ITT Industries, Inc. - 10-Q Summary (Q2 2002)
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2002, for ITT Industries, Inc., a diversified industrial company. The filing includes unaudited consolidated financial statements and management's discussion and analysis. The company operates through four primary segments: Defense Electronics & Services, Fluid Technology, Motion & Flow Control, and Electronic Components.
Key Financial Metrics
| Metric (in millions) | Q2 2002 | Q2 2001 | YTD 2002 | YTD 2001 |
|---|---|---|---|---|
| Sales and Revenues | $1,320.1 | $1,184.3 | $2,505.9 | $2,370.3 |
| Operating Income | $145.1 | $132.4 | $260.7 | $243.8 |
| Net Income | $92.9 | $76.1 | $164.4 | $135.2 |
| Diluted EPS | $0.99 | $0.84 | $1.76 | $1.49 |
| Cash from Operations (YTD) | $236.3 | $203.4 | ||
| Net Debt (YTD) | ||||
| Total Debt | $818.8 | $973.4 (Dec 31, 2001) | ||
| Cash & Equivalents | $168.5 | $121.3 (Dec 31, 2001) |
Note: Debt figures represent total external debt. Operating margin for Q2 2002 was 12.2% (excluding goodwill amortization impact).
Material Changes vs. Prior Period
- Revenue Growth: Q2 2002 sales increased 11.5% year-over-year, driven by higher volumes in Defense Electronics & Services (new contracts) and Fluid Technology (water/wastewater markets). YTD sales grew 5.7%.
- Profitability: Net income rose 22.1% in Q2 and 21.6% YTD. A significant factor was the adoption of SFAS No. 142, which eliminated goodwill amortization expense ($9.2 million after-tax in Q2 2001).
- Segment Performance:
- Defense Electronics & Services: Sales up 31.9% in Q2; operating income up 29.2% (excluding amortization).
- Fluid Technology: Sales up 7.2% in Q2; operating income up 4.2% (excluding amortization).
- Electronic Components: Sales declined 6.6% in Q2 due to softness in communications and commercial aerospace markets.
- Costs: Costs of sales increased 14.1% in Q2, reflecting higher volume. SG&A expenses were relatively flat excluding goodwill amortization.
Guidance, Outlook, and Risks
- Accounting Changes: The company adopted SFAS No. 142 (Goodwill) and SFAS No. 144 (Asset Disposal) effective Jan 1, 2002. No goodwill impairment was found during the transitional test.
- Restructuring: The company is executing a restructuring plan announced in late 2001. As of June 30, 2002, 62.5% of the planned headcount reduction (approx. 3,400 persons) has been completed. Remaining actions include closing five facilities and discontinuing 21 product lines.
- Strategic Review: A strategic review of the Fluid Handling Systems (FHS) automotive business was completed; management decided to retain and operate the business.
- Liquidity: Cash from operations was strong at $236.3 million YTD. The company has a $1.0 billion revolving credit facility backing its commercial paper program.
- Risks: Key risks include foreign currency exchange rates, general economic conditions, and environmental liabilities (over 100 sites under investigation). Management does not anticipate material adverse effects from environmental costs exceeding current accruals.
Investor Verification Checklist
- Goodwill Amortization Impact: Verify the adjusted net income figures, as the elimination of goodwill amortization significantly boosted reported earnings compared to 2001.
- Electronic Components Outlook: Monitor the "softness" in communications and aerospace markets affecting this segment's revenue decline.
- Restructuring Run-off: Track the completion of facility closures and remaining severance payments expected through 2003-2006.
- Environmental Accruals: Review the range of estimates for environmental remediation costs, noting the company's reliance on insurance recoveries.
- Debt Reduction: Confirm the trend of debt reduction (down from $973.4M to $818.8M) and its impact on interest expense.