ITT

ITT Industries, Inc. 1998 Form 10-K Summary

Business Context and Reporting Period

This filing covers the fiscal year ended December 31, 1998. ITT Industries, Inc. is a global manufacturing company with approximately 33,000 employees in 45 countries. The company operates through four principal segments: Connectors & Switches, Defense Products & Services, Pumps & Complementary Products, and Specialty Products. A defining event of the period was the strategic divestiture of its automotive businesses (Brake and Chassis and Electrical Systems) in September 1998, which were reclassified as discontinued operations.

Key Financial Metrics

*Adjusted figures exclude restructuring charges, nonrecurring items, and income from discontinued operations to reflect core continuing business performance.

Material Changes vs. Prior Period

• Divestitures: The company sold its automotive Brake and Chassis business to Continental AG and its Electrical Systems business to Valeo SA for a combined $3.7 billion in cash. This resulted in a one-time after-tax gain of $1.55 billion, driving the reported Net Income to $1.53 billion.
• Restructuring Charges: The company recorded $399.4 million in pretax restructuring and nonrecurring charges in 1998 (compared to $137.8 million in 1997). These charges included workforce reductions of 2,422 employees, facility consolidations, and increased environmental reserves.
• Debt Reduction: Proceeds from the automotive sales were used to significantly reduce total debt from $2.17 billion in 1997 to $767.1 million in 1998.
• Share Repurchases: The company repurchased approximately 22.5 million shares in 1998 for $830.8 million as part of a $1.1 billion program.
• Segment Growth: Excluding discontinued operations, sales grew 6.8% year-over-year. The Pumps & Complementary Products segment saw a 21.2% increase due to the inclusion of the Goulds acquisition for an additional five months.

Guidance, Outlook, and Risks

• Outlook: Management anticipates a relatively flat economic environment in the near term. The restructuring program is expected to generate $364.2 million in future cash savings and $78.1 million in non-cash savings between 1999 and 2003.
• Year 2000 (Y2K) Readiness: The company estimates total Y2K initiative costs at approximately $20 million. As of year-end, 80% of essential software/equipment was compliant. Management does not expect Y2K issues to have a material adverse effect on financial condition.
• Environmental Risks: ITT is a Potentially Responsible Party (PRP) at approximately 43 sites under CERCLA. While management believes current reserves are adequate, future remediation costs could vary based on regulatory changes and site conditions.
• Market Risks: The company faces exposure to currency fluctuations (primarily Deutsche Mark, Belgian Franc, Swedish Krona) and interest rate changes. A 10% adverse change in currency rates could impact the fair value of financial instruments by approximately $41.6 million.

Investor Verification Checklist

• Core Earnings Quality: Verify the sustainability of the $324.8 million adjusted operating income by reviewing segment-specific performance, particularly in the Pumps and Defense segments which drove growth.
• Restructuring Execution: Monitor the actual cash outflow for the $188.8 million projected restructuring costs in 1999 and the realization of the projected $364.2 million in savings.
• Debt and Liquidity: Confirm the utilization of the $880.9 million cash balance and the $1.5 billion revolving credit facility to fund future acquisitions and operations.
• Environmental Liabilities: Review updates on the San Fernando Valley aquifer litigation and other environmental remediation sites to ensure reserves remain adequate.
• Y2K Contingencies: Assess the progress of third-party vendor Y2K readiness, as supply chain disruptions remain a potential risk to operations.