ITT

ITT INC. 10-Q Filing Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for ITT Corporation for the period ended March 31, 2009. ITT is a global multi-industry leader in high-technology engineering and manufacturing, organized into three segments: Defense Electronics & Services, Fluid Technology, and Motion & Flow Control. The company operates in a challenging global economic environment, which has significantly impacted its commercial business segments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total sales decreased 8.9% year-over-year, driven by volume declines in commercial segments (Fluid Technology down 15.6%; Motion & Flow Control down 27.3%) and unfavorable foreign currency fluctuations (-4.2%). Defense Electronics & Services remained relatively flat.
• Profitability: Despite a 22.0% drop in operating income due to lower volumes and higher restructuring costs, Net Income increased 7.1%. This was primarily due to a significant reduction in income tax expense ($10.0M vs $78.0M in Q1 2008), driven by a $57.7M reversal of a deferred tax liability following the restructuring of international legal entities.
• Restructuring: Restructuring and asset impairment charges increased to $10.7M (from $3.6M), reflecting 118 planned position eliminations to reduce structural costs.
• Interest Expense: Decreased 35.0% to $26.4M due to lower commercial paper debt levels.
• Segment Performance: Defense Electronics & Services operating income grew 7.5% to $164.3M. Conversely, Fluid Technology and Motion & Flow Control operating incomes declined 32.5% and 59.0%, respectively.

Guidance, Outlook, and Risks

• 2009 Outlook: Management anticipates continued difficult market conditions. They plan restructuring actions totaling approximately $65.0M to $70.0M for the full year 2009. Foreign currency fluctuations are expected to continue negatively impacting results.
• Pension Costs: The company expects to incur approximately $40.6M in net periodic pension costs for 2009. Additional pension contributions of $38.0M to $43.0M are expected for the remainder of the year.
• Legal and Regulatory:
  • FCPA Settlement: Settled an SEC investigation regarding potential Foreign Corrupt Practices Act violations in China for $1.7M (disgorgement, interest, and penalty).
  • ITAR Violations: Continuing compliance with a Deferred Prosecution Agreement regarding export violations; a $50.0M penalty is being reduced by spending on advanced night vision technology.
  • Asbestos Litigation: 102,577 open claims remain; management does not expect a material adverse effect due to insurance coverage.
• Liquidity: The company maintains a $1.75B credit facility and access to commercial paper markets. Management believes liquidity is adequate to meet short-term and long-term requirements.

Investor Verification Checklist

• Tax Benefit Sustainability: Verify the permanence of the $57.7M deferred tax liability reversal and its impact on the effective tax rate (5.1% vs 31.3% prior year).
• Commercial Segment Exposure: Assess the depth of the downturn in Fluid Technology and Motion & Flow Control segments, which saw revenue declines of 15.6% and 27.3% respectively.
• Restructuring Execution: Monitor the realization of projected savings ($7.0M in 2009, $47.9M in 2010-2014) from the 118 position eliminations announced in Q1.
• Pension Funding: Track the actual cash outflow for pension contributions ($38M-$43M expected for the rest of 2009) and the impact of asset valuation on future costs.
• Legal Contingencies: Review the status of the 102,577 asbestos claims and the ongoing ITAR compliance monitoring to ensure no unexpected liabilities arise.