ITT Industries, Inc. - 2003 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: ITT Industries, Inc.
Reporting Period: Fiscal year ended December 31, 2003
Business Overview: A global multi-industry company with approximately 39,000 employees in 55 countries. The company operates through four principal segments: Fluid Technology, Defense Electronics & Services, Motion & Flow Control, and Electronic Components. ITT designs and manufactures engineered products and provides related services for water/wastewater, defense, automotive, and industrial markets.
Key Financial Metrics (2003)
| Metric | 2003 Value | 2002 Value |
|---|---|---|
| Sales and Revenues | $5,626.6 million | $4,985.3 million |
| Operating Income | $528.5 million | $537.6 million |
| Net Income | $403.9 million | $379.9 million |
| Diluted EPS | $4.29 | $4.06 |
| Cash from Operating Activities | $575.6 million | $594.8 million |
| Total Debt | $602.4 million | $791.8 million |
| Cash and Cash Equivalents | $414.2 million | $202.2 million |
| Capital Expenditures | $153.6 million | $153.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 12.9% to $5.63 billion, driven by a 15.0% increase in Fluid Technology and an 18.3% increase in Defense Electronics & Services. Growth was attributed to acquisitions, foreign currency translation, and organic volume increases.
- Operating Income: Decreased slightly by 1.7% ($9.1 million) despite revenue growth, primarily due to increased restructuring charges ($33.8 million in 2003 vs. $9.6 million in 2002) and higher SG&A and R&D expenses.
- Net Income: Increased 6.3% to $403.9 million, aided by a significant reduction in net interest expense (turning into net interest income of $10.1 million due to tax settlement interest) and income from discontinued operations ($13.0 million).
- Debt Reduction: Total debt decreased by $189.4 million as the company utilized strong operating cash flows to pay down obligations.
- Segment Performance:
- Fluid Technology: Operating income rose 7.9% to $271.4 million.
- Defense Electronics & Services: Operating income rose 21.5% to $187.1 million; backlog increased to $3.19 billion.
- Motion & Flow Control: Operating income rose 10.0% to $134.7 million.
- Electronic Components: Operating income declined 85.8% to $10.0 million due to pricing pressures, product mix changes, and restructuring costs.
Guidance, Outlook, and Risks
- 2004 Outlook: Management projects 2004 revenues to grow between 9% and 13% and operating income to increase between 15% and 24%.
- Defense Electronics: Expected revenue growth of 20-24%, driven by the acquisition of Eastman Kodak's Remote Sensing Systems business.
- Fluid Technology: Expected revenue growth of 9-11%, bolstered by the acquisition of WEDECO AG Water Technology.
- Motion & Flow Control: Expected revenue decline of 2-6% due to automotive platform losses, partially offset by marine business growth.
- Restructuring: The company announced $33.8 million in restructuring charges in 2003, targeting a reduction of 986 employees. Future cash savings are projected at $13 million in 2004 and $53 million between 2005 and 2008.
- Key Risks:
- Government Contracts: Approximately 81% of Defense Electronics revenue comes from the U.S. Government, subject to budget fluctuations and contract termination.
- Environmental Liabilities: The company is responsible for 104 remediation sites. Best estimate liability is $108.0 million.
- Discontinued Operations: Significant tax obligations ($154.2 million) related to the 1998 sale of automotive businesses are expected to be settled in 2004 or 2005.
- Pension Funding: The company pre-funded $200 million in 2003 and $100 million in Q1 2004 to avoid mandatory contributions in 2004-2005.
Investor Verification Checklist
- Acquisition Integration: Verify the financial impact and integration progress of the WEDECO AG (Fluid Technology) and Eastman Kodak Remote Sensing Systems (Defense) acquisitions announced in early 2004.
- Discontinued Operations Liability: Confirm the timing and funding source for the $154.2 million tax settlement related to the 1998 automotive business sales.
- Electronic Components Turnaround: Monitor the segment's ability to improve operating margins (forecasted to increase 430 basis points in 2004) following a sharp decline in 2003.
- Pension Assumptions: Review the sensitivity of pension obligations to changes in discount rates and actual returns on plan assets, given the significant unfunded status ($871.3 million).
- Restructuring Savings: Track the realization of projected $13 million in cash savings from 2003 restructuring actions in 2004.