ITT

ITT Industries, Inc. - 2002 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: ITT Industries, Inc.
Reporting Period: Fiscal year ended December 31, 2002.
Business Overview: A global multi-industry company with approximately 38,000 employees in 48 countries. The company operates through four principal segments: Fluid Technology, Defense Electronics & Services, Motion & Flow Control, and Electronic Components. The company is headquartered in White Plains, NY.

Key Financial Metrics (2002)

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 6.6% to $4.99 billion, driven by volume growth in Defense Electronics & Services, Fluid Technology, and Motion & Flow Control, partially offset by declines in Electronic Components.
• Profitability: Operating income rose 35.5% to $537.6 million. The operating margin improved by 230 basis points to 10.8%. This improvement was significantly aided by the absence of the $97.7 million restructuring and asset impairment charge recorded in 2001.
• Restructuring: In 2002, the company reversed $13.1 million of prior restructuring accruals into income and recorded a new $9.6 million charge for facility closures and severance. In contrast, 2001 included a significant $97.7 million charge.
• Tax Rate: The effective income tax rate dropped to 25.3% from 35.0% in 2001, due to a $31 million tax gain from a capital loss carryback and foreign tax planning initiatives.
• Debt Reduction: Total debt decreased by $181.6 million to $791.8 million, funded by strong operating cash flows.

Guidance, Outlook, and Risks

2003 Outlook:

• Revenue: Expected to increase 3% to 5% over 2002, aided by 2002 acquisitions.
• Operating Margin: Expected to be flat compared to 2002.
• Earnings Per Share: Anticipated to be lower than 2002, in the range of $3.70 to $3.90, primarily due to higher taxes (absence of the 2002 tax refund) and pension pre-funding costs.
• Cash Flow: Operating cash flow expected to be at least $370 million.

Segment Outlook:

• Fluid Technology: Revenue growth of 5% to 7% expected.
• Defense Electronics & Services: Revenue growth of 5% to 7% expected due to record backlog.
• Motion & Flow Control: Revenue decline of 4% to 6% expected due to automotive and aerospace market weakness.
• Electronic Components: Revenue expected to be flat to up 3% despite pricing pressures.

Risks and Contingencies:

• Environmental: The company is involved in remediation at approximately 104 sites. The best estimate for liability is $113 million (range $85M-$174M).
• Legal: Ongoing litigation regarding asbestos exposure (managed by insurance) and environmental insurance recovery.
• Pension Funding: Significant underfunding of pension plans ($1.3 billion deficit) due to lower asset returns and lower discount rates. The company expects to contribute $200 million to $400 million in the 2005-2006 timeframe.
• Market Conditions: Exposure to cyclical industries (automotive, aerospace, construction) and foreign currency fluctuations.

Investor Verification Checklist

• Goodwill Accounting: Verify the impact of SFAS No. 142 adoption (cessation of goodwill amortization) on reported earnings compared to pro forma figures.
• Restructuring Reversals: Confirm the sustainability of earnings given the $13.1 million reversal of prior restructuring accruals in 2002.
• Pension Obligations: Assess the long-term cash impact of the $1.3 billion pension underfunding and the projected $200M-$400M contributions in 2005-2006.
• Discontinued Operations: Review the $190 million remaining accruals related to the 1998 automotive business sales, specifically the $154.2 million tax obligation expected to be settled in 2004 or 2005.
• Electronic Components Segment: Monitor the turnaround strategy for this segment, which faced significant volume declines and pricing pressures in 2002.