ITT

ITT Industries, Inc. - 2004 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: ITT Industries, Inc.
Reporting Period: Fiscal Year Ended December 31, 2004
Business Overview: A global multi-industry company with approximately 44,000 employees in 59 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 markets including water/wastewater, defense, automotive, aerospace, and industrial applications.

Key Financial Metrics (2004)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 20.6% to $6.76 billion. Growth was driven by a 12% organic increase, 6% from acquisitions, and 3% from foreign currency translation.
• Profitability: Operating income rose 19.1% to $634.9 million, primarily due to higher volume across all segments. Net income increased 7.0%.
• Debt Levels: Total debt more than doubled to $1.27 billion, primarily to fund strategic acquisitions totaling $1.01 billion in 2004.
• Restructuring: The company recorded a $38.8 million restructuring charge in 2004 (vs. $33.3 million in 2003) to streamline operations, including the planned reduction of 1,319 employees and closure of two facilities.
• Discontinued Operations: A $5.2 million loss was recognized in 2004 related to the Network Systems & Services business, compared to $9.9 million of income in 2003 from the collection of a disputed receivable related to prior automotive divestitures.

Guidance, Outlook, and Risks

2005 Outlook:

• Revenue: Projected to grow 14-18% in Defense Electronics & Services; 2-6% in Fluid Technology; and modest growth in other segments.
• Operating Income: Projected to increase between 12% and 22%.
• Margins: Segment operating margins expected to improve by 70 to 110 basis points due to process improvements and pruning of low-margin products.
• Cash Flow: Operating cash flow projected between $575 million and $625 million.

Key Risks and Contingencies:

• Acquisition Integration: Significant 2004 acquisitions (Remote Sensing Systems, WEDECO) were excluded from the internal control audit due to timing.
• Legal Proceedings: Ongoing environmental remediation at approximately 80 sites (best estimate liability $98 million) and asbestos-related product liability claims (management believes costs are covered by insurance).
• Government Contracts: Defense Electronics & Services relies heavily on U.S. government contracts (87% of segment sales), subject to budget fluctuations and termination.
• Discontinued Operations: $154.1 million in tax obligations related to 1998 automotive divestitures expected to be settled in 2005.

Investor Verification Checklist

• Debt Servicing: Verify the impact of the increased debt load ($1.27B) on future interest expenses and liquidity, given the $1.4B credit facility limit.
• Acquisition Synergies: Monitor the integration and performance of the Remote Sensing Systems (RSS) and WEDECO acquisitions, which drove significant revenue growth.
• Restructuring Savings: Track the realization of projected cash savings ($12M in 2005, $57M in 2006-2009) from the 2004 restructuring plan.
• Discontinued Operations Liability: Confirm the settlement of the $154.1 million tax obligation related to the 1998 automotive business sales in 2005.
• Pension Funding: Review the funded status of pension plans, which showed a deficit of $754.9 million, and the impact of discount rate changes on future expenses.