ITT

ITT Industries, Inc. - 10-Q Summary (Period Ended September 30, 2003)

Business Context and Reporting Period

This is an unaudited quarterly report (Form 10-Q) for ITT Industries, Inc., covering the three and nine months ended September 30, 2003. The company operates through four primary segments: Fluid Technology, Defense Electronics & Services, Motion & Flow Control, and Electronic Components. As of October 31, 2003, there were 92,271,319 shares of common stock outstanding.

Key Financial Metrics

Note: Net Income includes $6.7 million (Q3) and $14.5 million (9M) from discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 11.3% in Q3 and 9.9% for the nine-month period, driven by higher volume in Defense Electronics & Services and Fluid Technology, acquisitions, and foreign currency translation.
• Profitability Pressure: Despite revenue growth, operating income remained flat in Q3 and declined slightly for the nine-month period. This was due to increased SG&A and R&D expenses, product mix changes, and net restructuring charges of $1.6 million (Q3) and $17.9 million (9M).
• Segment Performance:
  • Fluid Technology: Sales up 16.4% (Q3); operating income up 14.5%.
  • Defense Electronics & Services: Sales up 16.3% (Q3); operating income up 18.8%.
  • Electronic Components: Sales down 2.3% (Q3); operating income plummeted 90.9% due to market weakness in telecommunications and aerospace, product mix issues, and significant restructuring charges.
  • Motion & Flow Control: Sales up 1.2% (Q3); operating income down 3.4%.
• Cash Flow: Operating cash flow for the nine months decreased by $160.5 million compared to the prior year, primarily due to a $200 million prepaid pension contribution and payments of accrued expenses.

Guidance, Outlook, and Risks

• Restructuring: The company continues a program to reduce structural costs. In 2003, charges totaled $17.1 million (excluding reversals), targeting a headcount reduction of 685 persons. Projected future cash savings from 2003 actions are approximately $6 million in 2003 and $118 million between 2004 and 2008.
• Pension Obligations: The company faces significant pension underfunding. At year-end 2002, the funded status was a deficit of $1.32 billion. Management estimates a required contribution of $200 million to $400 million in the 2005-2006 timeframe, depending on market conditions.
• Discontinued Operations: The company holds $188.3 million in accruals related to discontinued automotive businesses, primarily $154.1 million in tax obligations expected to be settled in 2004 or 2005.
• Environmental Liabilities: The company is involved in approximately 105 environmental remediation sites. The best estimate for liability is $109.0 million, with a range of $81.0 million to $174.0 million.
• Legal Proceedings: The company is subject to various legal proceedings including asbestos product liability claims (managed by insurance) and environmental litigation. Management does not expect a material adverse impact on financial condition.

Investor Verification Checklist

• Electronic Components Segment: Verify the sustainability of the 90.9% drop in operating income and the timeline for recovery in telecommunications and aerospace markets.
• Pension Funding: Confirm the impact of the $200 million prepaid contribution on future cash flows and the sensitivity of the $1.3 billion deficit to changes in discount rates and asset returns.
• Restructuring Savings: Monitor the realization of the projected $118 million in future cash savings from 2003 restructuring actions.
• Discontinued Operations Tax Liability: Track the $154.1 million tax obligation settlement expected in 2004-2005 and any potential changes in the accrual.
• Environmental Exposure: Review updates on the $109 million environmental accrual, particularly regarding the San Fernando Valley aquifer and other high-cost sites.