ITT

ITT Industries, Inc. - Q1 2006 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2006. ITT Industries, Inc. operates through four principal segments: Fluid Technology, Defense Electronics & Services, Motion & Flow Control, and Electronic Components. The financial statements reflect the adoption of SFAS No. 123(R) regarding share-based payments effective January 1, 2006, and are restated for a two-for-one stock split effective February 21, 2006.

Key Financial Metrics

Note: Q1 2005 operating cash flow was positive, while Q1 2006 was negative primarily due to increased tax payments.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 6.8% year-over-year, driven by higher volume across all segments and a 2005 acquisition, partially offset by a 2.0% foreign currency translation impact.
• Profitability: Operating income rose 21.7% to $175.1 million. Segment operating margin improved to 10.7% from 9.3% in the prior year, attributed to operational efficiencies.
• Discontinued Operations: A significant driver of net income was a $48.4 million gain from discontinued operations in Q1 2006, compared to a $4.9 million loss in Q1 2005. This gain resulted from the sale of the automotive brake & fuel tubing business and the industrial non-metallic lined pumps and valves business.
• Tax Expense: Income tax expense increased to $46.1 million (effective rate 30%) from $11.6 million (effective rate 8.7%) in Q1 2005. The prior year benefited from approximately $30 million in tax settlements.
• Stock-Based Compensation: Adoption of SFAS 123(R) resulted in $7.6 million of stock-based compensation expense in Q1 2006, compared to $0 for stock options in Q1 2005 (prior to adoption).

Guidance, Outlook, and Risks

2006 Full-Year Guidance:

• Consolidated Revenues: Forecast between $7.9 billion and $8.0 billion.
• Segment Operating Margin: Forecast between 12.2% and 12.3%.
• Segment Forecasts:
  • Fluid Technology: $2.96B - $3.00B revenue; 13.0% - 13.1% margin.
  • Defense Electronics & Services: $3.55B - $3.58B revenue; 11.0% - 11.1% margin.
  • Motion & Flow Control: $675M - $695M revenue; 20.3% - 20.5% margin.
  • Electronic Components: $710M - $730M revenue; 6.8% - 7.0% margin.

Restructuring: The company recognized $15.8 million in restructuring charges in Q1 2006, involving the elimination of 385 positions. Projected future savings from 2006 actions are approximately $12.9 million in 2006 and $99.9 million between 2007 and 2011.

Risks and Contingencies:

• Environmental: The company is involved in approximately 56 ongoing environmental sites. The best estimate for liability is $93.0 million (range $67.4M - $149.2M).
• Legal Proceedings: Ongoing litigation includes asbestos product liability claims (largely covered by insurance), an investigation into ITT Night Vision's compliance with export regulations, and environmental insurance recovery suits.
• Pension Obligations: The company expects to incur approximately $95.4 million in net periodic pension cost for 2006. A $100 million voluntary contribution was made to U.S. plans in Q1 2006.

Investor Verification Checklist

• Verify the sustainability of the $46.5 million gain from discontinued operations, as this is a non-recurring item significantly boosting Q1 net income.
• Monitor the impact of the new SFAS 123(R) accounting standard on future earnings, as stock-based compensation is now a recurring expense.
• Review the progress of the $15.8 million restructuring plan and the realization of projected cost savings.
• Assess the company's ability to meet the 2006 revenue guidance given the 2.0% headwind from foreign currency translation noted in Q1.
• Track the status of the U.S. Attorney's investigation into ITT Night Vision's export compliance.