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. for the period ended June 30, 2004. The company operates in four primary segments: Fluid Technology, Defense Electronics & Services, Motion & Flow Control, and Electronic Components. The report covers the three and six months ended June 30, 2004, compared to the same periods in 2003.

Key Financial Metrics

Note: Debt figures represent total debt (current + long-term) as of June 30, 2004 ($359.7M current + $440.5M long-term) and Dec 31, 2003 ($141.5M current + $460.9M long-term).

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 14.9% in Q2 and 15.9% for the six-month period. Growth was driven by higher volume across all segments (approx. 10% contribution), acquisitions (approx. 5% contribution), and foreign currency translation.
• Profitability: Operating income rose 9.5% in Q2 and 13.0% for the six months. Segment operating margins were 10.7% in Q2 and 10.2% for the six months, slightly down from the prior year due to lower-margin acquisitions in the Fluid Technology segment.
• Restructuring: The company recorded $14.6 million in restructuring charges in Q2 2004 (vs. $5.9M in Q2 2003) and $19.9 million for the six months (vs. $16.3M in 2003). These charges relate to headcount reductions and facility closures.
• Cash Flow: Operating cash flow improved significantly to $57.5 million for the six months ended June 30, 2004, compared to a negative $33.4 million in the prior year. This improvement was largely due to a lower prepaid pension contribution in 2004 ($100M) compared to 2003 ($200M).
• Acquisitions: The company spent $257.3 million on acquisitions in the first six months of 2004, primarily for WEDECO AG Water Technology and Shanghai Hengtong, compared to $42.5 million in 2003.

Guidance, Outlook, and Risks

• Full Year 2004 Guidance:
  • Revenue: Projected between $6,450 million and $6,600 million.
  • Operating Margin: Projected segment operating margin between 11.1% and 11.5%.
  • Diluted EPS: Projected between $4.40 and $4.50.
  • Operating Cash Flow: Projected between $485.0 million and $535.0 million.
• Management Commentary: Management attributes strong performance to portfolio strength and new product introductions. The acquisition of WEDECO is expected to integrate with start-up costs impacting margins temporarily. A pending acquisition of Remote Sensing Systems (RSS) from Eastman Kodak for approx. $725 million is expected to close in Q3 2004.
• Risks and Contingencies:
  • Environmental: The company is involved in 104 environmental remediation sites. Accruals are $101.6 million (best estimate), with a range of $77.2M to $165.1M.
  • Discontinued Operations: Significant accruals of $186.0 million remain related to the 1998 sale of automotive businesses, primarily for taxes ($154.1M) expected to be settled in late 2004 or 2005.
  • Pension Obligations: The company faces significant pension liabilities. While no material minimum contributions are expected for the balance of 2004/2005, additional contributions of up to $400 million may be required in 2006 depending on market conditions.

Investor Verification Checklist

• Acquisition Integration: Verify the integration progress and margin impact of the WEDECO and Hengtong acquisitions, as well as the pending RSS acquisition.
• Discontinued Operations Settlement: Monitor the timing and final cost of the $154.1 million tax settlement related to the 1998 automotive divestitures.
• Pension Funding: Track the funded status of pension plans and potential contribution requirements for 2006, given the sensitivity to discount rates and asset returns.
• Restructuring Savings: Confirm that projected cash savings from 2003 and 2004 restructuring plans ($4M in 2004, $39M in 2005-2009) are being realized as planned.
• Environmental Liabilities: Review updates on the 104 remediation sites to ensure the $101.6 million accrual remains adequate against the high-end estimate of $165.1 million.