
|
Debt to total capitalization
|
41.2 | % | 47.5 | % | ||||||
|
Net debt (debt less cash and cash equivalents)
|
1,182.0 | 1,726.0 | ||||||||
|
Net capitalization (debt plus equity less cash and cash
equivalents)
|
4,241.9 | 5,670.8 | ||||||||
|
Net debt to net capitalization
|
27.9 | % | 30.4 | % | ||||||
Short-term debt,
including current maturities of long-term debt, was $1,679.0 and
$3,083.0 at December 31, 2008 and 2007, respectively. Net
debt at December 31, 2008 was $1,182.0 compared to $1,726.0
at December 31, 2007. This decrease primarily reflects the
pay down of debt during 2008, subsequent to our funding for the
acquisition of EDO.
We expect that cash
flows from operations and our access to the commercial paper
market will be sufficient to meet our short-term funding
requirements. We anticipate that cash flows from operations will
be utilized to further decrease our net debt balance during 2009.
Credit
Facilities and Commercial Paper Program
In November 2005,
ITT entered into a five-year revolving credit agreement (the
“November 2005 Credit Facility”), in the
33
Table of Contents
aggregate principal
amount of $1.25 billion. Effective November 8, 2007,
ITT exercised the option to increase the principal amount under
the revolving credit agreement to $1.75 billion. In March
2008, ITT entered into a new
364-day
revolving credit agreement (the “March 2008 Credit
Facility”), providing an additional $1.0 billion
principal amount of available borrowings. As a result, the
maximum amount of available borrowings under both facilities is
now $2.75 billion.
The provisions of
this agreement require that we maintain a minimum interest
coverage ratio. At December 31, 2008, we were in compliance
with our financial covenants.
Prior to December
2007, borrowing through commercial paper and under the revolving
credit agreements could not exceed $1.25 billion in the
aggregate outstanding. In December 2007 and March 2008, the ITT
Board of Directors approved commercial paper borrowings to
increase up to $1.75 billion and $2.75 billion,
respectively. At December 31, 2008, commercial paper
borrowings were $1,618.7.
The revolving credit
agreements are intended to provide 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.
|
AMOUNT IN |
|||||||||||||||
|
CREDIT |
COMMERCIAL |
EXCESS OF |
|||||||||||||
|
FACILITY |
PAPER |
COMMERCIAL |
|||||||||||||
| AMOUNT | OUTSTANDING | PAPER BALANCE | |||||||||||||
|
November 2005 Credit Facility
|
$ | 1,750.0 | $ | 1,618.7 | $ | 131.3 | |||||||||
|
March 2008 Credit Facility
|
1,000.0 | — | 1,000.0 | ||||||||||||
| $ | 2,750.0 | $ | 1,618.7 | $ | 1,131.3 | ||||||||||
The March 2008
Credit Facility will expire during the first quarter of 2009. We
believe that funds available to us under the November 2005
Credit Facility are more than sufficient to cover the level of
expected commercial paper borrowings in 2009, and to satisfy any
remaining cash requirements.
Contractual
Obligations
ITT’s
commitment to make future payments under long-term contractual
obligations was as follows, as of December 31, 2008:
| PAYMENTS DUE BY PERIOD | ||||||||||||||||||||||||||||||
|
LESS THAN |
MORE THAN |
ALL |
||||||||||||||||||||||||||||
| CONTRACTUAL OBLIGATIONS | TOTAL | 1 YEAR | 1-3 YEARS | 3-5 YEARS | 5 YEARS | OTHER | ||||||||||||||||||||||||
|
Long-term
debt(1)
|
$ | 434.9 | $ | 13.1 | $ | 90.1 | $ | 23.0 | $ | 308.7 | $ | – | ||||||||||||||||||
|
Interest
payments(2)
|
349.4 | 28.1 | 52.1 | 42.8 | 226.4 | – | ||||||||||||||||||||||||
|
Operating
leases(3)
|
721.2 | 126.4 | 196.8 | 149.4 | 248.6 | – | ||||||||||||||||||||||||
|
Purchase
obligations(4)(5)
|
695.7 | 451.8 | 228.8 | 15.1 | – | – | ||||||||||||||||||||||||
|
FIN 48
liability(6)
|
144.9 | – | – | – | – | 144.9 | ||||||||||||||||||||||||
|
Other long-term obligations reflected on balance
sheet(7)
|
187.4 | 39.2 | 48.1 | 25.1 | 75.0 | — | ||||||||||||||||||||||||
|
Total
|
$ | 2,533.5 | $ | 658.6 | $ | 615.9 | $ | 255.4 | $ | 858.7 | $ | 144.9 | ||||||||||||||||||
| (1) | See Note 14, “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 unamortized discount and exclude deferred gain on interest rate swaps. |
| (2) | Amounts represent estimate of future interest payments on long-term debt outstanding as of December 31, 2008 utilizing year end interest rates. |
| (3) | Refer to Note 13, “Leases and Rentals,” in the Notes to Consolidated Financial Statements, for further discussion of lease and rental agreements. |
| (4) | The unconditional purchase commitments are principally take or pay obligations related to the purchase of certain raw materials and subcontract work. |
| (5) | Purchase obligations include a three-year obligation in the amount of $9.2 that would require a termination penalty based on the number of remaining months. As of December 31, 2008, this fee would have been $2.3. |
| (6) | As of December 31, 2008, our liability in connection with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” (“FIN 48”) was $144.9. ITT was unable to reasonably estimate the timing of FIN 48 liability payments in individual years beyond 12 months due to uncertainties in the timing of the effective settlement of tax positions. (See the section entitled “Critical Accounting Estimates – Income Taxes”). |
| (7) | Other long-term obligations include estimated environmental payments. We estimate, based on historical experience, that we will spend between $8.0 and $12.0 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, 2008, our best estimate for environmental liabilities is $135.0. In addition, other long-term obligations include letters of credit, and payments in connection with our settlement of compliance issues in the Defense Electronics & Services business segment. |
34
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Off-Balance Sheet
Arrangements
Guarantees &
Indemnities
Since ITT’s
incorporation in 1920, we have acquired and disposed of numerous
entities. The related acquisition and disposition agreements
contain various representation and warranty clauses and may
provide indemnities for a misrepresentation or breach of the
representations and warranties by either party. The indemnities
address a variety of subjects; the term and monetary amounts of
each such indemnity are defined in the specific agreements and
may be affected by various conditions and external factors. Many
of the indemnities have expired either by operation of law or as
a result of the terms of the agreement. We do not have a
liability recorded for the historic indemnifications and are not
aware of any claims or other information that would give rise to
material payments under such indemnities.
In December of 2007,
we entered into a sale leaseback type agreement for our
corporate aircraft, with the aircraft leased back under a
five-year operating lease. We have provided, under the lease, a
residual value guarantee to the counterparty in the amount of
$50.2, which is the maximum amount of undiscounted future
payments. We would have to make payments under the residual
value guarantee only if the fair value of the aircraft was less
than the residual value guarantee upon termination of the
agreement. At December 31, 2008, the projected fair value
of the aircraft at the end of the lease is estimated to be $2.4
less than the residual value guarantee. Since this estimated
loss does not exceed the $5.4 gain we realized from the sale of
the aircraft, but deferred as a loss contingency for the
residual value guarantee, we have not recorded any additional
accrual in our financial statements.
ITT has a number of
individually immaterial guarantees outstanding at
December 31, 2008, that may be affected by various
conditions and external forces, some of which could require that
payments be made under such guarantees. We do not believe these
payments will have any material adverse impact on the financial
position, results of operations or cash flow on a consolidated
basis in the foreseeable future.
Critical
Accounting Estimates
The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. 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 inherently involve significant judgments and
uncertainties. Actual results in these areas could differ from
management’s estimates.
Contingent
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 against the Company relating to environmental
liabilities, product liabilities (including asbestos),
employment and pension matters, government contract issues and
commercial or contractual disputes, sometimes related to
acquisitions or divestitures. Accruals for anticipated
settlements have been established where the outcome of the
matter is probable and can be reasonably estimated. In addition,
accruals for legal fees for various matters have been
established where the fees are probable of payment and can be
reasonably estimated. Based on present information, including
our assessment of the merits of claims, as well as our current
reserves and insurance coverage, we do not expect that such
legal proceedings will have a material adverse impact on our
financial position, results of operations or cash flows, on a
consolidated basis.
However, because of
uncertainties related to these matters, we can only record
accruals based on currently available information. As additional
information becomes available, we reassess the potential
liability related to our pending claims and litigation and may
revise our estimates. Such revisions in the estimates of the
potential liabilities could have a material impact on our
consolidated financial position, results of operations or cash
flows. For a discussion of these contingencies, including
management’s judgment applied in the recognition and
measurement of specific liabilities, refer to Note 19,
“Commitments and Contingencies,” in the Notes to
Consolidated Financial Statements.
Employee
Benefit Plans
ITT sponsors
numerous employee pension and welfare benefit plans. The
determination of projected benefit obligations and the
recognition of expenses related to pension and other
postretirement obligations are dependent on assumptions used in
calculating these amounts. These assumptions include: discount
rates, expected rates of return on plan assets, rate of future
compensation increases, mortality, termination, health care
inflation trend rates (some of which are disclosed in
Note 16, “Employee Benefit Plans,” in the Notes
to Consolidated Financial Statements) and other factors.
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Key
Assumptions
A summary of the
significant assumptions used for the pension benefit plans are
as follows:
| WEIGHTED AVERAGE ASSUMPTIONS | 2008 | 2007 | ||||||||
|
Expected rate of return on plan assets used to determine net
periodic benefit cost
|
8.87 | % | 8.87 | % | ||||||
|
Discount rate used to determine net periodic benefit cost
|
6.19 | % | 5.87 | % | ||||||
|
Discount rate used to determine benefit obligation at December 31
|
6.24 | % | 6.19 | % | ||||||
|
Rate of future compensation increase used to determine benefit
obligation at December 31
|
3.97 | % | 4.45 | % | ||||||
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.
We determine our
expected return on plan assets assumption 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 10, 15, 20 and
25 years; make estimates of future returns using a Capital
Asset Pricing Model; and evaluate historical broad market
returns over the past 75 years based on our strategic asset
allocation, which is detailed in Note 16, “Employee
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 stood at 9.9%, 11.8%, 12.0%
and 12.4%, for the past 10, 15, 20, and 25 year periods,
respectively.
The chart below
shows actual versus the expected long-term returns for our
domestic pension plans that are utilized in the calculation of
the net periodic benefit cost. See Note 16, “Employee
Benefit Plans,” in the Notes to Consolidated Financial
Statements for more information.
| 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||||
|
Expected rate of return on plan assets
|
9.0 | % | 9.0 | % | 9.0 | % | 9.0 | % | 9.0 | % | |||||||||||||||
|
Actual rate of return on plan assets
|
(31.2 | )% | 12.7 | % | 13.8 | % | 13.2 | % | 15.2 | % | |||||||||||||||
Our weighted average
expected return on plan assets for all pension plans, including
foreign affiliate plans, at December 31, 2008 is 8.9%.
We utilize the
assistance of our plan actuaries in determining the discount
rate assumption. As a service to their clients, the plan
actuaries have developed and published an interest rate yield
curve comprising AAA/AA bonds with maturities between zero and
thirty years. The plan actuaries then discount the annual
benefit cash flows of ITT’s pension plan using this yield
curve and 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, 2008, is 6.24%. Also, at
December 31, 2008, we raised the discount rate on our
postretirement welfare plans to 6.25% from 6.0%.
At December 31,
2008, we lowered our expected rate of future compensation
increases for domestic plan participants to 4.0% from 4.5%,
based on recent historical experience and expectations for
future economic conditions.
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 2009 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
|
$ | (10.1 | ) | $ | 10.1 | |||||
|
Discount rate used to determine net periodic benefit cost
|
(27.0 | )* | 13.3 | |||||||
|
Rate of future compensation increases used to determine net
periodic pension cost
|
4.6 | (4.2 | ) | |||||||
| * | This scenario eliminates any amortization of deferred losses, since the amount subject to amortization must exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. |
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 78% of the total pension obligation, and therefore
the funded status of the U.S. Salaried Pension 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
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Pension Plan by
approximately $110. Similarly, every five percentage point
change in the actual 2009 rate of return on assets impacts the
same plan by approximately $150.
Fair Value of
Plan Assets
Our pension and
welfare benefit plans’ assets are comprised of a broad
range of investments including domestic and foreign securities,
private equity and fixed income investments, investments in
hedge funds, commodities and cash and cash equivalents. When
available, we have valued our investments based on observable
market inputs.
Observable inputs
are inputs that market participants would use in pricing the
investment based on market data obtained from independent
sources. These include inputs with quoted prices in active
markets, and inputs other than quoted prices in active markets
that are either directly or indirectly observable.
Unobservable inputs
are inputs that reflect the Company’s assumptions about the
estimates market participants would use in pricing the
investment, based on the best information available in the
circumstances. To the extent that valuation is based on inputs
that are less observable or unobservable in the market, the
determination of the fair value requires more judgment.
A substantial
portion of our pension and welfare benefit plan assets portfolio
is comprised of hedge fund and private equity investments. The
private equity and a portion of the hedge fund investments do
not have directly observable inputs, and as such, require
significant judgment to determine fair value.
Plan assets are
based on year-end fair market values. Absent the timely
availability of audited year-end financial statements for these
investments, from which we derive our allocable portion of each
investment’s fair value, management has incorporated its
own judgment and set of assumptions to value the investments as
of year-end.
See Note 16,
“Employee Benefit Plans” in the Notes to Consolidated
Financial Statements for further information.
Revenue
Recognition
ITT recognizes
revenue as services are rendered and when title transfers for
products, subject to any special terms and conditions of
specific contracts. For the majority of our product sales, title
transfers when products are shipped. Under certain
circumstances, title passes when products are delivered.
Further, some sales are recognized when the customer picks up
the product. In the Defense Electronics & Services
business segment, certain contracts require the delivery,
installation, testing, certification and customer acceptance
before revenue can be recorded.
The Defense
Electronics & Services business segment and certain
businesses in our Fluid Technology business segment generally
recognize sales and anticipated profits under long-term
fixed-price contracts based on units of delivery, completion of
scheduled performance milestones, or percentage of costs
incurred to total costs. Estimated contract profits are recorded
into earnings in proportion to recorded sales. During the
performance of such contracts, estimated final contract prices
and costs are periodically reviewed and revisions are made as
required. The effect of these revisions to estimates is included
in earnings in the period in which the revisions are made. Sales
under cost-reimbursement contracts are recorded as costs are
incurred and include estimated earned fees or profits calculated
on the basis of the relationship between costs incurred and
total estimated costs. For
time-and-material
contracts, revenue is recognized to the extent of billable rates
times hours incurred plus material and other reimbursable costs
incurred. Anticipated losses on contracts are recorded when
first identified by ITT. Revenue arising from the claims process
is not recognized either as income or as an offset against a
potential loss until it can be reliably estimated and
realization is probable.
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 that we expect to be 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 in our estimates 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.
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, in accordance with
FIN 48, we recognize the tax benefit from an uncertain tax
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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 these
reserves 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 charge to 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 account for
goodwill and indefinite-lived intangibles in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142)”. SFAS 142 states that
goodwill and indefinite-lived intangible assets are not
amortized, but are instead reviewed for impairment annually (or
more frequently if impairment indicators arise). We conduct our
annual impairment testing on October 1 to determine if we will
be able to recover all or a portion of the carrying value of
goodwill and indefinite-lived intangibles.
The application of
the impairment test requires judgment, including the
identification of reporting units, assignments of assets and
liabilities to reporting units and the determination of the fair
value of each reporting unit. Further, the impairment test
involves the use of accounting estimates and assumptions related
to future operating results. Consistent with the requirements of
SFAS 142, the fair values of our reporting units generally
are based on discounted cash flow projections that are believed
to be reasonable under current and forecasted circumstances, the
results of which form the basis for making judgments about
carrying values of the reported net assets of our reporting
units.
We conducted our
annual goodwill impairment test as of October 1, 2008, and
determined that there was no impairment. Subsequently, we
updated our forecast assumptions to reflect declining economic
conditions. As a result, we reassessed goodwill for impairment
for those reporting units significantly affected by changes to
our initial projections. Despite declines in the estimated fair
value for certain reporting units since our annual impairment
test, we concluded that there were no impairments as of the
interim test dates.
We will continue to
closely monitor the 2009 results and projections for these units
and the economic conditions of their product end-markets. Any
significant change in market conditions and estimates or
judgments could give rise to impairment in the period that the
change becomes known.
Other Intangible
Assets
Prior to performing
the goodwill impairment testing process for a reporting unit
under SFAS 142, if there is reason to believe that other
non-goodwill related intangible assets may be impaired, these
other intangible assets must first be tested for impairment
under SFAS 142 or SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,”
(“SFAS 144”). Assets governed by SFAS 144
require a recoverability test for impairment whereby the gross
undiscounted cash flows are determined specific to the asset.
For non-goodwill related indefinite-lived assets, a fair value
determination is made. If the carrying value of the asset
exceeds the fair value, then impairment occurs. The carrying
values of these assets are impaired as necessary to provide the
appropriate carrying value for the goodwill impairment
calculation.
These impairment
tests also involve the use of accounting estimates and
assumptions believed to be reasonable, the results of which form
the basis for our conclusions. Significant changes to these
estimates and assumptions could adversely impact our conclusion
to these impairment tests.
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
Statements
Certain statements
contained in this document, including within this
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (most particularly, material presented
under “Executive Summary,” “2009 Outlook,”
“Known Trends and Uncertainties,” “Restructuring
and Asset Impairment Charges,” “Employee Benefit
Plans,” “Liquidity and Capital Resources,” and
“Critical Accounting Estimates,” that are not
historical facts, constitute “Forward-Looking
Statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements, in
general, predict, forecast, indicate or imply future results,
performance or achievements and generally use words so
indicative. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause
the actual results or performance of ITT and its businesses to
be materially
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different from that
expressed or implied by such forward-looking statements. Such
factors may be described or referred to from time to time in
filings made by ITT with the Securities and Exchange Commission.
Included in those factors are the following: general economic
and business conditions; foreign currency exchange rates;
political, social and economic conditions and local regulations
in the countries in which ITT conducts its businesses;
government regulations and compliance therewith; demographic
changes; sales and revenues mix; pricing levels; changes in
sales and revenues to, or the identity of, significant
customers; changes in technology; industry capacity and
production rates; ability of outside third parties to comply
with their commitments; competition; capacity constraints;
availability of raw materials and adequate labor; availability
of appropriate professional expertise; projected savings from
restructuring actions; potential future employee benefit plan
contributions; availability of liquidity sufficient to meet
ITT’s needs; the ability to adapt to changes resulting from
acquisitions and divestitures and to affect cost reduction
programs; and various other factors referenced in this
Management’s Discussion and Analysis and under the caption
“Risk Factors.” In some areas, the availability of
energy sources may affect our production processes or customer
demand for our products or services. In addition to these
factors, our business segments may be affected by the more
specific factors referred to below and as included in
Item 1A.
The Defense
Electronics & Services business segment will be
affected by factors including the level of defense funding by
domestic and foreign governments; changes in the portion of the
U.S. Defense budget devoted to products and services of the
types of products we provide; our ability to receive contract
awards; government investigations; government contracts subject
to security and facility clearances; our ability to obtain and
maintain export licenses; our ability to sell to international
markets and our ability to develop and market products and
services for customers outside of traditional markets.
The Fluid Technology
business segment will be affected by factors including broad
economic conditions in markets served; governmental funding
levels; raw material prices; international demand for fluid
management products; the ability to successfully expand into new
geographic markets; weather conditions; and continued demand for
replacement parts and servicing.
The
Motion & Flow Control business segment will be
affected by the cyclical nature of the transportation industry;
economic conditions in its major markets; weather conditions;
production levels of major auto producers; and demand for
replacement parts.
ITT assumes no
obligation to update forward-looking statements to reflect
actual results or changes in or additions to the factors
affecting such forward-looking statements.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(In millions,
unless otherwise stated)
MARKET RISK
EXPOSURES
At December 31,
2008, our short-term and long-term debt obligations totaled
$2.1 billion. In addition, our cash and cash equivalents
balances at December 31, 2008 was $964.9. Based on these
positions, and our overall exposure to interest rates, a change
of 61 basis points (equivalent to 10% of ITT’s weighted
average short-term interest rates at December 31,
2008) on our cash and marketable securities and on our
floating rate debt obligations would have a $4.4 effect on our
pretax earnings for the year ended December 31, 2008.
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
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, 2008.
On the basis of this
review, management, including the CEO and the CFO, concluded
that our disclosure controls and procedures are designed, and
are effective, to give reasonable assurance that the information
required to be disclosed in our reports filed under the Act is
assembled, recorded, processed, summarized and reported within
the time periods specified in the SEC’s forms and reports,
and to ensure that information required to be disclosed in the
reports submitted under the Act is accumulated and communicated
to our management,
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including our CEO
and CFO, in a manner that allows timely decisions regarding
required disclosure.
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, reports to the General
Counsel and the CFO 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, 2008. 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,
2008, 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(d) in
this Annual Report on
Form 10-K.
| (c) | Remediation of Prior Year Material Weakness |
A material weakness
is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the
Company’s annual or interim financial statements will not
be prevented or detected on a timely basis.
As discussed in
“Item 9A Controls and Procedures –
Management Report on Internal Control Over Financial
Reporting” in our Annual Report on
Form 10-K
for the year ended December 31, 2007, a material weakness
existed in the Company’s internal control over financial
reporting related to income tax accounting. Specifically, the
Company did not maintain adequate processes and a sufficient
number of technically qualified personnel during the year to
facilitate the timely identification of all issues associated
with the Company’s income tax closing process.
During 2008, the
Company implemented the following measures to remediate the
material weakness related to financial reporting for income
taxes:
| n | Conducted a comprehensive evaluation of the income tax department organizational structure and processes. | |
| n | Expanded technical resources and management in the income tax accounting function, including the hiring of a Chief Tax Officer and Director of Tax Operations. | |
| n | Enhanced review procedures for ongoing as well as non-routine complex transactions in the income tax accounting function. | |
| n | Performed a detailed review of income tax payable accounts to substantiate existing balances. | |
| n | Performed a comprehensive reconciliation of the differences between the income tax basis and financial reporting basis of assets and liabilities to effectively reconcile and substantiate deferred tax balances. |
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| n | Assessed the existing internal control structure and implemented new controls, including enhanced reconciliations and analyses of income tax provisions and formal procedures to reconcile payable and deferred tax balances. |
The Company has
tested the effectiveness of the newly implemented controls and
found them to be operating effectively for a sufficient period
of time to reduce to a remote likelihood the possibility of
material misstatement. As a result, management has concluded
that, as of December 31, 2008, the material weakness
described above has been remediated.
| (d) | Changes in Internal Control over Financial Reporting |
Other than the
remediation of the income tax accounting material weakness
described in Item 9A(c) above, there were no changes during
the fourth quarter that have materially affected, or are
reasonably likely to materially affect, the Company’s
internal control over financial reporting.
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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
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,
2008, 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, 2008,
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, 2008, of the Company and our report dated
February 25, 2009 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte
& Touche
LLP
New York, New York
February 25,
2009
42
Table of Contents
| ITEM 9B. | OTHER INFORMATION |
None.
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 2009 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 are
also available to any shareholder who requests them 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 2008. 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.”
43
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 45 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. |
44
Table of Contents
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
| PAGE | ||
| 46 | ||
| 47 | ||
| 48 | ||
| 49 | ||
| 50 | ||
| 51 | ||
| 52 |
45
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and Shareholders of
ITT Corporation
White Plains, New York
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,
2008 and 2007, 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, 2008. 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, 2008 and 2007, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the
United States of America.
As discussed in
Note 1 to the consolidated financial statements, the
Company changed its method of accounting for uncertain income
tax positions in 2007.
As discussed in
Note 1 to the consolidated financial statements, the
Company changed its method of accounting for defined pension and
other postretirement plans in 2006.
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, 2008, 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 25, 2009 expressed
an unqualified opinion on the Company’s internal control
over financial reporting.
/s/ Deloitte
& Touche
LLP
New York, New York
February 25,
2009
46
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
INCOME STATEMENTS
|
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS) |
|||||||||||||||
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Product sales
|
$ | 9,181.2 | $ | 7,057.5 | $ | 6,198.1 | |||||||||
|
Service revenues
|
2,513.6 | 1,945.8 | 1,609.8 | ||||||||||||
|
Total sales and revenues
|
11,694.8 | 9,003.3 | 7,807.9 | ||||||||||||
|
Costs of product sales
|
6,255.1 | 4,746.4 | 4,224.5 | ||||||||||||
|
Costs of service revenues
|
2,184.3 | 1,688.6 | 1,393.9 | ||||||||||||
|
Total costs of sales and revenues
|
8,439.4 | 6,435.0 | 5,618.4 | ||||||||||||
|
Gross profit
|
3,255.4 | 2,568.3 | 2,189.5 | ||||||||||||
|
Selling, general and administrative expenses
|
1,723.5 | 1,342.7 | 1,175.9 | ||||||||||||
|
Research and development expenses
|
244.3 | 182.3 | 160.9 | ||||||||||||
|
Restructuring and asset impairment charges, net
|
77.5 | 66.1 | 51.7 | ||||||||||||
|
Operating income
|
1,210.1 | 977.2 | 801.0 | ||||||||||||
|
Interest income
|
31.3 | 49.6 | 25.4 | ||||||||||||
|
Interest expense
|
140.8 | 114.9 | 86.2 | ||||||||||||
|
Miscellaneous expense, net
|
13.1 | 13.4 | 12.9 | ||||||||||||
|
Income from continuing operations before income tax expense
|
1,087.5 | 898.5 | 727.3 | ||||||||||||
|
Income tax expense
|
312.3 | 265.5 | 227.6 | ||||||||||||
|
Income from continuing operations
|
775.2 | 633.0 | 499.7 | ||||||||||||
|
Discontinued operations:
|
|||||||||||||||
|
Income from discontinued operations, including tax benefit of
$6.9, $26.1, and $1.0, respectively
|
19.5 | 109.1 | 81.4 | ||||||||||||
|
Net income
|
$ | 794.7 | $ | 742.1 | $ | 581.1 | |||||||||
|
Earnings Per Share:
|
|||||||||||||||
|
Income from continuing operations:
|
|||||||||||||||
|
Basic
|
$ | 4.29 | $ | 3.51 | $ | 2.71 | |||||||||
|
Diluted
|
$ | 4.23 | $ | 3.44 | $ | 2.67 | |||||||||
|
Discontinued operations:
|
|||||||||||||||
|
Basic
|
$ | 0.11 | $ | 0.60 | $ | 0.44 | |||||||||
|
Diluted
|
$ | 0.10 | $ | 0.59 | $ | 0.43 | |||||||||
|
Net income:
|
|||||||||||||||
|
Basic
|
$ | 4.40 | $ | 4.11 | $ | 3.15 | |||||||||
|
Diluted
|
$ | 4.33 | $ | 4.03 | $ | 3.10 | |||||||||
|
Average Common Shares – Basic
|
180.7 | 180.6 | 184.3 | ||||||||||||
|
Average Common Shares – Diluted
|
183.4 | 184.0 | 187.4 | ||||||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements.
47
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
|
(IN MILLIONS) |
PRE-TAX |
TAX |
NET OF TAX |
||||||||||||
| YEAR ENDED DECEMBER 31, 2008 | (LOSS) | BENEFIT | AMOUNT | ||||||||||||
|
Net income
|
$ | 794.7 | |||||||||||||
|
Other comprehensive loss:
|
|||||||||||||||
|
Net foreign currency translation adjustments (refer to table
below)
|
$ | (221.2 | ) | $ | – | (221.2 | ) | ||||||||
|
Changes in pension and other benefit plans
|
(2,118.8 | ) | 781.1 | (1,337.7 | ) | ||||||||||
|
Other
|
(0.1 | ) | – | (0.1 | ) | ||||||||||
|
Other comprehensive loss
|
$ | (2,340.1 | ) | $ | 781.1 | (1,559.0 | ) | ||||||||
|
Comprehensive loss
|
$ | (764.3 | ) | ||||||||||||
|
Disclosure of 2008 foreign currency translation
reclassification:
|
|||||||||||||||
|
Foreign currency translation adjustments
|
$ | (214.7 | ) | ||||||||||||
|
Less: Reclassification adjustment for gains included in net
income
|
(6.5 | ) | |||||||||||||
|
Net foreign currency translation adjustments
|
$ | (221.2 | ) | ||||||||||||
|
(IN MILLIONS) |
PRE-TAX |
TAX |
NET OF TAX |
||||||||||||
| YEAR ENDED DECEMBER 31, 2007 | INCOME | EXPENSE | AMOUNT | ||||||||||||
|
Net income
|
$ | 742.1 | |||||||||||||
|
Other comprehensive income:
|
|||||||||||||||
|
Net foreign currency translation adjustments (refer to table
below)
|
$ | 276.1 | $ | – | 276.1 | ||||||||||
|
Changes in pension and other benefit plans
|
427.2 | (126.3 | ) | 300.9 | |||||||||||
|
Other
|
1.5 | (0.5 | ) | 1.0 | |||||||||||
|
Other comprehensive income
|
$ | 704.8 | $ | (126.8 | ) | 578.0 | |||||||||
|
Comprehensive income
|
$ | 1,320.1 | |||||||||||||
|
Disclosure of 2007 foreign currency translation reclassification:
|
|||||||||||||||
|
Foreign currency translation adjustments
|
$ | 235.7 | |||||||||||||
|
Add: Reclassification adjustment for losses included in net
income
|
40.4 | ||||||||||||||
|
Net foreign currency translation adjustments
|
$ | 276.1 | |||||||||||||
|
(IN MILLIONS) |
PRE-TAX |
TAX |
NET OF TAX |
||||||||||||
| YEAR ENDED DECEMBER 31, 2006 | INCOME | EXPENSE | AMOUNT | ||||||||||||
|
Net income
|
$ | 581.1 | |||||||||||||
|
Other comprehensive income:
|
|||||||||||||||
|
Net foreign currency translation adjustments (refer to table
below)
|
$ | 161.2 | $ | – | 161.2 | ||||||||||
|
Minimum pension liability
|
88.9 | (30.8 | ) | 58.1 | |||||||||||
|
Other
|
0.3 | (0.1 | ) | 0.2 | |||||||||||
|
Other comprehensive income
|
$ | 250.4 | $ | (30.9 | ) | 219.5 | |||||||||
|
Comprehensive income
|
$ | 800.6 | |||||||||||||
|
Disclosure of 2006 foreign currency translation reclassification:
|
|||||||||||||||
|
Foreign currency translation adjustments
|
$ | 177.7 | |||||||||||||
|
Less: Reclassification adjustment for gains included in net
income
|
(16.5 | ) | |||||||||||||
|
Net foreign currency translation adjustments
|
$ | 161.2 | |||||||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements.
48
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS, UNLESS OTHERWISE STATED) |
||||||||||
| DECEMBER 31 | 2008 | 2007 | ||||||||
|
Assets
|
||||||||||
|
Current assets:
|
||||||||||
|
Cash and cash equivalents
|
$ | 964.9 | $ | 1,840.0 | ||||||
|
Receivables, net
|
1,961.1 | 1,935.0 | ||||||||
|
Inventories, net
|
803.8 | 887.6 | ||||||||
|
Deferred income taxes
|
203.4 | 105.9 | ||||||||
|
Other current assets
|
131.0 | 161.3 | ||||||||
|
Total current assets
|
4,064.2 | 4,929.8 | ||||||||
|
Plant, property and equipment, net
|
993.9 | 980.3 | ||||||||
|
Deferred income taxes
|
608.5 | 29.7 | ||||||||
|
Goodwill
|
3,831.3 | 3,829.7 | ||||||||
|
Other intangible assets, net
|
616.5 | 733.0 | ||||||||
|
Other assets
|
365.8 | 1,050.2 | ||||||||
|
Total non-current assets
|
6,416.0 | 6,622.9 | ||||||||
|
Total assets
|
$ | 10,480.2 | $ | 11,552.7 | ||||||
|
Liabilities and Shareholders’ Equity
|
||||||||||
|
Current liabilities:
|
||||||||||
|
Accounts payable
|
$ | 1,234.6 | $ | 1,296.8 | ||||||
|
Accrued expenses
|
991.2 | 958.9 | ||||||||
|
Accrued taxes
|
30.2 | 40.9 | ||||||||
|
Short-term debt and current maturities of long-term debt
|
1,679.0 | 3,083.0 | ||||||||
|
Pension and postretirement benefits
|
68.8 | 68.5 | ||||||||
|
Deferred income taxes
|
26.7 | 8.2 | ||||||||
|
Total current liabilities
|
4,030.5 | 5,456.3 | ||||||||
|
Pension benefits
|
1,689.9 | 381.4 | ||||||||
|
Postretirement benefits other than pensions
|
451.7 | 383.2 | ||||||||
|
Long-term debt
|
467.9 | 483.0 | ||||||||
|
Other liabilities
|
780.3 | 904.0 | ||||||||
|
Total non-current liabilities
|
3,389.8 | 2,151.6 | ||||||||
|
Total liabilities
|
7,420.3 | 7,607.9 | ||||||||
|
Shareholders’ Equity:
|
||||||||||
|
Common stock: Authorized – 500 shares,
$1 par value per share, outstanding –
181.7 shares and 181.5 shares,
respectively(1)
|
180.6 | 180.7 | ||||||||
|
Retained earnings
|
4,203.0 | 3,528.8 | ||||||||
|
Accumulated other comprehensive (loss) income:
|
||||||||||
|
Pension and other benefits
|
(1,534.1 | ) | (196.4 | ) | ||||||
|
Cumulative translation adjustments
|
209.8 | 431.0 | ||||||||
|
Unrealized gain on investment securities
|
0.6 | 0.7 | ||||||||
|
Total accumulated other comprehensive (loss) income
|
(1,323.7 | ) | 235.3 | |||||||
|
Total shareholders’ equity
|
3,059.9 | 3,944.8 | ||||||||
|
Total liabilities and shareholders’ equity
|
$ | 10,480.2 | $ | 11,552.7 | ||||||
| (1) | Shares outstanding include unvested restricted common stock of 1.1 and 0.8 at December 31, 2008 and 2007, respectively. |
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements.
49
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(IN MILLIONS) |
|||||||||||||||
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Operating Activities
|
|||||||||||||||
|
Net income
|
$ | 794.7 | $ | 742.1 | $ | 581.1 | |||||||||
|
Less: Income from discontinued operations
|
19.5 | 109.1 | 81.4 | ||||||||||||
|
Income from continuing operations
|
775.2 | 633.0 | 499.7 | ||||||||||||
|
Adjustments to income from continuing operations:
|
|||||||||||||||
|
Depreciation and amortization
|
278.3 | 185.4 | 171.6 | ||||||||||||
|
Stock-based compensation
|
30.8 | 34.6 | 22.9 | ||||||||||||
|
Restructuring and asset impairment charges, net
|
77.5 | 66.1 | 51.7 | ||||||||||||
|
Payments for restructuring
|
(54.1 | ) | (51.5 | ) | (43.4 | ) | |||||||||
|
Change in receivables
|
(112.9 | ) | (236.7 | ) | (61.2 | ) | |||||||||
|
Change in inventories
|
70.4 | 111.8 | (101.4 | ) | |||||||||||
|
Change in accounts payable and accrued expenses
|
61.3 | 137.2 | 246.4 | ||||||||||||
|
Change in accrued and deferred taxes
|
19.7 | (34.1 | ) | 30.3 | |||||||||||
|
Change in other current and non-current assets
|
(21.9 | ) | (106.0 | ) | (74.0 | ) | |||||||||
|
Change in other current and non-current liabilities
|
(0.8 | ) | 47.2 | 30.7 | |||||||||||
|
Other, net
|
(3.9 | ) | 11.1 | 7.4 | |||||||||||
|
Net Cash – operating activities
|
1,119.6 | 798.1 | 780.7 | ||||||||||||
|
Investing Activities
|
|||||||||||||||
|
Additions to plant, property and equipment
|
(248.7 | ) | (239.3 | ) | (177.1 | ) | |||||||||
|
Acquisitions, net of cash acquired
|
(275.7 | ) | (2,009.2 | ) | (89.5 | ) | |||||||||
|
Proceeds from sale of assets and businesses
|
21.6 | 283.6 | 226.6 | ||||||||||||
|
Other, net
|
(0.1 | ) | 6.8 | (6.3 | ) | ||||||||||
|
Net Cash – investing activities
|
(502.9 | ) | (1,958.1 | ) | (46.3 | ) | |||||||||
|
Financing Activities
|
|||||||||||||||
|
Short-term debt, net
|
(1,229.0 | ) | 2,311.9 | (155.6 | ) | ||||||||||
|
Long-term debt repaid
|
(23.3 | ) | (15.2 | ) | (13.3 | ) | |||||||||
|
Long-term debt issued
|
0.6 | 0.5 | 0.5 | ||||||||||||
|
Repurchase of common stock
|
(75.0 | ) | (299.0 | ) | (210.0 | ) | |||||||||
|
Proceeds from issuance of common stock
|
34.4 | 65.4 | 69.0 | ||||||||||||
|
Dividends paid
|
(120.9 | ) | (96.6 | ) | (77.6 | ) | |||||||||
|
Tax benefit from stock option exercises and restricted stock
award lapses
|
6.7 | 15.0 | 16.7 | ||||||||||||
|
Other, net
|
(0.9 | ) | (0.9 | ) | 0.1 | ||||||||||
|
Net Cash – financing activities
|
(1,407.4 | ) | 1,981.1 | (370.2 | ) | ||||||||||
|
Exchange Rate Effects on Cash and Cash Equivalents
|
(73.4 | ) | 103.0 | 50.6 | |||||||||||
|
Net Cash – Discontinued Operations:
|
|||||||||||||||
|
Operating Activities
|
(9.1 | ) | (16.2 | ) | 80.2 | ||||||||||
|
Investing Activities
|
(1.9 | ) | (4.0 | ) | (9.3 | ) | |||||||||
|
Financing Activities
|
— | (1.0 | ) | 0.4 | |||||||||||
|
Net change in cash and cash equivalents
|
(875.1 | ) | 902.9 | 486.1 | |||||||||||
|
Cash and cash equivalents – beginning of year
|
1,840.0 | 937.1 | 451.0 | ||||||||||||
|
Cash and Cash Equivalents – End of Year
|
$ | 964.9 | $ | 1,840.0 | $ | 937.1 | |||||||||
|
Supplemental Disclosures of Cash Flow Information
|
|||||||||||||||
|
Cash paid during the year for:
|
|||||||||||||||
|
Interest
|
$ | 135.5 | $ | 96.0 | $ | 80.4 | |||||||||
|
Income taxes (net of refunds received)
|
$ | 281.6 | $ | 313.6 | $ | 197.3 | |||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements.
50
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ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
(IN MILLIONS) |
SHARES | DOLLARS | ||||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
|
Common Stock
|
||||||||||||||||||||||||||||
|
Beginning balance
|
180.7 | 182.6 | 184.6 | $ | 180.7 | $ | 182.6 | $ | 184.6 | |||||||||||||||||||
|
Stock incentive plans
|
1.1 | 2.2 | 2.6 | 1.1 | 2.2 | 2.6 | ||||||||||||||||||||||
|
Repurchases
|
(1.2 | ) | (4.1 | ) | (4.6 | ) | (1.2 | ) | (4.1 | ) | (4.6 | ) | ||||||||||||||||
|
Ending balance
|
180.6 | 180.7 | 182.6 | $ | 180.6 | $ | 180.7 | $ | 182.6 | |||||||||||||||||||
|
Retained Earnings
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$ | 3,528.8 | $ | 3,029.5 | $ | 2,666.0 | ||||||||||||||||||||||
|
Net income
|
794.7 | 742.1 | 581.1 | |||||||||||||||||||||||||
|
Cash dividend declared on common stock — $0.70, $0.56,
and $0.44 per share, respectively
|
(127.3 | ) | (101.7 | ) | (81.3 | ) | ||||||||||||||||||||||
|
Net repurchase of common stock and other
|
6.8 | (141.1 | ) | (136.3 | ) | |||||||||||||||||||||||
|
Ending balance
|
$ | 4,203.0 | $ | 3,528.8 | $ | 3,029.5 | ||||||||||||||||||||||
|
Accumulated Other Comprehensive (Loss) Income
|
||||||||||||||||||||||||||||
|
Pension and postretirement benefit plans:
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$ | (196.4 | ) | $ | (497.3 | ) | $ | (120.4 | ) | |||||||||||||||||||
|
Changes in pension and other benefit plans, net of tax
|
(1,337.7 | ) | 300.9 | — | ||||||||||||||||||||||||
|
Cumulative effect of adopting SFAS 158 (net of deferred
income tax benefit of $231.3)
|
— | — | (435.0 | ) | ||||||||||||||||||||||||
|
Recognition of minimum pension liability
|
— | — | 58.1 | |||||||||||||||||||||||||
|
Ending balance
|
$ | (1,534.1 | ) | $ | (196.4 | ) | $ | (497.3 | ) | |||||||||||||||||||
|
Cumulative translation adjustments:
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$ | 431.0 | $ | 154.9 | $ | (6.3 | ) | |||||||||||||||||||||
|
Reclassification adjustment for (gains) losses included in net
income
|
(6.5 | ) | 40.4 | (16.5 | ) | |||||||||||||||||||||||
|
Foreign currency translation
|
(214.7 | ) | 235.7 | 177.7 | ||||||||||||||||||||||||
|
Ending balance
|
$ | 209.8 | $ | 431.0 | $ | 154.9 | ||||||||||||||||||||||
|
Unrealized (loss) gain on investment securities:
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$ | 0.7 | $ | (0.3 | ) | $ | (0.5 | ) | ||||||||||||||||||||
|
Unrealized (loss) gain
|
(0.1 | ) | 1.0 | 0.2 | ||||||||||||||||||||||||
|
Ending balance
|
$ | 0.6 | $ | 0.7 | $ | (0.3 | ) | |||||||||||||||||||||
|
Total accumulated other comprehensive (loss) income
|
$ | (1,323.7 | ) | $ | 235.3 | $ | (342.7 | ) | ||||||||||||||||||||
|
Total Shareholders’ Equity
|
$ | 3,059.9 | $ | 3,944.8 | $ | 2,869.4 | ||||||||||||||||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements.
51
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Impairment
Charges,” for further discussion on impairment losses.
Plant,
Property and Equipment
Plant, property and
equipment, including capitalized interest applicable to major
project expenditures, are recorded at cost. For financial
reporting purposes, depreciation is provided on a straight-line
basis over the economic useful lives of the assets involved as
follows: buildings 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. See
Note 10, “Plant, Property and Equipment, Net,”
for further information.
Goodwill and
Other Intangible Assets
In accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”), goodwill, the excess of cost over
the fair value of net assets acquired, and indefinite-lived
intangible assets are tested for impairment on an annual basis,
or more frequently if circumstances warrant.
See Note 11,
“Goodwill and Other Intangible Assets, Net,” for
further information.
Foreign
Currency Translation
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. The national currencies of the
foreign companies are generally the functional currencies. Net
gains/(losses) from foreign currency transactions are reported
currently in selling, general and administrative expenses
(“SG&A”) and were $3.9, $1.7, and $(0.7), in
2008, 2007, and 2006, respectively.
Employee
Benefit Plans
ITT accounts for its
defined benefit pension plans and other postretirement benefit
plans using actuarial models as required by
SFAS No. 87, “Employers’ Accounting for
Pensions” (“SFAS 87”), and
SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions”
(“SFAS 106”), respectively. These models use an
attribution approach that generally spreads individual events
over the service lives of the employees in the plan. Examples of
“events” are changes in actuarial assumptions such as
discount rate, rate of compensation increase and mortality.
Effective
December 31, 2006, we adopted SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106 and 132(R)”
(“SFAS 158”), which effectively requires balance
sheet recognition of the underfunded or overfunded status of
pension and postretirement benefit plans and to recognize
changes in the funded status through comprehensive income.
Actuarial gains and losses and prior service costs or credits
that have not been recognized under SFAS 87 and
SFAS 106 must be recognized in accumulated other
comprehensive income within shareholders’ equity, net of
taxes, until they are amortized as a component of net periodic
benefit cost.
See Note 16,
“Employee Benefit Plans,” for further information on
our benefit plans.
Stock-Based
Compensation
ITT adopted
SFAS No. 123(R), “Share-Based Payment”
(“SFAS 123R”), effective January 1, 2006 on
a prospective basis in accounting for stock-based compensation.
Accordingly, we recognize the employee services received in
exchange for awards of equity instruments based on the
grant-date fair value of the award as determined by option
pricing models. The calculated compensation cost is recognized
over the period that the employee is required to provide
services per the conditions of the award. Generally, stock-based
compensation costs are reflected in selling, general and
administrative expenses. See Note 17, “Stock-Based and
Long-Term Incentive Employee Compensation,” for further
detail.
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 reliability exists.
ITT adopted the
Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement
No. 109” (“FIN 48”), effective
January 1, 2007 which effectively changed the accounting
for uncertain tax positions and related disclosures. See
Note 6, “Income Taxes,” for further details.
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.
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
53
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
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
becomes 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 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
included in other assets when it is known that a claim will be
realized.
See Note 19,
“Commitments and Contingencies,” for further details.
Earnings Per
Share
Basic earnings per
share is based on the weighted average number of common shares
outstanding. Diluted earnings per share is based on the weighted
average number of common shares outstanding and potentially
dilutive common shares, which include stock options and
restricted stock. See Note 7, “Earnings Per
Share,” for further information.
Fair Value
Measurements
In accordance with
SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”), 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. We use a
hierarchical structure to prioritize the inputs to valuation
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 the lowest priority to
unobservable inputs (e.g., discounted cash flows)
(“Level 3”).
NOTE 2
New Accounting
Pronouncements
In September 2006,
the FASB issued SFAS 157, which became effective
January 1, 2008, except as amended by FASB Staff Positions
(“FSP”)
157-1,
157-2 and
157-3.
SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands the related disclosure
requirements.
FSP 157-1
excludes SFAS No. 13, “Accounting for
Leases,” and its related interpretive accounting
pronouncements that address leasing transactions, while
FSP 157-2
delays the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis, until fiscal years beginning
after November 15, 2008.
FSP 157-3
clarifies the application of SFAS 157 in a market that is
not active and provides an example of how to determine the fair
value of a financial asset in an inactive market. ITT adopted
the provisions of SFAS 157, as amended, with the exception
of the application of the statement to non-recurring
nonfinancial assets and nonfinancial liabilities. The adoption
of this statement did not have a material effect on ITT’s
financial statements for fair value measurements made during the
year ended December 31, 2008. ITT will adopt the provisions
of the statement related to non-recurring nonfinancial assets
and nonfinancial liabilities effective January 1, 2009, and
does not expect its adoption to have a material effect on
ITT’s financial statements.
In February 2007,
the FASB issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities”
(“SFAS 159”) effective January 1, 2008.
SFAS 159, issued by the FASB in February 2007, permits an
entity to measure certain financial assets and financial
liabilities at fair value. Under SFAS 159, entities
electing the fair value option will report unrealized gains and
losses in earnings as of each subsequent reporting date. The
fair value option may be elected on an
instrument-by-instrument
basis with few exceptions, as long as it is applied to the
instrument in its entirety. SFAS 159 establishes
presentation and disclosure requirements to help financial
statement users understand the effect of an entity’s
election on its earnings. SFAS 159 requires prospective
application. If an entity elects the fair value option for items
existing as of the date of adoption, the difference between
their carrying amount and fair value should be included in a
cumulative-effect adjustment to the opening balance of retained
earnings. ITT adopted this statement as of January 1, 2008,
but has not elected to apply the fair value option to any
eligible assets or liabilities. Thus, the adoption of this
statement did not have a material effect on ITT’s financial
statements for the year ended December 31, 2008.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007),
“Business Combinations”
(“SFAS 141(R)”), which replaces
SFAS No. 141, “Business Combinations.”
SFAS 141(R) retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting be used
for all business combinations and for an acquirer to be
identified for each business combination. However,
SFAS 141(R) changes the method of applying the acquisition
method in a number of significant areas, including 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
54
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
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.
SFAS 141(R) is effective on a prospective basis for all
business combinations for which the acquisition date is on or
after the beginning of the first annual period subsequent to
December 15, 2008, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax
contingencies. SFAS 141(R) amends SFAS No. 109,
“Accounting for Income Taxes,” such that adjustments
made to valuation allowances on deferred taxes and acquired tax
contingencies associated with acquisitions that closed prior to
the effective date of SFAS 141(R) would also apply the
provisions of SFAS 141(R). See Note 6, “Income
Taxes,” for further discussion. Early adoption of
SFAS 141(R) is not permitted. ITT will adopt this statement
effective January 1, 2009. While we do not expect a
material impact on ITT’s financial statements upon
adoption, the effects on future periods will depend upon the
nature and significance of future business combinations subject
to this statement.
In December 2007,
the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an
amendment of ARB No. 51.” This statement requires the
recognition of a noncontrolling interest (minority interest) as
a separate component within equity within the consolidated
balance sheet. It also requires the amount of consolidated net
income attributable to the parent and the noncontrolling
interest be clearly identified and presented within the
consolidated statement of income. This statement also amends
certain of ARB No. 51’s consolidation procedures to
make them consistent with the requirements of SFAS 141(R).
SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. ITT will
adopt this statement effective January 1, 2009 and does not
expect its adoption to have a material effect on ITT’s
financial statements.
In March 2008, the
FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities – an
amendment of FASB Statement No. 133.” This statement
amends SFAS No. 133 by requiring enhanced disclosures
about an entity’s derivative instruments and hedging
activities, but does not change SFAS No. 133’s
scope or accounting. SFAS No. 161 requires increased
qualitative, quantitative and credit-risk disclosures about the
entity’s derivative instruments and hedging activities.
SFAS 161 is effective for fiscal years, and interim periods
within those fiscal years, beginning after November 15,
2008, with earlier adoption permitted. ITT will adopt this
statement effective January 1, 2009. This statement will
not impact ITT’s financial results as the statement is
disclosure only in nature.
In June 2008, the
FASB issued FSP
No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities.” This
FSP concluded that all outstanding unvested share-based payment
awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders
and therefore are considered participating securities for
purposes of computing earnings per share. Entities that have
participating securities that are not convertible into common
stock are required to use the “two-class” method of
computing earnings per share. The two-class method is an
earnings allocation formula that determines earnings per share
for each class of common stock and participating security
according to dividends declared (or accumulated) and
participation rights in undistributed earnings. This FSP is
effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early
adoption is prohibited. ITT will adopt this statement effective
January 1, 2009 and does not expect its adoption to have a
material effect on ITT’s financial statements.
In December 2008,
the FASB issued FSP No. FAS 132(R)-1,
“Employers’ Disclosure about Postretirement Benefit
Plan Assets,” which amends SFAS No. 132(R) to
require more disclosures about employers’ plan assets of a
defined benefit pension or other postretirement plan, including
employers’ investing strategies, major categories of plan
assets, concentrations of risk within plan assets, and valuation
techniques used to measure the fair value of plan assets. This
FSP is effective for fiscal years ending after December 15,
2009. Earlier application of the provisions of this FSP is
permitted. This statement will not impact ITT’s financial
results as the statement is disclosure only in nature.
NOTE 3
Acquisitions
2008
Acquisitions
During 2008, we
spent $49.2, net of cash acquired on acquisitions that we do not
believe are material individually or in the aggregate to our
results of operations or financial position, as well as other
acquisition-related costs. Additionally, we spent $226.5 in
connection with companies acquired during 2007. See below for
further information.
2007
Acquisitions
EDO
Corporation
On December 20,
2007, ITT acquired all of the outstanding shares of EDO
Corporation (“EDO”), a global aerospace and
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
defense company, for
$56 per outstanding share of EDO plus the assumption of debt,
which valued the transaction at approximately $1.8 billion.
There was no contingent consideration related to the acquisition.
EDO designs and
manufactures a diverse range of products for defense,
intelligence and commercial markets, and provides related
engineering and professional services. The addition of EDO
allows our Defense Electronics & Services business
segment to provide a broader set of solutions to a wider band of
customers. Furthermore, we expect to be better positioned to
play an important role in some of the U.S. military’s
vital transformational initiatives.
ITT’s results
of operations for the year ended December 31, 2007 reflect
the impact of results of operations for EDO from
December 20, 2007.
As of
December 31, 2007, the excess of the purchase price over
the fair value of net assets acquired was $1,200.4 (none of
which is tax deductible), and was recorded as goodwill in the
Defense Electronics & Services business segment.
Intangible assets relating to this acquisition totaled $442.4 at
December 31, 2007, entirely consisting of customer
relationships, with a weighted average amortization period of
approximately 13 years.
The following table
summarizes the preliminary estimates of fair values of the
assets acquired and liabilities assumed from EDO as of
December 20, 2007, the effective date of the acquisition:
|
TOTAL |
|||||
| IMPACT | |||||
|
Current assets
|
$ | 534.6 | |||
|
Goodwill and intangible assets
|
1,642.8 | ||||
|
Other non-current assets
|
107.4 | ||||
|
Total assets acquired
|
$ | 2,284.8 | |||
|
Current liabilities
|
$ | 321.8 | |||
|
Long-term debt
|
567.0 | ||||
|
Pension and other benefit plan obligations, long-term
|
60.8 | ||||
|
Other long-term liabilities
|
150.0 | ||||
|
Net assets acquired
|
$ | 1,185.2 | |||
We finalized our
purchase price allocation during 2008, which resulted in an
increase to recorded goodwill of $36.6, and a decrease of $31.5
in amortizable intangible assets.
Other 2007
Acquisitions
During 2007, we
spent $410.5, net of cash acquired, and including direct
acquisition costs, on acquisitions that we do not believe are
material individually or in the aggregate to our results of
operations or financial position. The most significant of these
acquisitions was International Motion Control, Inc.
(“IMC”), which we acquired on September 10, 2007
for $390.5, net of cash acquired and including direct
acquisition costs. IMC is a global developer of motion control
products, and is a market leader in the manufacture of specialty
energy absorption, industrial and aviation control and
automation technology. IMC, which had 2006 revenues of
approximately $200, adds a complementary mix of highly
engineered, mission-critical products to ITT’s
Motion & Flow Control business segment.
2006
Acquisitions
During 2006, we
spent $89.5 on acquisitions that we do not believe are material
individually or in the aggregate to our results of operations or
financial position.
NOTE 4
Restructuring and
Asset Impairment Charges
Fourth Quarter
2008 Restructuring Activities and Asset Impairment
Charges
In response to
current and anticipated market conditions, we accelerated
restructuring activities across our businesses during the fourth
quarter of 2008. These restructuring actions resulted in a net
restructuring charge of $56.3 and related payments of $9.5. We
anticipate an additional $6.2 of restructuring charges will be
incurred and payments of $47.7 will occur during 2009 related to
these actions.
56
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Components of
Charges
| FOURTH QUARTER 2008 ACTIONS | ||||||||||||||||||||||||||||||
|
OTHER |
LEASE |
PLANNED |
||||||||||||||||||||||||||||
|
EMPLOYEE- |
CANCELLATION
& |
ASSET |
POSITION |
|||||||||||||||||||||||||||
| SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | |||||||||||||||||||||||||
|
Fluid Technology
|
$ | 24.1 | $ | 0.2 | $ | 0.4 | $ | 0.1 | $ | 24.8 | 523 | |||||||||||||||||||
|
Defense Electronics & Services
|
8.3 | 0.7 | 0.4 | – | 9.4 | 144 | ||||||||||||||||||||||||
|
Motion & Flow Control
|
19.7 | 0.3 | 0.3 | 0.8 | 21.1 | 578 | ||||||||||||||||||||||||
|
Corporate and Other
|
0.9 | 0.1 | – | – | 1.0 | 13 | ||||||||||||||||||||||||
| $ | 53.0 | $ | 1.3 | $ | 1.1 | $ | 0.9 | $ | 56.3 | 1,258 | ||||||||||||||||||||
The charges
associated with actions announced during the fourth quarter of
2008 primarily represent a reduction of structural costs in all
business segments and the planned closure of a facility within
the Motion & Flow Control business segment. Planned
position eliminations total 1,258, including 601 factory
workers, 629 office workers and 28 management employees.
Additionally, during
the fourth quarter of 2008, we recorded a net restructuring and
asset impairment charge of $5.3, reflecting costs of $3.9
related to prior actions and the reversal of $0.4 of
restructuring accruals that management determined would not be
required, as well as an asset impairment charge of $1.8 related
to the write-down of software due to a decision to cancel a
project as a result of an organizational realignment.
2008
Restructuring Activities
During 2008, we
recorded a net restructuring charge of $74.6, reflecting costs
of $66.9 related to new actions and $9.3 related to prior
years’ plans, as well as the reversal of $1.6 of
restructuring accruals that management determined would not be
required.
Components of
Charges
| 2008 ACTIONS | ||||||||||||||||||||||||||||||||||||||||
|
PRIOR |
||||||||||||||||||||||||||||||||||||||||
|
OTHER |
LEASE |
PLANNED |
YEARS’
PLANS |
|||||||||||||||||||||||||||||||||||||
|
EMPLOYEE- |
CANCELLATION
& |
ASSET |
POSITION |
ADDITIONAL |
REVERSAL OF |
|||||||||||||||||||||||||||||||||||
| SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | |||||||||||||||||||||||||||||||||
|
Fluid Technology
|
$ | 30.7 | $ | 0.4 | $ | 0.9 | $ | 0.1 | $ | 32.1 | 600 | $ | 3.2 | $ | (1.0 | ) | ||||||||||||||||||||||||
|
Defense Electronics & Services
|
9.6 | 0.7 | 0.6 | – | 10.9 | 157 | 0.1 | (0.2 | ) | |||||||||||||||||||||||||||||||
|
Motion & Flow Control
|
20.5 | 0.6 | 0.4 | 0.8 | 22.3 | 589 | 6.0 | (0.4 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
1.4 | 0.1 | 0.1 | – | 1.6 | 14 | – | – | ||||||||||||||||||||||||||||||||
| $ | 62.2 | $ | 1.8 | $ | 2.0 | $ | 0.9 | $ | 66.9 | 1,360 | $ | 9.3 | $ | (1.6 | ) | |||||||||||||||||||||||||
The charges
associated with actions announced during 2008 primarily
represent a reduction of structural costs in all business
segments and the planned closure of a facility in the
Motion & Flow Control business segment and a facility
in the Defense Electronics & Services business
segment. Planned position eliminations total 1,360, including
614 factory workers, 704 office workers and 42 management
employees. The costs associated with the prior years’ plans
primarily reflect severance and lease cancellation related costs.
2008 Asset
Impairment Charges
During 2008, we
recognized $2.9 of charges related to the impairment of
long-lived assets. During the fourth quarter of 2008, we
recognized an asset impairment charge of $1.8 related to the
write-down of software due to a decision to cancel a project as
a result of an organizational realignment. During the third
quarter of 2008, we recognized an impairment charge of $1.1
related to one of our Motion & Flow Control
businesses, reflecting the reduction of our expected future
earnings for this business.
57
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
2007
Restructuring Activities
During 2007, we
recorded a net restructuring charge of $61.1, reflecting costs
of $57.9 related to new actions and $7.4 related to prior year
plans, as well as the reversal of $4.2 of restructuring accruals
that management determined would not be required.
Components of
Charges
| 2007 ACTIONS | ||||||||||||||||||||||||||||||||||||||||
|
PRIOR |
||||||||||||||||||||||||||||||||||||||||
|
OTHER |
LEASE |
PLANNED |
YEARS’ PLANS |
|||||||||||||||||||||||||||||||||||||
|
EMPLOYEE- |
CANCELLATION
& |
ASSET |
POSITION |
ADDITIONAL |
REVERSAL OF |
|||||||||||||||||||||||||||||||||||
| SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | |||||||||||||||||||||||||||||||||
|
Fluid Technology
|
$ | 32.7 | $ | 0.5 | $ | 1.4 | $ | 2.1 | $ | 36.7 | 410 | $ | 3.5 | $ | (1.1 | ) | ||||||||||||||||||||||||
|
Defense Electronics & Services
|
6.2 | – | 1.5 | – | 7.7 | 115 | 2.9 | (0.9 | ) | |||||||||||||||||||||||||||||||
|
Motion & Flow Control
|
9.5 | – | 0.3 | 0.4 | 10.2 | 201 | 1.0 | (0.5 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
3.3 | – | – | – | 3.3 | 3 | – | (1.7 | ) | |||||||||||||||||||||||||||||||
| $ | 51.7 | $ | 0.5 | $ | 3.2 | $ | 2.5 | $ | 57.9 | 729 | $ | 7.4 | $ | (4.2 | ) | |||||||||||||||||||||||||
The charges
associated with actions announced during 2007 represent a
reduction of structural costs in all business segments and the
planned closure of four facilities in the Fluid Technology
business segment, one facility in the Motion & Flow
Control business segment and two facilities in the Defense
Electronics & Services business segment. Planned
position eliminations total 729, including 341 factory workers,
345 office workers and 43 management employees. The costs
associated with prior years’ plans primarily reflect
additional costs related to an adjustment to the write-off of
leased space as well as asset write-offs and severance costs.
2007 Asset
Impairment Charges
During the fourth
quarter of 2007, we recognized $5.0 of charges related to the
impairment of long-lived assets. The impairment was the result
of our determination that two businesses, one within the
Motion & Flow Control business segment and one within
the Fluid Technology business segment, were experiencing lower
than expected financial results, and as a result certain
long-lived assets of those businesses may be impaired. After
revising the earnings forecasts for those businesses to reflect
current business conditions, asset impairment charges of $4.2
and $0.8 were recorded within the Motion & Flow
Control and Fluid Technology business segments, respectively.
2006
Restructuring Activities
During 2006, we
recorded a net restructuring charge of $51.7, reflecting costs
of $52.7 related to new actions and $3.8 related to prior year
plans, as well as the reversal of $4.8 of restructuring accruals
that management determined would not be required.
Components of
Charges
| 2006 ACTIONS | ||||||||||||||||||||||||||||||||||||||||
|
OTHER |
LEASE |
PRIOR |
||||||||||||||||||||||||||||||||||||||
|
EMPLOYEE- |
CANCELLATION |
PLANNED |
YEARS’ PLANS |
|||||||||||||||||||||||||||||||||||||
|
RELATED |
& OTHER |
ASSET |
POSITION |
ADDITIONAL |
REVERSAL OF |
|||||||||||||||||||||||||||||||||||
| SEVERANCE | COSTS | COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | |||||||||||||||||||||||||||||||||
|
Fluid Technology
|
$ | 17.0 | $ | 2.8 | $ | 5.7 | $ | 1.2 | $ | 26.7 | 441 | $ | 0.9 | $ | (0.9 | ) | ||||||||||||||||||||||||
|
Defense Electronics & Services
|
3.2 | 0.1 | 3.9 | – | 7.2 | 113 | – | (0.9 | ) | |||||||||||||||||||||||||||||||
|
Motion & Flow Control
|
11.3 | 0.1 | 4.1 | 1.2 | 16.7 | 236 | 2.8 | (3.0 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
2.1 | – | – | – | 2.1 | 26 | 0.1 | – | ||||||||||||||||||||||||||||||||
| $ | 33.6 | $ | 3.0 | $ | 13.7 | $ | 2.4 | $ | 52.7 | 816 | $ | 3.8 | $ | (4.8 | ) | |||||||||||||||||||||||||
The charges
associated with actions announced during 2006 represent a
reduction of structural costs in all business segments and the
closure of three facilities in the Fluid Technology business
segment, two in the Motion & Flow Control business
segment and one in the Defense Electronics & Services
business segment. Planned position eliminations total 816,
including 427 factory workers, 360 office workers and 29
management employees. The costs associated with prior
years’ plans primarily reflect additional severance costs.
58
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
The following table
displays a rollforward of restructuring accruals:
|
DEFENSE |
MOTION |
||||||||||||||||||||||
|
ELECTRONICS |
FLUID |
& FLOW |
CORPORATE |
||||||||||||||||||||
| & SERVICES | TECHNOLOGY | CONTROL | AND OTHER | TOTAL | |||||||||||||||||||
|
Balance, January 1 2006
|
$ | – | $ | 19.0 | $ | 8.9 | $ | 0.2 | $ | 28.1 | |||||||||||||
|
Additional charges for prior year plans
|
– | 0.9 | 2.8 | 0.1 | 3.8 | ||||||||||||||||||
|
Cash payments and other related to prior charges
|
– | (14.1 | ) | (8.0 | ) | (0.3 | ) | (22.4 | ) | ||||||||||||||
|
Reversals of prior charges
|
– | (0.7 | ) | (2.7 | ) | – | (3.4 | ) | |||||||||||||||
|
Charges for 2006 actions
|
7.2 | 26.7 | 16.7 | 2.1 | 52.7 | ||||||||||||||||||
|
Reversal of 2006 charges
|
(0.9 | ) | (0.2 | ) | (0.3 | ) | – | (1.4 | ) | ||||||||||||||
|
Cash payments and other related to 2006 charges
|
(3.0 | ) | (8.0 | ) | (8.9 | ) | (0.5 | ) | (20.4 | ) | |||||||||||||
|
Asset write-offs
|
– | (1.2 | ) | (1.2 | ) | – | (2.4 | ) | |||||||||||||||
|
Balance December 31, 2006
|
3.3 | 22.4 | 7.3 | 1.6 | 34.6 | ||||||||||||||||||
|
Additional charges for prior year plans
|
2.9 | 3.5 | 1.0 | – | 7.4 | ||||||||||||||||||
|
Cash payments and other related to prior charges
|
(2.0 | ) | (17.9 | ) | (5.3 | ) | (1.2 | ) | (26.4 | ) | |||||||||||||
|
Reversals of prior charges
|
(0.6 | ) | (1.1 | ) | (0.3 | ) | – | (2.0 | ) | ||||||||||||||
|
Charges for 2007 actions
|
7.7 | 36.7 | 10.2 | 3.3 | 57.9 | ||||||||||||||||||
|
Reversal of 2007 charges
|
(0.3 | ) | – | (0.2 | ) | (1.7 | ) | (2.2 | ) | ||||||||||||||
|
Cash payments and other related to 2007 charges
|
(3.1 | ) | (20.5 | ) | (3.2 | ) | – | (26.8 | ) | ||||||||||||||
|
Asset write-offs
|
– | (2.1 | ) | (0.4 | ) | – | (2.5 | ) | |||||||||||||||
|
Balance December 31, 2007
|
7.9 | 21.0 | 9.1 | 2.0 | 40.0 | ||||||||||||||||||
|
Additional charges for prior year plans
|
0.1 | 3.2 | 6.0 | – | 9.3 | ||||||||||||||||||
|
Cash payments and other related to prior charges
|
(5.1 | ) | (20.8 | ) | (10.4 | ) | (1.5 | ) | (37.8 | ) | |||||||||||||
|
Reversals of prior charges
|
(0.2 | ) | (0.6 | ) | (0.3 | ) | – | (1.1 | ) | ||||||||||||||
|
Charges for 2008 actions
|
10.9 | 32.1 | 22.3 | 1.6 | 66.9 | ||||||||||||||||||
|
Reversal of 2008 charges
|
– | (0.4 | ) | (0.1 | ) | – | (0.5 | ) | |||||||||||||||
|
Cash payments and other related to 2008 charges
|
(3.1 | ) | (8.5 | ) | (5.5 | ) | (0.4 | ) | (17.5 | ) | |||||||||||||
|
Asset write-offs
|
– | (0.1 | ) | (0.8 | ) | – | (0.9 | ) | |||||||||||||||
|
Balance December 31, 2008
|
$ | 10.5 | $ | 25.9 | $ | 20.3 | $ | 1.7 | $ | 58.4 | |||||||||||||
59
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
The accrual balance
as of December 31, 2008 of $58.4 includes $51.2 for
severance and $7.2 for facility carrying costs and other.
The following is a
reconciliation of employee position eliminations associated with
restructuring activities through 2008:
|
Planned reductions as of January 1, 2006
|
204 | ||||
|
Planned reductions from 2006 actions
|
816 | ||||
|
Actual reductions, January 1 – December 31, 2006
|
(750 | ) | |||
|
Planned reductions as of December 31, 2006
|
270 | ||||
|
Planned reductions from 2007 actions
|
729 | ||||
|
Actual reductions, January 1 – December 31, 2007
|
(686 | ) | |||
|
Planned reductions as of December 31, 2007
|
313 | ||||
|
Planned reductions from 2008 actions
|
1,360 | ||||
|
Actual reductions, January 1 – December 31,
2008
|
(1,165 | ) | |||
|
Planned reductions as of December 31, 2008
|
508 | ||||
As of the end of
2008, of the planned facility closures, one facility in the
Motion & Flow Control business segment remains to be
closed. This closure is expected during the first half of 2009.
NOTE 5
Discontinued
Operations
Switches
During 2007, we sold
the majority of the Switches businesses to a private equity
firm, for net proceeds of $223.2, and an after-tax gain of
$84.4. During the third quarter of 2008, we completed the sale
of the remaining component of the Switches businesses to the
same buyer, for net proceeds of $5.1. As a result, we recorded
an after-tax gain on sale of $5.4 for the year ended
December 31, 2008.
Revenues and
operating income for the Switches businesses reported in
discontinued operations were as follows:
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | |||||||||||
|
Revenues
|
$ | 7.7 | $ | 177.8 | $ | 374.8 | ||||||||
|
Operating income
|
$ | 0.2 | $ | 11.0 | $ | 30.6 | ||||||||
Fluid Handling
Systems
In the first quarter
of 2006, we completed the sale of our automotive brake and
fueling tubing and components business (“Fluid Handling
Systems” or “FHS”) to a privately held company
for net proceeds of $187.7 and a gain of $19.0. The business,
which was a component of our Motion & Flow Control
business segment, manufactures steel and plastic tubing for fuel
and brake lines, quick-connects, and serves the transportation
industry.
Revenues and
operating income were $41.2 and $2.6, respectively, for the year
ended December 31, 2006.
Richter
During the first
quarter of 2006, we also completed the sale of our industrial
non-metallic lined pumps and valves business
(“Richter”) to a private equity investor for net
proceeds of $24.8 and a gain of $22.2. The business, which was a
component of the Fluid Technology business segment, was a
manufacturer of pumps and valves for selected segments in the
chemical, fine chemical and pharmaceutical industries.
Revenues and
operating income were $2.0 and $0.2, respectively, for the year
ended December 31, 2006.
60
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
NOTE 6
Income
Taxes
Income tax data from
continuing operations is as follows:
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
U.S. and foreign components of income from continuing operations
before income taxes:
|
|||||||||||||||
|
U.S.
|
$ | 662.6 | $ | 454.9 | $ | 367.1 | |||||||||
|
Foreign
|
424.9 | 443.6 | 360.2 | ||||||||||||
| $ | 1,087.5 | $ | 898.5 | $ | 727.3 | ||||||||||
|
Provision (benefit) for income tax:
|
|||||||||||||||
|
Current
|
|||||||||||||||
|
U.S. federal
|
$ | 160.2 | $ | 89.8 | $ | 62.5 | |||||||||
|
State and local
|
4.8 | 8.1 | 7.5 | ||||||||||||
|
Foreign
|
130.6 | 133.5 | 94.4 | ||||||||||||
| $ | 295.6 | $ | 231.4 | $ | 164.4 | ||||||||||
|
Deferred:
|
|||||||||||||||
|
U.S. federal
|
$ | 23.0 | $ | 21.8 | $ | 53.2 | |||||||||
|
State and local
|
(0.4 | ) | 4.1 | 0.6 | |||||||||||
|
Foreign
|
(5.9 | ) | 8.2 | 9.4 | |||||||||||
| 16.7 | 34.1 | 63.2 | |||||||||||||
|
Total income tax expense
|
$ | 312.3 | $ | 265.5 | $ | 227.6 | |||||||||
A reconciliation of
the tax provision at the U.S. statutory rate to the
effective income tax expense rate as reported is as follows:
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Tax provision at U.S. statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | |||||||||
|
Foreign tax rate differential
|
(2.2 | ) | (1.4 | ) | (3.1 | ) | |||||||||
|
Effect of repatriation of foreign earnings
|
(0.4 | ) | (0.7 | ) | (2.4 | ) | |||||||||
|
State and local income tax
|
0.4 | 1.4 | 0.7 | ||||||||||||
|
Research credit
|
(0.2 | ) | (0.3 | ) | (0.4 | ) | |||||||||
|
Tax examinations
|
– | (4.9 | ) | – | |||||||||||
|
Domestic manufacturing deduction
|
(0.3 | ) | (1.0 | ) | (1.1 | ) | |||||||||
|
Penalty
|
– | – | 2.4 | ||||||||||||
|
Tax account validation adjustment
|
(3.8 | ) | – | – | |||||||||||
|
Other
|
0.2 | 1.4 | 0.2 | ||||||||||||
|
Effective income tax expense rate
|
28.7 | % | 29.5 | % | 31.3 | % | |||||||||
Deferred income
taxes are established for temporary differences between the
amount of assets and liabilities recognized for financial
reporting purposes and for tax reporting purposes and for
carryforwards.
Deferred tax assets
(liabilities) include the following:
| 2008 | 2007 | |||||||||||||||||||
|
DEFERRED |
DEFERRED |
DEFERRED |
DEFERRED |
|||||||||||||||||
| DECEMBER 31 | ASSETS | LIABILITIES | ASSETS | LIABILITIES | ||||||||||||||||
|
Employee benefits
|
$ | 936.5 | $ | – | $ | 172.0 | $ | – | ||||||||||||
|
Accelerated depreciation
|
– | (6.3 | ) | – | (34.3 | ) | ||||||||||||||
|
Accruals
|
198.3 | – | 185.3 | – | ||||||||||||||||
|
Uniform capitalization
|
11.7 | – | 4.5 | – | ||||||||||||||||
|
Investment
|
– | (108.5 | ) | – | (112.3 | ) | ||||||||||||||
|
Loss carryforwards
|
293.0 | – | 302.8 | – | ||||||||||||||||
|
Foreign tax credit
|
1.1 | – | 1.1 | – | ||||||||||||||||
|
State credit carryforwards
|
7.8 | – | 8.6 | – | ||||||||||||||||
|
Intangibles
|
– | (322.4 | ) | – | (327.2 | ) | ||||||||||||||
|
Other
|
– | (22.3 | ) | – | (70.3 | ) | ||||||||||||||
|
Subtotal
|
1,448.4 | (459.5 | ) | 674.3 | (544.1 | ) | ||||||||||||||
|
Valuation allowance
|
(265.4 | ) | – | (212.2 | ) | – | ||||||||||||||
| $ | 1,183.0 | $ | (459.5 | ) | $ | 462.1 | $ | (544.1 | ) | |||||||||||
Deferred taxes in
the Consolidated Balance Sheets consist of the following:
| DECEMBER 31 | 2008 | 2007 | ||||||||
|
Current assets
|
$ | 203.4 | $ | 105.9 | ||||||
|
Non-current assets
|
608.5 | 29.7 | ||||||||
|
Other current liabilities
|
(26.7 | ) | (8.2 | ) | ||||||
|
Other liabilities
|
(61.7 | ) | (209.4 | ) | ||||||
| $ | 723.5 | $ | (82.0 | ) | ||||||
No provision was
made for U.S. taxes payable on accumulated undistributed
foreign earnings of certain subsidiaries amounting to
approximately $1,474.8 because these amounts are permanently
reinvested. 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.
Taxes have not been provided for other outside basis differences
since these differences are not expected to reverse in the
foreseeable future.
61
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
We have the
following attributes available for utilization:
| ATTRIBUTE: | AMOUNT | FIRST YEAR OF EXPIRATION | ||||||||
|
U.S. net operating loss
|
$ | 25.9 | December 31, 2020 | |||||||
|
State net operating losses
|
$ | 2,794.5 | December 31, 2009 | |||||||
|
Federal and state captial loss
|
$ | 136.3 | December 31, 2012 | |||||||
|
State tax credits
|
$ | 7.8 | December 31, 2012 | |||||||
|
U.S. foreign tax credits
|
$ | 1.1 | December 31, 2009 | |||||||
|
Foreign net operating loss
|
$ | 554.5 | December 31, 2009 | |||||||
As of
December 31, 2008, a valuation allowance of $265.4 exists
for certain U.S. subsidiary state net operating loss
carryforwards, certain foreign net operating loss carryforwards,
and certain U.S. federal capital loss carryforwards that
may not be realized. As of December 31, 2007, a valuation
allowance of $212.2 existed for certain U.S. subsidiary
state net operating loss carryforwards, certain foreign net
operating loss carryforwards, and certain U.S. federal
capital loss carryforwards that may not be realized. During
2008, the valuation allowance increased by $53.2 resulting from
the following: increase of $4.1 attributable to foreign net
operation loss carryforwards, decrease of $13.6 attributable to
state net operating loss carryforwards, an increase of $57.0
attributable to the state deferred tax asset for pension, and an
increase of $5.7 attributable to U.S. federal and state
capital loss carryforwards.
Shareholders’
equity at December 31, 2008 and 2007 reflects tax benefits
related to stock-based compensation in 2008 and 2007 of
approximately $8.6 and $21.5, respectively.
The Internal Revenue
Service (“IRS”) is currently examining our federal
consolidated income tax returns for the years ended
December 31, 2004 through December 31, 2006. The IRS
has completed its examination of all years through 2003. As of
December 31, 2008 we believe the accrual for income taxes
payable is sufficient to cover potential liabilities arising
from these examinations.
Uncertain Tax
Positions
Under FIN 48,
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, 2008 is as follows:
| 2008 | |||||
|
Balance at January 1
|
$ | 103.3 | |||
|
Additions based on tax positions related to the current year
|
6.6 | ||||
|
Additions based on tax positions related to purchase accounting
|
2.4 | ||||
|
Additions for tax positions of prior years
|
66.2 | ||||
|
Reductions for tax positions of prior years
|
(13.5 | ) | |||
|
Reductions for tax positions related to purchase accounting
|
(2.2 | ) | |||
|
Settlements
|
(15.3 | ) | |||
|
Lapse of statute of limitations
|
(2.6 | ) | |||
|
Balance at December 31
|
$ | 144.9 | |||
As of
January 1, 2009, we will adopt FAS 141(R) and
subsequent recognition, if any, of a previously unrecognized tax
position will be reflected in tax expense attributable to
continuing or discontinued operations. As of December 31,
2008, the recognition of the uncertain tax positions that would
affect the effective tax rate is $76.9. Included in the balance
at December 31, 2008 are tax positions of $59.8, 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 $8.2
attributable to discontinued operations would not impact the
annual effective tax rate.
We do not believe
that the unrecognized tax benefits 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 these open tax years by major
jurisdiction:
| JURISDICTION | EARLIEST OPEN YEAR | ||||
|
Austria
|
2004 | ||||
|
Canada
|
1999 | ||||
|
Germany
|
2000 | ||||
|
Italy
|
2003 | ||||
|
Netherlands
|
2002 | ||||
|
Sweden
|
2003 | ||||
|
United Kingdom
|
2003 | ||||
|
United States
|
2004 | ||||
62
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
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 the years ended
December 31, 2008 and 2007, we recognized $9.7 and $6.7 in
interest and penalties, respectively. We had $28.1 and $36.2 for
the payment of interest and penalties accrued for as of
December 31, 2008 and 2007, respectively.
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:
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Basic Earnings Per Share:
|
|||||||||||||||
|
Income from continuing operations
|
$ | 775.2 | $ | 633.0 | $ | 499.7 | |||||||||
|
Average common shares outstanding
|
180.7 | 180.6 | 184.3 | ||||||||||||
|
Basic earnings per share
|
$ | 4.29 | $ | 3.51 | $ | 2.71 | |||||||||
|
Diluted Earnings Per Share:
|
|||||||||||||||
|
Income from continuing operations
|
$ | 775.2 | $ | 633.0 | $ | 499.7 | |||||||||
|
Average common shares outstanding
|
180.7 | 180.6 | 184.3 | ||||||||||||
|
Add: Impact of stock options and restricted stock
|
2.7 | 3.4 | 3.1 | ||||||||||||
|
Average common shares outstanding on a diluted basis
|
183.4 | 184.0 | 187.4 | ||||||||||||
|
Diluted earnings per share
|
$ | 4.23 | $ | 3.44 | $ | 2.67 | |||||||||
Shares underlying
stock options excluded from the computation of diluted earnings
per share because they were anti-dilutive were as follows:
| DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Stock options
|
4.1 | 0.5 | 0.8 | ||||||||||||
|
Average exercise price
|
$ | 49.29 | $ | 56.78 | $ | 52.60 | |||||||||
|
Years of expiration
|
2012- | 2012- | 2012- | ||||||||||||
| 2015 | 2014 | 2013 | |||||||||||||
The amounts of
anti-dilutive restricted common stock excluded from the
computation of diluted earnings per share for 2008, 2007 and
2006 were insignificant.
NOTE 8
Receivables,
Net
| DECEMBER 31 | 2008 | 2007 | ||||||||
|
Trade
|
$ | 1,909.4 | $ | 1,843.3 | ||||||
|
Other
|
92.9 | 127.9 | ||||||||
|
Less – allowance for doubtful accounts and cash
discounts
|
(41.2 | ) | (36.2 | ) | ||||||
| $ | 1,961.1 | $ | 1,935.0 | |||||||
NOTE 9
Inventories,
Net
| DECEMBER 31 | 2008 | 2007 | ||||||||
|
Finished goods
|
$ | 196.2 | $ | 209.4 | ||||||
|
Work in process
|
323.0 | 304.0 | ||||||||
|
Raw materials
|
365.5 | 470.8 | ||||||||
|
Less – progress payments
|
(80.9 | ) | (96.6 | ) | ||||||
| $ | 803.8 | $ | 887.6 | |||||||
NOTE 10
Plant, Property
and Equipment, Net
| DECEMBER 31 | 2008 | 2007 | ||||||||
|
Land and improvements
|
$ | 59.0 | $ | 58.7 | ||||||
|
Buildings and improvements
|
575.9 | 573.3 | ||||||||
|
Machinery and equipment
|
1,620.2 | 1,598.8 | ||||||||
|
Furniture, fixtures and office equipment
|
230.9 | 232.6 | ||||||||
|
Construction work in progress
|
132.4 | 93.3 | ||||||||
|
Other
|
82.3 | 76.5 | ||||||||
| 2,700.7 | 2,633.2 | |||||||||
|
Less – accumulated depreciation and amortization
|
(1,706.8 | ) | (1,652.9 | ) | ||||||
| $ | 993.9 | $ | 980.3 | |||||||
63
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
NOTE 11
Goodwill and
Other Intangible Assets, Net
Changes in the
carrying amount of goodwill for the years ended
December 31, 2008 and 2007 by business segment are as
follows:
|
DEFENSE |
MOTION & |
||||||||||||||||||||||
|
ELECTRONICS
& |
FLUID |
FLOW |
CORPORATE |
||||||||||||||||||||
| SERVICES | TECHNOLOGY | CONTROL | AND OTHER | TOTAL | |||||||||||||||||||
|
Balance as of January 1, 2007
|
$ | 962.3 | $ | 1,123.9 | $ | 245.6 | $ | 5.0 | $ | 2,336.8 | |||||||||||||
|
Goodwill acquired during the period
|
1,214.4 | 5.4 | 236.9 | – | 1,456.7 | ||||||||||||||||||
|
Other-net,
including foreign currency translation
|
0.1 | 38.1 | (2.0 | ) | – | 36.2 | |||||||||||||||||
|
Balance as of December 31, 2007
|
2,176.8 | 1,167.4 | 480.5 | 5.0 | 3,829.7 | ||||||||||||||||||
|
Goodwill acquired during the period
|
– | 7.0 | 16.2 | – | 23.2 | ||||||||||||||||||
|
Adjustments to purchase price allocations
|
34.0 | – | 3.0 | – | 37.0 | ||||||||||||||||||
|
Other-net,
including foreign currency translation
|
(0.2 | ) | (52.1 | ) | (6.3 | ) | – | (58.6 | ) | ||||||||||||||
|
Balance as of December 31, 2008
|
$ | 2,210.6 | $ | 1,122.3 | $ | 493.4 | $ | 5.0 | $ | 3,831.3 | |||||||||||||
Information
regarding our other intangible assets is as follows:
|
GROSS |
|||||||||||||||
|
CARRYING |
ACCUMULATED |
NET |
|||||||||||||
| AMOUNT | AMORTIZATION | INTANGIBLES | |||||||||||||
|
2007
|
|||||||||||||||
|
Finite-lived
intangibles:
|
|||||||||||||||
|
Customer
relationships
|
$ | 672.9 | $ | (62.1 | ) | $ | 610.8 | ||||||||
|
Proprietary
technology
|
63.2 | (15.5 | ) | 47.7 | |||||||||||
|
Trademarks
|
28.3 | (2.3 | ) | 26.0 | |||||||||||
|
Patents and other
|
53.2 | (22.2 | ) | 31.0 | |||||||||||
|
Indefinite-lived
intangibles- Brands and trademarks
|
17.5 | – | 17.5 | ||||||||||||
|
Balance as of
December 31, 2007
|
$ | 835.1 | $ | (102.1 | ) | $ | 733.0 | ||||||||
|
2008
|
|||||||||||||||
|
Finite-lived
intangibles:
|
|||||||||||||||
|
Customer
relationships
|
$ | 643.7 | $ | (149.9 | ) | $ | 493.8 | ||||||||
|
Proprietary
technology
|
68.4 | (20.2 | ) | 48.2 | |||||||||||
|
Trademarks
|
32.1 | (4.9 | ) | 27.2 | |||||||||||
|
Patents and
other
|
54.7 | (25.7 | ) | 29.0 | |||||||||||
|
Indefinite-lived
intangibles- Brands and trademarks
|
18.3 | – | 18.3 | ||||||||||||
|
Balance as of
December 31, 2008
|
$ | 817.2 | $ | (200.7 | ) | $ | 616.5 | ||||||||
Amortization expense
related to intangible assets for 2008, 2007 and 2006 was $100.0,
$35.3 and $26.7, respectively.
Estimated
amortization expense for each of the five succeeding years is as
follows:
| 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
|
$102.1
|
$ | 79.8 | $ | 67.0 | $ | 58.1 | $ | 42.0 | ||||||||||||
Customer
relationships, proprietary technology, trademarks and patents
and other are amortized over weighted average lives of
approximately 15 years, 13 years, 14 years and
16 years, respectively.
Impairment
Testing
We account for
goodwill and indefinite-lived intangibles in accordance with
SFAS 142. SFAS 142 states that goodwill and
indefinite-lived intangible assets are not amortized, but are
instead reviewed for impairment annually (or more frequently if
impairment indicators arise). We conduct our annual impairment
testing on October 1 to determine if we will be able to recover
all or a portion of the carrying value of goodwill and
indefinite-lived intangibles.
We conducted our
annual goodwill impairment test as of October 1, 2008, and
determined that there was no impairment. Subsequently, we
updated our forecast assumptions to reflect declining economic
conditions. As a result, we reassessed goodwill for impairment
for those reporting units significantly affected by changes to
our initial projections. Despite declines in the estimated fair
value for certain reporting units since our annual impairment
test, we concluded that there were no impairments as of the
interim test dates.
64
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
We will continue to
closely monitor the 2009 results and projections for these units
and the economic conditions of their product end-markets. Any
significant change in market conditions and estimates or
judgments could give rise to impairment in the period that the
change becomes known.
NOTE 12
Other
Assets
Other assets consist
of the following:
| DECEMBER 31 | 2008 | 2007 | ||||||||
|
Insurance receivables
|
$ | 198.3 | $ | 182.0 | ||||||
|
Other employee benefit-related assets
|
61.2 | 51.3 | ||||||||
|
Other long-term third party
receivables-net
|
46.7 | 54.3 | ||||||||
|
Capitalized software costs
|
26.4 | 27.0 | ||||||||
|
Investments in unconsolidated companies
|
8.4 | 9.3 | ||||||||
|
Environmental and employee benefit trusts
|
1.8 | 8.7 | ||||||||
|
Pension assets and prepaid benefit plan costs
|
1.7 | 675.6 | ||||||||
|
Other
|
21.3 | 42.0 | ||||||||
| $ | 365.8 | $ | 1,050.2 | |||||||
ITT recorded sales
to unconsolidated affiliates during 2008, 2007 and 2006 totaling
$17.3, $13.7 and $16.0, respectively. Additionally, ITT
purchased $18.1 of products from unconsolidated affiliates
during 2008. For all investments in unconsolidated companies,
our exposure is limited to the amount of the investment. All
investments accounted for under the cost method represent voting
rights interests of less than 20%.
NOTE 13
Leases and
Rentals
ITT leases certain
offices, manufacturing buildings, land, machinery, automobiles,
aircraft, computers and other equipment. Such leases expire at
various dates and may include renewals and escalations. ITT
often pays maintenance, insurance and tax expense related to
leased assets. Rental expenses under operating leases were
$133.3, $99.2 and $85.1, for 2008, 2007 and 2006, respectively.
Future minimum operating lease payments under long-term
operating leases as of December 31, 2008 are shown below.
|
2009
|
$ | 126.4 | |||
|
2010
|
105.7 | ||||
|
2011
|
91.1 | ||||
|
2012
|
75.8 | ||||
|
2013
|
73.6 | ||||
|
2014 and thereafter
|
248.6 | ||||
|
Total minimum lease payments
|
$ | 721.2 | |||
NOTE 14
Debt
Debt consists of the
following:
| December 31 | ||||||||||
| Short-term debt | 2008 | 2007 | ||||||||
|
Commercial
paper(1)
|
$ | 1,618.7 | $ | 1,589.7 | ||||||
|
Short-term
loans(1)
|
47.0 | 1,317.2 | ||||||||
|
Current maturities of long-term debt and
other(2)
|
13.3 | 176.1 | ||||||||
|
Short-term debt and current maturities of long-term debt
|
$ | 1,679.0 | $ | 3,083.0 | ||||||
|
INTEREST |
December 31 | ||||||||||||||
| Long-term debt | RATE | 2008 | 2007 | ||||||||||||
|
Notes and debentures:
|
|||||||||||||||
|
Maturity date
|
|||||||||||||||
|
2/1/2008
|
8.875 | % | $ | – | $ | 13.2 | |||||||||
|
5/1/2011
|
6.500 | % | 31.7 | 31.7 | |||||||||||
|
7/1/2011
|
7.500 | % | 37.4 | 37.4 | |||||||||||
|
2008-2014
|
4.700 | % | 82.2 | 89.9 | |||||||||||
|
11/15/2025
|
7.400 | % | 250.0 | 250.0 | |||||||||||
|
8/25/2048
|
(3 | ) | 17.3 | 17.3 | |||||||||||
|
2008 –
2022(2)
|
(4 | ) | 16.3 | 171.6 | |||||||||||
|
Deferred gain on interest rate
swaps(5)
|
54.7 | 59.2 | |||||||||||||
|
Subtotal
|
489.6 | 670.3 | |||||||||||||
|
Less – unamortized discount
|
(8.4 | ) | (11.2 | ) | |||||||||||
|
Long-term
debt(6)
|
481.2 | 659.1 | |||||||||||||
|
Less – current maturities of long-term debt and
other(2)
|
(13.3 | ) | (176.1 | ) | |||||||||||
|
Net long-term
debt(7)
|
$ | 467.9 | $ | 483.0 | |||||||||||
| (1) | The weighted average interest rate for short-term borrowings was 6.17% and 5.78% at December 31, 2008 and 2007, respectively. The fair value of our short-term loans approximates carrying value. |
65
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
| (2) | Includes $153.5 related to debt acquired in connection with the acquisition of EDO at December 31, 2007, which was repaid during 2008. |
| (3) | The interest rate was 0.16% and 4.52% at December 31, 2008 and 2007, respectively. |
| (4) | The weighted average interest rate was 5.38% and 2.62% at December 31, 2008 and 2007, respectively. |
| (5) | Deferred gain on terminated interest rate swaps accreted into income over the remaining terms of the underlying debt, which mature at various dates through 2025. |
| (6) | The fair value of long-term debt excluding the deferred gain on interest rate swaps was $450.4 and $474.7 as of December 31, 2008 and 2007, respectively. The year-over-year decrease in fair value primarily reflects the impact of principal payments on certain long-term debt. |
| (7) | The fair value of net long-term debt excluding the deferred gain on interest rate swaps was $437.1 and $460.2 as of December 31, 2008 and 2007, respectively. The year-over-year decrease in fair value primarily reflects the impact of principal payments on certain long-term debt. |
Principal payments
required on long-term debt and other for the next five years are:
| 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
|
$13.1
|
$ | 10.4 | $ | 79.7 | $ | 10.0 | $ | 13.0 | ||||||||||||
The book value of
assets pledged as collateral amounted to $46.6 as of
December 31, 2008.
In November 2005,
ITT entered into a five-year revolving credit agreement in the
aggregate principal amount of $1.25 billion. Effective
November 8, 2007, ITT exercised the option to increase the
principal amount under the revolving credit agreement to
$1.75 billion. In March 2008, ITT entered into a new
364-day
revolving credit agreement (the “March 2008 Credit
Facility”), providing an additional $1.0 billion
principal amount of available borrowings. As a result, the
maximum amount of outstanding borrowings under both facilities
is now $2.75 billion. The intended purpose of these credit
agreements is to provide additional liquidity as a source of
funding for the commercial paper program, if needed.
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 November 2005 and March 2008 Credit Facilities is
0.08% and 0.06%, respectively, of the total commitment. The
provisions of this agreement require that we maintain a minimum
interest coverage ratio. At December 31, 2008, we were in
compliance with our financial covenants.
Prior to December
2007, borrowing through commercial paper and under the revolving
credit agreements could not exceed $1.25 billion in the
aggregate outstanding. In December 2007, the ITT Board of
Directors approved commercial paper borrowings to increase up to
$1.75 billion. At December 31, 2008, commercial paper
borrowings were $1,618.7.
As of
December 31, 2008, ITT had an $82.2 obligation associated
with a ten-year agreement involving the sale and the subsequent
lease back of certain properties. Under the terms of the
agreement, ITT is 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.
NOTE 15
Other
Liabilities
Other liabilities
consist of the following:
| DECEMBER 31 | 2008 | 2007 | ||||||||
|
Product liability, guarantees and other legal matters
|
$ | 275.1 | $ | 264.6 | ||||||
|
Deferred income taxes and other tax-related accruals
|
182.9 | 310.1 | ||||||||
|
Compensation and other employee-related benefits
|
133.8 | 139.5 | ||||||||
|
Environmental
|
119.5 | 110.2 | ||||||||
|
Other
|
69.0 | 79.6 | ||||||||
| $ | 780.3 | $ | 904.0 | |||||||
NOTE 16
Employee Benefit
Plans
Investment and
Savings 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 $55.0, $36.6 and
$35.6 for the years ended 2008, 2007 and 2006, respectively.
Pension
Plans
ITT sponsors
numerous defined benefit pension plans. We fund employee pension
benefits, except in some countries outside the U.S., where
funding is not required. In addition to sponsored pension plans,
certain employees participate in multi-employer pension plans
sponsored by local or national unions. Our contribution to such
plans amounted to $0.6, $0.8 and $1.2, for 2008, 2007 and 2006,
respectively.
66
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Postretirement
Health and Life Insurance Plans
ITT provides health
care and life insurance benefits for certain eligible retired
employees. We have pre-funded a portion of the health care and
life insurance obligations, where such pre-funding can be
accomplished on a tax-effective basis.
Changes in benefit
obligations, plan assets, and funded status for the years ended
2008 and 2007 were as follows:
| PENSION | OTHER BENEFITS | |||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||||
|
Change in benefit obligation
|
||||||||||||||||||
|
Benefit obligation at beginning of year
|
$ | 5,380.7 | $ | 5,173.7 | $ | 740.9 | $ | 723.1 | ||||||||||
|
Service cost
|
98.9 | 97.8 | 7.6 | 7.6 | ||||||||||||||
|
Interest cost
|
324.7 | 297.4 | 41.9 | 41.9 | ||||||||||||||
|
Amendments made during the year/other
|
3.5 | 12.4 | (2.4 | ) | – | |||||||||||||
|
Actuarial (gain) loss
|
(9.9 | ) | (147.6 | ) | (36.6 | ) | 5.4 | |||||||||||
|
Benefits paid
|
(359.8 | ) | (327.1 | ) | (48.7 | ) | (44.7 | ) | ||||||||||
|
Liabilities assumed through acquisition/other
|
– | 228.7 | – | 7.6 | ||||||||||||||
|
Effect of currency translation
|
(115.1 | ) | 45.4 | – | – | |||||||||||||
|
Benefit obligation at end of year
|
$ | 5,323.0 | $ | 5,380.7 | $ | 702.7 | $ | 740.9 | ||||||||||
|
Change in plan assets
|
||||||||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 5,653.5 | $ | 5,051.9 | $ | 310.6 | $ | 283.7 | ||||||||||
|
Actual return on plan assets
|
(1,654.8 | ) | 622.2 | (98.6 | ) | 31.6 | ||||||||||||
|
Assets assumed through acquisition/other
|
– | 175.5 | – | – | ||||||||||||||
|
Employer contributions
|
24.1 | 83.1 | – | – | ||||||||||||||
|
Employee contributions
|
3.4 | 2.9 | – | – | ||||||||||||||
|
Benefits paid
|
(333.6 | ) | (304.8 | ) | (6.6 | ) | (4.7 | ) | ||||||||||
|
Effect of currency translation
|
(81.0 | ) | 22.7 | – | – | |||||||||||||
|
Fair value of plan assets at end of year
|
$ | 3,611.6 | $ | 5,653.5 | $ | 205.4 | $ | 310.6 | ||||||||||
|
Funded status at end of year
|
$ | (1,711.4 | ) | $ | 272.8 | $ | (497.3 | ) | $ | (430.3 | ) | |||||||
Amounts
recognized in the Consolidated Balance Sheets as of
December 31, 2008 and 2007 consist of:
| PENSION | OTHER BENEFITS | |||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||||
|
Non-current assets
|
$ | 1.7 | $ | 675.6 | $ | – | $ | – | ||||||||||
|
Current liabilities
|
(23.2 | ) | (21.4 | ) | (45.6 | ) | (47.1 | ) | ||||||||||
|
Non-current liabilities
|
(1,689.9 | ) | (381.4 | ) | (451.7 | ) | (383.2 | ) | ||||||||||
| $ | (1,711.4 | ) | $ | 272.8 | $ | (497.3 | ) | $ | (430.3 | ) | ||||||||
Amounts
recognized in accumulated other comprehensive loss at
December 31, 2008 and 2007 consist of:
| PENSION | OTHER BENEFITS | |||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||||
|
Net loss
|
$ | 2,219.5 | $ | 177.6 | $ | 200.0 | $ | 114.1 | ||||||||||
|
Prior service cost
|
25.6 | 29.3 | 6.4 | 11.7 | ||||||||||||||
| $ | 2,245.1 | $ | 206.9 | $ | 206.4 | $ | 125.8 | |||||||||||
During the fourth
quarter of 2008, we recognized a substantial decline in the fair
market value of our pension plan assets, contributing a pre-tax
charge to other comprehensive loss of $2,118.8. See the
“Fair Value of Plan Assets” section of this footnote
for further details related to the method and judgment used to
value our pension plan assets.
The estimated net
loss and prior service cost that will be amortized from
accumulated other comprehensive loss into net periodic benefit
cost over the next fiscal year is as follows:
| PENSION | OTHER BENEFITS | |||||||||
|
Net loss
|
$ | 41.6 | $ | 15.1 | ||||||
|
Prior service cost
|
3.8 | 3.5 | ||||||||
The accumulated
benefit obligation for all defined benefit pension plans was
$5,075.4 and $5,089.4 at December 31, 2008 and 2007,
respectively.
Information for
pension plans with an accumulated benefit obligation in excess
of plan assets:
| DECEMBER 31 | 2008 | 2007 | ||||||||
|
Projected benefit obligation
|
$ | 5,139.9 | $ | 710.4 | ||||||
|
Accumulated benefit obligation
|
4,898.2 | 685.6 | ||||||||
|
Fair value of plan assets
|
3,426.3 | 309.5 | ||||||||
67
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Components of net
periodic benefit cost and other amounts recognized in other
comprehensive (loss) income for the years 2008, 2007 and 2006,
were as follows:
| PENSION | OTHER BENEFITS | |||||||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||||||
|
Net periodic benefit cost
|
||||||||||||||||||||||||||||
|
Service cost
|
$ | 98.9 | $ | 97.8 | $ | 98.7 | $ | 7.6 | $ | 7.6 | $ | 8.0 | ||||||||||||||||
|
Interest cost
|
324.7 | 297.4 | 284.1 | 41.9 | 41.9 | 39.9 | ||||||||||||||||||||||
|
Expected return on plan assets
|
(445.2 | ) | (399.5 | ) | (375.6 | ) | (27.5 | ) | (25.1 | ) | (22.4 | ) | ||||||||||||||||
|
Amortization of net actuarial loss
|
17.6 | 63.3 | 87.9 | 3.8 | 2.4 | 9.4 | ||||||||||||||||||||||
|
Amortization of prior service cost
|
3.7 | 2.7 | 2.7 | 2.8 | 5.3 | 2.3 | ||||||||||||||||||||||
|
Total net periodic benefit (income) cost
|
(0.3 | ) | 61.7 | 97.8 | 28.6 | 32.1 | 37.2 | |||||||||||||||||||||
|
Other changes in plan assets and benefit obligations
recognized in other comprehensive (loss) income
|
||||||||||||||||||||||||||||
|
Net loss (gain)
|
2,059.5 | (365.9 | ) | – | 89.7 | (4.8 | ) | – | ||||||||||||||||||||
|
Prior service cost (benefit)
|
– | 13.2 | – | (2.5 | ) | 4.0 | – | |||||||||||||||||||||
|
Amortization of net actuarial loss
|
(17.6 | ) | (63.3 | ) | – | (3.8 | ) | (2.4 | ) | – | ||||||||||||||||||
|
Amortization of prior service cost
|
(3.7 | ) | (2.7 | ) | – | (2.8 | ) | (5.3 | ) | – | ||||||||||||||||||
|
Minimum pension liability income
|
– | – | (88.9 | ) | – | – | – | |||||||||||||||||||||
|
Total loss (income) recognized in other comprehensive (loss)
income
|
2,038.2 | (418.7 | ) | (88.9 | ) | 80.6 | (8.5 | ) | – | |||||||||||||||||||
|
Total charge/(income) recognized in net periodic benefit cost
and other comprehensive (loss) income
|
$ | 2,037.9 | $ | (357.0 | ) | $ | 8.9 | $ | 109.2 | $ | 23.6 | $ | 37.2 | |||||||||||||||
Assumptions
Weighted-average
assumptions used to determine benefit obligations at December
31:
| PENSION | OTHER BENEFITS | |||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||||
|
Discount rate
|
6.24 | % | 6.19 | % | 6.25 | % | 6.00 | % | ||||||||||
|
Rate of future compensation increase
|
3.97 | % | 4.45 | % | 4.00 | % | 4.50 | % | ||||||||||
Weighted-average
assumptions used to determine net periodic benefit cost for the
years ended December 31:
| PENSION | OTHER BENEFITS | |||||||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||||||
|
Discount rate
|
6.19 | % | 5.87 | % | 5.64 | % | 6.00 | % | 6.00 | % | 5.50 | % | ||||||||||||||||
|
Expected return on plan assets
|
8.87 | % | 8.87 | % | 8.88 | % | 9.00 | % | 9.00 | % | 9.00 | % | ||||||||||||||||
|
Rate of future compensation increase
|
4.45 | % | 4.48 | % | 4.44 | % | 4.50 | % | 4.50 | % | 4.50 | % | ||||||||||||||||
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 assumed rate of
future increases in the per capita cost of health care (the
health care trend rate) is 7.5% for 2009, decreasing ratably to
5.0% in 2016. Increasing the health care trend rates by one
percent per year would have the effect of increasing the benefit
obligation by $37.2 and the aggregate service and interest cost
components by $2.9. A decrease of one percent in the health care
trend rate would reduce the benefit obligation by $31.9 and the
aggregate service and interest cost components by $2.4. To the
extent that actual experience differs from the inherent
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,
68
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
the review of
various indices, discussion with our actuaries, and the review
of competitive surveys in the geographic areas where the plans
are sited. Changes in these assumptions would affect the
financial position and results of operations.
Plan
Assets
Domestic plan assets
held within the ITT Corporation Master Trust, which covers
relatively all of the domestic pension plans and the various
welfare benefit plan trusts, were as follows:
|
PENSION |
OTHER BENEFITS |
||||||||||||||||||
| DECEMBER 31 | DECEMBER 31 | ||||||||||||||||||
| ASSET CATEGORY | 2008 | 2007 | 2008 | 2007 | |||||||||||||||
|
Equity securities
|
37.8 | % | 57.7 | % | 42.4 | % | 60.5 | % | |||||||||||
|
Private equity
|
31.7 | 16.5 | 25.4 | 12.8 | |||||||||||||||
|
Hedge funds
|
21.4 | 16.1 | 17.1 | 12.4 | |||||||||||||||
|
Commodities
|
3.6 | 4.2 | 2.9 | 3.2 | |||||||||||||||
|
Fixed income securities
|
3.4 | 3.7 | 10.1 | 8.7 | |||||||||||||||
|
Cash and other
|
2.1 | 1.8 | 2.1 | 2.4 | |||||||||||||||
|
Total
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
The current asset
allocation for the domestic pension funds apportions 69.5% to
equity market investments, including private equity investments,
and 30.5% to fixed income instruments, hedge funds and
commodities. The investment in our stock within the
U.S. Master Trust approximated 1% in 2008 and 2007.
Fair Value of
Plan Assets
Our pension and
welfare benefit plans’ assets are comprised of a broad
range of investments including domestic and foreign securities,
private equity and fixed income investments, investments in
hedge funds, commodities and cash and cash equivalents. When
available, we have valued our investments based on observable
market inputs.
Observable inputs
are inputs that market participants would use in pricing the
investment based on market data obtained from independent
sources. These include inputs with quoted prices in active
markets, and inputs other than quoted prices in active markets
that are either directly or indirectly observable.
Unobservable inputs
are inputs that reflect the Company’s assumptions about the
estimates market participants would use in pricing the
investment, based on the best information available in the
circumstances. To the extent that valuation is based on inputs
that are less observable or unobservable in the market, the
determination of the fair value requires more judgment.
A substantial
portion of our pension and welfare benefit plans’ assets
portfolio is comprised of hedge fund and private equity
investments. The private equity and a portion of the hedge fund
investments do not have directly observable inputs, and as such,
require significant judgment to determine fair value. Plan
assets are based on year-end fair market values. Absent the
timely availability of audited year-end financial statements for
investments, from which we derive our allocable portion of each
investment’s fair value, management has incorporated its
own judgment and assumptions to value the investments as of
year-end.
See “Critical
Accounting Estimates” within Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of
Operations, for further employee benefit plan information,
including the related estimates, assumptions, uncertainties, and
potential financial statement impact from revisions to our
estimates.
Contributions
Funding requirements
under IRS rules are a major consideration in making
contributions to our pension plans. With respect to qualified
pension plans, we intend to contribute annually not less than
the minimum required by applicable law and regulations. We
currently anticipate making contributions to our pension plans
in the range of $20.0 to $25.0 during 2009, of which $5.5 is
expected to be made in the first quarter.
Estimated
Future Benefit Payments
The following
benefit payments covering pension and other benefit plans have
been projected based on benefits earned to date and the
expectation that certain future service will be earned by
currently active employees:
|
OTHER |
||||||||||
| PENSION | BENEFITS | |||||||||
|
2009
|
$ | 338.0 | $ | 52.6 | ||||||
|
2010
|
344.7 | 54.1 | ||||||||
|
2011
|
352.6 | 55.8 | ||||||||
|
2012
|
360.3 | 56.4 | ||||||||
|
2013
|
369.5 | 57.1 | ||||||||
|
2014 – 2018
|
1,985.8 | 293.2 | ||||||||
69
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
NOTE 17
Stock-Based and
Long-Term Incentive Employee Compensation
Stock-based and
long-term incentive employee compensation cost reduced
consolidated results of operations as follows:
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Pre-tax compensation cost
|
$ | 55.2 | $ | 57.9 | $40 | .2 | |||||||||
|
Future tax benefit
|
$ | 18.2 | $ | 19.0 | $14 | .1 | |||||||||
Stock Option
and Restricted Stock Compensation Plans
Our stock option and
restricted share award incentive plans provide for the awarding
of options on common shares and restricted common shares to
employees and non-employee directors. The options are
exercisable in seven or ten-year periods, except in certain
instances of death, retirement or disability. Certain options
become exercisable upon the earlier of the attainment of
specified market price appreciation of our common shares or at
six or nine years after the date of grant. Other options become
exercisable upon the earlier of the attainment of specified
market price appreciation of ITT’s common shares or over a
three-year period commencing with the date of grant. The
exercise price per share is the fair market value of the
underlying common stock on the date each option is granted.
Restricted shares typically vest three years from the date of
grant. ITT makes shares available for the exercise of stock
options or the vesting of restricted shares by purchasing shares
in the open market or by issuing shares from Treasury.
The ITT Amended and
Restated 2003 Equity Incentive Plan (“2003 Equity Incentive
Plan”) was approved by shareholders and established in May
of 2003. This plan provides for the grant of stock options,
stock appreciation rights, restricted stock and restricted stock
units. The number of shares initially available for awards under
this plan was 12.2. As of December 31, 2008,
5.0 shares were available for future grants.
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 awards granted under these prior plans
will continue to vest and be exercisable in accordance with
their original terms; however, no future grants will be made
under these prior plans.
A summary of the
status of our stock option and restricted stock shares as of
December 31, 2008, 2007 and 2006 and changes during the
years then ended is presented below:
| 2008 | 2007 | 2006 | ||||||||||||||||||||||||||
|
WEIGHTED- |
WEIGHTED- |
WEIGHTED- |
||||||||||||||||||||||||||
|
AVERAGE |
AVERAGE |
AVERAGE |
||||||||||||||||||||||||||
|
EXERCISE |
EXERCISE |
EXERCISE |
||||||||||||||||||||||||||
| STOCK OPTIONS | SHARES | PRICE | SHARES | PRICE | SHARES | PRICE | ||||||||||||||||||||||
|
Outstanding at beginning of year
|
8.7 | $ | 38.13 | 10.6 | $ | 35.50 | 13.1 | $ | 32.88 | |||||||||||||||||||
|
Granted
|
0.6 | 53.57 | 0.5 | 58.52 | 0.6 | 52.59 | ||||||||||||||||||||||
|
Exercised
|
(1.0 | ) | 32.82 | (2.2 | ) | 29.92 | (2.5 | ) | 27.04 | |||||||||||||||||||
|
Canceled or expired
|
(0.2 | ) | 44.31 | (0.2 | ) | 42.14 | (0.6 | ) | 31.45 | |||||||||||||||||||
|
Outstanding at end of year
|
8.1 | $ | 39.83 | 8.7 | $ | 38.13 | 10.6 | $ | 35.50 | |||||||||||||||||||
|
Options exercisable at end of year
|
6.8 | $ | 37.02 | 6.4 | $ | 33.83 | 7.4 | $ | 30.62 | |||||||||||||||||||
Restricted shares
and restricted stock unit awards were granted during the years
ended December 31, 2008, 2007, and 2006 with fair market
values based on ITT’s stock price on the date of grant and
have vesting periods of three years.
70
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
| YEAR ENDED DECEMBER 31, 2008 | ||||||||||||||||||||
| UNVESTED | OUTSTANDING | |||||||||||||||||||
|
WEIGHTED- |
WEIGHTED- |
|||||||||||||||||||
|
AVERAGE |
AVERAGE |
|||||||||||||||||||
|
GRANT DATE |
GRANT DATE |
|||||||||||||||||||
| RESTRICTED SHARES/STOCK UNITS | AWARDS | FAIR VALUE | AWARDS | FAIR VALUE | ||||||||||||||||
|
Unvested/outstanding at beginning of year
|
1.1 | $ | 52.64 | 1.3 | $ | 50.93 | ||||||||||||||
|
Granted
|
0.4 | 53.57 | 0.4 | 53.57 | ||||||||||||||||
|
Vested/lapsed
|
(0.2 | ) | 47.65 | (0.1 | ) | 45.76 | ||||||||||||||
|
Canceled or expired
|
(0.1 | ) | 55.89 | (0.1 | ) | 55.89 | ||||||||||||||
|
Unvested/outstanding at end of year
|
1.2 | $ | 53.75 | 1.5 | $ | 51.96 | ||||||||||||||
| YEAR ENDED DECEMBER 31, 2007 | ||||||||||||||||||||
| UNVESTED | OUTSTANDING | |||||||||||||||||||
|
WEIGHTED- |
WEIGHTED- |
|||||||||||||||||||
|
AVERAGE |
AVERAGE |
|||||||||||||||||||
|
GRANT DATE |
GRANT DATE |
|||||||||||||||||||
| RESTRICTED SHARES/STOCK UNITS | AWARDS | FAIR VALUE | AWARDS | FAIR VALUE | ||||||||||||||||
|
Unvested/outstanding at beginning of year
|
0.9 | $ | 48.45 | 1.0 | $ | 46.87 | ||||||||||||||
|
Granted
|
0.4 | 59.16 | 0.4 | 59.16 | ||||||||||||||||
|
Vested/lapsed
|
(0.2 | ) | 45.89 | (0.1 | ) | 44.08 | ||||||||||||||
|
Unvested/outstanding at end of year
|
1.1 | $ | 52.64 | 1.3 | $ | 50.93 | ||||||||||||||
| YEAR ENDED DECEMBER 31, 2006 | ||||||||||||||||||||
| UNVESTED | OUTSTANDING | |||||||||||||||||||
|
WEIGHTED- |
WEIGHTED- |
|||||||||||||||||||
|
AVERAGE |
AVERAGE |
|||||||||||||||||||
|
GRANT DATE |
GRANT DATE |
|||||||||||||||||||
| RESTRICTED SHARES/STOCK UNITS | AWARDS | FAIR VALUE | AWARDS | FAIR VALUE | ||||||||||||||||
|
Unvested/outstanding at beginning of year
|
0.4 | $ | 43.00 | 0.5 | $ | 41.03 | ||||||||||||||
|
Granted
|
0.5 | 52.62 | 0.5 | 52.62 | ||||||||||||||||
|
Unvested/outstanding at end of year
|
0.9 | $ | 48.45 | 1.0 | $ | 46.87 | ||||||||||||||
The outstanding
restricted shares include 0.1 shares issued to non-employee
directors in-payment for part of the annual retainer. This cost
is expected to be recognized ratably over a weighted average
period of 1.5 years.
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 2008, 2007 and 2006 was $29.5, $70.7 and
$100.8, respectively.
For 2008, the amount
of cash received from the exercise of stock options was $34.4
with an associated tax benefit realized of $12.1. SFAS 123R
requires that we classify as a financing activity the cash flows
attributable to excess tax benefits from stock option exercises.
Cash provided by operating activities decreased and cash
provided by financing activities increased by $6.7, $15.0 and
$16.7 for the years ended December 31, 2008, 2007 and 2006,
respectively, related to excess tax benefits from stock options
and restricted stock.
71
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
The following table
summarizes information about ITT’s stock options at
December 31, 2008:
| OPTIONS OUTSTANDING | OPTIONS EXERCISABLE | |||||||||||||||||||||||||||||||||||||||||
|
WEIGHTED- |
WEIGHTED- |
|||||||||||||||||||||||||||||||||||||||||
|
AVERAGE |
WEIGHTED- |
AVERAGE |
WEIGHTED- |
|||||||||||||||||||||||||||||||||||||||
|
REMAINING |
AVERAGE |
AGGREGATE |
REMAINING |
AVERAGE |
AGGREGATE |
|||||||||||||||||||||||||||||||||||||
|
CONTRACTUAL |
EXERCISE |
INTRINSIC |
CONTRACTUAL |
EXERCISE |
INTRINSIC |
|||||||||||||||||||||||||||||||||||||
| RANGE OF EXERCISE PRICES | NUMBER | LIFE (IN YEARS) | PRICE | VALUE | NUMBER | LIFE (IN YEARS) | PRICE | VALUE | ||||||||||||||||||||||||||||||||||
| $ | 15.44 – 19.78 | 0.7 | 1.48 | $ | 17.88 | $ | 21.0 | 0.7 | 1.48 | $ | 17.88 | $ | 21.0 | |||||||||||||||||||||||||||||
| 25.32 – 26.91 | 0.7 | 3.02 | 25.36 | 13.6 | 0.7 | 3.02 | 25.36 | 13.7 | ||||||||||||||||||||||||||||||||||
| 30.91 – 38.74 | 2.5 | 4.62 | 34.63 | 28.0 | 2.5 | 4.62 | 34.63 | 28.0 | ||||||||||||||||||||||||||||||||||
| 41.52 – 49.91 | 2.5 | 3.43 | 45.18 | 2.1 | 2.5 | 3.35 | 45.29 | 1.8 | ||||||||||||||||||||||||||||||||||
| 50.24 – 57.99 | 1.6 | 5.09 | 54.49 | (13.7 | ) | 0.4 | 4.29 | 54.35 | (3.6 | ) | ||||||||||||||||||||||||||||||||
| 60.72 – 69.00 | 0.1 | 6.03 | 66.76 | (1.0 | ) | – | – | – | – | |||||||||||||||||||||||||||||||||
| 8.1 | $ | 50.0 | 6.8 | $ | 60.9 | |||||||||||||||||||||||||||||||||||||
The aggregate
intrinsic value in the preceding table represents the total
pre-tax intrinsic value, based on ITT’s closing stock price
of $45.99 as of December 31, 2008, 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, 2008,
included as exercisable in the preceding table was
0.5 million.
As of
December 31, 2008, the total number of stock options ITT
expects to vest (including those that have already vested) was
8.0 million. These stock options have a weighted-average
exercise price of $39.51, an aggregate intrinsic value of $61.3,
and a weighted-average remaining contractual life of
3.9 years.
At December 31,
2008, there was $39.8 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.
The fair value of
each option grant was estimated on the date of grant using the
binomial lattice pricing model in 2008, 2007 and 2006. The
following are weighted-average assumptions for 2008, 2007 and
2006:
| 2008 | 2007 | 2006 | |||||||||||||
|
Dividend yield
|
1.31 | % | 0.96 | % | 0.84 | % | |||||||||
|
Expected volatility
|
28.69 | % | 23.09 | % | 24.07 | % | |||||||||
|
Expected life (in years)
|
4.7 | 4.8 | 4.8 | ||||||||||||
|
Risk-free rates
|
2.31 | % | 4.39 | % | 4.73 | % | |||||||||
|
Weighted-average grant date fair value
|
$ | 13.46 | $ | 14.68 | $ | 14.09 | |||||||||
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.
Long-Term
Incentive Plan
The ITT 1997
Long-Term Incentive Plan (the “LTIP”), approved by
shareholders in 1997, authorizes performance awards to be made
to key employees of ITT. The LTIP is considered a liability
plan, under the provisions of SFAS 123R. Accordingly, we
reassess the fair value of its LTIP awards at the end of each
reporting period.
Payment, if any, of
target cash awards will be made at the end of the applicable
three-year performance period and will be based on ITT’s
total shareholder return performance measured against the total
shareholder return performance of other stocks generally
comprising the S&P Industrials Index.
The fair value of
each award is calculated on a quarterly basis using Monte Carlo
simulations. The three-year volatility of the outstanding awards
as of December 31, 2008 was approximately 26%. The number
of companies included in the applicable benchmark group range
from 300 to 342 for the awards outstanding as of
December 31, 2008.
72
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
At December 31,
2008, there was $20.0 of total unrecognized compensation cost
related to non-vested awards granted under the LTIP. This cost
is expected to be recognized ratably over a weighted-average
period of 1.3 years. The total cash paid to settle the LTIP
liability was $19.3, $17.6 and $17.2, during the years ended
2008, 2007 and 2006, respectively.
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.
As of
December 31, 2008 and 2007, 25.2 and 25.4 shares of
Common Stock were held in Treasury, respectively.
NOTE 19
Commitments and
Contingencies
ITT Corporation and
its subsidiaries from time to time are involved in legal
proceedings that are incidental to the operation of their
businesses. Some of these proceedings allege damages relating to
environmental liabilities, intellectual property matters,
copyright infringement, personal injury claims, employment and
pension matters, government contract issues and commercial or
contractual disputes, sometimes related to acquisitions or
divestitures. ITT will continue to vigorously defend itself
against all claims. Although the ultimate outcome of any legal
matter cannot be predicted with certainty, based on present
information including our assessment of the merits of the
particular claim, as well as our current reserves and insurance
coverage, we do not expect that such legal proceedings will have
any material adverse impact on the cash flow, results of
operations, or financial condition of ITT on a consolidated
basis in the foreseeable future, unless otherwise noted below.
See “Critical
Accounting Estimates” within Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of
Operations, for a discussion of contingent liabilities,
including the related estimates, assumptions, uncertainties, and
potential financial statement impact from revisions to our
estimates.
Environmental
In the ordinary
course of business, ITT is subject to federal, state, local, and
foreign environmental laws and regulations. ITT is responsible,
or is alleged to be responsible, for ongoing environmental
investigation and remediation of sites in various countries.
These sites are in various stages of investigation
and/or
remediation and in many of these proceedings ITT’s
liability is considered de minimis. ITT has received
notification from the U.S. Environmental Protection Agency,
and from similar state and foreign environmental agencies, that
a number of sites formerly or currently owned
and/or
operated by ITT, and other properties impacted from those
operations, contain disposed or recycled materials or wastes and
require environmental investigation
and/or
remediation. These sites include instances where ITT has been
identified as a potentially responsible party under federal and
state environmental laws and regulations.
Accruals for
environmental matters are recorded on a site by site basis when
it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated, based on current
law and existing technologies. ITT’s accrued liabilities
for these environmental matters represent the best estimates
related to the investigation and remediation of environmental
media such as water, soil, soil vapor, air and structures, as
well as related legal fees. These estimates, and related
accruals, are reviewed periodically and updated for progress of
investigation and remediation efforts and changes in facts and
legal circumstances. Liabilities for these environmental
expenditures are recorded on an undiscounted basis.
It is difficult to
estimate the final total costs of investigation and remediation
due to various factors, including incomplete information
regarding particular sites and other potentially responsible
parties, uncertainty regarding the extent of investigation or
remediation and our share, if any, of liability for such
conditions, the selection of alternative remedial approaches,
and changes in environmental standards and regulatory
requirements. In management’s opinion, the total amount
accrued is appropriate based on existing facts and
circumstances. Management does not anticipate that these
liabilities will have a material adverse effect on the
consolidated financial position, results of operations or cash
flows.
The following table
illustrates the activity related to ITT’s accrued
liabilities for these environmental matters.
| 2008 | 2007 | |||||||||
|
Beginning balance January 1
|
$ | 124.7 | $ | 114.4 | ||||||
|
Additional accruals attributable to acquisitions in the period
|
8.1 | 3.0 | ||||||||
|
Accruals added during the period
|
0.5 | 6.2 | ||||||||
|
Change in estimates for pre-existing accruals
|
19.6 | 13.0 | ||||||||
|
Payments
|
(17.9 | ) | (11.9 | ) | ||||||
|
Ending balance December 31
|
$ | 135.0 | $ | 124.7 | ||||||
73
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
The following table
illustrates the low- and high-end range of estimated liability,
and number of active sites for these environmental matters.
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | ||||||||
|
Low-end range
|
$ | 101.2 | $ | 94.6 | ||||||
|
High-end range
|
$ | 229.3 | $ | 213.2 | ||||||
|
Number of active environmental investigation and remediation
sites
|
102 | 90 | ||||||||
In a suit filed in
1991, in the California Superior Court, Los Angeles County,
ITT Corporation, et al. v. Pacific Indemnity Corporation et
al., against our insurers, we are seeking recovery of costs
incurred in connection with certain environmental liabilities.
Discovery, procedural matters, changes in California law, and
various appeals have prolonged this case. For several years, the
case had been on appeal before the California Court of Appeals
from a decision by the California Superior Court dismissing
certain claims made by ITT. The dismissed claims were claims
where the costs incurred were solely due to administrative
(versus judicial) actions. However, in April 2007, the Superior
Court vacated its earlier ruling, dismissing the claims based on
the California Supreme Court’s decision in Powerine Oil
Co. v. Superior Court. As a result, the Court of
Appeals dismissed the appeal as moot. The case is now back
before the Superior Court and the parties are engaged in further
discovery. During the course of the litigation, we have
negotiated settlements with certain defendant insurance
companies and are prepared to pursue legal remedies where
reasonable negotiations are not productive.
Product
Liability and Other Matters
ITT, including its
subsidiary Goulds Pumps, Inc. (“Goulds”), has been
joined as a defendant with numerous other companies in product
liability lawsuits alleging injury due to asbestos. These claims
allege that our products sold prior to 1985 contained a part
manufactured by a third party, e.g., a gasket, which contained
asbestos. The asbestos was encapsulated in the gasket (or other)
material and was non-friable. In certain other cases, it is
alleged that former ITT companies were distributors for other
manufacturers’ products that may have contained asbestos.
As of
December 31, 2008, there were 103,006 open claims against
ITT. Frequently, the plaintiffs are unable to demonstrate any
injury or do not identify any ITT or Goulds product as a source
of asbestos exposure. During 2008, we resolved 5,894 claims.
Most of these claims were dismissed, with settlement on a modest
percentage of claims. The average amount of settlement per claim
has been nominal.
Additionally, a
large majority of all defense and settlement costs have been
covered by insurance. Within the past several years, we have
negotiated
coverage-in-place
agreements with our more significant insurance carriers. We are
continuing to seek payment for our net exposure to these costs
from our other insurers.
Our estimated
accrued costs, net of expected insurance recoveries, for the
resolution of all of these pending claims were $27.6 and $24.8
as of December 31, 2008 and 2007, respectively.
The table below
provides additional information regarding asbestos-related
claims filed against ITT.
| 2008 | 2007 | 2006 | |||||||||||||
|
Open claims – January 1
|
102,568 | 110,602 | 124,122 | ||||||||||||
|
New claims filed
|
6,332 | 4,147 | 4,482 | ||||||||||||
|
Claims closed
|
(5,894 | ) | (12,181 | ) | (18,002 | ) | |||||||||
|
Open claims – December 31
|
103,006 | 102,568 | 110,602 | ||||||||||||
Although it is
impossible to predict the ultimate outcome of current open
claims, based on current information, our experience in handling
these matters, and our substantial insurance program, we do not
believe that these claims will have a material adverse effect on
our consolidated financial position, results of operations or
cash flows.
While it is probable
that we will incur additional costs for claims to be filed in
the future, these additional costs are not reasonably estimable
at this time. As part of the
coverage-in-place
agreements, we have assumed the primary responsibility for
administering our asbestos-related claims. Prior to these
agreements, the asbestos claims were administered and paid by
our primary insurance carriers and, as a result, we only have
limited information about those claims. We have engaged an
outside consultant to construct a comprehensive database of
existing claims. The database is expected to provide additional
information about the nature of the claims and will allow us to
re-assess whether a reasonable estimate of future claims and
associated costs can be developed. This effort is anticipated to
be completed in the second half of 2009. It is possible that the
estimated costs of these future claims, net of expected
insurance recoveries, may be material to our results of
operations in the period when recorded.
We provide an
indemnity to U.S. Silica Company for silica personal injury
suits filed prior to September 12, 2005 against our former
subsidiary Pennsylvania Glass Sand. ITT sold the stock of
Pennsylvania Glass Sand to U.S. Silica Company in
74
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
1985. Over the past
three years, the majority of the silica cases involving PGS have
been dismissed without payment. Currently there are less than
4,000 cases pending against PGS. The Company expects that the
majority of the remaining cases will also be dismissed. Our
indemnity had been paid in part by our historic product
liability carrier, however, in September 2005, the carrier
communicated to us that it would no longer provide insurance for
these claims. On October 4, 2005, we filed a suit against
the insurer, ITT v. Pacific Employers Insurance Co., CA
No. 05CV 5223, seeking defense costs and indemnity from
the insurance carrier for Pennsylvania Glass Sand product
liabilities. In April 2007, the Court granted our motion for
summary judgment on the carrier’s duty to defend the silica
cases; however, that decision was overturned on appeal. The
matter was returned to the Superior Court in part for
determination of several factual issues. We will continue to
seek past and future defense costs for these cases from this
carrier. We believe that these matters will not have a material
adverse effect on our consolidated financial position, results
of operations or cash flows. All silica-related costs, net of
insurance recoveries, are shared pursuant to the Distribution
Agreement. See “BUSINESS – Company History and
Certain Relationships” for a description of the
Distribution Agreement.
On October 25,
2006, Fencourt Reinsurance Company (“Fencourt”), a
subsidiary of The Hartford, filed a contribution claim against
ITT for losses incurred by Fencourt as a result of a reinsurance
contract obligation it owes to Century Indemnity Company,
Fencourt Reinsurance Co., Ltd. v. ITT Industries, Inc.
(C.A. No. 06-4786 U.S. D.Ct E.D.PA).
Century Indemnity Company was an insurer of ITT’s Domestic
Casualty Program from 1978 through 1992. Fencourt, formed in
1978, was a captive insurer of the predecessor ITT Corporation
and provided reinsurance to Century for certain ITT self-insured
losses. Fencourt was transferred to The Hartford in the demerger
of ITT in 1995. This matter is covered by the 1995 Distribution
Agreement (See “BUSINESS – Company History and
Certain Relationships”) and that agreement contains clear
language that The Hartford agreed to assume the liabilities of
Fencourt and indemnify ITT against all claims against Fencourt.
The case is stayed pending the resolution of an arbitration
proceeding pending before the American Arbitration Association
in New Jersey. On January 20, 2009, the arbitrator issued a
favorable decision that ITT is not liable for the losses
incurred by Fencourt. The parties are reviewing the case to
determine what other matters remain to be decided by the
arbitrator. Management believes that this matter will not have a
material adverse effect on our consolidated financial position,
results of operations or cash flows.
In December 2005,
the Company received an anonymous c omplaint regarding the
possible payment of commissions to foreign government officials
by employees of our Nanjing Goulds Pumps company, in Nanjing,
China. Such commission payments may violate the Foreign Corrupt
Practices Act. The Company conducted an investigation utilizing
internal and external resources and voluntarily disclosed the
results of the investigation to the United States Department of
Justice and the SEC. On February 11, 2009, the Company
entered into a settlement with the SEC in which the Company,
without admitting or denying liability, has agreed to pay $1.7
in total related to disgorged profits, prejudgment interest and
a civil penalty. The settlement also restrains and enjoins the
Company from violating Sections 13(b)(2)(A and
B) of the Securities and Exchange Act of 1934.
On March 27,
2007, we reached a settlement relating to an investigation of
our ITT Night Vision Division’s compliance with the
International Traffic in Arms Regulations (“ITAR”)
pursuant to which we pled guilty to two violations based on the
export of defense articles without a license and the omission of
material facts in required export reports. The Company was
assessed a total of $50.0 in fines, forfeitures and penalties,
which was accrued for fully as of December 31, 2006. We
also entered into a Deferred Prosecution Agreement with the
U.S. Government which deferred action regarding a third
count of violations related to ITAR pending our implementation
of a remedial action plan, including the appointment of an
independent monitor. ITT was also assessed a deferred
prosecution monetary penalty of $50.0 which ITT will reduce for
monies spent over the five years following the date of the Plea
Agreement, to accelerate and further the development and
fielding of advanced night vision technology. On
October 11, 2007, ITT and the Department of Defense
finalized an Administrative Compliance Agreement wherein we
agreed to take certain remedial actions including implementing
compliance programs and appointing an independent monitor for
the oversight of our compliance programs. On December 28,
2007, we finalized a Consent Agreement with the Department of
State wherein we agreed to undertake certain remedial actions,
including appointment of a Special Compliance Official. The
Company continues to perform under the terms of the agreements.
Management believes that these matters will not have a material
adverse effect on our consolidated financial position, results
of operations or cash flows.
On April 17,
2007, ITT’s Board of Directors received a letter on behalf
of a shareholder requesting that the Board take appropriate
action against the employees responsible for the violations at
our Night Vision facility described above, which were disclosed
on
Form 8-K
filed on March 30, 2007. The Board
75
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
of Directors
appointed a Special Litigation Committee to evaluate the
request. The Special Litigation Committee conducted an
investigation with the assistance of independent counsel and
concluded that no legal actions should be brought by ITT.
During 2007 and
2008, the Company received notice of four shareholder derivative
actions each filed in the U.S. District Court for the
Southern District of New York, known variously as, Sylvia
Piven trustee under trust agreement dated April 3, 1973
f/b/o Sylvia B. Piven, derivatively on behalf of ITT
Corporation v. Steve Loranger et al. and ITT Corporation
(the “Piven” action), Norman Levy,
derivatively on behalf of ITT Industries, Inc. v. Steven R.
Loranger et al. and ITT Industries, Inc., Anthony
Reale v. Steven R. Loranger et al. and ITT Company
[sic], and Robert Wilkinson v. Steven R. Loranger et
al. and ITT Corporation. Each case alleges that the
ITT’s Board of Directors breached their fiduciary duties by
failing to properly oversee ITT’s compliance programs at
its Night Vision business. The Complaints seeks compensatory and
punitive damages for ITT from its Directors, the removal of the
Directors, and the election of new directors. The four cases
were consolidated into one action In Re ITT Corporation
Derivative Litigation, CA
No. 07-CV-2878
(CLB). On motion by the Company, the Piven action was dismissed
for lack of diversity. On April 10, 2008, the Court denied
Company’s Motion to Dismiss the consolidated Complaint. ITT
filed a Motion for Reconsideration and on November 25,
2008, the Court granted the Motion and dismissed the matter
without prejudice. The Court provided the plaintiffs the
opportunity to refile the case upon the development of certain
additional facts. The plaintiffs refiled the case on
December 23, 2008. The Company has filed another Motion to
Dismiss which is currently before the Court. The Defendants have
also filed a Motion to Dismiss based on the Special Litigation
Committee’s report referenced above which is also currently
before the Court. Management believes that these derivative
suits will not have a material adverse effect on our
consolidated financial position, results of operations or cash
flows.
NOTE 20
Guarantees,
Indemnities and Warranties
Guarantees &
Indemnities
Since ITT’s
incorporation in 1920, we have acquired and disposed of numerous
entities. The related acquisition and disposition agreements
contain various representation and warranty clauses and may
provide indemnities for a misrepresentation or breach of the
representations and warranties by either party. The indemnities
address a variety of subjects; the term and monetary amounts of
each such indemnity are defined in the specific agreements and
may be affected by various conditions and external factors. Many
of the indemnities have expired either by operation of law or as
a result of the terms of the agreement. We do not have a
liability recorded for the historic indemnifications and are not
aware of any claims or other information that would give rise to
material payments under such indemnities.
In December of 2007,
we entered into a sale leaseback type agreement for our
corporate aircraft, with the aircraft leased back under a
five-year operating lease. We have provided, under the lease, a
residual value guarantee to the counterparty in the amount of
$50.2, which is the maximum amount of undiscounted future
payments. We would have to make payments under the residual
value guarantee only if the fair value of the aircraft was less
than the residual value guarantee upon termination of the
agreement. At December 31, 2008, the projected fair value
of the aircraft at the end of the lease is estimated to be $2.4
less than the residual value guarantee. Since this estimated
loss does not exceed the $5.4 gain we realized from the sale of
the aircraft but deferred as a loss contingency for the residual
value guarantee, we have not recorded any additional accrual in
our financial statements.
ITT has a number of
individually immaterial guarantees outstanding at
December 31, 2008, that may be affected by various
conditions and external forces, some of which could require that
payments be made under such guarantees. We do not believe these
payments will have any material adverse impact on the financial
position, results of operations or cash flow on a consolidated
basis in the foreseeable future.
Product
Warranties
ITT warrants
numerous products, the terms of which vary widely. In general,
ITT warrants its products against defect and specific
non-performance. In the automotive businesses, liability for
product defects could extend beyond the selling price of the
product and could be significant if the defect shuts down
production or results in a recall. Changes in product warranty
accruals for December 31, 2008 and 2007 were as follows:
| 2008 | 2007 | ||||||||
|
Beginning balance January 1
|
$ | 52.1 | $ | 46.8 | |||||
|
Accruals for product warranties issued in the period
|
38.0 | 30.5 | |||||||
|
Changes in pre-existing warranties, including changes in
estimates and foreign currency translation adjustments
|
(1.9 | ) | (2.1 | ) | |||||
|
Payments
|
(30.8 | ) | (23.1 | ) | |||||
|
Ending balance December 31
|
$ | 57.4 | $ | 52.1 | |||||
76
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
NOTE 21
Business Segment
Information
|
DEFENSE |
MOTION & |
|||||||||||||||||||||||||||
|
ELECTRONICS
& |
FLUID |
FLOW |
CORPORATE |
|||||||||||||||||||||||||
| SERVICES | TECHNOLOGY | CONTROL | AND OTHER | ELIMINATIONS | TOTAL | |||||||||||||||||||||||
|
2008
|
||||||||||||||||||||||||||||
|
Product
sales
|
$ | 3,924.9 | $ | 3,692.7 | $ | 1,575.1 | $ | – | $ | (11.5 | ) | $ | 9,181.2 | |||||||||||||||
|
Service
revenues
|
2,357.4 | 147.9 | 8.3 | – | – | 2,513.6 | ||||||||||||||||||||||
|
Total sales and
revenues
|
6,282.3 | 3,840.6 | 1,583.4 | – | (11.5 | ) | 11,694.8 | |||||||||||||||||||||
|
Operating income
(loss)
|
727.0 | 468.7 | 191.7 | (177.3 | ) | – | 1,210.1 | |||||||||||||||||||||
|
Plant, property
and equipment, net
|
369.3 | 372.3 | 229.1 | 23.2 | – | 993.9 | ||||||||||||||||||||||
|
Total
assets
|
4,464.5 | 2,878.3 | 1,357.8 | 1,779.6 | – | 10,480.2 | ||||||||||||||||||||||
|
Additions to
plant, property and equipment
|
88.0 | 80.5 | 63.7 | 16.5 | – | 248.7 | ||||||||||||||||||||||
|
Depreciation
|
65.8 | 63.0 | 48.7 | 2.1 | – | 179.6 | ||||||||||||||||||||||
|
Amortization
|
85.2 | 6.4 | 7.3 | (0.2 | ) | – | 98.7 | |||||||||||||||||||||
|
2007
|
||||||||||||||||||||||||||||
|
Product sales
|
$ | 2,381.7 | $ | 3,358.2 | $ | 1,332.1 | $ | – | $ | (14.5 | ) | $ | 7,057.5 | |||||||||||||||
|
Service revenues
|
1,794.5 | 150.9 | 0.4 | – | – | 1,945.8 | ||||||||||||||||||||||
|
Total sales and
revenues
|
4,176.2 | 3,509.1 | 1,332.5 | – | (14.5 | ) | 9,003.3 | |||||||||||||||||||||
|
Operating income
(loss)
|
502.7 | 432.7 | 187.4 | (145.6 | ) | – | 977.2 | |||||||||||||||||||||
|
Plant, property and
equipment, net
|
353.5 | 394.8 | 224.9 | 7.1 | – | 980.3 | ||||||||||||||||||||||
|
Total assets
|
4,466.2 | 3,106.4 | 1,364.5 | 2,615.6 | – | 11,552.7 | ||||||||||||||||||||||
|
Additions to plant,
property and equipment
|
57.7 | 88.6 | 45.2 | 47.8 | – | 239.3 | ||||||||||||||||||||||
|
Depreciation
|
48.4 | 61.1 | 44.6 | 1.4 | – | 155.5 | ||||||||||||||||||||||
|
Amortization
|
20.7 | 6.1 | 2.9 | 0.2 | – | 29.9 | ||||||||||||||||||||||
|
2006
|
||||||||||||||||||||||||||||
|
Product sales
|
$ | 2,183.9 | $ | 2,935.7 | $ | 1,092.9 | $ | – | $ | (14.4 | ) | $ | 6,198.1 | |||||||||||||||
|
Service revenues
|
1,475.4 | 134.4 | – | – | – | 1,609.8 | ||||||||||||||||||||||
|
Total sales and
revenues
|
3,659.3 | 3,070.1 | 1,092.9 | – | (14.4 | ) | 7,807.9 | |||||||||||||||||||||
|
Operating income
(loss)
|
404.3 | 370.6 | 149.7 | (123.6 | ) | – | 801.0 | |||||||||||||||||||||
|
Plant, property and
equipment, net
|
281.4 | 361.1 | 185.1 | 5.4 | – | 833.0 | ||||||||||||||||||||||
|
Total assets
|
2,052.3 | 2,846.9 | 860.3 | 1,641.1 | – | 7,400.6 | ||||||||||||||||||||||
|
Additions to plant,
property and equipment
|
60.9 | 67.2 | 44.3 | 4.7 | – | 177.1 | ||||||||||||||||||||||
|
Depreciation
|
45.2 | 59.3 | 39.0 | 1.4 | – | 144.9 | ||||||||||||||||||||||
|
Amortization
|
19.7 | 7.1 | 0.1 | (0.2 | ) | – | 26.7 | |||||||||||||||||||||
|
PLANT, PROPERTY
AND |
||||||||||||||||||||||||||||
| SALES AND REVENUES* | EQUIPMENT, NET | |||||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 | DECEMBER 31 | |||||||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||||||
|
Geographical Information
|
||||||||||||||||||||||||||||
|
United States
|
$ | 7,998.0 | $ | 5,814.3 | $ | 5,041.2 | $ | 581.4 | $ | 557.5 | $ | 458.1 | ||||||||||||||||
|
Western Europe
|
2,098.3 | 1,896.4 | 1,683.9 | 313.7 | 337.1 | 317.3 | ||||||||||||||||||||||
|
Asia Pacific
|
603.6 | 474.4 | 411.2 | 64.5 | 58.3 | 31.1 | ||||||||||||||||||||||
|
Other
|
994.9 | 818.2 | 671.6 | 34.3 | 27.4 | 26.5 | ||||||||||||||||||||||
|
Total Segments
|
$ | 11,694.8 | $ | 9,003.3 | $ | 7,807.9 | $ | 993.9 | $ | 980.3 | $ | 833.0 | ||||||||||||||||
* Sales
and revenues to external customers are attributed to individual
regions based upon the destination of product or service
delivery.
77
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Sales and revenues
by product category, net of intercompany balances, are as
follows:
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | 2006 | ||||||||||||
|
Pumps & Complementary Products
|
$ | 3,840.3 | $ | 3,508.9 | $ | 3,070.1 | |||||||||
|
Defense Products
|
3,923.6 | 2,380.1 | 2,182.5 | ||||||||||||
|
Defense Services
|
2,357.4 | 1,794.5 | 1,475.4 | ||||||||||||
|
Connectors
|
444.6 | 417.1 | 370.1 | ||||||||||||
|
Flow Control
|
382.0 | 243.5 | 205.4 | ||||||||||||
|
Friction Materials
|
447.8 | 393.4 | 318.4 | ||||||||||||
|
Marine Products
|
185.7 | 121.5 | 98.7 | ||||||||||||
|
Shock Absorbers
|
113.4 | 144.3 | 87.3 | ||||||||||||
|
Total
|
$ | 11,694.8 | $ | 9,003.3 | $ | 7,807.9 | |||||||||
The Defense
Electronics & Services business segment had sales and
revenues from the United States Government of $5,893.8, $3,920.3
and $3,244.0, for 2008, 2007 and 2006, respectively. Apart from
the United States Government, no other government or commercial
customer accounted for 10% or more of sales and revenues.
78
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
NOTE 22
Quarterly Results
for 2008 and 2007 (Unaudited)
|
FULL |
|||||||||||||||||||||||
| THREE MONTHS ENDED | MAR. 31 | JUNE 30 | SEPT. 30 | DEC. 31 | YEAR | ||||||||||||||||||
|
2008
|
|||||||||||||||||||||||
|
Sales and
revenues
|
$ | 2,806.4 | $ | 3,064.1 | $ | 2,879.3 | $ | 2,945.0 | $ | 11,694.8 | |||||||||||||
|
Gross
profit
|
760.9 | 867.1 | 810.7 | 816.7 | 3,255.4 | ||||||||||||||||||
|
Income from
continuing operations
|
170.9 | 224.3 | 204.5 | 175.5 | 775.2 | ||||||||||||||||||
|
Net
income
|
171.9 | 221.0 | 216.3 | 185.5 | 794.7 | ||||||||||||||||||
|
Income from
continuing operations per share
|
|||||||||||||||||||||||
|
– Basic
|
$ | 0.94 | $ | 1.24 | $ | 1.13 | $ | 0.97 | $ | 4.29 | |||||||||||||
|
– Diluted
|
$ | 0.93 | $ | 1.22 | $ | 1.11 | $ | 0.96 | $ | 4.23 | |||||||||||||
|
Net income per
share
|
|||||||||||||||||||||||
|
– Basic
|
$ | 0.95 | $ | 1.22 | $ | 1.20 | $ | 1.03 | $ | 4.40 | |||||||||||||
|
– Diluted
|
$ | 0.94 | $ | 1.20 | $ | 1.18 | $ | 1.02 | $ | 4.33 | |||||||||||||
|
Common stock
information price per share range:
|
|||||||||||||||||||||||
|
High
|
$ | 66.01 | $ | 67.62 | $ | 69.73 | $ | 56.15 | $ | 69.73 | |||||||||||||
|
Low
|
$ | 50.94 | $ | 52.05 | $ | 52.25 | $ | 34.75 | $ | 34.75 | |||||||||||||
|
Close
|
$ | 51.81 | $ | 63.33 | $ | 55.61 | $ | 45.99 | $ | 45.99 | |||||||||||||
|
Dividends per
share
|
$ | 0.175 | $ | 0.175 | $ | 0.175 | $ | 0.175 | $ | 0.70 | |||||||||||||
|
2007
|
|||||||||||||||||||||||
|
Sales and revenues
|
$ | 2,070.3 | $ | 2,223.1 | $ | 2,181.2 | $ | 2,528.7 | $ | 9,003.3 | |||||||||||||
|
Gross profit
|
584.2 | 642.4 | 641.1 | 700.6 | 2,568.3 | ||||||||||||||||||
|
Income from
continuing operations
|
136.8 | 199.2 | 168.6 | 128.4 | 633.0 | ||||||||||||||||||
|
Net income
|
140.0 | 213.7 | 230.1 | 158.3 | 742.1 | ||||||||||||||||||
|
Income from
continuing operations per share
|
|||||||||||||||||||||||
|
– Basic
|
$ | 0.75 | $ | 1.11 | $ | 0.94 | $ | 0.71 | $ | 3.51 | |||||||||||||
|
– Diluted
|
$ | 0.74 | $ | 1.08 | $ | 0.92 | $ | 0.70 | $ | 3.44 | |||||||||||||
|
Net income per share
|
|||||||||||||||||||||||
|
– Basic
|
$ | 0.77 | $ | 1.19 | $ | 1.28 | $ | 0.88 | $ | 4.11 | |||||||||||||
|
– Diluted
|
$ | 0.76 | $ | 1.16 | $ | 1.25 | $ | 0.86 | $ | 4.03 | |||||||||||||
|
Common stock
information price per share range:
|
|||||||||||||||||||||||
|
High
|
$ | 62.33 | $ | 70.44 | $ | 73.44 | $ | 69.96 | $ | 73.44 | |||||||||||||
|
Low
|
$ | 56.30 | $ | 60.02 | $ | 58.09 | $ | 60.05 | $ | 56.30 | |||||||||||||
|
Close
|
$ | 60.32 | $ | 68.28 | $ | 67.93 | $ | 66.04 | $ | 66.04 | |||||||||||||
|
Dividends per share
|
$ | 0.14 | $ | 0.14 | $ | 0.14 | $ | 0.14 | $ | 0.56 | |||||||||||||
The above table
reflects the range of market prices of ITT’s common stock
for 2008 and 2007. The prices are as reported in the
consolidated transaction reporting system of the New York Stock
Exchange, the principal market in which ITT’s common stock
is traded, under the symbol “ITT.” Our common stock is
listed on the New York and Euronext exchanges.
During the period
from January 1, 2009 through January 31, 2009, the
high and low reported market prices of ITT’s common stock
were $50.80 and $44.36, respectively. ITT declared dividends of
$0.2125 per common share in the first quarter of 2009. There
were 21,381 holders of record of ITT’s common stock on
January 31, 2009.
79
Table of Contents
SIGNATURES
Pursuant to the
requirements of Section 13 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, and
by the undersigned in the capacity indicated.
ITT Corporation
(Registrant)
| By: |
/s/ Janice
M.
Klettner
|
Janice M.
Klettner
Vice President
and Chief Accounting Officer
(Principal
accounting officer)
February 25, 2009
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 25, 2009 | ||||
|
/s/ Denise
L.
Ramos Denise L. Ramos (Principal financial officer) |
Senior Vice President and Chief Financial Officer |
February 25, 2009 | ||||
|
/s/ Curtis
J.
Crawford Curtis J. Crawford |
Director | February 25, 2009 | ||||
|
/s/ Christina
A.
Gold Christina A. Gold |
Director | February 25, 2009 | ||||
|
/s/ Ralph
F.
Hake Ralph F. Hake |
Director | February 25, 2009 | ||||
|
/s/ John
J.
Hamre John J. Hamre |
Director | February 25, 2009 | ||||
|
/s/ Paul
J.
Kern Paul J. Kern |
Director | February 25, 2009 | ||||
|
/s/ Frank
T.
MacInnis Frank T. MacInnis |
Director | February 25, 2009 | ||||
|
/s/ Surya
N.
Mohapatra Surya N. Mohapatra |
Director | February 25, 2009 | ||||
|
/s/ Linda
S.
Sanford Linda S. Sanford |
Director | February 25, 2009 | ||||
|
/s/ Markos
I.
Tambakeras Markos I. Tambakeras |
Director | February 25, 2009 | ||||
II-1
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 May 13, 2008 | Incorporated by reference to Exhibit 3.2 of ITT Corporation’s Form 8-K Current Report dated May 14, 2008 (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 | ||||
| (10.1 | )* | Separation Agreement between Nicholas P. Hill and ITT Corporation dated February 20, 2009 | Attached. | |||
| (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 | Attached. | |||
| (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. | Attached. | |||
II-2
Table of Contents
|
EXHIBIT |
||||||
|
NUMBER
|
DESCRIPTION | LOCATION | ||||
| (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. | Attached. | |||
| (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 10.12 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. | Attached. | |||
| (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. | Attached. | |||
| (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. | Attached. | |||
| (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. | Attached. | |||
| (10.18 | )* | ITT Industries Excess Benefit Trust | Incorporated by reference to Exhibit 10.17 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). | |||
| (10.20 | ) | Distribution Agreement among ITT Corporation, ITT Destinations, Inc. and ITT Hartford Group, Inc. | Incorporated by reference to Exhibit 10.1 listed under ITT Industries’ Form 8-B dated December 20, 1995 (CIK No. 216228, File No. 1-5672). | |||
| (10.21 | ) | Intellectual Property License Agreement between and among ITT Corporation, ITT Destinations, Inc. and ITT Hartford Group, Inc. | Incorporated by reference to Exhibit 10.2 to ITT Industries’ Form 8-B dated December 20, 1995 (CIK No. 216228, File No. 1-5672). | |||
| (10.22 | ) | Tax Allocation Agreement among ITT Corporation, ITT Destinations, Inc. and ITT Hartford Group, Inc. | Incorporated by reference to Exhibit 10.3 to ITT Industries’ Form 8-B dated December 20, 1995 (CIK No. 216228, File No. 1-5672). | |||
| (10.23 | ) | Employee Benefit Services and Liability Agreement among ITT Corporation, ITT Destinations, Inc. and ITT Hartford Group, Inc. | Incorporated by reference to Exhibit 10.7 to ITT Industries’ Form 8-B dated December 20, 1995 (CIK No. 216228, File No. 1-5672). | |||
| (10.24 | ) | Five-year Competitive Advance and Revolving Credit Facility Agreement dated as of November 10, 2005 | Incorporated by reference to Exhibit 10.1 to ITT Industries’ Form 8-K Current Report dated November 10, 2005 (CIK No. 216228, File No. 1-5672). | |||
| (10.25 | ) | Agreement with Valeo SA with respect to the sale of the Automotive Electrical Systems Business | Incorporated by reference to Exhibit 10(b) to ITT Industries’ Form 10-Q Quarterly Report for the quarterly period ended September 30, 1998 (CIK No. 216228, File No. 1-5672). | |||
| (10.26 | ) | Agreement with Continental AG with respect to the sale of the Automotive Brakes and Chassis Business | Incorporated by reference to Exhibit 2.1 to ITT Industries’ Form 8-K Current Report dated October 13, 1998 (CIK No. 216228, File No. 1-5672). | |||
| (10.27 | ) | Participation Agreement among ITT Industries, Rexus L.L.C. (Rexus) and Air Bail S.A.S. and RBS Lombard, Inc., as investors, and master lease agreement, lease supplements and related agreements between Rexus as lessor and ITT Industries, as lessee | Incorporated by Reference to Exhibits listed under Item 9.01 to ITT Industries Form 8-K Current Report dated December 20, 2004 (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). | |||
II-3
Table of Contents
|
EXHIBIT |
||||||
|
NUMBER
|
DESCRIPTION | LOCATION | ||||
| (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). | |||
| (10.31 | )* | Transition Memorandum and Separation Agreement dated February 23, 2009 between Vincent A. Maffeo and ITT Corporation | Attached. | |||
| (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) | Attached. | |||
| (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). | |||
| (10.40 | )* | Separation Memorandum dated July 10, 2007 and effective as of July 18, 2007 between ITT Corporation and George E. Minnich | Incorporated by reference to Exhibit 10.1 to ITT Corporation Form 8-K Current Report dated July 19, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (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 | ) | Reserved | ||||
| (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). | |||
II-4
Table of Contents
|
EXHIBIT |
||||||
|
NUMBER
|
DESCRIPTION | LOCATION | ||||
| (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 |
Attached. | |||
| (10.54 | ) | ITT Director Consent Letter – Required Modifications to Prior Annual Retainer Deferrals | Attached. | |||
| (10.55 | )* | ITT Excess Pension Plan IIB. Effective as of January 1, 1988. As Amended and Restated as of December 31, 2008. | Attached. | |||
| (11 | ) | Statement re computation of per share earnings | Not required to be filed. | |||
| (12 | ) | Statement re computation of ratios | Filed herewith. | |||
| (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. | |||
II-5
Table of Contents
|
EXHIBIT |
||||||
|
NUMBER
|
DESCRIPTION | LOCATION | ||||
| (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). | |||
* Management
compensatory plan
II-6