ITT

ITT Industries, Inc. - 10-Q Filing Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for ITT Industries, Inc., covering the three and six months ended June 30, 1999. The company operates in four primary segments: Defense Products & Services, Pumps & Complementary Products, Specialty Products, and Connectors & Switches. As of July 31, 1999, there were 87,914,595 shares of common stock outstanding.

Key Financial Metrics

Note: Operating margin for the six months ended June 30, 1999, was approximately 8.2% ($187.1M / $2,283.4M).

Material Changes vs. Prior Period

• Revenue Growth: Sales increased $66.4 million (5.9%) in Q2 1999 and $58.9 million (2.6%) for the six-month period compared to 1998. Growth was driven by Defense Products & Services (+$65.8M in Q2) and Specialty Products (+$32.4M in Q2), offset by declines in Connectors & Switches and Pumps.
• Profitability Surge: Net income from continuing operations for Q2 1999 was $63.3 million, a significant increase from $30.2 million in Q2 1998. This improvement is attributed to cost reduction initiatives and a substantial decrease in interest expense.
• Interest Expense Reduction: Net interest expense decreased $19.2 million in Q2 and $42.8 million for the six months compared to the prior year, resulting from debt reduction using proceeds from prior automotive sales.
• Discontinued Operations: The 1998 period included significant income from discontinued operations ($39.1M in Q2, $86.7M for six months), whereas 1999 had none, making the comparison of total net income less favorable despite strong continuing operations.
• Stock Repurchases: The company completed a $1.1 billion stock repurchase program in Q1 1999, spending $383.4 million on repurchases in the first six months of 1999 alone.

Guidance, Outlook, and Risks

• Restructuring Progress: The company is on track with its 1998 restructuring plan. As of June 30, 1999, 9 of 16 planned facilities were closed, and 1,177 of 2,422 planned headcount reductions were achieved. A reserve of $104.2 million remains for restructuring.
• Debt Management: Management announced plans to redeem all outstanding 8 3/4% senior debentures (due 2006) and 9 1/4% senior debentures (due 2001) on August 1, 1999.
• Year 2000 (Y2K) Compliance: Over 99% of essential software and equipment is Y2K compliant. Estimated total costs are $20.8 million, with $16.1 million incurred to date. The company is monitoring critical suppliers, with 98% expected to be compliant.
• Legal Contingencies: Ongoing environmental litigation regarding the San Fernando Valley aquifer. A settlement in principle was reached in June 1999 with the EPA and Lockheed Martin. The company is also pursuing insurance recovery for these costs.
• Accounting Changes: The effective date of FASB Statement No. 133 (Derivatives) has been deferred to 2001. The company has not yet quantified the impact but does not expect it to be material.

Investor Verification Checklist

• Debt Redemption: Verify the successful execution of the August 1, 1999, redemption of senior debentures and the impact on future interest expenses.
• Restructuring Costs: Monitor the remaining $104.2 million restructuring reserve and the timeline for completing the remaining headcount reductions and facility closures.
• Segment Performance: Review the sustainability of growth in Defense and Specialty segments versus the weakness in Connectors & Switches and Pumps.
• Y2K Costs: Confirm that the remaining $4.7 million in estimated Y2K costs does not exceed current projections.
• Legal Settlements: Track the finalization of the San Fernando Valley aquifer settlement and the outcome of insurance recovery lawsuits.