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 September 30, 2006. ITT is a global multi-industry company operating through four principal segments: Fluid Technology, Defense Electronics & Services, Motion & Flow Control, and Electronic Components—Connectors. The company is a large accelerated filer and is not a shell company. As of October 31, 2006, there were 184,698,612 shares of common stock outstanding.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Sales and Revenues | $2,001.1 | $5,756.6 |
| Operating Income | $214.9 | $601.3 |
| Net Income | $143.5 | $440.3 |
| Diluted EPS (Net Income) | $0.77 | $2.35 |
| Cash from Operating Activities | N/A | $487.4 |
| Cash and Cash Equivalents | $792.5 | $792.5 |
| Total Debt | $1,107.0 | $1,107.0 |
| Net Debt | $314.5 | $314.5 |
Note: Operating margin for the nine months ended September 30, 2006, was 10.4%.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 15.4% in the third quarter and 10.8% for the nine months ended September 30, 2006, compared to the prior year. Growth was driven primarily by higher volume across all segments (12.9% contribution in Q3), with smaller contributions from acquisitions and foreign currency translation.
- Operating Income: Operating income rose 19.4% in Q3 and 15.1% for the nine-month period. This improvement was due to higher volume and lower restructuring costs, partially offset by increased Selling, General, and Administrative (SG&A) expenses.
- Restructuring Charges: Restructuring and asset impairment charges decreased significantly to $9.8 million in Q3 2006 (down from $23.2 million in Q3 2005) and $32.0 million for the nine months (down from $43.1 million in 2005).
- Discontinued Operations: Income from discontinued operations was $3.1 million in Q3 2006 compared to $35.9 million in Q3 2005. The 2005 figure included a significant tax settlement. For the nine months, income from discontinued operations was $62.5 million, driven by a $42.3 million gain on the sale of automotive and industrial pump businesses.
- Stock-Based Compensation: The adoption of SFAS 123(R) in 2006 resulted in the recognition of stock-based compensation expense, which reduced net income by $3.5 million in Q3 and $9.8 million for the nine months.
Guidance, Outlook, and Risks
- 2006 Revenue Guidance: Management forecasts consolidated revenues for 2006 to be between $7.7 billion and $7.8 billion. Segment forecasts include Fluid Technology ($3.02B–$3.05B), Defense Electronics & Services ($3.67B–$3.70B), and a combined forecast for Motion & Flow Control and Electronic Components ($1.07B–$1.085B).
- Capital Allocation: In October 2006, the company announced a new $1 billion share repurchase program over three years, replacing the previous practice of covering only option exercises. The company also repurchased $136.4 million of stock in the first nine months of 2006.
- Legal and Environmental Risks: The company faces ongoing environmental liabilities with a best estimate accrual of $102.7 million (range $72.1M–$170.8M). Specific matters include the San Fernando Valley aquifer cleanup and sites in Florida and Michigan. Additionally, the Defense Electronics & Services segment is under investigation by the U.S. Attorney for the Western District of Virginia regarding compliance with International Traffic in Arms Regulations.
- Accounting Changes: The company changed its annual goodwill impairment testing date from January 1 to October 1. The company also adopted SFAS 158 regarding pension accounting, which is expected to reduce total shareholders' equity by approximately $731 million upon adoption at year-end 2006.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the one-time $42.3 million gain from discontinued operations in the nine-month period.
- Restructuring Savings: Confirm the realization of projected future savings from 2006 restructuring actions, estimated at $129 million between 2007 and 2011.
- Environmental Accruals: Monitor the $102.7 million environmental accrual and potential increases due to regulatory changes or site investigations.
- Regulatory Investigation: Track the outcome of the U.S. Attorney's investigation into ITT Night Vision's export compliance, which could result in a material settlement.
- Share Repurchase Execution: Assess the pace of the new $1 billion share repurchase program announced in October 2006.