ITT INC.
10-Qs and 10-Ks
PROXIES
Table of Contents
FORM 10-K
ANNUAL REPORT
ANNUAL REPORT
Pursuant
to Section 13 of the Securities Exchange Act of 1934
For
The Fiscal Year Ended December 31, 2009
2009
Table of Contents
NOTICE
This document is a
copy of the Annual Report filed by ITT Corporation, with the
Securities and Exchange Commission and the New York Stock
Exchange. It has not been approved or disapproved by the
Commission nor has the Commission passed upon its accuracy or
adequacy.
Table of Contents
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT
ANNUAL REPORT
| (Mark One) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2009 | ||
|
OR
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Transition period from to | ||
Commission File
No. 1-5672
ITT
CORPORATION
| Incorporated in the State of Indiana |
13-5158950
(I.R.S. Employer Identification No.) |
1133 Westchester
Avenue, White Plains, NY 10604
(Principal Executive Office)
Telephone Number: (914) 641-2000
(Principal Executive Office)
Telephone Number: (914) 641-2000
Securities
registered pursuant to Section 12(b) of the Act, all of
which are registered on The New York Stock Exchange,
Inc.:
COMMON STOCK, $1
PAR VALUE
Securities
registered pursuant to Section 12(g) of the Act:
None.
Indicate by check
mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check
mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the
Act. Yes
o
No
þ
Indicate by check
mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check
mark whether the registrant has submitted electronically and
posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to
Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files. Yes
þ
No
o
Indicate by check
mark if disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and
“smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a
smaller reporting company)
Indicate by check
mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The aggregate market
value of the common stock of the registrant held by
non-affiliates of the registrant on June 30, 2009 was
approximately $8.1 billion.
As of
January 29, 2010, there were outstanding 182.9 million
shares of common stock, $1 par value, of the registrant.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the
registrant’s definitive proxy statement filed or to be
filed with the Securities and Exchange Commission pursuant to
Regulation 14A involving the election of directors at the
annual meeting of the shareholders of the registrant scheduled
to be held on May 11, 2010, are incorporated by reference
in Part III of this
Form 10-K.
TABLE OF
CONTENTS
* Included
pursuant to Instruction 3 to Item 401(b) of
Regulation S-K.
Table of Contents
PART I
| ITEM 1. | BUSINESS |
(In millions,
except per share amounts, unless otherwise stated)
GENERAL
ITT Corporation is a
global multi-industry high-technology engineering and
manufacturing organization engaged directly and through its
subsidiaries, with approximately 40,200 employees operating
in 62 countries. We generate revenue and cash through the
design, manufacture, and sale of a wide range of engineered
products and by providing services in three vital markets:
global defense and security, water and fluids management, and
motion and flow control. Our portfolio of our three core
businesses is focused on making a difference to our communities
and the world. From climate change and water scarcity to
population growth, infrastructure modernization, critical
communications and security concerns, ITT Corporation is
prepared to play a continuing role in developing sustainable
solutions to pressing global problems.
Our growth strategy
is centered on both organic and acquisition growth. Our ability
to grow organically stems from our value-based product
development process, new and existing technologies, distribution
capabilities, customer relationships and strong market
positions. We believe our innovative and essential products and
services position us well to grow within the markets we serve at
or above market rates. In addition to our growth initiatives, we
have a number of strategic initiatives within the framework of
the ITT Management System aimed at enhancing our operational
performance. These include global strategic sourcing, footprint
rationalization and realignment, Six Sigma and lean fulfillment.
Unless the context
otherwise indicates, references herein to “ITT,”
“the Company,” and such words as “we,”
“us,” and “our” include ITT Corporation and
its subsidiaries. ITT Industries, Inc. was incorporated on
September 5, 1995 in Indiana. On July 1, 2006, ITT
Industries, Inc. changed its name to ITT Corporation. Reference
is made to “– COMPANY HISTORY AND CERTAIN
RELATIONSHIPS.”
Our principal
executive offices are located at 1133 Westchester Avenue,
White Plains, NY 10604. Our telephone number is
(914) 641-2000.
BUSINESS
SEGMENTS
Our business is
comprised of three principal business segments which are aligned
with the markets they serve: Defense Electronics &
Services (Defense segment), Fluid Technology (Fluid segment),
and Motion & Flow Control (Motion & Flow
segment). The following table illustrates annual consolidated
revenue and operating income attributable to each of our
business segments, as well the percentage of total revenue and
total segment operating income, for the periods specified.
| 2009 | 2008 | 2007 | |||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 | $ | % | $ | % | $ | % | |||||||||||||||||||||
|
Revenue
|
|||||||||||||||||||||||||||
|
Defense
|
$ | 6,296.8 | 58 | % | $ | 6,282.3 | 54 | % | $ | 4,176.2 | 46 | % | |||||||||||||||
|
Fluid
|
3,363.3 | 31 | 3,840.6 | 33 | 3,509.1 | 39 | |||||||||||||||||||||
|
Motion & Flow
|
1,253.0 | 11 | 1,583.4 | 13 | 1,332.5 | 15 | |||||||||||||||||||||
|
Eliminations
|
(8.6 | ) | — | (11.5 | ) | — | (14.5 | ) | — | ||||||||||||||||||
|
Consolidated Revenue
|
$ | 10,904.5 | 100 | % | $ | 11,694.8 | 100 | % | $ | 9,003.3 | 100 | % | |||||||||||||||
|
Operating Income
|
|||||||||||||||||||||||||||
|
Defense
|
$ | 776.0 | 60 | % | $ | 727.0 | 52 | % | $ | 502.7 | 45 | % | |||||||||||||||
|
Fluid
|
392.9 | 31 | 468.7 | 34 | 432.7 | 38 | |||||||||||||||||||||
|
Motion & Flow
|
118.2 | 9 | 191.7 | 14 | 187.4 | 17 | |||||||||||||||||||||
|
Segment Operating Income
|
1,287.1 | 100 | % | 1,387.4 | 100 | % | 1,122.8 | 100 | % | ||||||||||||||||||
|
Corporate and Other
|
(377.7 | ) | (177.3 | ) | (145.6 | ) | |||||||||||||||||||||
|
Consolidated Operating Income
|
$ | 909.4 | $ | 1,210.1 | $ | 977.2 | |||||||||||||||||||||
2
Table of Contents
Defense
Electronics & Services
Our Defense segment
is designed to serve future needs around safety, security,
intelligence and communication. We achieve this through the
development, manufacture, and support of high-technology
electronic systems and components for worldwide defense and
commercial markets, and by providing communications systems and
engineering and applied research. The Defense segment is a
trusted provider of mission-critical products and services that
support the United States military and its allies. We also
develop space-based technologies that enable Global Positioning
Satellite (GPS) systems to communicate a precise location and
allow weather satellites to help forecasters calculate when and
where the next hurricane will hit. In many important ways, we
are working to ensure a safer, more secure world. Principal
manufacturing facilities are located within the United States of
America and United Kingdom.
The Defense segment
sells its products to a wide variety of governmental and
non-governmental entities located throughout the world. A
substantial portion of U.S. Government work is performed in
the United States under prime contracts and subcontracts, some
of which by statute are subject to profit limitations and all of
which are subject to termination by the U.S. Government.
Certain products have particular commercial application,
including night vision devices. The following table illustrates
the percentage of revenue for each customer base:
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
U.S.
Government
(a)
|
92 | % | 94 | % | 94 | % | |||||||||
|
International governments
|
5 | 3 | 4 | ||||||||||||
|
Commercial
|
3 | 3 | 2 | ||||||||||||
| 100 | % | 100 | % | 100 | % | ||||||||||
| (a) | Includes revenue derived through the U.S. Government’s foreign military sales program (FMS). The FMS program is the government-to-government method for selling U.S. defense equipment, services, and training. |
Factors that could
impact the Defense segment’s financial results include the
level of defense funding by domestic and foreign governments,
our ability to receive contract awards, advance technology, the
ability to develop and market products and services for
customers outside of traditional markets and our ability to
obtain appropriate export licenses for international sales and
business. Primary areas of business focus include new or
improved product offerings, new contract wins, successful
program execution and increasing our presence in international
and commercial markets.
The Defense segment
is comprised of seven divisions; Advanced
Engineering & Sciences, Communication Systems,
Electronic Systems, Intelligence & Information
Warfare, Night Vision, Space Systems and Systems Divisions. The
following table illustrates the annual revenue by division
within our Defense segment, and the percentage of total Defense
segment revenue for the periods specified:
| 2009 | 2008 | 2007 | |||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 | $ | % | $ | % | $ | % | |||||||||||||||||||||
|
Electronic Systems
|
$ | 1,554.5 | 25 | % | $ | 1,537.7 | 25 | % | $ | 450.7 | 11 | % | |||||||||||||||
|
Systems
|
1,464.1 | 23 | 1,401.1 | 22 | 1,353.7 | 32 | |||||||||||||||||||||
|
Advanced Engineering & Sciences
|
1,013.2 | 16 | 968.7 | 15 | 485.0 | 12 | |||||||||||||||||||||
|
Communication Systems
|
983.4 | 16 | 1,141.8 | 18 | 807.5 | 19 | |||||||||||||||||||||
|
Space Systems
|
641.8 | 10 | 594.8 | 10 | 605.8 | 14 | |||||||||||||||||||||
|
Night Vision
|
532.0 | 8 | 500.7 | 8 | 484.7 | 12 | |||||||||||||||||||||
|
Intelligence & Information Warfare
|
149.1 | 2 | 185.1 | 3 | 1.8 | – | |||||||||||||||||||||
|
Eliminations
|
(41.3 | ) | – | (47.6 | ) | (1 | ) | (13.0 | ) | – | |||||||||||||||||
| $ | 6,296.8 | 100 | % | $ | 6,282.3 | 100 | % | $ | 4,176.2 | 100 | % | ||||||||||||||||
Advanced
Engineering & Sciences Division
(AES)
–
based in Herndon, Virginia, AES provides a wide range of
research, technologies and engineering support services to
government, industrial and commercial customers. In addition,
the division
3
Table of Contents
provides products
and services for information collection, information processing
and control, information security, homeland defense and
telecommunications systems. The division also leads the air
traffic control modernization program for the U.S. Federal
Aviation Administration (FAA).
Communications
Systems Division
(CS)
–
based in Fort Wayne, Indiana, CS develops wireless
networking systems for tactical military and government systems.
CS is a provider of military VHF radios, including the Single
Channel Ground and Airborne Radio System (SINCGARS) and Advanced
Tactical Communications Systems. CS is developing new
technologies such as Soldier Radio Waveform, the
U.S. next-generation capability to support network-centric
operations, and already provides many similar capabilities
through its SpearNet systems for the individual soldier. The
latest fully programmable radio systems, including the SINCGARS
SideHat, Soldier Radios and Sensor Radios, are supporting
transformational experimentation by the U.S. Army. In
addition, CS provides highly reliable radio systems to the FAA
for air traffic control, including the newest
ground-to-air
radios, complete border control security systems, and
reference – class GPS receivers.
Electronic
Systems Division
(ES)
–
based in Clifton, New Jersey, ES produces a broad range of next
generation information, situational awareness and Electronic
Warfare systems for mission success and survivability for
multiple military aircraft, surface ships, submarines, and
ground vehicles. ES products and technologies include integrated
electronic warfare systems for self-protection, reconnaissance
and surveillance, Counter Improvised Explosive Devices (CIEDs)
for vehicles, mine defense, naval command/sonar applications,
and submarine communication and tracking. In addition, ES
produces aircraft armament suspension/release equipment for
front line fighters, electronic weapons interface systems, and
advanced composite structures for the U.S. Marine Corp, as
well as mobile, ship and land-based precision landing and air
traffic systems for landing assistance in extreme physical
environments.
Intelligence &
Information Warfare Division
(IIW)
–
based in Nashua, New Hampshire, IIW designs, develops,
manufactures, tests, and deploys hardware and software for the
U.S. Government, law enforcement agencies, and commercial
use. IIW products are utilized in numerous applications,
including protecting soldiers in the field, detecting illegal
activity in prisons and secured facilities, and providing
high-technology means of communication. IIW products include
field-proven protection technologies, such as the Mobile
Multi-Band Jammer 2.1, and detection and surveillance solutions
products such as the Cell
Hound
tm
,
which detects and locates all active cell phones within or near
a facility. IIW also provides high-tech communications solutions
that support tactical field devices and Mission Operations
Centers over a secure web-based portal for remote monitoring and
administration of devices.
Night Vision
Division
(NV)
–
based in Roanoke, Virginia, NV supplies night vision equipment
available to U.S. and allied military forces. The equipment
includes night vision goggles, enhanced night vision goggles,
monoculars and weapon sights for ground forces, and image
intensifier tubes required for all of these systems. NV is
developing advanced technology for the digital battlefield that
will allow improved mobility and situational awareness. NV also
supplies high-performance night vision devices to
U.S. federal, state and local law enforcement officers in
support of homeland security.
Space Systems
Division
(SSD)
–
based in Rochester, New York, SSD provides innovative remote
sensing and navigation solutions to customers in the defense,
intelligence, space science, and commercial aerospace
communities. SSD solutions include intelligence, surveillance
and reconnaissance, high-resolution commercial imaging, earth
and space science, climate and environmental monitoring, GPS
navigation, image and data processing and dissemination, and
space control and missile defense.
Systems
Division
–
based in Colorado Springs, Colorado, the Systems Division
provides systems integration, communications, engineering and
technical support solutions ranging from strategic command and
control and tactical warning and attack assessment, to testing,
training and range evaluation. The Systems Division also
provides total systems support solutions for combat equipment,
tactical information systems and facilities management.
2010
Realignment
In January 2010, a
strategic realignment of the Defense segment was announced to
better align with the emerging needs of its expanding global
customer base, which is increasingly integrated and
network-centric. The realignment, which is scheduled to be
completed by year end 2010, will enable better product portfolio
integration, encouraging a more coordinated market approach and
reduce operational redundancies. The Defense segment is being
renamed ITT Defense and Information Solutions. The current
organizational structure, consisting of seven divisions, is
being consolidated into three larger divisions.
The ES and CS
divisions, as well as a portion of the IIW division, are being
combined to form Electronic Systems division, based in Clifton,
N.J. This division will deliver advanced protection measures
that work together to help ITT’s customers defend their
networks and disable enemy networks. It will shift its focus
from producing separate,
point-of-use
products to secure, networked communications systems and
powerful
4
Table of Contents
sensing,
surveillance and reconnaissance technologies that address the
entire spectrum of electronic warfare.
The SSD and NV
divisions are being combined to form Geospatial Systems,
based in Rochester, N.Y. The new division will focus on
providing networked sensors, such as next generation imaging,
including space and air sensors, image/infrared/digital sensors
and air/ground/space systems, which transition the
company’s capabilities from disparate image acquisition to
image processing and distribution across the network.
The AES and Systems
divisions are being combined with a portion of the IIW division
to form the Information Systems division, based in Herndon, Va.
This division will focus on networked decision support solutions
through the combination of large system operations and
maintenance capabilities with the sophisticated techniques of
information integration and protection, such as next-generation
air traffic management solutions, national intelligence networks
and cyber security. This combination will expand the
capabilities that have made ITT a leading systems developer for
high-priority needs.
Fluid
Technology
Our Fluid segment is
a provider of water and wastewater treatment solutions, pumps
and related technologies for industrial, commercial and
municipal customers. The segment is committed to the sustainable
development and use of the world’s water resources and
focused on providing innovative equipment, systems and
applications knowledge to users throughout the cycle of water.
We are also dedicated to preserving the environment and
nurturing knowledge and awareness of the world’s water
issues through our support of non-governmental organizations.
Our engineers have designed and fielded breakthrough
technologies for fluid handling products that conserve
resources, increase efficiencies, and improve the quality of
life for individuals, businesses, and communities.
As a producer of
fluid handling equipment and related products for treating and
recycling wastewater, ITT actively promotes more efficient use
and re-use of water and endeavors to raise the level of
awareness of the need to preserve and protect the earth’s
water resources. ITT strives to provide its global customer base
with the systems and solutions they need to meet ever-increasing
demands on life cycle cost control and energy and operating
efficiencies.
Our strategy to
expand across the value chain to provide better service for our
customers is moving us from a product supplier to a solution
provider. Through ITT’s overarching strategic Value Based
Product Development program, we now have in place a company-wide
system for rapid development of new offerings and technologies
to augment our current offering of systems and solutions. This
strategy has guided us in our acquisitions and business
development efforts. For example, today ITT can extend its core
offering of submersible pumps and mixers with systems to control
plant operation, technologies that analyze the waste stream, and
products and systems to treat water through biological,
filtration, oxidation and disinfection processes. In the
industrial markets, our pump systems are now equipped with
intelligent control technologies.
Major production and
assembly facilities are located in Australia, Canada, China,
France, Germany, India, Italy, Poland, South Korea, Sweden,
United Kingdom, and the United States of America. In addition, a
global network of service centers provide for aftermarket
customer care. Service centers offer an array of integrated
service solutions for industry including preventive monitoring,
contract maintenance, emergency field service, engineered
upgrades, inventory management, and overhauls for pumps and
other rotating equipment.
Principal customers
are in North America, Europe, the Middle East, Central and South
America, and the Asia-Pacific region. Sales are made directly to
customers or through independent distributors and
representatives.
Factors that could
impact Fluid Technology’s financial results include broad
economic conditions in markets served, the ability of
municipalities to fund projects, raw material prices and
continued demand for replacement parts and service. Primary
areas of business focus include new product development,
geographic expansion into new markets, facility rationalization
and global sourcing of direct material purchases.
Our Fluid segment
brings its product and services portfolio to market through
three market-oriented business divisions: Water &
Wastewater, Residential & Commercial Water, and
Industrial Process. The following table illustrates the annual
revenue by division within the Fluid segment, and the percentage
of total Fluid segment revenue for the periods specified:
5
Table of Contents
| 2009 | 2008 | 2007 | |||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 | $ | % | $ | % | $ | % | |||||||||||||||||||||
|
Water & Wastewater
|
$ | 1,632.3 | 49 | % | $ | 1,805.0 | 47 | % | $ | 1,658.0 | 47 | % | |||||||||||||||
|
Residential & Commercial Water
|
1,078.5 | 32 | 1,283.2 | 33 | 1,194.9 | 34 | |||||||||||||||||||||
|
Industrial Process
|
719.2 | 21 | 815.5 | 21 | 703.9 | 20 | |||||||||||||||||||||
|
Eliminations
|
(66.7 | ) | (2 | ) | (63.1 | ) | (1 | ) | (47.7 | ) | (1 | ) | |||||||||||||||
| $ | 3,363.3 | 100 | % | $ | 3,840.6 | 100 | % | $ | 3,509.1 | 100 | % | ||||||||||||||||
Water &
Wastewater Division
(WWW)
–
based in Stockholm, Sweden, WWW provides a complete offering to
municipal and industrial wastewater transport and treatment
customers including a full range of wastewater and dewatering
pumps, secondary biological treatment, filtration and
disinfection products. ITT is the originator and largest
manufacturer of submersible pumps and mixers that form the heart
of many of the world’s wastewater treatment facilities, as
well as a leader in biological treatment systems for municipal
and industrial wastewater. ITT also provides rapid gravity media
filtration, tertiary filtration and denitrification systems for
wastewater as well as ultraviolet (UV) and ozone oxidation
systems for disinfection.
ITT’s brands
include
Flygt
®
,
Sanitaire
®
,
ABJ
®
,
Leopold
®
and
WEDECO
®
.
Residential &
Commercial Water Division
(RCW)
–
based in Morton Grove, Illinois, RCW manufactures and markets
pumps, systems and accessories for residential, municipal and
commercial applications including water, wells, HVAC systems,
pressure boosters, boiler controls and fire protection. For the
building trades market, ITT provides a broad variety of pressure
boosting pumps, fire pump packages and products/systems for HVAC
service, building service and utility applications. ITT membrane
filtration systems provide clean water for municipalities and
customers requiring purified water. For turf irrigation,
municipal systems, golf courses and irrigation applications, ITT
provides packaged pump systems. ITT’s brands include Goulds
Pumps
®
,
Lowara
®
,
Bell &
Gossett
®
,
McDonnell &
Miller
®
,
Vogel
®
,
A-C Fire
Pump
®
and
Flowtronex
®
.
In May 2009, ITT
acquired Laing GmbH (Laing) of Germany, a privately held
producer of energy-efficient circulator pumps primarily used in
residential and commercial plumbing and heating, ventilating and
air conditioning systems. The acquisition broadened ITT’s
portfolio of energy-efficient products available to customers
and was fully integrated into the RCW division during 2009.
Industrial
Process Division
(IP)
–
based in Seneca Falls, New York, IP brings a complete portfolio
of pumps, valves and control systems for industrial markets
including chemical, water and wastewater, pulp &
paper, hydrocarbon processing, power generation, mining, and
niche industrial applications. ITT’s industrial pump
products are paired with desalination “watermakers”
for the offshore drilling and production as well as a range of
heat exchangers for industrial applications. ITT’s brands
serving industrial markets include Goulds
Pumps
®
,
Fabri-Valve
®
,
Dia-Flo
®
,
Cam-Tite
Cam-Line
®
,
C’treat
®
,
Standard
®
and
Pure-Flo
®
.
Motion &
Flow Control
Our
Motion & Flow segment delivers highly engineered,
durable components that succeed in the harshest environments
where the cost of failure is high. The segment manufactures
specialty shock absorbers and brake friction materials for the
transportation industry, switch applications for industrial and
aerospace industries, electrical connectors used in
telecommunications, computers, aerospace and industrial
applications, and a wide range of pumps and tailored products
for marine, beverage and general industrial markets. The segment
primarily serves the high-end of its markets, with high brand
recognition, and a focus on new product development and
operational excellence.
Revenue
opportunities are balanced between original equipment
manufacturing (OEM) and after-market customers. In addition to
the traditional markets of the U.S. and Western Europe,
opportunities in emerging markets within Asia and other
countries are increasing. Principal customers are located in
Brazil, Canada, France, Germany, Italy, Japan, the United
Kingdom and United States of America. Major production
facilities are located in Germany, China, Italy, the
Netherlands, Mexico, Czech Republic, Japan, the United Kingdom
and United States of America.
The
Motion & Flow segment’s financial results are
driven by economic conditions in their major markets, the
cyclical nature of the transportation industry, production
levels of major auto producers, demand for marine and leisure
products, raw material prices, the success of new product
development, platform life and changes in technology. Primary
areas of business focus include expansion into adjacent markets,
new product development, manufacturing footprint optimization,
global sourcing of direct material purchases and lean
fulfillment.
Certain
Motion & Flow Control divisions were combined
6
Table of Contents
during 2008 and 2009
to improve our strategic alignment with end-markets, and to
better leverage our production capabilities and cost structures.
This included the consolidation of our Controls, Aerospace
Controls and Energy Absorption divisions into an
aerospace-facing division referred to as Control Technologies,
and the combination of our
Koni
®
shocks product line with our Friction Technologies division, now
collectively referred to as the Motion Technologies division.
With the completion of the strategic alignment, the
Motion & Flow segment is comprised of the Motion
Technologies, Interconnect Solutions, Control Technologies and
Flow Control divisions.
The following table
illustrates the annual revenue by division within the
Motion & Flow segment, as well the percentage of total
Motion & Flow segment revenue for the periods
specified:
| 2009 | 2008 | 2007 | |||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 | $ | % | $ | % | $ | % | |||||||||||||||||||||
|
Motion Technologies
|
$ | 490.9 | 39 | % | $ | 561.9 | 35 | % | $ | 495.4 | 37 | % | |||||||||||||||
|
Interconnect Solutions
|
341.4 | 27 | 453.2 | 29 | 425.6 | 32 | |||||||||||||||||||||
|
Control Technologies
|
242.7 | 19 | 321.9 | 20 | 159.9 | 12 | |||||||||||||||||||||
|
Flow Control
|
183.5 | 15 | 247.5 | 16 | 251.6 | 19 | |||||||||||||||||||||
|
Eliminations
|
(5.5 | ) | – | (1.1 | ) | – | – | – | |||||||||||||||||||
| $ | 1,253.0 | 100 | % | $ | 1,583.4 | 100 | % | $ | 1,332.5 | 100 | % | ||||||||||||||||
Motion
Technologies
Division
–
based in Barge, Italy, Motion Technologies designs and
manufactures products serving global automotive and railway
customers. Products include friction pads and back plates for
braking applications for the world’s largest manufacturers
of cars, trucks and light commercial vehicles, and
Koni
®
shocks used in car, bus, truck, trailer, and rail applications.
Interconnect
Solutions
Division
–
based in Santa Ana, California, Interconnect Solutions designs
and manufactures connectors, interconnects, cable assemblies,
multi-function grips, input/output card kits and smart card
systems. Markets served include the areas of defense, aerospace,
industrial, transportation, computer, and telecommunications.
Connector products are marketed primarily under the
Cannon
®
brand name.
Control
Technologies
Division
–
based in Valencia, California, Control Technologies is a
worldwide supplier of valves, actuators, pumps and switches for
the commercial, military, regional, business jet and general
aviation markets. Products are principally sold to OEM and the
aftermarket in North and South America, Europe and Asia. Control
Technologies also sells switches and regulators into the oil and
gas, fluid power, power generation, and chemical markets. Under
its
Conoflow
®
brand, ITT markets pressure regulators and diaphragm seals for
industrial applications and natural gas vehicles. The division
also designs and manufactures a wide range of standard and
custom energy absorption and vibration isolation solutions
serving the industrial, oil and gas, rail, aviation and defense
markets. Products under the
Enidine
®
brand name include shock absorbers, buffers, tow bar snubbers,
rate controls, dampers, vibration isolators and other related
products.
Flow Control
Division
–
based in Gloucester, Massachusetts, Flow Control is a leading
producer of pumps and related products for the marine, beverage
and general industrial markets. Products are sold worldwide
under the brand names
Jabsco
®
,
Rule
®
,
Flojet
®
,
and
Danforth
®
.
ITT, through its
Flojet
®
and
Totton
®
brands, is also a producer of pumps and components for beverage
applications. Both
Jabsco
®
and
Flojet
®
also produce pumps for other specialty industrial fluid
dispensing applications. Flow Control businesses provide valve
actuation control systems for harsh environments, including oil
and gas pipelines, as well as solenoid valves with a wide array
of end uses ranging from petrochemical plants to drag cars.
Acquisitions and
Divestitures
We have been
involved in an ongoing program of acquiring businesses that
provide a strategic fit with businesses we presently conduct and
divesting businesses that are not aligned with our strategy. ITT
did not complete any material acquisitions or divestitures
during 2009 or 2008. In December 2007, we acquired all of the
outstanding shares of EDO Corporation (EDO), a global aerospace
and defense company, for approximately $1.8 billion. This
acquisition provided our Defense segment with a broader set of
solutions to a wider band of customers. During 2007, we
completed other additional acquisitions that were not material
individually or in the aggregate to our results of operations or
financial position. The most significant of these acquisitions
was International Motion Control Inc (IMC), a global developer
of motion control products. For further information on
acquisitions and divestitures, see Note 3,
“Acquisitions” and Note 5,
“Divestitures” in the Notes to Consolidated Financial
Statements.
7
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Geographic
Markets
The following table
illustrates ITT’s annual net revenue from external
customers by geographic market for the periods specified:
| 2009 | 2008 | 2007 | |||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 | $ | % | $ | % | $ | % | |||||||||||||||||||||
|
United States
|
$ | 7,592.3 | 70 | % | $ | 7,998.0 | 68 | % | $ | 5,814.3 | 65 | % | |||||||||||||||
|
Western Europe
|
1,814.0 | 17 | 2,098.3 | 18 | 1,896.4 | 21 | |||||||||||||||||||||
|
Asia Pacific
|
576.8 | 5 | 603.6 | 5 | 474.4 | 5 | |||||||||||||||||||||
|
Other
|
921.4 | 8 | 994.9 | 9 | 818.2 | 9 | |||||||||||||||||||||
| $ | 10,904.5 | 100 | % | $ | 11,694.8 | 100 | % | $ | 9,003.3 | 100 | % | ||||||||||||||||
See Note 21,
“Business Segment Information,” in the Notes to
Consolidated Financial Statements for further geographical
information concerning revenue and plant, property and
equipment. Further information regarding the risks associated
with our international operations is contained within
Item 1A, “Risk Factors” of this Annual Report on
Form 10-K.
Backlog
The following table
illustrates order backlog by business segment as of December 31:
| DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
Defense
|
$ | 5,187.2 | $ | 5,240.1 | $ | 5,233.7 | |||||||||
|
Fluid
|
823.8 | 890.1 | 887.1 | ||||||||||||
|
Motion & Flow
|
376.0 | 417.1 | 440.4 | ||||||||||||
| $ | 6,387.0 | $ | 6,547.3 | $ | 6,561.2 | ||||||||||
Order backlog for
our Defense segment represents unfilled firm orders for our
products and services for which funding has been both authorized
and appropriated by the customer, commonly referred to as funded
backlog. Order backlog related to our Fluid and
Motion & Flow segments is unfunded, meaning funding
has not been appropriated and the customer is not contractually
obligated.
Competition
Substantially all of
our businesses operate in highly competitive markets.
Technological innovation, price, quality, reliability, and
service are the primary competitive factors faced by our
businesses. We compete against a number of large companies
engaged in the manufacture and sale of similar lines of products
and services, as well as smaller enterprises with focused
expertise on specific products or services. We are positioned to
address competitive pressures through the utilization of
far-reaching distribution networks, strong brand names, broad
product lines focused on market niches, a global customer base,
a continuous stream of new products developed from an extensive
technology base, a focus on quality and customer service, and
through continuous cost improvement programs and life cycle cost
initiatives. Our many products and services go to market
collectively linked by the ITT brand, the engineered blocks
symbol, and the tagline “Engineered for life.” The
brand has been enhanced and strengthened over the years through
a coordinated effort that includes advertising, public relations
activities, trade exhibits, and
point-of-sale
material. We have adapted to changes and remained competitive in
our markets during these challenging economic times by
continuing to aggressively focus on the needs of our customers,
increasing investments in the development of new technologies,
and implementing extensive cost-saving initiatives and
productivity improvements in each of our business segments, such
as focused supply chain management, reductions in overall cycle
time, and through strategic restructuring and realignment
actions.
During 2009, we
realigned the businesses operating under our Motion &
Flow segment to improve our strategic alignment with end
markets, and to better leverage our production capabilities and
cost structures. This included the consolidation and
streamlining of divisions and reduction of operational
redundancies.
In 2010, we
announced the plan for strategic realignment of our Defense
segment to enable stronger portfolio positioning to accelerate
new technology development in systems and solutions, achieve a
more coordinated market approach, and reduce operational
redundancies.
Cyclicality
Many of our
commercial businesses are subject to specific industry and
general economic cycles. Certain of our commercial businesses
are subject to industry cycles, including but not limited to,
the residential and commercial real estate, municipal,
construction, oil and gas, mining and minerals, marine,
transportation, automotive and aerospace industries.
Governmental
Regulation and Related Matters
A number of our
businesses are subject to governmental regulation by law or
through contractual arrangements. Our Defense segment performs
work under contracts with the United States Department of
Defense or other agencies of
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the United States
Government and similar agencies in certain other countries.
These contracts are subject to security and facility clearances
under applicable governmental regulations, including the
requirement of background investigations for high-level security
clearances for our executive officers. Most of such contracts
are subject to termination by the respective governmental
parties on various grounds, although such terminations generally
are rare.
A portion of our
business is classified by the U.S. Government and cannot be
specifically described. The operating results of these
classified programs are included in our Consolidated Financial
Statements. The business risks associated with classified
programs, as a general matter, do not differ materially from
those of our other government programs and products.
Environmental
Matters
We are subject to
stringent environmental laws and regulations concerning air
emissions, water discharges and waste disposal. In the United
States, such environmental laws and regulations include the
Federal Clean Air Act, the Clean Water Act, the Resource,
Conservation and Recovery Act, and the Comprehensive
Environmental Response, Compensation and Liability Act.
Environmental requirements are significant factors affecting all
operations. We have established an internal program to assess
compliance with applicable environmental requirements for all of
our facilities. The program is designed to identify problems in
a timely manner, correct deficiencies and prevent future
noncompliance. Over the past several years we have conducted
regular, thorough audits of our major operating facilities. As a
result, management believes that our companies are in
substantial compliance with current environmental regulations.
Management does not
believe, based on current circumstances, that we will incur
compliance costs pursuant to such regulations that will have a
material adverse effect on our financial position, results of
operations or cash flows. We closely monitor our environmental
responsibilities, together with trends in the environmental
laws. While environmental laws and regulations are subject to
change, the nature of such is inherently unpredictable and the
timing of potential changes is uncertain. However, the effect of
legislative or regulatory changes could be material to the
Company’s financial condition or results of operations. In
addition, we have purchased insurance protection against certain
unknown environmental risks.
See “Legal
Proceedings” and “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations – Contingent Liabilities.”
Asbestos
Matters
ITT, including its
subsidiary Goulds Pumps, Inc. (Goulds), has been joined as a
defendant with numerous other companies in product liability
lawsuits alleging personal injury due to asbestos exposure.
These claims allege that certain of our products sold prior to
1985 contained a part manufactured by a third party, e.g., a
gasket, which contained asbestos. To the extent these
third-party parts may have contained asbestos, it was
encapsulated in the gasket (or other) material and was
non-friable. In certain other cases, it is alleged that former
ITT companies were distributors for other manufacturers’
products that may have contained asbestos. Frequently, the
plaintiffs are unable to identify any ITT or Goulds product as a
source of asbestos exposure. In addition, in a large majority of
the claims against the Company, the plaintiffs are unable to
demonstrate any injury. Many of those claims have been placed on
inactive dockets. Our experience to date is that a substantial
portion of resolved claims have been dismissed without payment
by the Company.
Historically, we
have recorded a liability for pending asbestos claims. As
previously disclosed in our 2008 Annual Report on
Form 10-K,
while it was probable that we would incur additional costs for
future claims to be filed against the Company, a liability for
potential future claims was not reasonably estimable due to a
number of factors. In the third quarter of 2009, we were able to
develop and analyze key data, such as settlements and dismissals
by disease type, necessary to estimate our exposure to potential
future asbestos claims. Based on this information, we recorded
an asbestos-related charge for unasserted claims to be filed
over the next 10 years of $209.6 (after-tax $130.7), net of
estimated probable insurance recoveries. As of December 31,
2009, our estimated total undiscounted asbestos liability,
including legal fees, for both pending and unasserted claims
expected to be filed over the next 10 years was $933.2,
with a corresponding asbestos-related asset of $666.3, for a net
exposure of $266.9.
See Note 19,
“Commitments and Contingencies,” in the Notes to
Consolidated Financial Statements for further information
concerning asbestos-related matters.
Raw
Materials
All of our
businesses require various raw materials, the availability and
prices of which may fluctuate. Although some cost increases may
be recovered through increased prices to customers, our
operating results are exposed to such fluctuations. We attempt
to control such costs through long-term purchasing and various
other programs. There have been no raw materials shortages that
have had a material adverse impact on our business as a whole.
Research and
Development
Our businesses
require a substantial commitment of resources for research and
development activities to maintain significant
9
Table of Contents
positions in the
markets we serve. Such activities are conducted in laboratory
and engineering facilities at several of our major manufacturing
locations. Research and development activities are important in
all of our business segments. During 2009, 2008 and 2007, we
spent $258.1, $244.3, and $182.3, respectively, on research and
development, as we continued to invest in the development of new
products and technology despite the global economic downturn.
Intellectual
Property
While we own and
control a number of patents, trade secrets, confidential
information, trademarks, trade names, copyrights, and other
intellectual property rights which, in the aggregate, are of
material importance to our business, management believes that
our business, as a whole, is not materially dependent upon any
one intellectual property or related group of such properties.
We are licensed to use certain patents, technology, and other
intellectual property rights owned and controlled by others,
and, similarly, the U.S. Government
and/or
other
entities may be licensed to use certain patents, technology, and
other intellectual property rights owned and controlled by us.
Patents, patent
applications, and license agreements will expire or terminate
over time by operation of law, in accordance with their terms or
otherwise. Such expiration or termination of patents, patent
applications, and license agreements is not expected by our
management to have a material adverse effect on our financial
position, results of operations or cash flows.
At the time of the
Distribution (see – “Company History and Certain
Relationships”), we obtained from ITT Destinations certain
exclusive rights and licenses to use the “ITT” name,
mark, and logo. In 1999, we acquired all rights, title, and
interest in and to the “ITT” name, mark, and logo and
an assignment of certain agreements granting The Hartford and
ITT Educational Services, Inc. (ESI) limited rights to use the
“ITT” name, mark, and logo in their businesses. These
agreements are perpetual, and the licenses are subject to
maintenance of certain quality standards by both The Hartford
and ESI.
Employees
As of
December 31, 2009, ITT employed approximately
40,200 people. Approximately 23,600 are employed in the
United States, of whom approximately 14% are represented by
labor unions. Generally, labor relations have been maintained in
a normal and satisfactory manner.
Company History
and Certain Relationships
ITT Corporation is
an Indiana corporation incorporated on September 5, 1995 as
ITT Indiana, Inc. It is the successor pursuant to a statutory
merger of ITT Corporation, a Delaware corporation (ITT
Delaware), into ITT Indiana, Inc. effective December 20,
1995, whereupon its name became ITT Industries, Inc. ITT
Delaware, originally incorporated in Maryland in 1920 as
International Telephone and Telegraph Corporation, was
reincorporated in Delaware in 1968. It changed its name to ITT
Corporation in 1983. On December 19, 1995, ITT Delaware
made a distribution (the Distribution) to its stockholders
consisting of all the shares of common stock of ITT
Destinations, Inc., a Nevada corporation (ITT Destinations), and
all the shares of common stock of ITT Hartford Group, Inc., a
Delaware corporation (now known as The Hartford Financial
Services Group, Inc. or The Hartford), both of which were
wholly-owned subsidiaries of ITT Delaware. In connection with
the Distribution, ITT Destinations changed its name to ITT
Corporation. On February 23, 1998, ITT Corporation was
acquired by Starwood Hotels & Resorts Worldwide, Inc.
Subsequent to acquiring the ownership of the ITT name in 1999,
ITT Industries, Inc. changed its name to ITT Corporation on
July 1, 2006.
As part of the
Distribution, ITT Delaware, ITT Destinations, and The Hartford
entered into a Distribution Agreement (the Distribution
Agreement) providing for, among other things, certain corporate
transactions required to effect the Distribution and other
arrangements among the three parties subsequent to the
Distribution.
The Distribution
Agreement provides for, among other things, assumptions of
liabilities and cross indemnities generally designed to allocate
the financial responsibility for the liabilities arising out of
or in connection with (i) the former Automotive,
Defense & Electronics, and Fluid Technology segments
to ITT Industries, Inc. (now ITT Corporation) and its
subsidiaries, (ii) the hospitality, entertainment, and
information services businesses to ITT Destinations and its
subsidiaries, and (iii) the insurance businesses to The
Hartford and its subsidiaries. The Distribution Agreement also
provides for the allocation of the financial responsibility for
the liabilities arising out of or in connection with former and
present businesses not described in the immediately preceding
sentence to or among ITT Industries, Inc., ITT Destinations, and
The Hartford on a shared basis. The Distribution Agreement
provides that neither ITT Industries, Inc. (now ITT
Corporation), ITT Destinations nor The Hartford will take any
action that would jeopardize the intended tax consequences of
the Distribution.
ITT Industries, Inc.
(now ITT Corporation), ITT Destinations, and The Hartford also
entered into agreements in connection with the Distribution
relating to intellectual property, tax, and employee benefit
matters.
10
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Available
Information, Internet Address and Internet Access to Current and
Periodic Reports
ITT’s website
address is www.itt.com. ITT makes available free of charge on or
through www.itt.com/ir our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (SEC).
Information contained on our website is not incorporated by
reference unless specifically stated herein. As noted, we file
the above reports electronically with the SEC, and they are
available on the SEC’s web site (www.sec.gov). In addition,
all reports filed by ITT with the SEC may be read and copied at
the SEC’s Public Reference Room located at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Forward-Looking
Statements” for information regarding forward-looking
statements and cautionary statements relating thereto.
| Item 1A. | RISK FACTORS |
We are subject to
various risks and uncertainties relating to or arising out of
the nature of our businesses, financial conditions and results
of operations, including those discussed below, which may affect
the value of our common stock. We believe the risks discussed
below are currently the most significant, although additional
risks not presently known to us or that we currently deem less
significant may also materially impact our business, financial
condition and results of operations. If any of the events or
circumstances described in the following risk factors occur, our
business, financial condition or results of operations may
suffer, and the trading price of our common stock could
decline.
The effects of
changes in worldwide economic and capital markets conditions may
significantly affect our revenue, profitability, results of
operations and our ability to maintain liquidity or procure
capital.
The Company’s
business may be adversely affected by factors in the United
States and other countries that are beyond its control, such as
disruptions in financial markets or downturns in economic
activity in specific countries or regions, or in the various
industries in which the Company operates; social, political or
labor conditions in specific countries or regions; or adverse
changes in the availability and cost of capital, interest rates,
tax rates, or regulations in the jurisdictions in which the
Company operates. If for any reason we lose access to our
currently available lines of credit, or if we are required to
raise additional capital, we may be unable to do so in the
current credit and stock market environment, or we may be able
to do so only on unfavorable terms.
Adverse changes to
financial conditions could jeopardize certain counterparty
obligations, including those of our insurers, financial
institutions and parties to the Distribution Agreement. The
tightening of credit markets may reduce the funds available to
our customers to buy our products and services for an unknown,
but perhaps lengthy, period. Restrictive credit markets may also
result in customers extending times for payment and may result
in our having higher customer receivables with increased default
rates. General concerns about the fundamental soundness of
domestic and foreign economies may also cause customers to
reduce consumption even in a stable marketplace.
Many of the
businesses in which we operate are subject to specific industry
and general economic cycles. Certain businesses are subject to
industry cycles, including but not limited to the residential
and commercial real estate, construction, oil and gas, mining
and minerals, transportation, automotive and aerospace
industries. Downturns in these industries could adversely affect
portions of our businesses.
We are dependent
on the U.S. Government for a substantial portion of our
revenue.
Approximately 53% of
our 2009 revenue was derived from products and services
ultimately sold to the U.S. Government, including the
Department of Defense (DOD), and are therefore affected by,
among other things, the annual federal budget, appropriations
made to defense programs, and spending levels. DOD budget and
priorities impacting the programs can be affected by external
threats to our national security, funding for on-going
operations in Iraq and Afghanistan, future priorities of the
current presidential administration, and the overall health of
the U.S. and world economies. Our future results may be
impacted by our ability to receive awards under new and on-going
defense programs, as well as other U.S. Government
programs, our ability to develop and market products and
services under these programs, as well as the variability of
timing and size of certain key orders. The U.S. Government
has the ability to terminate contracts for convenience or for
default; therefore, our future results could be materially
impacted by the termination or failure to fund one or more
significant contracts by the U.S. Government. Since many of
our government contracts are fixed-price, increased costs which
cannot be justified as an increase to the contract value exposes
the risk of reduced profitability and the potential loss of
future business. In addition, numerous contracts are subject to
security and facility clearances, as well as export licenses,
which, if withdrawn, restricted or made unavailable, would
adversely affect our business. Changes in U.S. Government
contracting regulations, and related governmental investigations
could increase our costs of
11
Table of Contents
regulatory
compliance and could have a negative effect on our brand name
and on our ability to win new business.
We rely on our
information systems in our operations. Security
breaches could adversely affect our business and results of
operations.
The efficient
operation of our business is dependent on computer hardware and
software systems. Even the most well protected information
systems are vulnerable to internal and external security
breaches including by computer hackers and cyber terrorists. The
unavailability of the information systems, the failure of these
systems to perform as anticipated for any reason or any
significant breach of security could disrupt our business and
could result in decreased performance and increased overhead
costs, causing our business and results of operations to suffer.
Our systems are
decentralized, which presents various risks, including the risk
that we may be slower or less able to identify or react to
problems affecting a key business than we would be in a more
centralized environment. In addition, it means that
“company-wide” business initiatives, such as the
integration of information technology systems, are often more
challenging and costly to implement, and their risk of failure
higher, than they would be in a more centralized environment.
Depending on the nature of the initiative in question, such
failure could materially adversely affect our business,
financial condition or results of operations.
We are subject to
laws, regulations and potential liability relating to claims,
complaints and proceedings, including those related to
antitrust, environmental, product, and other matters.
We are subject to
various laws, ordinances, regulations and other requirements of
government authorities in foreign countries and in the United
States, such as the Foreign Corrupt Practices Act, any
violations of which could create a substantial liability for us,
and also could cause harm to our reputation. Changes in laws,
ordinances, regulations or other government policies, the
nature, timing, and effect of which are uncertain, may
significantly increase our expenses and liabilities.
From time to time we
are involved in legal proceedings that are incidental to the
operation of our businesses. Some of these proceedings allege
damages relating to environmental liabilities, product
liability, personal injury claims, employment and pension
matters, government contract issues and commercial or
contractual disputes, sometimes related to acquisitions or
divestitures. Additionally, we may become subject to significant
claims of which we are currently unaware or the claims of which
we are aware may result in our incurring a significantly greater
liability than we anticipate or can estimate.
Unanticipated
changes in our tax rate or exposure to additional tax
liabilities resulting from changes to tax laws among other
factors could negatively affect our profitability.
Our future
success will depend on, among other factors, our key
employees.
Our ability to
operate our business and implement our strategies depends, in
part, on the efforts of our executive officers and other key
personnel. Our future success will depend on, among other
factors, our ability to attract and retain key employees as part
of our senior leadership succession plans. The loss of the
services of any of our key employees, domestically or abroad,
could have a material adverse effect on our business or business
prospects.
Portfolio
management strategies for growth, including cost-saving
initiatives, may not meet expectations.
We regularly review
our portfolio of businesses and pursue growth through the
acquisition of other companies, assets and product lines that
either complement or expand our existing business. Although we
conduct what we believe to be a prudent level of investigation
regarding the operating and financial condition of the
businesses we purchase, a level of risk remains regarding the
actual operating condition of these businesses. Until we
actually assume operating control of these business assets and
their operations, we may not be able to ascertain the actual
value or understand the potential liabilities of the acquired
entities and their operations. Acquisitions involve a number of
risks and present financial, managerial and operational
challenges that could have a material adverse effect on our
reputation and business, including that an acquired business
could under-perform relative to our expectations, the failure to
realize expected synergies, integration of technology,
operations, personnel and financial and other systems, the
possibility that we have acquired substantial undisclosed
liabilities, potentially insufficient internal controls over
financial activities or financial reporting at an acquired
company that could impact us on a consolidated basis, diversion
of management attention from other businesses, loss of key
employees of the acquired businesses, and customer
dissatisfaction or performance.
Our portfolio
reviews also include the potential for cost-saving initiatives
through restructuring, realignment and other initiatives. We
strive for and expect to achieve cost savings in connection with
certain initiatives, including: (i) manufacturing process
and supply chain rationalization; (ii) streamlining
redundant administrative overhead and support activities; and
(iii) restructuring and repositioning organizations. Cost
savings expectations are inherently estimates that are difficult
to predict and are necessarily speculative in nature, and we
cannot provide assurance that we will achieve expected, or any,
actual cost savings. Our restructuring activities may place
substantial demands on our management, which could
12
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lead to the
diversion of management’s attention from other business
priorities and lack of customer focus.
Our exposure to
pending and future asbestos claims and related assets,
liabilities, and cash flows are subject to significant
uncertainties, which could have adverse effects on our financial
condition, results of operations and cash flows.
ITT, including its
subsidiary Goulds Pumps, Inc., has been joined as a defendant in
numerous lawsuits and claims in which the plaintiffs claim
damages for personal injury arising from exposure to asbestos in
connection with certain products sold or distributed that may
have contained asbestos. We expect to be named as defendants in
similar actions in the future. The estimated liability is based
on assumptions with respect to the plaintiffs’ propensity
to sue, claim acceptance rates, disease type, historic
settlement and defense costs and other variables based on
certain recent time periods. Those assumptions and time periods
ultimately may or may not be proven to be reliable predictors of
future trends. A significant change in one or more of the
variables or the assumptions could substantially change the
estimated liability for pending claims and those expected to be
filed in the next 10 years. Although it is probable that
the Company will incur additional costs for asbestos claims
filed beyond the next 10 years, we do not believe there is
a reasonable basis for estimating those costs at this time.
There are also
significant assumptions made in developing the estimates of the
related probable insurance recoveries. These assumptions, such
as policy triggers, the methodology for allocating claims to
policies, and the continued solvency of the Company’s
insurers, may or may not be proven to be correct and if
incorrect could directly affect whether and how the insurers
will be available to pay the Company’s asbestos costs.
Finally, there are inherent uncertainties in litigation. We
cannot give any assurances regarding the outcome of any
litigation to enforce our rights under our insurance policies.
Due to these
uncertainties, as well as our inability to reasonably estimate
any additional asbestos liability for claims filed beyond the
next 10 years, it is not possible to predict the ultimate
outcome of the cost of resolving the pending and all unasserted
asbestos claims. Additionally, we believe it is possible that
the cost of asbestos claims filed beyond the next 10 years,
net of expected insurance recoveries, could have a material
adverse effect on our financial position and on the results of
operations or cash flows for a particular period.
Goodwill and
other intangible assets represent a significant portion of our
total assets.
At December 31,
2009, we had goodwill and other intangible assets of $4,382.9,
net of accumulated amortization, which accounts for 39% of our
total assets. We conduct an annual impairment test to determine
if we will be able to recover all or a portion of the carrying
value of goodwill and indefinite-lived intangibles. In addition,
we review goodwill and indefinite-lived intangible assets for
impairment more frequently if impairment indicators arise. If it
is determined that the carrying value of our goodwill and
indefinite-lived intangibles exceeds the estimated fair value,
we may be required to record a material non-cash charge to
earnings. The fair values of our goodwill and indefinite-lived
intangibles are based on discounted cash flow projections that
are believed to be reasonable under current and forecasted
circumstances. Any significant change in market conditions and
estimates or judgments used to determine expected future cash
flows that indicate a reduction in fair value may give rise to
impairment in the period that the change becomes known.
Our business
could be adversely affected by raw material price volatility and
the inability of key suppliers to meet quality and delivery
requirements.
Our business relies
on third-party suppliers, contract manufacturing and commodity
markets to secure raw materials, parts and components used in
our products. We are exposed to volatility in the prices and
availability of these materials. In some instances we depend
upon a single source of supply, manufacturing or assembly or
participate in commodity markets that may be subject to
allocations of limited supplies by suppliers. Delays in
obtaining supplies may result from a number of factors affecting
our suppliers, including capacity constraints, labor disputes,
the impaired financial condition of a particular supplier,
suppliers’ allocations to other purchasers, ability to meet
regulatory requirements, weather emergencies or acts of war or
terrorism. Any delay in our suppliers’ abilities to provide
us with necessary materials, price increases, or decreased
availability of raw materials or commodities could impair our
ability to deliver products to our customers and, accordingly,
could have a material adverse effect on our business, results of
operations and financial condition.
Results from our
international operations could be adversely affected by changes
in economic conditions, foreign currency fluctuations and
changes in local government regulations.
Our international
operations, including sales of U.S. exports, comprise a
growing portion of our operations and are a strategic focus for
continued future growth. Our strategy calls for increasing sales
to operations in overseas markets, including developing markets
such as Central and South America, China, India and the Middle
East. In 2009, approximately 30% of our total sales were to
customers operating outside of the United States. Risks related
to international operations include exchange control
regulations, wage and price controls, employment regulations,
foreign
13
Table of Contents
investment laws,
import, export and other trade restrictions, changes in
regulations regarding transactions with state-owned enterprises,
nationalization of private enterprises, government instability,
our ability to hire and maintain qualified staff in these
regions and maintaining the safety of our employees. The cost of
compliance with increasingly complex and often conflicting
regulations worldwide can also impair our flexibility in
modifying product, marketing, pricing, or other strategies for
growing our businesses, as well as our ability to improve
productivity and maintain acceptable operating margins.
As we continue to
grow our business internationally, our operating results could
be affected by the relative strength of the European, Asian and
developing economies and the impact of currency exchange rate
fluctuations.
The level of
returns on employee benefit plan assets, changes in interest
rates and other factors could affect our earnings and cash flows
in future periods.
A substantial
portion of our current and retired employee population is
covered by pension and other employee-related defined benefit
plans (collectively, postretirement benefit plans). We may
experience significant fluctuations in costs related to
postretirement benefit plans as a result of macro-economic
factors, such as health care costs, that are beyond our control.
The cost of our postretirement plans are incurred over long
periods of time and involves various factors and uncertainties
during those periods, which can be volatile and unpredictable,
including the rates of return on postretirement benefit plan
assets, discount rates used to calculate liabilities and
expenses, rates of future compensation increases, and trends for
future medical costs. Management develops each assumption using
relevant Company experience in conjunction with market-related
data. Our financial position and results of operations could be
materially affected by significant changes in key economic
indicators, investment returns on plan assets, financial market
volatility, future legislation and other governmental regulatory
actions.
U.S. Government
Cost Accounting Standards govern the extent to which
postretirement costs and plan contributions are allocable to and
recoverable under contracts with the U.S. Government. As a
result, we have sought and would seek reimbursement from the DOD
for a portion of our postretirement costs and plan contributions.
We make
contributions to fund our postretirement benefit plans when
considered necessary or advantageous to do so. The
macro-economic factors discussed above, including the return on
postretirement benefit plan assets may influence future funding
requirements. A significant decline in the fair value of our
plan assets, or other adverse changes to our overall pension and
other employee-related benefit plans could require us to make
significant funding contributions and affect cash flows in
future periods.
We face
heightened legal challenges with respect to intellectual
property.
We have developed
and actively pursue developing proprietary technology in the
industries in which we operate, and rely on intellectual
property laws and a number of patents to protect such
technology. In doing so, we incur ongoing costs to enforce and
defend our intellectual property. Our inability to protect our
intellectual property could have a material adverse effect on
our business. In addition, third parties may claim that we
infringe on their intellectual property, and we could suffer
significant litigation or licensing expense as a result.
These risk factors
are discussed in more detail under the captions
“BUSINESS – Competition;
— Cyclicality; – Governmental Regulations
and Related Matters; – Environmental
Matters; – Raw Materials; – Intellectual
Property” – “LEGAL PROCEEDINGS” and
“CONTROLS AND PROCEDURES.”
| Item 1B. | UNRESOLVED STAFF COMMENTS |
None.
| Item 2. | PROPERTIES |
Our principal
executive offices are in leased premises located in White
Plains, NY. We consider the many offices, plants, warehouses,
and other properties that we own or lease to be in good
condition and generally suitable for the purposes for which they
are used. These properties are located in several states in the
United States, as well as in numerous countries throughout the
world. See “BUSINESS” for further information with
respect to properties in each of our business segments.
| Item 3. | LEGAL PROCEEDINGS |
ITT Corporation and
its subsidiaries from time to time are involved in legal
proceedings, the majority of which are incidental to the
operation of their businesses. Some of these proceedings allege
damages relating to environmental liabilities, intellectual
property matters, copyright infringement, personal injury
claims, employment and pension matters, government contract
issues and commercial or contractual disputes, sometimes related
to acquisitions or divestitures. See Note 19
“Commitments and Contingencies” in the Notes to
Consolidated Financial Statements for further information.
| Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matter was
submitted to a vote of our shareholders during the fourth
quarter of the fiscal year covered by this report.
14
Table of Contents
EXECUTIVE
OFFICERS OF THE REGISTRANT
The following
information is provided regarding the executive officers of ITT.
Each of the executive officers was elected to his or her
position to serve at the pleasure of the Company’s Board of
Directors.
|
AGE AT
|
|||||||||||
| NAME | 2/1/10 | CURRENT TITLE | OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS | ||||||||
|
Angela A. Buonocore
|
51 | Senior Vice President, Chief Communications Officer (2008) | Vice President, Director of Corporate Relations, ITT (2007); Vice President, Corporate Communications, The Pepsi Bottling Group (2001) | ||||||||
|
Aris C. Chicles
|
48 | Senior Vice President and Director of Strategy and Corporate Development (2008) | Vice President, Director of Strategy and Corporate Development, ITT (2006); Vice President, Business and Corporate Development, American Standard, Inc. (2000) | ||||||||
|
Scott A. Crum
|
53 | Senior Vice President and Director, Human Resources (2002) | |||||||||
|
Donald E. Foley
|
58 | Senior Vice President and Treasurer (2003) | |||||||||
|
Frank R. Jimenez
|
45 | Vice President and General Counsel (2009) | General Counsel of the Navy (2006); Deputy General Counsel, U.S. Department of Defense (2005); Principal Deputy General Counsel of the Navy (2004) | ||||||||
|
Janice M. Klettner
|
49 | Vice President, ITT (2008), Chief Accounting Officer and Assistant Secretary (2006) | Vice President, Corporate Controller, Avon Products (1998) | ||||||||
|
Steven R. Loranger
|
57 | Chairman, President and Chief Executive Officer and Director (2004) | Executive Vice President and Chief Operating Officer of Textron, Inc. (2002) | ||||||||
|
David F. Melcher
|
55 | Vice President, ITT (2008), President, ITT Defense & Information Solutions | Vice President, Strategy and Business Development, ITT Defense Electronics & Services (2008); Lieutenant General, U.S. Army, Deputy Chief of Staff, Military Deputy for Budget (2006); Deputy Chief of Staff, Programs (2004); Director, Program Analysis and Evaluation (2002) | ||||||||
|
Gretchen W. McClain
|
47 | Senior Vice President, ITT (2008), President, ITT Fluid and Motion Control, (2008) | Vice President, President, ITT Fluid Technology (2007); President, ITT Residential & Commercial Water (2005); Vice President, Honeywell Aerospace (2004) and Honeywell Engines & Systems (2003) | ||||||||
|
Denise L. Ramos
|
53 | Senior Vice President and Chief Financial Officer (2007) | Chief Financial Officer, Furniture Brands International (2005); Chief Financial Officer, KFC (2002) | ||||||||
Note:
Date in parentheses indicates the year in which the position was
assumed.
15
Table of Contents
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
COMMON
STOCK – MARKET PRICES AND DIVIDENDS
| 2009 | 2008 | |||||||||||||||||||
| HIGH | LOW | HIGH | LOW | |||||||||||||||||
|
Three Months Ended
|
||||||||||||||||||||
|
March 31
|
$ | 51.42 | $ | 31.94 | $ | 66.01 | $ | 50.94 | ||||||||||||
|
June 30
|
46.91 | 37.26 | 67.62 | 52.05 | ||||||||||||||||
|
September 30
|
52.71 | 41.15 | 69.73 | 52.25 | ||||||||||||||||
|
December 31
|
56.95 | 48.43 | 56.15 | 34.75 | ||||||||||||||||
The above table
reflects the range of market prices of our common stock as
reported in the consolidated transaction reporting system of the
New York Stock Exchange, the principal market in which this
security is traded (under the trading symbol “ITT”).
During the period from January 1, 2010 through
January 31, 2010, the high and low reported market prices
of our common stock were $51.79 and $48.05, respectively.
We declared
dividends of $0.2125 and $0.175 per share of common stock in
each of the four quarters of 2009 and 2008, respectively. In the
first quarter of 2010, we declared a dividend of $0.25 per share
for shareholders of record on March 3, 2010.
Dividend decisions
are subject to the discretion of our Board of Directors and will
be based on, and affected by, a number of factors, including
operating results and financial requirements. Therefore, there
can be no assurance as to what level of dividends, if any, will
be paid in the future.
There were 20,510
holders of record of our common stock on January 29, 2010.
ITT common stock is
listed on the New York Stock Exchange and Euronext Exchange.
EQUITY
COMPENSATION PLAN INFORMATION
The information
called for by Item 5(a) is incorporated herein by reference
to the portions of the definitive proxy statement referred to in
Item 10 of this Annual Report on
Form 10-K
set forth under the caption “Equity Compensation Plan
Information.”
ISSUER PURCHASES
OF EQUITY SECURITIES
|
TOTAL
|
MAXIMUM
|
|||||||||||||||||||
|
NUMBER
|
DOLLAR
|
|||||||||||||||||||
|
OF
SHARES
|
VALUE
OF
|
|||||||||||||||||||
|
PURCHASED
AS
|
SHARES
THAT
|
|||||||||||||||||||
|
PART
OF
|
MAY YET
BE
|
|||||||||||||||||||
|
TOTAL
|
AVERAGE
|
PUBLICLY
|
PURCHASED
|
|||||||||||||||||
|
NUMBER
|
PRICE
|
ANNOUNCED
|
UNDER
THE
|
|||||||||||||||||
|
(IN MILLIONS)
|
OF SHARES
|
PAID
|
PLANS
OR
|
PLANS
OR
|
||||||||||||||||
| PERIOD | PURCHASED | PER SHARE (1) | PROGRAMS (2) | PROGRAMS (2) | ||||||||||||||||
|
10/1/09 – 10/31/09
|
– | $ | – | – | $ | 569.2 | ||||||||||||||
|
11/1/09 – 11/30/09
|
– | $ | – | – | $ | 569.2 | ||||||||||||||
|
12/1/01 – 12/31/09
|
– | $ | – | – | $ | 569.2 | ||||||||||||||
| (1) | Average price paid per share is calculated on a settlement basis and excludes commission. |
| (2) | On October 27, 2006, we announced a $1 billion share repurchase program. On December 16, 2008, we announced that the ITT Board of Directors had approved the elimination of the original three-year term with respect to the repurchase program. This program replaces our previous practice of covering shares granted or exercised in the context of ITT’s performance incentive plans. The program is consistent with our capital allocation process, which is centered on those investments necessary to grow our businesses organically and through acquisitions, while also providing cash returns to shareholders. Our strategy for cash flow utilization is to invest in our business, repay debt, pay dividends, execute strategic acquisitions, and repurchase common stock. As of December 31, 2009, we had repurchased 7.1 million shares for $430.8, including commission fees, under our $1 billion share repurchase program. |
16
Table of Contents
PERFORMANCE
GRAPH
CUMULATIVE
TOTAL RETURN
Based upon an
initial investment of $100 on December 31, 2004
with dividends reinvested
with dividends reinvested
| 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | |||||||||||||||||||||||||
|
ITT Corporation
|
$ | 100.00 | $ | 122.65 | $ | 136.69 | $ | 160.29 | $ | 113.08 | $ | 124.73 | ||||||||||||||||||
|
S&P 500
|
$ | 100.00 | $ | 104.91 | $ | 121.48 | $ | 128.15 | $ | 80.74 | $ | 102.11 | ||||||||||||||||||
|
S&P 500 Industrials Index
|
$ | 100.00 | $ | 102.32 | $ | 115.92 | $ | 129.88 | $ | 78.03 | $ | 94.36 | ||||||||||||||||||
Information
provided in the Performance Graph shall not be deemed filed with
the SEC.
17
Table of Contents
| Item 6. | SELECTED FINANCIAL DATA |
| (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||
|
Results and Position
|
|||||||||||||||||||||||||
|
Revenue
|
$ | 10,904.5 | $ | 11,694.8 | $ | 9,003.3 | $ | 7,807.9 | $ | 7,040.8 | |||||||||||||||
|
Gross profit
|
3,060.7 | 3,255.4 | 2,568.3 | 2,189.5 | 1,968.2 | ||||||||||||||||||||
|
Selling, general and administrative expenses
|
1,576.4 | 1,709.2 | 1,328.9 | 1,158.0 | 1,030.4 | ||||||||||||||||||||
|
Research and development expenses
|
258.1 | 244.3 | 182.3 | 160.9 | 156.8 | ||||||||||||||||||||
|
Asbestos-related costs, net
|
237.5 | 14.3 | 13.8 | 17.9 | 1.6 | ||||||||||||||||||||
|
Restructuring and asset impairment charges, net
|
79.3 | 77.5 | 66.1 | 51.7 | 53.9 | ||||||||||||||||||||
|
Operating income
|
909.4 | 1,210.1 | 977.2 | 801.0 | 725.5 | ||||||||||||||||||||
|
Income from continuing operations
|
650.7 | 775.2 | 633.0 | 499.7 | 528.8 | ||||||||||||||||||||
|
Net income
|
643.7 | 794.7 | 742.1 | 581.1 | 359.5 | ||||||||||||||||||||
|
Capital expenditures
|
271.6 | 248.7 | 239.3 | 177.1 | 164.4 | ||||||||||||||||||||
|
Depreciation and amortization
|
292.6 | 278.3 | 185.4 | 171.6 | 174.4 | ||||||||||||||||||||
|
Total assets
|
11,129.1 | 10,480.2 | 11,552.7 | 7,400.6 | 7,071.9 | ||||||||||||||||||||
|
Long-term debt
|
1,430.8 | 467.9 | 483.0 | 500.4 | 516.0 | ||||||||||||||||||||
|
Total debt
|
1,505.8 | 2,146.9 | 3,566.0 | 1,097.4 | 1,266.9 | ||||||||||||||||||||
|
Cash dividends declared per common share
|
0.85 | 0.70 | 0.56 | 0.44 | 0.36 | ||||||||||||||||||||
|
Earnings Per Share
|
|||||||||||||||||||||||||
|
Income from continuing operations
|
|||||||||||||||||||||||||
|
Basic
|
$ | 3.56 | $ | 4.26 | $ | 3.49 | $ | 2.70 | $ | 2.86 | |||||||||||||||
|
Diluted
|
$ | 3.54 | $ | 4.21 | $ | 3.43 | $ | 2.66 | $ | 2.80 | |||||||||||||||
|
Net income
|
|||||||||||||||||||||||||
|
Basic
|
$ | 3.53 | $ | 4.37 | $ | 4.09 | $ | 3.14 | $ | 1.95 | |||||||||||||||
|
Diluted
|
$ | 3.50 | $ | 4.32 | $ | 4.02 | $ | 3.09 | $ | 1.91 | |||||||||||||||
18
Table of Contents
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In millions,
except per share amounts, unless otherwise stated)
BUSINESS
OVERVIEW
ITT is a global
multi-industry high-technology engineering and manufacturing
organization engaged directly and through its subsidiaries. We
generate revenue and cash through the design, manufacture, and
sale of a wide range of engineered products and the provision of
related services. Our business is comprised of three principal
business segments which are aligned with the markets they serve:
Defense Electronics & Services (Defense segment),
Fluid Technology (Fluid segment) and Motion & Flow
Control (Motion & Flow segment).
Our strategy is
centered on both organic and acquisitive growth. Our ability to
grow organically stems from our value-based product development
process, new and existing technologies, distribution
capabilities, customer relationships and strong market
positions. Our acquisitive growth strategy focuses on
identifying and acquiring businesses that align with and
provide adjacencies to our current core portfolio of
businesses. In addition to our growth initiatives, we have a
number of strategic initiatives within the framework of the ITT
Management System aimed at enhancing our operational
performance. These include global sourcing, footprint
rationalization and realignment, Six Sigma and lean fulfillment.
In January 2010, a
strategic realignment of the Defense segment was announced to
better align with the emerging needs of its expanding global
customer base, which is increasingly integrated and
network-centric. The realignment, which is scheduled to be
completed by year end 2010, will enable better product portfolio
integration, encouraging a more coordinated market approach and
reduce operational redundancies. The Defense segment is being
renamed ITT Defense and Information Solutions. The current
organizational structure, consisting of seven divisions, is
being consolidated into three larger ones.
Key Performance
Indicators and Non-GAAP Measures
Management reviews
key performance metrics including revenue, segment operating
income and margins, earnings per share, orders growth, and
backlog, among others. In addition, we consider certain measures
to be useful to management and investors evaluating our
operating performance for the periods presented, and provide a
tool for evaluating our ongoing operations and our management of
assets held from period to period. These metrics, however, are
not measures of financial performance under accounting
principles generally accepted in the United States (GAAP) and
should not be considered a substitute for revenue growth
(decline), operating income, or cash flows from operating,
investing and financing activities as determined in accordance
with GAAP, and may not be comparable to similarly titled
measures reported by other companies. We consider the following
non-GAAP measures to be key performance indicators:
| n | “organic revenue,” “organic orders,” and “organic operating income” defined as revenue, orders, and operating income, respectively, excluding the impact of foreign currency fluctuations and contributions from acquisitions and divestitures. | |
| n | “adjusted net income from continuing operations” and “adjusted earnings per diluted share” defined as reported GAAP income from continuing operations and reported GAAP diluted earnings per share, adjusted to exclude special items that may include, but are not limited to, unusual and infrequent non-operating items and non-operating tax settlements or adjustments related to prior periods. Special items represent significant charges or credits that impact current results, but may not be related to the Company’s ongoing operations and performance. | |
| n | “free cash flow” defined as GAAP cash flow from operations less capital expenditures. |
A reconciliation of
adjusted income from continuing operations, including adjusted
earnings per diluted share, is provided below.
| RECONCILIATION OF ADJUSTED INCOME FROM CONTINUING OPERATIONS | 2009 | 2008 | 2007 | ||||||||||||
|
Income from continuing operations
|
$ | 650.7 | $ | 775.2 | $ | 633.0 | |||||||||
|
Asbestos-related costs for unasserted claims, net
|
130.7 | – | – | ||||||||||||
|
Tax-related special items
|
(85.7 | ) | (34.1 | ) | (27.7 | ) | |||||||||
|
Adjusted income from continuing operations
|
695.7 | 741.1 | 605.3 | ||||||||||||
|
Income from continuing operations per diluted share
|
$ | 3.54 | $ | 4.21 | $ | 3.43 | |||||||||
|
Adjusted income from continuing operations per diluted share
|
$ | 3.78 | $ | 4.03 | $ | 3.28 | |||||||||
EXECUTIVE
SUMMARY
During 2009, we
worked to proactively address the economic downturn by
aggressively focusing on productivity and cost reductions.
Through our global sourcing, footprint rationalization and
realignment, Six Sigma and lean fulfillment initiatives, we
generated significant productivity and cost savings. We
continued to focus on our customers by aligning with their
needs, investing in new technologies and consolidating aspects
19
Table of Contents
of our
Motion & Flow segment around customer solutions. We
improved our manufacturing footprint by consolidating 10
locations and growing our low-cost region manufacturing and
sourcing presence by approximately 25%
year-over-year.
We managed our liquidity and debt structure, through the
issuance of $1.0 billion of favorable fixed-rate long-term
debt, and deploying capital in a disciplined manner, resulting
in a reduction to our outstanding commercial paper balance of
$1.6 billion. These accomplishments have positioned us for
continued strong growth in the future.
ITT reported revenue
of $10.9 billion for the year ended December 31, 2009,
a decrease of 6.8% from $11.7 billion reported in 2008,
reflecting challenging market conditions for our Fluid and
Motion & Flow segments. Income from continuing
operations for 2009 was $650.7, a decrease of $124.5, or 16.1%,
as compared to 2008. The decrease was primarily driven by lower
sales volumes and the establishment of an accrual for future
asbestos claims, partially offset by savings from significant
productivity and other initiatives as discussed above.
Adjusted income from
continuing operations was $695.7, a decrease of $45.4, or 6.1%,
from the comparable prior year adjusted amount.
Additional financial
highlights for 2009 include the following:
| n | Despite difficult market conditions, revenue declined only 4.7% on an organic basis, reflecting the enduring nature of the demand for our products. | |
| n | Adjusted diluted earnings per share of $3.78, declined 6.2% versus the prior year. | |
| n | We generated free cash flow of $998.1, which included a fourth quarter voluntary cash contribution to our U.S. Salaried Retirement Plan of $100.0 ($62.0 net of taxes). | |
| n | Selling, General & Administrative (SG&A) expenses decreased 7.8% during 2009, reflecting productivity gains from various cost-saving initiatives as well as lower sales volumes. Related to these cost-saving initiatives, we recognized restructuring expenses of $79.3 and $77.5 during 2009 and 2008, respectively. SG&A as a percentage of revenue declined 10 basis points to 14.5%. | |
| n | During the third quarter of 2009, we recognized an after-tax charge of $130.7 to income from continuing operations related to the establishment of an accrual for future asbestos claims to be filed over the next ten years, net of an estimate for related insurance recoveries. See Note 19, “Commitments & Contingencies,” in the Notes to Consolidated Financial Statements for additional information. | |
| n | Our segment working capital as a percentage of sales improved 70 basis points to 12.4% and our net debt to net capital ratio declined from 27.9% to 7.0% year-over-year. In addition, we issued $1.0 billion in senior unsecured notes in May 2009, and reduced our year-over-year outstanding commercial paper balance by $1.6 billion to $55.0. |
Further details
related to these results are contained in the following
Consolidated Financial Results and Segment Review sections.
2010
OUTLOOK
Continued volatility
and uncertainty in the global economic environment, including
disruptions in global financial markets and global currency
fluctuations, make it difficult to accurately project how our
businesses and the various markets and industries which they
serve will be affected in 2010. In this environment, our
strategy is to remain focused on the needs of our customers and
to execute on three key elements; driving productivity and
market growth, differentiating organic growth through product
diversification and advancement in customer solutions, and
aligning our portfolio with macro trends such as aging
infrastructure, growing middle class, resource scarcity and
global security.
With the successful
execution of our 2009 objectives, we have placed the Company in
a position to aggressively focus on strategic actions that will
grow our top-line revenue. Our 2010 actions will also be focused
on generating solid free cash flow, leveraging recent
investments, and driving operating margin expansion through the
realization of planned incremental productivity benefits. These
cost and productivity actions include discretionary cost
controls, and driving incremental supply chain savings through
our integrated global strategic sourcing group.
We recently
announced the planned strategic realignment of our Defense
segment. The realignment will enable stronger portfolio
positioning to accelerate new technology development in systems
and solutions, achieve a more coordinated market approach, and
reduce operational redundancies. The Defense segment is being
renamed ITT Defense & Information Solutions.
We continue to plan
for the long-term by increasing growth investments, including
research and development activities, significant capital
investments to support our strategic initiatives, including our
position on the FAA next generation air traffic control program
as well as other non-DOD areas, emerging market expansion, and
investing in new information technology systems. We are
continuing to focus on our customers by aligning our activities,
including our vital service and maintenance offerings, with
their needs. We plan to improve product life cycle costs by
making our products more energy efficient and by reducing the
total cost of ownership, as well as launching a Value-Based
Commercial Excellence initiative focused on fully utilizing our
commercial resources more efficiently and effectively.
We will strengthen
our current position around the
20
Table of Contents
growing global macro
trends by pursuing adjacencies within our Fluid segment,
emerging market opportunities, and non-DOD growth like
air-traffic control and cyber security, as well as responsibly
deploying our capital in a manner to fully realize the benefits
from these trends. We will continue to identify areas for cost
reduction and leverage our business and functional strength to
achieve competitive advantages.
KNOWN TRENDS AND
UNCERTAINTIES
The following list
represents a summary of known trends and uncertainties, which
could have a significant impact on our results of operations,
financial position
and/or
cash
flows from operating, investing and financing activities.
| n | The global economic environment remains in a relative state of uncertainty. Although a slight upturn has been seen in the financial trading markets during the last nine months of 2009, we expect the overall global economic recovery to be a long-term process. The potential for unforeseen adverse macroeconomic events remains a concern and the occurrence of such events could have a significant unfavorable effect on our business. | |
| n | Programs supported by our Defense segment are generally in line with the fiscal year 2010 budget recently signed by President Obama; however, the future impact to our business from U.S. Defense programs will be influenced by the Quadrennial Defense Review and the development of the 2011 Department of Defense budget. Changes in the portion of the U.S. Defense budget allocated to programs supported by our Defense segment could materially impact our business. In addition, the variability of timing and size of key orders could negatively impact our future results. | |
| n | Associated with recent declines in real estate markets around the world, particularly within the United States and Europe, we have experienced a reduction in demand for portions of our Fluid segment which sell products with residential and commercial market applications. This trend could continue to adversely affect our business in future periods. | |
| n | In 2009, our position with municipal markets was an area of strength, as compared to the majority of other markets and industries serviced by our Fluid segment, which benefited from significant international contract wins. However, the relative strength of the municipal market remains uncertain as the potential for delays or cancellations of projects continues to exist. Such events could have a significant adverse affect on our Fluid segment. | |
| n | A portion of our Fluid segment provides products to end markets such as oil and gas, power, chemical and mining. Economic conditions negatively impacted this portion of our business during 2009. Changes in economic conditions could impact our results in future periods. | |
| n | The commercial airline industry has been significantly impacted by a decline in passenger and cargo traffic volume over the past year. According to the International Air Transport Association, losses are expected to continue into 2010. Commercial airline carriers have responded through spending cuts, including the postponement of new aircraft purchases and delayed aircraft maintenance. These activities have negatively impacted our Motion & Flow segment throughout 2009. Further worsening or slow recovery of the industry could continue to adversely affect our business in future periods. | |
| n | The connectors industry experienced declines of approximately 25% during 2009 in both orders and sales as compared to 2008 levels. Recent data provided from a connectors industry report suggests, however, that improvement may be occurring during 2010. Approximately 27% of our Motion & Flow segment is sensitive to trends within the connector industry. | |
| n | The global automotive and marine markets declined significantly in 2008 and throughout 2009, with significant contraction in OEM production over the same period. While government automotive stimulus packages introduced during the second and third quarters of 2009 have encouraged moderate recovery within global automotive markets, the stability of the market is still uncertain. Further declines in either the global automotive or marine markets could negatively impact portions of our Motion & Flow segment. | |
| n | We expect to incur $140.0 of net periodic postretirement cost in 2010. Changes to our postretirement benefit plans, including material declines in the fair value of our postretirement benefit plan assets or adverse changes in other macro-economic factors could affect our results of operations, as well as require us to make significant funding contributions. |
The information
provided above does not represent a complete list of trends and
uncertainties that could impact our business in either the near
or long-term. It should, however, be considered along with the
risk factors identified in Item 1A of this Annual Report on
Form 10-K
and our disclosure under the caption “Forward-Looking
Statements” at the end of this section.
21
Table of Contents
CONSOLIDATED
FINANCIAL RESULTS
|
2009/2008
|
2008/2007
|
||||||||||||||||||||||||
|
INCREASE
|
INCREASE
|
||||||||||||||||||||||||
|
(DECREASE)
|
(DECREASE)
|
||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 |
%/POINT
|
%/POINT
|
|||||||||||||||||||||||
| 2009 | 2008 | 2007 | CHANGE | CHANGE | |||||||||||||||||||||
|
Revenue
|
$ | 10,904.5 | $ | 11,694.8 | $ | 9,003.3 | (6.8 | )% | 29.9 | % | |||||||||||||||
|
Gross profit
|
3,060.7 | 3,255.4 | 2,568.3 | (6.0 | )% | 26.8 | % | ||||||||||||||||||
|
Selling, general and administrative expenses
|
1,576.4 | 1,709.2 | 1,328.9 | (7.8 | )% | 28.6 | % | ||||||||||||||||||
|
Research and development expenses
|
258.1 | 244.3 | 182.3 | 5.6 | % | 34.0 | % | ||||||||||||||||||
|
Asbestos-related costs, net
|
237.5 | 14.3 | 13.8 | – | 3.6 | % | |||||||||||||||||||
|
Restructuring and asset impairment charges, net
|
79.3 | 77.5 | 66.1 | 2.3 | % | 17.2 | % | ||||||||||||||||||
|
Operating income
|
909.4 | 1,210.1 | 977.2 | (24.8 | )% | 23.8 | % | ||||||||||||||||||
|
Interest expense
|
99.5 | 140.8 | 114.9 | (29.3 | )% | 22.5 | % | ||||||||||||||||||
|
Interest income
|
24.3 | 31.3 | 49.6 | (22.4 | )% | (36.9 | )% | ||||||||||||||||||
|
Income tax expense
|
174.5 | 312.3 | 265.5 | (44.1 | )% | 17.6 | % | ||||||||||||||||||
|
Income from continuing operations
|
650.7 | 775.2 | 633.0 | (16.1 | )% | 22.5 | % | ||||||||||||||||||
|
Gross margin
|
28.1 | % | 27.8 | % | 28.5 | % | 0.3 | (0.7 | ) | ||||||||||||||||
|
Selling, general and administrative expenses as a % of revenue
|
14.5 | % | 14.6 | % | 14.8 | % | (0.1 | ) | (0.2 | ) | |||||||||||||||
|
Research and development expenses as a % of revenue
|
2.4 | % | 2.1 | % | 2.0 | % | 0.3 | 0.1 | |||||||||||||||||
|
Operating margin
|
8.3 | % | 10.3 | % | 10.9 | % | (2.0 | ) | (0.6 | ) | |||||||||||||||
|
Effective tax rate
|
21.1 | % | 28.7 | % | 29.5 | % | (7.6 | ) | (0.8 | ) | |||||||||||||||
REVENUE AND
ORDERS
Revenue for 2009 was
$10,904.5, representing a 6.8%, or $790.3, decrease from 2008.
Volume declines, primarily driven by global economic conditions,
continued to negatively impact our commercial business segments,
while revenue at our Defense segment was relatively flat
year-over-year.
Our Fluid segment represented approximately 60% of the decrease,
with
year-over-year
declines in all divisions, primarily the Residential &
Commercial Water division. Our Motion & Flow segment
accounted for approximately 40% of the decrease. Included in the
total revenue decline of $790.3 is the impact of unfavorable
foreign currency fluctuations of $223.7.
Revenue for 2008 was
$11,694.8, representing a 29.9% increase over 2007. This
increase reflects contributions from acquisitions of $1,948.7,
including EDO Corporation (EDO) and International Motion
Control, Inc. (IMC), and a benefit of $98.5 from foreign
currency exchange fluctuations. Despite a global economic
environment that deteriorated as the year progressed, organic
revenue grew 7.2% over the prior year primarily driven by higher
volumes, price increases and contributions from new products and
programs.
The following table
illustrates the impact of organic growth, acquisitions completed
during the period, and foreign currency translation fluctuations
on revenue during these periods.
| $ CHANGE | % CHANGE | |||||||||
|
2007 Revenue
|
$ | 9,003.3 | ||||||||
|
Organic growth
|
644.3 | 7.2 | % | |||||||
|
Acquisitions/(Divestitures), net
|
1,948.7 | 21.6 | % | |||||||
|
Foreign currency translation
|
98.5 | 1.1 | % | |||||||
|
Total change in revenue
|
2,691.5 | 29.9 | % | |||||||
|
2008 Revenue
|
$ | 11,694.8 | ||||||||
|
Organic decline
|
(554.7 | ) | (4.7 | )% | ||||||
|
Acquisitions/(Divestitures), net
|
(11.9 | ) | (0.1 | )% | ||||||
|
Foreign currency translation
|
(223.7 | ) | (2.0 | )% | ||||||
|
Total change in revenue
|
(790.3 | ) | (6.8 | )% | ||||||
|
2009 Revenue
|
$ | 10,904.5 | ||||||||
Orders received
during 2009 totaled $10,689.7, representing a decrease of 8.8%,
or $1,037.0 from the prior year. On an organic basis, orders
declined $774.9, or 6.6%, primarily driven by the impact of
challenging global economic conditions on the majority of
industries and markets served by our commercial business
segments, as well as difficult comparisons to strong 2008 orders
within the industrial, commercial and
22
Table of Contents
aerospace markets.
Improvement in orders was seen during the fourth quarter of 2009
with growth of 2.6% over prior year and sequential growth over
the third quarter of 2009, primarily driven by our Defense
segment.
Orders received
during 2008 totaled $11,726.1, an increase of $2,628.3 over the
prior year, including orders attributable to acquisitions and a
favorable benefit from foreign currency exchange translation.
Organic orders increased 8.5% overall, including growth of 14.8%
and 5.6% at our Defense and Fluid segments, respectively. Our
Motion & Flow segment reported a full-year organic
orders decline of 3.0%.
GROSS
PROFIT
Gross profit for
2009 was $3,060.7, a 6.0% decrease from 2008. This decrease was
attributable to the decline in revenue and unfavorable foreign
currency fluctuations, partially offset by benefits from
productivity gains, including efforts to improve supply chain
productivity and control material costs. Gross margin increased
30 basis points to 28.1% during 2009. The 30 basis
point improvement is primarily due to benefits from productivity
improvements and various other cost-saving initiatives, which
more than offset the impacts from reductions in sales volumes.
Gross profit for
2008 was $3,255.4, a 26.8% increase over 2007. Gross margin of
27.8% decreased 70 basis points for 2008, due to higher
production costs, impact from the EDO acquisition, partially
offset by price increases, and benefits from productivity and
strategic initiatives, including efforts to improve supply chain
productivity and control material costs.
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
SG&A decreased
7.8% to $1,576.4 in 2009. The
year-over-year
decrease was primarily attributable to cost-saving initiatives
in response to declining global economic conditions, lower sales
volumes, favorable foreign currency exchange translation and
lower stock compensation expense, partially offset by higher
postretirement plan costs.
SG&A increased
28.6% to $1,709.2 in 2008. The
year-over-year
increase was primarily attributable to the acquisitions of EDO
and IMC, and a negative impact from foreign currency exchange
translation. In addition, we recognized certain loss
contingencies as a result of realignment actions taken during
the fourth quarter of 2008 in our Fluid and Motion &
Flow segments.
RESEARCH AND
DEVELOPMENT EXPENSES
Research and
development expenses (R&D) increased $13.8 and $62.0 during
2009 and 2008, respectively, over each prior year period. The
2009 increase was primarily due to increased spending for
development materials on key growth platforms across our Defense
segment. The 2008 increase reflects the impact of acquisitions,
including EDO and IMC. R&D as a percentage of revenue was
2.4%, 2.1%, and 2.0% for the years ended December 31, 2009,
2008 and 2007, respectively, as we continued our efforts within
each of our business segments to support product development.
ASBESTOS-RELATED
COSTS, NET
During 2009, we
recorded asbestos-related costs of $237.5, primarily related to
the estimated liability, net of expected recoveries from
insurance coverage and former ITT entities, for claims projected
to be filed against the Company over the next 10 years. See
the section entitled “Asbestos Matters” and
Note 19, “Commitments & Contingencies,”
in the Notes to Consolidated Financial Statements for additional
information.
RESTRUCTURING AND
ASSET IMPAIRMENT CHARGES, NET
During 2009, 2008
and 2007, we recorded $79.3, $77.5 and $66.1, respectively, of
restructuring and asset impairment charges, net of restructuring
accruals reversed. In response to the uncertainty present in the
global economic environment, we initiated significant
restructuring activities during the fourth quarter of 2008 and
throughout 2009, which, as a result, will better position our
businesses for 2010. These charges primarily include facility
consolidations and headcount reductions, which reflect our
efforts to streamline our operating structure.
See the section
entitled “Restructuring and Asset Impairment Charges”
and Note 4, “Restructuring and Asset Impairment
Charges,” in the Notes to Consolidated Financial Statements
for additional information.
OPERATING
INCOME
We generated
operating income of $909.4 during 2009, a 24.8% decrease from
the prior year, primarily reflecting volume declines and
increased asbestos-related costs. These negative impacts were
partially offset by benefits from the implementation of
extensive
cost-saving
initiatives and productivity improvements, such as structural
changes made to optimize our sourcing and reduce cycle times. In
addition, we completed a strategic realignment of our
Motion & Flow segment to better leverage our
production capabilities and cost structures as well as reduce
operational redundancies.
Operating margin
decreased to 8.3% for 2009, a
year-over-year
decline of 200 basis points, primarily attributable to
reductions in sales volumes and the impact of asbestos-related
costs. These negative impacts were partially offset by benefits
from productivity improvements and various cost-saving
initiatives.
Operating income of
$1,210.1 for 2008 reflects a 23.8% increase over the prior year.
This increase was largely due to the impact from our EDO and IMC
acquisitions. In addition, we realized organic operating income
growth of 18.8% and 7.0%
23
Table of Contents
from our Defense and
Fluid segments, respectively. These contributions were primarily
attributable to higher sales volumes and new programs at the
Defense segment, and price increases at the Fluid segment.
Operating income increased $4.3 at our Motion & Flow
segment primarily due to contributions from acquisitions, such
as IMC, and a benefit from foreign currency exchange
translation, partially offset by higher production costs.
Operating margin
decreased 60 basis points
year-over-year
to 10.3% for 2008. This decrease reflects increased SG&A,
including the impact of acquisitions (higher amortization of
intangible assets), costs incurred in connection with our fourth
quarter realignment actions, higher restructuring expense, and
unfavorable foreign currency transaction costs, partially offset
by benefits from operating efficiencies and cost savings
initiatives, and lower pension expense.
INTEREST EXPENSE
AND INTEREST INCOME
Interest expense
decreased 29.3% during 2009, due to interest rate declines on
our commercial paper and variable rate debt as well as lower
year-over-year
levels of outstanding commercial paper and a decrease in
interest related to taxes, partially offset by interest expense
incurred related to the $1.0 billion debt issuance in May
2009.
Interest expense
increased 22.5% during 2008 due to higher levels of debt,
primarily reflecting our funding for acquisitions and capital
expenditures during the periods, tax-related charges, and higher
interest rates during the fourth quarter of 2008, partially
offset by lower interest rates during the first nine months of
2008.
The
2009 year-over-year
decrease in interest income of 22.4% was primarily due to lower
average interest rates during the 2009 periods as compared to
the prior year, partially offset by the recognition of interest
refunds of $13.2 received in conjunction with an IRS tax
settlement. The
2008 year-over-year
decrease in interest income of 36.9% was driven by a lower
average balance of cash and cash equivalents as compared to the
prior year.
INCOME TAX
EXPENSE
Income tax expense
was $174.5 or 21.1% of income from continuing operations before
income taxes for 2009, compared to $312.3 or 28.7% during the
prior year. The
year-over-year
decrease in the effective tax rate was primarily attributable to
the completion of a one-time restructuring of certain
international legal entities which resulted in a reduction of
the income tax provision in the amount of $57.7. In addition,
reversals of valuation allowances of $17.1 coupled with other
tax credits and allowable deductions of $12.0 have largely
offset the prior year benefit from the tax account validation
adjustment of $36.7.
Income tax expense
was $312.3 or 28.7% of income from continuing operations before
income taxes for 2008, compared to $265.5 or 29.5% during the
prior year. The
year-over-year
decrease in the effective tax rate was primarily attributable to
a tax account validation adjustment of $36.7 and the benefit
from mix of earnings in countries with differing statutory
rates, partially offset by a benefit recognized during 2007
associated with the settlement of a tax examination of $44.2.
See Note 6,
“Income Taxes,” in the Notes to Consolidated Financial
Statements for additional information.
INCOME FROM
DISCONTINUED OPERATIONS, NET OF TAX
During 2007, we sold
the majority of the Switches businesses to a private equity
firm, for net proceeds of $223.2, and an after-tax gain of
$84.4. During the third quarter of 2008, we completed the sale
of the remaining component of the Switches businesses to the
same buyer, for net proceeds of $5.1. As a result, we recorded
an after-tax gain on sale of $5.4 in 2008.
See Note 5,
“Divestitures,’’ in the Notes to Consolidated
Financial Statements for additional information.
24
Table of Contents
SEGMENT
REVIEW
| REVENUE | OPERATING INCOME | OPERATING MARGIN | ||||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
|
Defense
|
$ | 6,296.8 | $ | 6,282.3 | $ | 4,176.2 | $ | 776.0 | $ | 727.0 | $ | 502.7 | 12.3 | % | 11.6 | % | 12.0 | % | ||||||||||||||||||||||||
|
Fluid
|
3,363.3 | 3,840.6 | 3,509.1 | 392.9 | 468.7 | 432.7 | 11.7 | % | 12.2 | % | 12.3 | % | ||||||||||||||||||||||||||||||
|
Motion & Flow
|
1,253.0 | 1,583.4 | 1,332.5 | 118.2 | 191.7 | 187.4 | 9.4 | % | 12.1 | % | 14.1 | % | ||||||||||||||||||||||||||||||
|
Corporate and Other/Eliminations
|
(8.6 | ) | (11.5 | ) | (14.5 | ) | (377.7 | ) | (177.3 | ) | (145.6 | ) | – | – | – | |||||||||||||||||||||||||||
|
Total
|
$ | 10,904.5 | $ | 11,694.8 | $ | 9,003.3 | $ | 909.4 | $ | 1,210.1 | $ | 977.2 | 8.3 | % | 10.3 | % | 10.9 | % | ||||||||||||||||||||||||
Defense
Electronics & Services
Our Defense segment
is designed to serve future needs around safety, security,
intelligence and communication through the development,
manufacture, and support of high-technology electronic systems
and components for worldwide defense and commercial markets, and
provides communications systems and engineering and applied
research. The Defense segment sells its products to a wide
variety of governmental and non-governmental entities located
throughout the world. The Defense segment is comprised of seven
divisions; Advanced Engineering & Sciences,
Communication Systems, Electronic Systems,
Intelligence & Information Warfare, Night Vision,
Space Systems and Systems Divisions.
2009 Versus
2008
| $ CHANGE | % CHANGE | |||||||||
|
2008 Revenue
|
$ | 6,282.3 | ||||||||
|
Organic growth
|
19.5 | 0.3 | % | |||||||
|
Foreign currency translation
|
(5.0 | ) | (0.1 | )% | ||||||
|
Total change in revenue
|
14.5 | 0.2 | % | |||||||
|
2009 Revenue
|
$ | 6,296.8 | ||||||||
The
2009 year-over-year
revenue growth of 0.2% was due to a number of positive and
negative impacts from various divisions comprising our Defense
segment.
Communication
Systems
Division
–
Revenue decreased 13.9% due to a decline in domestic Single
Channel Ground and Airborne Radio (SINCGARS) volume, as well as
reduced deliveries in our C4 (command, control, communications
and computers) business.
Space Systems
Division
–
Revenue growth of 7.9% was driven by positive contributions from
the GPS Navigation project, as well as other classified programs.
Night Vision
Division
–
Revenue growth of
6.3% was driven by increased international sales.
Advanced
Engineering & Sciences
Division
–
Revenue growth of
4.6% related to positive contributions from the Federal Aviation
Administration’s (FAA) next generation air-traffic control
program, and increased activity on other contracts.
Systems
Division
–
Revenue growth of
4.5% was driven by benefits from Middle East activity and
program wins, including the Tethered Aerostat Radar System and
service contracts, such as Maxwell Air Force Base and
Fort Benning.
Electronic
Systems
Division
—
Revenue growth of 1.1% driven by strength within Airborne
Integrated Electronic warfare systems and radar systems,
partially offset by year-over-year declines in CREW deliveries.
Intelligence &
Information Warfare
Division
–
Revenue decreased 19.4% due to timing of deliveries for our
electronic ground warfare systems.
Operating income
increased $49.0 or 6.7% during 2009, resulting in an operating
margin of 12.3%, an improvement of 70 basis points versus
the prior year. The
year-over-year
growth, reflecting reduced costs of sales and SG&A
expenses, was primarily attributable to benefits from
cost-saving initiatives, such as productivity and sourcing
strategies. These benefits were partially offset by increases in
costs of materials, labor and other overhead, other unfavorable
program mix impacts, higher employee benefit plan costs and
increased investments in R&D.
We received orders
of $6,223.0 during 2009, compared to $6,232.9 in the prior year.
Significant orders received during 2009 include:
| n | $363 domestic SINCGARS order, | |
| n | $317 award to produce additional CREW 2.1 Counter-IED Jammers (CREW), | |
| n | $155 order to supply two Advanced Imagers for the Japanese weather satellite program, | |
| n | $138 Intelligence & Information Warfare equipment order, | |
| n | $121 U.S. Night Vision order, and | |
| n | $63 under the IDIQ Logistics Civil Augmentation Program (LOGCAP) IV, Task Order 5 contract win, with an estimated value of $1.2 billion. |
Funded order backlog
was $5.2 billion at December 31, 2009 and 2008. The
level of order activity related to programs
25
Table of Contents
within the Defense
segment can be affected by the timing of government funding
authorizations and project evaluation cycles.
Year-over-year
comparisons could, at times, be impacted by these factors, among
others.
2008 Versus
2007
| $ CHANGE | % CHANGE | |||||||||
|
2007 Revenue
|
$ | 4,176.2 | ||||||||
|
Organic growth
|
341.9 | 8.2 | % | |||||||
|
Acquisitions
|
1,766.4 | 42.3 | % | |||||||
|
Foreign currency translation
|
(2.2 | ) | (0.1 | )% | ||||||
|
Total change in revenue
|
2,106.1 | 50.4 | % | |||||||
|
2008 Revenue
|
$ | 6,282.3 | ||||||||
Acquisitions,
including EDO and its shipments of CREW, contributed $1,766.4 in
revenue for 2008. Organic revenue increased $341.9 or 8.2%,
primarily due to contributions from the Advanced
Engineering & Sciences division, driven by both
existing and new contracts, including classified research
programs, data analysis contracts, and the FAA’s contract
to build the next generation air-traffic control system. Organic
revenue growth was also attributable to contributions from our
Communications Systems division, driven by strength in
international SINCGARS sales, and our Systems division,
primarily driven by non-conflict related programs such as
SENSOR, missile defense and space control programs. Positive
contributions from the GPS Navigation and the GeoEye projects
were more than offset by declines in remote sensing and
classified government programs at our Space Systems division.
Night Vision division organic revenue increased as a result of
contributions from new products and higher international sales.
Revenue from our Electronic Systems division was relatively flat
year-over-year,
as decreases in our radar systems offset contributions from
avionics.
Operating income
increased $224.3 or 44.6% during 2008. Acquisitions, including
EDO, contributed $129.8 during 2008, with the remaining increase
of $94.5 attributable to organic growth. The
year-over-year
organic growth increase was primarily attributable to the
previously mentioned revenue drivers. Operating margins
decreased 40 basis points to 11.6%, reflecting higher
production costs and higher amortization of intangible assets
recognized as a result of the EDO acquisition, partially offset
by benefits from productivity improvements and supply chain
initiatives.
We received orders
of $6,232.9 during 2008, an increase of $2,159.0 over the prior
year, primarily attributable to contributions from acquisitions
of $1,555.1, including EDO. Organic orders grew 14.8% over the
prior year. Funded order backlog was $5.2 billion at
December 31, 2008 and 2007.
Fluid
Technology
Our Fluid segment
provides critical products and services in markets that are
driven by population growth, increasing environmental
regulation, and global infrastructure trends. Products include
water and wastewater treatment systems, pumps and related
technologies, and other water and fluid control products with
residential, commercial, and industrial applications. Fluid
Technology brings its product and services portfolio to market
through three market-oriented business divisions:
Water & Wastewater, Residential & Commercial
Water, and Industrial Process.
2009 Versus
2008
| $ CHANGE | % CHANGE | |||||||||
|
2008 Revenue
|
$ | 3,840.6 | ||||||||
|
Organic decline
|
(348.6 | ) | (9.1 | )% | ||||||
|
Acquisitions
|
23.9 | 0.6 | % | |||||||
|
Foreign currency translation
|
(152.6 | ) | (3.9 | )% | ||||||
|
Total change in revenue
|
(477.3 | ) | (12.4 | )% | ||||||
|
2009 Revenue
|
$ | 3,363.3 | ||||||||
The decline in
organic revenue of $348.6 from the prior year was primarily the
result of lower volumes and significant overall weakness in most
markets served by our Fluid segment caused by challenging global
economic conditions. The segment’s declines were driven by
weakness in Residential and Commercial Water and Industrial
Process divisions. The overall segment revenue decline was
partially mitigated by moderate growth and stability in our
performance within municipal markets. However, we believe our
2009 performance compares favorably against those competing with
us in markets such as municipal, industrial, commercial and
residential. Further details are as follows:
Water &
Wastewater
Division
–
Organic revenue decreased $62.8 or 3.5% in 2009 as continued
weakness within the global industrial and dewatering markets was
partially offset by stability in municipal markets.
Residential &
Commercial Water Division –
Organic
revenue decreased $194.8 or 15.2% in 2009 reflecting unfavorable
global residential market conditions and commercial market
declines.
Industrial
Process Division –
Organic
revenue decreased by $84.7 or 10.4% in 2009. These results
reflect weakness related to declines in North American general
industrial markets, partially offset by growth within the
oil & gas and power markets as well as within the EMEA
region.
Operating income for
2009 decreased $75.8 or 16.2% from the prior year, with a
decline in operating margin of 50 basis points to 11.7%.
These declines were primarily
26
Table of Contents
attributable to
reductions in sales volumes and higher employee benefit plan
expenses, partially offset by strong productivity, which
provided increasing benefits as the year progressed, and lower
realignment costs.
During 2009, the
Fluid segment received orders of $3,263.5, a decrease of $675.2
or 17.1%, including unfavorable foreign currency fluctuations of
$183.0 or 4.6%, from the prior year. These results are primarily
attributable to the decline in global economic conditions. The
Industrial Process division experienced a 27.0% decline in
organic orders, due to weakness in industrial orders within the
North American and Asia Pacific regions, partially offset by
significant contract wins in Brazil and Saudi Arabia within the
oil and gas market during the fourth quarter. The
Residential & Commercial Water division experienced a
16.0% decline in organic orders reflecting continued global
commercial weakness. These two divisions accounted for
approximately 87% of the segment’s total decline in organic
orders. Order backlog was $823.8 at December 31, 2009,
compared to $890.1 at December 31, 2008.
2008 Versus
2007
| $ CHANGE | % CHANGE | |||||||||
|
2007 Revenue
|
$ | 3,509.1 | ||||||||
|
Organic growth
|
271.9 | 7.7 | % | |||||||
|
Acquisitions
|
9.9 | 0.3 | % | |||||||
|
Foreign currency translation
|
49.7 | 1.4 | % | |||||||
|
Total change in revenue
|
331.5 | 9.4 | % | |||||||
|
2008 Revenue
|
$ | 3,840.6 | ||||||||
The increase in
revenue was primarily attributable to organic growth of 7.7%,
driven by higher volume and price, and the benefit from foreign
exchange translation. Factors driving organic revenue growth
were as follows:
Water &
Wastewater
Division
–
Organic revenue increased $100.5 or 6.1% in 2008 due to strength
in water/wastewater transport, particularly within the municipal
market, and dewatering, primarily attributable to the mining
market.
Residential &
Commercial Water Division –
Organic
revenue increased $63.2 or 5.3% in 2008 due to strength in
global commercial markets as well as strength in the North
American agriculture/irrigation market, partially offset by
weakness in the North American residential market.
Industrial
Process Division –
Organic
revenue increased by $121.9 or 17.3% in 2008 due to strength in
our industrial operations, particularly within the chemical, oil
and gas, power and mining markets.
Operating income for
2008 increased $36.0 or 8.3% over prior year, with a benefit of
1.3% attributable to foreign currency exchange translation.
Organic operating income growth of 7.0% was primarily
attributable to the previously mentioned revenue drivers.
Operating margins decreased 10 basis points to 12.2% during
2008, reflecting higher production costs, as well as costs
associated with the disposition of a manufacturing facility,
partially offset by benefits from productivity improvements and
supply chain initiatives and lower pension expense.
During 2008, we
received orders of $3,938.7, an increase of $281.6 or 7.7% over
the prior year, primarily due to organic order growth of $204.7
or 5.6%. This increase was primarily attributable to the
Industrial Process division, resulting from strength in large
project orders and strength in international markets. Order
backlog was $890.1 at December 31, 2008, compared to $887.1
at December 31, 2007.
Motion &
Flow Control
Our
Motion & Flow segment provides highly engineered,
durable components that serve the high end of our markets. This
group of businesses provides products and services for the areas
of defense, aerospace, industrial, transportation, computer,
telecommunications, marine and beverage. In addition to its
traditional markets of the U.S. and Western Europe,
opportunities in emerging markets such as Asia are increasing.
Certain
Motion & Flow divisions were combined during 2008 and
2009 to improve our strategic alignment with end-markets, and to
better leverage our production capabilities and cost structure.
This included the consolidation of our Controls, Aerospace
Controls and Energy Absorption divisions into an
aerospace-facing division referred to as Control Technologies,
and the combination of our
Koni
®
shocks product line with our Friction Technologies division (now
collectively referred to as the Motion Technologies division).
The Motion & Flow segment now consists of the
Interconnect Solutions, Motion Technologies, Flow Control and
Control Technologies divisions.
2009 Versus
2008
| $ CHANGE | % CHANGE | |||||||||
|
2008 Revenue
|
$ | 1,583.4 | ||||||||
|
Organic decline
|
(228.2 | ) | (14.4 | )% | ||||||
|
Divestitures
|
(35.8 | ) | (2.3 | )% | ||||||
|
Foreign currency translation
|
(66.4 | ) | (4.2 | )% | ||||||
|
Total change in revenue
|
(330.4 | ) | (20.9 | )% | ||||||
|
2009 Revenue
|
$ | 1,253.0 | ||||||||
The decline in
revenue of $330.4 from the prior year was primarily the result
of lower volumes caused by challenging global economic
conditions affecting the majority of markets served by our
Motion & Flow segment during 2009. The declines were
mitigated during the latter half of 2009, through market share
gains in the beverage and marine markets,
27
Table of Contents
benefits from
European automotive stimulus programs, and solid results in rail
within emerging markets. However, we believe our 2009
performance compares favorably against those competing with us
in key markets such as automotive, general industrial, aerospace
and defense. Further details are as follows:
Motion
Technologies
Division
–
Organic revenue decreased $35.6 or 6.3% reflecting weakness in
the automotive and rail markets during the majority of 2009.
These declines were partially offset, however, by strength in
both markets during the latter half of 2009 resulting from
benefits from European government stimulus programs and growth
in emerging markets primarily related to efforts on China’s
high-speed rail project.
Interconnect
Solutions Division –
Organic
revenue declined $102.1 or 22.5%. These results are in-line with
the overall connectors industry which experienced significant
reductions in revenue and orders during 2009. This division
serves the aerospace and industrial markets which were severely
impacted by the economic downturn.
Flow Control
Division –
Organic
revenue decreased $29.7 or 12.0%, primarily attributable to
declines within the global industrial market, partially offset
by market share gains in the beverage industry and a relatively
flat marine market which saw declines in original equipment
sales being offset by an increase in after-market sales.
Control
Technologies Division –
Organic
revenue declined $56.3 or 17.5%. These results reflect a
reduction in commercial aerospace original equipment production
and sluggish after-market sales performance, as well as the
impact of decreased industrial production activity, partially
offset by strong performance in the defense market and the
Enidine
®
product line.
Operating income
decreased $73.5 or 38.3% during 2009, including impacts from
unfavorable foreign currency fluctuations of $24.9. The decline
was primarily affected by lower sales volume, as well as higher
postretirement plan costs, partially offset by benefits from net
cost reductions driven by various cost-saving initiatives and
lower realignment costs. In the second half of 2009, we began
realizing benefits associated with the significant restructuring
and realignment actions taken over the last two years. As a
result, this contributed to
year-over-year
improvements in operating income of $16.7 in the fourth quarter.
Operating margin decreased 270 basis points to 9.4% during
2009, primarily reflecting the factors described above.
During 2009, the
Motion & Flow segment received orders of $1,237.2, a
decrease of $326.1 or 20.9%, including unfavorable foreign
currency fluctuations of $64.7, from the prior year. These
results are primarily attributable to the decline in global
economic conditions. Our Interconnect Solutions division
experienced a 25.3% decline in orders, a rate consistent with
the industry as a whole. Our Control Technologies division
incurred a 28.6% decline in orders, with significant impacts
coming from the aerospace market. These two divisions accounted
for approximately 76% of the segment’s total decline in
organic orders. The segment’s 2009 order results benefited
from significant automotive and transportation wins with Ford,
Mercedes, Bombardier (China), and Siemens (China) as well as
market share gains in the food and beverage market. Order
backlog was $376.0 at December 31, 2009, compared to $417.1
at December 31, 2008.
2008 Versus
2007
| $ CHANGE | % CHANGE | |||||||||
|
2007 Revenue
|
$ | 1,332.5 | ||||||||
|
Organic growth
|
27.4 | 2.1 | % | |||||||
|
Acquisitions
|
172.4 | 12.9 | % | |||||||
|
Foreign currency translation
|
51.1 | 3.8 | % | |||||||
|
Total change in revenue
|
250.9 | 18.8 | % | |||||||
|
2008 Revenue
|
$ | 1,583.4 | ||||||||
Revenue increased
$250.9 over the prior year, primarily attributable to
contributions from IMC and the benefit of foreign currency
exchange translation. Organic revenue grew $27.4 or 2.1%.
Factors driving this increase were as follows:
Motion
Technologies
Division
–
Organic revenue increased $26.9 or 5.4%. These increases were
attributable to higher volumes of OEM components (new platform
wins) and aftermarket brake pad sales. These contributions were
partially offset by a general slowdown during the second half of
2008 in the global automotive markets.
Interconnect
Solutions Division –
Organic
revenue increased on higher volumes by $16.1 or 3.8%, primarily
attributable to the Americas and Asia markets (strength in
medical, defense, aerospace, rail and industrial markets,
particularly within the oil & gas industry), partially
offset by a
slow-down
in
overall industry order activity during the fourth quarter of
2008.
Flow Control
Division –
Organic
revenue decreased $25.0 or 9.9%. This decrease was primarily
attributable to an overall decline in the bath, spa and
whirlpool markets, partially offset by positive contributions
from the domestic beverage market.
Control
Technologies Division –
Organic
revenue increased $10.8 or 6.8%, primarily driven by strength in
commercial/aerospace aftermarket products.
Operating income
increased $4.3 or 2.3% including contributions from acquisitions
and the benefit from foreign currency exchange translation.
Operating income declined $28.0 or 14.9% on an organic basis
primarily due to realignment costs
28
Table of Contents
associated with the
planned sale of our Spa and Whirlpool business as well as our
European Industrial Distribution business, higher restructuring
expense and production costs, partially offset by increased
sales volume, benefits from productivity improvements and supply
chain initiatives, and lower pension expense.
Operating margins
decreased 200 basis points to 12.1% during 2008, primarily
reflecting the factors described above.
During 2008, we
received orders of $1,563.3, an increase of $184.3 or 13.4% over
the prior year. This increase was driven by contributions from
acquisitions, including IMC, and the benefit from foreign
currency exchange translation, partially offset by a decline in
organic orders of 3.0%. Order backlog was $417.1 at
December 31, 2008, compared to $440.4 at December 31,
2007.
Corporate and
Other
Corporate expenses
of $377.7 for 2009 increased $200.4 compared to the same prior
year period. This increase is primarily due to additional
asbestos-related costs of $223.2 recognized during 2009,
partially offset by lower environmental-related and bonus costs
as well as investment gains on corporate-owned life insurance
policies. Corporate expenses of $177.3 for 2008 increased $31.7
compared to the prior year, primarily reflecting higher bonus
and restructuring costs, as well as corporate initiatives,
including expanded resources and review procedures in the tax
accounting function.
Restructuring and
Asset Impairment Charges
2009
Restructuring Activities
During 2009, we
recorded a net restructuring charge of $79.3, reflecting costs
of $70.7 related to new actions and $11.4 related to prior
years’ plans, as well as the reversal of $2.8 of
restructuring accruals that management determined would not be
required. The charges associated with actions announced during
2009 primarily represent severance costs for reductions in
headcount associated with the strategic relocation of certain
production operations within our Fluid and Motion &
Flow segments to lower cost regions, as well as other various
planned reductions in headcount associated with our lean
fulfillment initiative. Planned position eliminations total
1,092 employees, including 528 factory workers, 530 office
workers and 34 management employees. The costs recognized during
2009 related to prior years’ plans of $11.4 primarily
reflect additional severance and lease cancellation related
costs. We do not expect to incur significant additional costs
associated with plans initiated during 2009 in future periods.
We made
restructuring payments of $81.9 during 2009, of which $29.2
related to actions announced during 2009 and $52.7 related to
prior years’ plans. The projected future savings over a
five-year horizon from restructuring actions announced during
2009 are approximately $61 during 2010 (of which $42 is
incremental to savings realized in 2009), and $272 between 2011
and 2014. The following table details the components of
restructuring charges recorded during 2009.
Components of
Charges
| 2009 ACTIONS | ||||||||||||||||||||||||||||||||||||||||
|
PRIOR
|
||||||||||||||||||||||||||||||||||||||||
|
OTHER
|
LEASE
|
PLANNED
|
YEARS’
PLANS
|
|||||||||||||||||||||||||||||||||||||
|
EMPLOYEE-
|
CANCELLATION
&
|
ASSET
|
POSITION
|
ADDITIONAL
|
REVERSAL OF
|
|||||||||||||||||||||||||||||||||||
| SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | |||||||||||||||||||||||||||||||||
|
Fluid
|
$ | 31.0 | $ | 0.4 | $ | 2.4 | $ | 0.4 | $ | 34.2 | 506 | $ | 3.9 | $ | (1.3 | ) | ||||||||||||||||||||||||
|
Motion & Flow
|
31.3 | 0.5 | 1.5 | 0.7 | 34.0 | 496 | 3.3 | (0.7 | ) | |||||||||||||||||||||||||||||||
|
Defense
|
1.3 | – | 0.3 | – | 1.6 | 79 | 4.2 | (0.6 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
0.6 | 0.2 | 0.1 | – | 0.9 | 11 | – | (0.2 | ) | |||||||||||||||||||||||||||||||
| $ | 64.2 | $ | 1.1 | $ | 4.3 | $ | 1.1 | $ | 70.7 | 1,092 | $ | 11.4 | $ | (2.8 | ) | |||||||||||||||||||||||||
2010 Defense
Realignment
In January 2010, a
strategic realignment of the Defense segment was announced to
better align with the emerging needs of its expanding global
customer base, which is increasingly integrated and
network-centric. The realignment, which is scheduled to be
completed by year end 2010, will enable better product portfolio
integration, encouraging a more coordinated market approach and
reduced operational redundancies. The Defense segment is being
renamed ITT Defense and Information Solutions. The current
organizational structure, consisting of seven divisions, is
being consolidated into three larger divisions. We expect to
incur approximately $20 to $30 in restructuring expenses during
2010 associated with the realignment, with incremental margin
benefits expected in 2011.
2008
Restructuring Activities
During 2008, we
recorded a net restructuring charge of $74.6, reflecting costs
of $66.9 related to new actions and $9.3 related
29
Table of Contents
to prior years’
plans, as well as the reversal of $1.6 of restructuring accruals
that management determined would not be required. The charges
associated with actions announced during 2008 primarily
represent a reduction of structural costs in all business
segments and the planned closure of a facility in the
Motion & Flow segment and a facility in the Defense
segment. Planned position eliminations total 1,360, including
614 factory workers, 704 office workers and 42 management
employees. The costs associated with the prior years’ plans
primarily reflect severance and lease cancellation related costs.
We made
restructuring payments of $54.1 during 2008, of which $16.1
related to actions announced during 2008 and $38.0 related to
prior years’ plans. The projected future savings over a
four-year
horizon from restructuring actions announced during 2008 are
approximately $77 during 2010, and $231 between 2011 and 2013.
No material changes have occurred to previously reported
anticipated savings from restructuring actions. The following
table details the components of restructuring charges recorded
during 2008.
Components of
Charges
| 2008 ACTIONS |
PRIOR
|
|||||||||||||||||||||||||||||||||||||||
|
OTHER
|
LEASE
|
PLANNED
|
YEARS’ PLANS
|
|||||||||||||||||||||||||||||||||||||
|
EMPLOYEE-
|
CANCELLATION
&
|
ASSET
|
POSITION
|
ADDITIONAL
|
REVERSAL OF
|
|||||||||||||||||||||||||||||||||||
| SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | |||||||||||||||||||||||||||||||||
|
Fluid
|
$ | 30.7 | $ | 0.4 | $ | 0.9 | $ | 0.1 | $ | 32.1 | 600 | $ | 3.2 | $ | (1.0 | ) | ||||||||||||||||||||||||
|
Motion & Flow
|
20.5 | 0.6 | 0.4 | 0.8 | 22.3 | 589 | 6.0 | (0.4 | ) | |||||||||||||||||||||||||||||||
|
Defense
|
9.6 | 0.7 | 0.6 | – | 10.9 | 157 | 0.1 | (0.2 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
1.4 | 0.1 | 0.1 | – | 1.6 | 14 | – | – | ||||||||||||||||||||||||||||||||
| $ | 62.2 | $ | 1.8 | $ | 2.0 | $ | 0.9 | $ | 66.9 | 1,360 | $ | 9.3 | $ | (1.6 | ) | |||||||||||||||||||||||||
2008 Asset
Impairment Charges
During 2008, we
recognized $2.9 of charges related to the impairment of
long-lived assets. During the fourth quarter of 2008, we
recognized an asset impairment charge of $1.8 related to the
write-down of software due to a decision to cancel a project as
a result of an organizational realignment. During the third
quarter of 2008, we recognized an impairment charge of $1.1
related to one of our Motion & Flow businesses,
reflecting the reduction of our expected future earnings for
this business.
2007
Restructuring Activities
During 2007, we
recorded a net restructuring charge of $61.1, reflecting costs
of $57.9 related to new actions and $7.4 related to prior year
plans, as well as the reversal of $4.2 of restructuring accruals
that management determined would not be required. The charges
associated with actions announced during 2007 represent a
reduction of structural costs in all business segments and the
planned closure of four facilities in the Fluid segment, one
facility in the Motion & Flow segment and two
facilities in the Defense segment. Planned position eliminations
total 729, including 341 factory workers, 345 office workers and
43 management employees. The costs associated with prior
years’ plans primarily reflect additional costs related to
an adjustment to the write-off of leased space as well as asset
write-offs and severance costs.
We made
restructuring payments of $51.5 during 2007,of which $26.8
related to actions announced during 2007 and $24.7 related to
prior years’ plans. The projected future savings over a
three-year horizon from restructuring actions announced during
2007 are approximately $58 during 2010, and $115 between 2010
and 2012. No material changes have occurred to previously
reported anticipated savings from restructuring actions. The
following table details the components of restructuring charges
recorded during 2007.
30
Table of Contents
Components of
Charges
| 2007 ACTIONS |
PRIOR
|
|||||||||||||||||||||||||||||||||||||||
|
OTHER
|
LEASE
|
PLANNED
|
YEARS’ PLANS
|
|||||||||||||||||||||||||||||||||||||
|
EMPLOYEE-
|
CANCELLATION
&
|
ASSET
|
POSITION
|
ADDITIONAL
|
REVERSAL OF
|
|||||||||||||||||||||||||||||||||||
| SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | |||||||||||||||||||||||||||||||||
|
Fluid
|
$ | 32.7 | $ | 0.5 | $ | 1.4 | $ | 2.1 | $ | 36.7 | 410 | $ | 3.5 | $ | (1.1 | ) | ||||||||||||||||||||||||
|
Motion & Flow
|
9.5 | – | 0.3 | 0.4 | 10.2 | 201 | 1.0 | (0.5 | ) | |||||||||||||||||||||||||||||||
|
Defense
|
6.2 | – | 1.5 | – | 7.7 | 115 | 2.9 | (0.9 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
3.3 | – | – | – | 3.3 | 3 | – | (1.7 | ) | |||||||||||||||||||||||||||||||
| $ | 51.7 | $ | 0.5 | $ | 3.2 | $ | 2.5 | $ | 57.9 | 729 | $ | 7.4 | $ | (4.2 | ) | |||||||||||||||||||||||||
2007 Asset
Impairment Charges
During the fourth
quarter of 2007, we recognized $5.0 of charges related to the
impairment of long-lived assets. The impairment was the result
of our determination that two businesses, one within the
Motion & Flow segment and one within the Fluid
segment, were experiencing lower than expected financial
results, and as a result certain long-lived assets of those
businesses may be impaired. After revising the earnings
forecasts for those businesses to reflect current business
conditions, asset impairment charges of $4.2 and $0.8 were
recorded within the Motion & Flow and Fluid segments,
respectively.
Postretirement
Benefit Plans
Postretirement
Expense
Postretirement costs
(pension and other
employee-related
defined benefit plans) affect results in all segments. We
recorded $98.5 of net periodic postretirement cost in the
Consolidated Income Statement during 2009, compared with net
periodic postretirement costs of $28.3 and $93.8 in 2008 and
2007, respectively. As more fully described in Note 16,
“Employee Benefit Plans,” in the Notes to Consolidated
Financial Statements, the primary drivers behind the increase in
the net periodic postretirement cost were the effect of an
increase in the amortization of actuarial losses, and lower
expected returns on plan assets, partially offset by an increase
in the discount rate for our foreign plans.
In 2010, we expect
to incur approximately $140.0 of net periodic postretirement
cost that will be recorded in the Consolidated Income Statement.
The increase in net periodic postretirement cost is primarily
due to an increase in the amortization of deferred losses and
the effect of higher service cost due to the addition of
approximately 3,000 employees from the prior EDO
Corporation into the U.S. Salaried Retirement Plan.
Funded Status,
Plan Contributions and Other
At December 31,
2009, our postretirement benefit plans were underfunded by
$1.8 billion. A substantial portion of the underfunded
position arose during the fourth quarter of 2008, when we
recognized a substantial decline in the fair market value of our
postretirement benefit plan assets. Favorable market conditions
during the latter half of 2009 resulted in an increase in the
fair market value of our postretirement benefit plan assets,
contributing to an after-tax gain to other comprehensive income
of $145.9. Further, $377.9 of the $1.8 billion underfunded
obligation is in pension plans where funding is not permitted
or, in foreign environments, where funding is not feasible.
Funding requirements
under IRS rules are a major consideration in making
contributions to our U.S. postretirement benefit plans.
With respect to U.S. qualified postretirement benefit
plans, we intend to contribute annually not less than the
minimum required by applicable law and regulations. In 2009, we
contributed $161.0 to our postretirement plans, including a
voluntary contribution of $100.0 to the U.S. Salaried Retirement
Plan during the fourth quarter.
The
U.S. Pension Protection Act of 2006 (Pension Act) contains
funding requirements for defined benefit pension plans. The
Pension Act establishes a 100% funding target over 7 years
for plan years beginning after December 31, 2007. No
shortfall amortization payments are required if the pension plan
meets the following targets: 92% funded in 2008; 94% funded in
2009; and 96% funded in 2010. The U.S. Worker, Retiree, and
Employer Recovery Act of 2008 (WRERA) was passed in December
2008. WRERA provides (i) the shortfall amortization charge
will be based on the transition percentages (92% in 2008, 94% in
2009, 96% in 2010 and 100% thereafter) as opposed to the
original Pension Act language of 100% of funding target,
(ii) clarification that the averaging method used to value
assets is to be adjusted for expected earnings which
31
Table of Contents
results in
“asset smoothing,” and (iii) relief from the
restriction on benefit accruals in 2009, by allowing a plan
sponsor to use the greater of the Adjusted Funding Target
Attainment Percentage from January 1, 2008 and
January 1, 2009.
In 2010, we are not
required to make any mandatory contributions to our
U.S. Salaried Retirement Plan to satisfy minimum statutory
funding requirements. Further, assuming that actual plan returns
are consistent with our expected return on plan assets, interest
rates remain constant, and there are no additional changes to
U.S. pension funding legislation, we may be required to
make mandatory contributions of approximately $100 in 2011. We
may, however, make voluntary contributions over the next two
years to improve the funded status of our U.S. Salaried
Plan. We currently anticipate making contributions to our
postretirement benefit plans in the range of $10 to $15 during
2010.
The funded status at
the end of 2010 and future required contributions, will depend
primarily on the actual return on assets during the year and the
discount rate at the end of the year. Depending on these
factors, and the resulting funded status of our pension plans,
the level of future statutory minimum contributions could be
material.
Recoverable
Pension Costs and Plan Contributions
U.S. Government
Cost Accounting Standards govern the extent to which
postretirement costs and plan contributions are allocable to and
recoverable under contracts with the U.S. Government. As a
result, we have sought and would seek reimbursement from the DOD
for a portion of our postretirement costs and plan
contributions. Effective January 1, 2010, approximately
3,000 employees from the prior EDO Corporation will join
the U.S. Salaried Retirement Plan. The addition of these
employees is estimated to increase the percentage of active
U.S. Salaried Retirement Plan participants under the
Defense segment to 76% from approximately 72% at
December 31, 2009.
Cash Flow
Summary
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
Operating Activities
|
$ | 1,269.7 | $ | 1,119.6 | $ | 798.1 | |||||||||
|
Investing Activities
|
(285.1 | ) | (502.9 | ) | (1,958.1 | ) | |||||||||
|
Financing Activities
|
(771.9 | ) | (1,407.4 | ) | 1,981.1 | ||||||||||
|
Foreign Exchange
|
40.0 | (73.4 | ) | 103.0 | |||||||||||
2009 Versus
2008
Cash and cash
equivalents increased $250.7 to $1,215.6 during 2009. The
$1,269.7 of cash generated from operating activities more than
funded the $771.9 and $285.1 cash used in financing and
investing activities, respectively. These uses of cash were due
to a $639.8 net repayment of debt combined with investments
in the business of $271.6 for capital expenditures and $34.3 for
acquisitions, while at the same time returning value to the
shareholders through $147.9 of dividend payments, an increase of
22% over 2008.
2008 Versus
2007
Cash and cash
equivalents decreased $875.1 to $964.9 during 2008. The $1,119.6
of cash generated from operating activities was insufficient to
cover the $502.9 and $1,407.4 cash used in financing and
investing activities, respectively. These uses of cash were due
to a $1,251.7 net repayment of debt combined with
investments in the business of $248.7 for capital expenditures
and $275.7 for acquisitions, while at the same time returning
value to the shareholders through $120.9 of dividend payments,
an increase of 25% over 2007.
Operating
Activities
2009 Versus
2008
Cash provided by
operating activities in 2009 increased $150.1 from the prior
year. This increase is largely the result of a net cash
improvement of $320.9 from working capital, partially offset by
a $136.9 increase in contributions to our pension plans. The
working capital improvement was primarily due to a
year-to-year
reduction in accounts receivable in the Defense and Fluid
segments due to lower sales volumes and improved collections.
The increase in pension plan contributions was driven by a
$100.0 voluntary contribution to the U.S. Salaried
Retirement Plan in 2009, as compared to none in 2008. Cash from
operating activities was also negatively impacted as compared to
the prior year due to a $98.7 increased use of cash from accrued
expenses in all business segments. Although income from
continuing operations declined $124.5 from the prior year, this
was largely due to the increase in non-cash asbestos costs of
$223.2, excluding the income tax benefit reflected within
accrued and deferred taxes. As a result, this did not have an
impact on cash flows from operating activities. Net asbestos
payments were not significant in each of the years. Net annual
cash outflows related to the recorded asbestos liability are
projected to be approximately $10 to $15 over the next several
years, relatively consistent with recent levels, and increase to
approximately $30 to $40 by 2019.
2008 Versus
2007
Cash provided by
operating activities in 2008 increased $321.5 from the prior
year. This significant increase is partially due to a $235.1
increase in income from continuing operations, excluding
non-cash increases in depreciation and amortization, combined
with a $59.0 reduction in contributions to our pension plans,
$50.0 of which related to our U.S. Salaried Retirement
Plan. Working capital provided a modest increase in cash from
last year as a $123.8 reduction in the use of cash from accounts
receivable, primarily driven by improved cash collections within
the Fluid segment, was largely offset by reduced sources of cash
of $75.9 from accounts payable and accrued expenses and $41.4
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from inventories.
Each of the business segments contributed to the accounts
payable and accrued expenses impact, led by lower volumes and
timing of payments, while the change in inventories was
primarily attributable to the Defense segment due to the ramp up
of CREW units, coupled with delayed international shipments.
Additionally, EDO businesses were a significant contribution
underlying the overall operating cash flow performance.
Investing
Activities
Capital
Expenditures:
2009 Versus
2008
Capital expenditures
during 2009 were $271.6, an increase of $22.9 as compared to the
prior year. The increase is driven by $27.8 of incremental
investments within the Defense segment primarily in support of
the ADS-B contract with the FAA, as well as $21.7 of incremental
investments in IT infrastructure. These incremental investments
were partially mitigated by the absence of prior year
investments for ITT’s new headquarters that consolidated
the corporate headquarters with the headquarters operations of
its Fluid and Motion & Flow segments, in addition to
reductions in Fluid and Motion & Flow segments in
response to reduced revenues.
2008 Versus
2007
Capital expenditures
during 2008 were $248.7, an increase of $9.4 as compared to
2007. The increase is driven by higher spending of $30.3 in the
Defense segment primarily due to the acquisition of EDO at the
end of 2007, an $18.5 increase in the Motion & Flow
segment as a result of the purchase of a manufacturing facility
in Mexico, combined with timing of investments as compared to
last year. These increases were offset by net reductions of
$39.4 largely reflecting the absence of a prior year cash
payment of $44.8 related to the renewal of the sale leaseback
arrangement for ITT’s corporate aircraft whose term expired
in December 2007 (see Note 20, “Guarantees,
Indemnities and Warranties,” in the Notes to Consolidated
Financial Statements for further discussion). This was partially
offset by payments related to the leasehold improvements for
ITT’s new headquarters that consolidates its corporate
headquarters and the headquarters operations of its Fluid and
Motion & Flow segments.
Acquisitions:
During 2009, we
spent $34.3 primarily on acquisitions of two businesses within
our Fluid segment.
During 2008, we
spent $226.5 related to additional costs for 2007 acquisitions
including, the EDO acquisition within the Defense segment. We
also spent $49.2 on acquisitions of several other smaller
companies, including two companies in the Motion &
Flow segment and two companies in the Fluid segment.
During 2007, we
spent $2,009.2 for the acquisition of six companies. The
acquisitions of EDO for $1,598.7 within our Defense segment and
of IMC for $390.5 within our Motion & Flow segment
comprised most of the total spending. Of the other acquisitions,
one was in the Defense segment and three were in the Fluid
segment.
Proceeds from
Sale of Assets and Businesses:
During 2008, we
completed the sale of the remaining component of the Switches
businesses, for net proceeds of $5.1. In 2007, we had sold the
substantial part of our Switches businesses for net proceeds of
$223.2, with the buyer to acquire the remainder once asset
transfer issues were resolved.
Additionally, as
part of ITT’s renewal of its corporate aircraft sale
leaseback, in 2007 we received a cash payment of $50.2 for the
sale of the aircraft to the lessor (see Note 20,
“Guarantees, Indemnities and Warranties,” in the Notes
to Consolidated Financial Statements for further discussion).
Financing
Activities
Debt:
During 2009, we
repaid net debt of $639.8. In May 2009, the Company issued
$500.0 of 4.9% Senior Notes due 2014 and $500.0 of
6.125% Senior Notes due 2019. The offering resulted in net
proceeds of $992.1. These proceeds combined with cash from
operations were used to repay $1,603.0 of short-term debt and
$29.3 of long-term debt.
During 2008, our use
of cash related to short-term debt increased $3,540.9 over the
prior year, reflecting net payments of $1,229.0 in 2008
primarily related to the financing of the EDO acquisition as
compared to net short-term borrowings of $2,311.9 in 2007.
Share
Repurchases:
Consistent with our
2009 objectives surrounding the preservation of liquidity, we
did not participate in the share repurchase program during the
year. As of December 31, 2008, we had repurchased
7.1 shares for $430.8, including commission fees, under our
$1 billion share repurchase program. In 2008, we spent
$75.0, including commission fees, on the repurchase of common
stock. In 2007, we spent $299.0, including commission fees, on
the repurchase of common stock. Of this amount, $48.6 relates to
0.9 shares which were acquired at the end of 2006 and
settled in January 2007. The remaining $250.5 relates to
4.1 shares repurchased in 2007.
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Dividends:
In 2009, we made
$147.9 of dividend payments to shareholders, a 22% increase over
2008. In 2008, we made $120.9 of dividend payments to
shareholders, a 25% increase over 2007.
Foreign
Exchange
During 2009, the
currency exchange rate effects on cash and cash equivalents was
a benefit of $40.0 primarily due to a stronger Euro
year-over-year.
During 2008, the $73.4 negative foreign exchange impact was
primarily due to a weaker Euro, Swedish Krona and Canadian
Dollar as compared to the prior year. The $103.0 foreign
exchange benefit in 2007 was driven by a stronger Euro as
compared to the prior year.
Liquidity and
Capital Resources
Our principal source
of liquidity is operating cash flows. We have the ability to
meet our additional short-term funding requirements through the
issuance of commercial paper. Our funding needs are monitored
and strategies are executed to meet overall liquidity
requirements, including the management of our capital structure
on both a short and long-term basis. Significant factors that
affect our overall management of liquidity include the adequacy
of commercial paper and supporting bank lines of credit, and the
ability to attract long-term capital on satisfactory terms. We
assess these factors along with current market conditions on a
continuous basis, and as a result may alter the mix of our
short- and long-term financing, when advantageous to do so.
In April 2009, we
filed a shelf registration statement on
Form S-3
with the Securities Exchange Commission (SEC), pursuant to
which, in May 2009, we issued $500.0 of 4.9% Senior
Notes due 2014 and $500.0 of 6.125% Senior Notes due 2019
(collectively, the Notes). The offering resulted in gross
proceeds of $998.3, offset by $6.2 in debt issuance costs. We
may redeem the Notes in whole or in part at any time at a
redemption price equal to the greater of (i) 100% of the
principal amount of such Notes and (ii) the sum of the
present value of the remaining scheduled payments of principal
and interest thereon (exclusive of interest accrued to the date
of redemption) discounted to the redemption date on a semiannual
basis at the Treasury Rate plus 50 basis points, plus, in
each case, accrued and unpaid interest to the date of
redemption. If the Company experiences a change of control, the
Company will be required to offer to repurchase the Notes at a
price equal to 101% of the principal amount plus accrued
interest. The Notes are senior unsecured obligations and rank
equally with all existing and future senior unsecured
indebtedness.
We manage our
worldwide cash requirements considering available funds among
the many subsidiaries through which we conduct business and the
cost effectiveness with which those funds can be accessed. We
have and will continue to transfer cash from the international
subsidiaries to U.S. and to other international
subsidiaries when it is cost effective to do so.
We expect that
available cash, our committed credit facility and access to the
public debt markets provide adequate short-term and long-term
liquidity. We believe that cash flows from operations and our
access to the commercial paper market are sufficient to meet our
short-term funding requirements. If our access to the commercial
paper market were adversely affected, we believe that
alternative sources of liquidity, including available cash and
our existing committed credit facility, would be sufficient to
meet our short-term funding requirements.
We do not believe,
subject to risks and uncertainties inherent in the estimation
process, that the asbestos-related net liability for unasserted
claims to be filed over the next 10 years will result in a
material impact to either our short-term or long-term liquidity
positions, nor do we anticipate the net liability for claims to
be filed over the next 10 years will have a material impact
to our net annual cash flows.
Current debt ratios
have positioned us to grow our business with investments for
organic growth and through strategic acquisitions, while
providing the ability to return value to shareholders through
increased dividends and share repurchases.
| DECEMBER 31 | 2009 | 2008 | ||||||||
|
Cash and cash equivalents
|
$ | 1,215.6 | $ | 964.9 | ||||||
|
Short-term debt and current maturities of long-term debt
|
$ | 75.0 | $ | 1,679.0 | ||||||
|
Long-term debt
|
1,430.8 | 467.9 | ||||||||
|
Total debt
|
1,505.8 | 2,146.9 | ||||||||
|
Total shareholders’ equity
|
3,878.3 | 3,059.9 | ||||||||
|
Total capitalization (debt plus equity)
|
$ | 5,384.1 | $ | 5,206.8 | ||||||
|
Debt to total capitalization
|
28.0 | % | 41.2 | % | ||||||
|
Net debt (debt less cash and cash equivalents)
|
290.2 | 1,182.0 | ||||||||
|
Net capitalization (debt plus equity less cash and cash
equivalents)
|
4,168.5 | 4,241.9 | ||||||||
|
Net debt to net capitalization
|
7.0 | % | 27.9 | % | ||||||
The reduction in net
debt primarily reflects our focus on preserving liquidity and
improving financial capacity for 2010. Some of this improved
financial capacity was committed when we entered into an
agreement on February 17, 2010 to purchase Nova Analytics
Corporation (Nova), a privately held company. The purchase price
is approximately $390, subject to normal and customary closing
conditions. We expect that the purchase price will be funded
through a mix of cash and commercial paper. Nova is a leading
manufacturer of premium quality field, portable, on-line and
laboratory analytical
34
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instruments used in
water and wastewater, environmental, industrial, food and
beverage, pharmaceutical and medical applications.
Nova provides ITT
strong brands, technologies, robust distribution and solid
aftermarket content in the growing $6 billion analytical
instrumentation market. The addition of Nova will help
strengthen our global positions by broadening the set of
solutions we offer customers in key markets such as municipal
water and wastewater, industrial processing, and
food & beverage.
The transaction is
projected to be completed by the end of March 2010 pending
customary regulatory approvals. Nova employs approximately
725 people across Germany, Norway, France, the United
Kingdom, the United States and China with projected 2010 revenue
of approximately $150.
Credit
Facilities and Commercial Paper Program
In November 2005,
ITT entered into a five-year revolving credit agreement
(November 2005 Credit Facility), in the aggregate principal
amount of $1.25 billion. Effective November 8, 2007,
ITT exercised the option to increase the principal amount under
the revolving credit agreement to $1.75 billion. As of
December 31, 2009, we were in compliance with the financial
covenants specified under this agreement. During the first
quarter of 2009, a separate 364-day $1.0 billion credit
facility expired and was not renewed.
The revolving credit
agreements are intended to provide additional liquidity as a
source of funding for the commercial paper program, if needed.
Our policy is to maintain unused committed bank lines of credit
in an amount greater than outstanding commercial paper balances.
During 2009, we utilized cash from operations and the
$1.0 billion long-term debt issuance to pay down our
outstanding commercial paper balance. As of December 31,
2009 and 2008, the commercial paper balance was $55.0 and
$1,618.7, respectively.
Contractual
Obligations
ITT’s
commitment to make future payments under long-term contractual
obligations was as follows, as of December 31, 2009:
| PAYMENTS DUE BY PERIOD | ||||||||||||||||||||||||||||||
|
LESS THAN
|
MORE THAN
|
|||||||||||||||||||||||||||||
| CONTRACTUAL OBLIGATIONS | TOTAL | 1 YEAR | 1-3 YEARS | 3-5 YEARS | 5 YEARS | |||||||||||||||||||||||||
|
Long-term
debt
(1)
|
$ | 1,406.0 | $ | 10.5 | $ | 89.9 | $ | 551.1 | $ | 754.5 | ||||||||||||||||||||
|
Interest
payments
(2)
|
721.4 | 82.6 | 156.6 | 139.7 | 342.5 | |||||||||||||||||||||||||
|
Operating
leases
(3)
|
721.2 | 147.7 | 212.2 | 125.7 | 235.6 | |||||||||||||||||||||||||
|
Purchase
obligations
(4)
|
818.2 | 400.2 | 294.7 | 123.3 | – | |||||||||||||||||||||||||
|
Other long-term obligations reflected on balance
sheet
(5)
|
193.1 | 20.6 | 37.6 | 29.4 | 105.5 | |||||||||||||||||||||||||
|
Total
|
$ | 3,859.9 | $ | 661.6 | $ | 791.0 | $ | 969.2 | $ | 1,438.1 | ||||||||||||||||||||
In addition to the
amounts presented in the table above, we have recorded
liabilities for pending and future unasserted asbestos claims to
be filed over a
10-year
period and uncertain tax positions of $933.2 and $170.9,
respectively, in our Consolidated Balance Sheet as of
December 31, 2009. These amounts have been excluded from
the contractual obligations table due to an inability to
reasonably estimate the timing of payments in individual years
beyond 12 months.
| (1) | See Note 14, “Debt,” in the Notes to Consolidated Financial Statements, for discussion of the use and availability of debt and revolving credit agreements. Amounts represent total long-term debt, including current maturities and exclude the deferred gain on interest rate swaps and unamortized discounts and debt issuance costs. |
| (2) | Amounts represent estimate of future interest payments on long-term debt outstanding as of December 31, 2009 utilizing year end interest rates. |
| (3) | Refer to Note 13, “Leases and Rentals,” in the Notes to Consolidated Financial Statements, for further discussion of lease and rental agreements. |
| (4) | Represents unconditional purchase commitments that are principally take or pay obligations related to the purchase of certain raw materials and subcontract work. |
| (5) | Other long-term obligations include estimated environmental payments. We estimate, based on historical experience, that we will spend between $8.0 and $13.0 per year on environmental investigation and remediation. We are contractually required to spend a portion of these monies based on existing agreements with various governmental agencies and other entities. At December 31, 2009, our best estimate for environmental liabilities is $139.7. In addition, other long-term obligations include letters of credit, and payments in connection with our settlement of compliance issues in the Defense segment. |
Off-Balance Sheet
Arrangements
Guarantees &
Indemnities
Since ITT’s
incorporation in 1920, we have acquired and disposed of numerous
entities. The related acquisition and disposition agreements
contain various representation and warranty clauses and may
provide indemnities for a misrepresentation or breach of the
representations and warranties by either party. The indemnities
address a variety of subjects; the term and monetary amounts of
each such indemnity are defined in the specific agreements and
may be affected by various conditions
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and external
factors. Many of the indemnities have expired either by
operation of law or as a result of the terms of the agreement.
We do not have a liability recorded for the historic
indemnifications and are not aware of any claims or other
information that would give rise to material payments under such
indemnities.
In December of 2007,
we entered into a sale leaseback type agreement for our
corporate aircraft, with the aircraft leased back under a
five-year operating lease. We have provided, under the lease, a
residual value guarantee to the counterparty in the amount of
$41.7. We would have to make payments under the residual value
guarantee only if the fair value of the aircraft was less than
the residual value guarantee upon termination of the agreement.
At December 31, 2009, the projected fair value of the
aircraft at the end of the lease is estimated to be $3.9 less
than the residual value guarantee. However, since this estimated
loss does not exceed the $5.4 gain we realized from the sale of
the aircraft which has been deferred as a loss contingency for
the residual value guarantee, we have not recorded any
additional accrual in our financial statements.
ITT has a number of
individually immaterial guarantees outstanding at
December 31, 2009, that may be affected by various
conditions and external forces, some of which could require that
payments be made under such guarantees. We do not believe these
payments will have any material adverse impact on the financial
position, results of operations or cash flow on a consolidated
basis in the foreseeable future.
Critical
Accounting Estimates
The preparation of
financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses.
Significant accounting policies used in the preparation of the
Consolidated Financial Statements are discussed in Note 1,
“Summary of Significant Accounting Policies,” in the
Notes to Consolidated Financial Statements. Accounting estimates
and assumptions discussed in this section are those that we
consider most critical to an understanding of our financial
statements because they inherently involve significant judgments
and uncertainties. Actual results in these areas could differ
from management’s estimates.
Contingent
Liabilities
From time to time,
we are involved in legal proceedings that are incidental to the
operation of our businesses. Some of these proceedings allege
damages against the Company relating to environmental
liabilities, intellectual property matters, copyright
infringement, personal injury claims, employment and pension
matters, government contract issues and commercial or
contractual disputes, sometimes related to acquisitions or
divestitures. Accruals for anticipated settlements have been
established where the outcome of the matter is probable and can
be reasonably estimated. In addition, accruals for legal fees
for various matters have been established where the fees are
probable of payment and can be reasonably estimated. Based on
present information, including our assessment of the merits of
claims, as well as our current reserves and insurance coverage,
we do not expect that such legal proceedings will have a
material adverse impact on the cash flow, results of operations,
or financial position, on a consolidated basis in the
foreseeable future, unless otherwise noted.
However, because of
uncertainties related to these matters, we can only record
accruals based on currently available information. As additional
information becomes available, we reassess the potential
liability related to our pending claims and litigation and may
revise our estimates. Such revisions in the estimates of the
potential liabilities could have a material impact on our
consolidated financial position, results of operations or cash
flows. For a discussion of these contingencies, including
management’s judgment applied in the recognition and
measurement of specific liabilities, refer to Note 19,
“Commitments and Contingencies,” in the Notes to
Consolidated Financial Statements.
Asbestos
Matters
ITT, including its
subsidiary Goulds Pumps, Inc. (Goulds), has been joined as a
defendant with numerous other companies in product liability
lawsuits alleging personal injury due to asbestos exposure.
These claims allege that certain of our products sold prior to
1985 contained a part manufactured by a third party, e.g., a
gasket, which contained asbestos. To the extent these
third-party parts may have contained asbestos, it was
encapsulated in the gasket (or other) material and was
non-friable. In certain other cases, it is alleged that former
ITT companies were distributors for other manufacturers’
products that may have contained asbestos.
Estimating our
exposure to asbestos claims is subject to significant management
judgment, as there is significant uncertainty and risk
associated with the variables that can affect the timing,
severity, quantity and resolution of claims. The methodology
used to project future asbestos costs is based largely on the
Company’s experience in a reference period including the
last few years for claims filed, settled and dismissed. This
experience is compared to the results of previously conducted
epidemiological studies by estimating the number of individuals
likely to develop asbestos-related diseases. Those studies were
undertaken in connection with an independent analysis of the
population of U.S. workers across eleven different industry
and occupation categories believed to have been exposed to
asbestos. Using that information for the industry and occupation
36
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categories relevant
to the Company, an estimate was developed of the number of
future claims to be filed against the Company, as well as the
aggregate settlement costs that would be incurred to resolve
both pending and future claims based upon the average settlement
costs by disease during the reference period. In addition, the
estimate is augmented for the costs of defending asbestos claims
in the tort system using a forecast based on recent experience
as well as discussions with the Company’s defense counsel.
The methodology to project future asbestos costs is one in which
the underlying assumptions are separately assessed for their
reasonableness and then each is used as an input in estimating
the liability. Our assessment of the underlying assumptions is
based upon recent experience and future expectations, yielding
only one value for each assumption.
The liability
estimate is most sensitive to those factors surrounding
mesothelioma claims as these claims represent nearly
90 percent of the total liability. These factors include
the number of new mesothelioma claims filed against the Company,
the average settlement costs for mesothelioma claims, and the
percentage of mesothelioma claims dismissed against the Company.
These factors are interdependent, and no one factor predominates
in determining the liability estimate.
The recorded
liability represents our best estimate based upon current, known
information. While there are other potential estimates, our
methodology does not create a range of estimates of reasonably
possible outcomes as we have determined our point estimate based
upon our assessment of the value of each underlying assumption.
Projecting future asbestos costs is subject to numerous
variables and uncertainties that are inherently difficult to
predict. In addition to the uncertainties surrounding the key
factors discussed above, other factors include the long latency
period prior to the manifestation of the asbestos-related
disease, costs of medical treatment, the impact of bankruptcies
of other companies that are co-defendants, uncertainties
surrounding the litigation process from jurisdiction to
jurisdiction and from case to case, and the impact of potential
legislative or judicial changes. Furthermore, any predictions
with respect to the variables impacting the estimate of the
asbestos liability are subject to even greater uncertainty as
the projection period lengthens. In light of the uncertainties
and variables inherent in the long-term projection of the
Company’s total asbestos liability, although it is probable
that the Company will incur additional costs for asbestos claims
filed beyond the next 10 years, we do not believe there is
a reasonable basis for estimating those costs at this time. As
part of our ongoing review of asbestos claims, each quarter we
will reassess the projected liability of unasserted asbestos
claims to be filed over the next 10 years based upon the
trends we are experiencing in those factors to which the
liability is most sensitive, maintaining a rolling 10-year
projection. Annually, in the third quarter each year, we will
conduct a detailed study with the assistance of an outside
consultant to review and update as appropriate the underlying
assumptions used in our liability estimate. Additionally, we
will periodically reassess the time horizon over which a
reasonable estimate of unasserted claims can be projected.
We record a
corresponding asbestos-related insurance asset that represents
our best estimate of probable insurance recoveries for the
asbestos liabilities for pending claims, as well as unasserted
claims to be filed over the next 10 years. In developing
this estimate, the Company considered its
coverage-in-place
and other settlement agreements with its insurers, as well as a
number of additional factors. These additional factors include
current levels of recovery experience, the financial viability
of the insurance companies, the method by which losses will be
allocated to the various insurance policies and the years
covered by those policies, and interpretation of the various
policy terms and limits and their interrelationships. The timing
and amount of reimbursements will vary due to differing policy
terms and certain gaps in coverage as a result of some insurer
insolvencies. In addition, the Company retained an insurance
consulting firm to assist management in the estimation of
probable insurance recoveries based upon the analysis of policy
terms, the likelihood of recovery provided by our legal counsel
assuming the continued viability of those insurance carriers
which are currently solvent and incorporating risk mitigation
judgments where policy terms or other factors were not certain.
We have estimated
that we have insurance that will cover 69 percent of the
asbestos costs (defense and settlement costs) for pending claims
as well as unasserted claims to be filed over the next
10 years. However, because there are gaps in our coverage,
reflecting certain uninsured periods and prior insurance
settlements, and we expect that certain policies from some of
our primary insurers will exhaust within the next 10 years,
the insurance coverage percent is expected to decline for
potential additional asbestos liabilities. The tenth year of our
projection of the unasserted asbestos claims liability against
the related insurance asset declines to approximately
25 percent. Future recoverability rates may also be
impacted by other factors, such as future insurance settlements,
insolvencies and judicial determinations relevant to our
coverage program, which are difficult to predict and subject to
a high degree of uncertainty.
The underlying
asbestos liability and corresponding insurance asset are based
upon current, known information. However, future events
affecting the key factors and other variables for either the
asbestos liability or the insurance asset could cause the actual
costs and insurance recoveries to be higher or lower than
currently estimated. Due to these uncertainties as well as
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our inability to
reasonably estimate any additional asbestos liability for claims
filed beyond the next 10 years, it is not possible to
predict the ultimate outcome of the cost of resolving the
pending and all unasserted asbestos claims. We believe it is
possible that the cost of asbestos claims filed beyond the next
10 years, net of expected insurance recoveries, could have
a material adverse effect on our financial position and on the
results of operations or cash flows for a particular period.
See Note 19,
“Commitments and Contingencies” in the Notes to
Consolidated Financial Statements for further information.
Pension
Plans
ITT sponsors
numerous defined benefit pension plans for employees around the
world. The determination of projected benefit obligations and
the recognition of expenses related to pension plans are
dependent on various assumptions. These major assumptions
primarily relate to discount rates, long-term expected rates of
return on plan assets, rate of future compensation increases,
mortality and termination (some of which are disclosed in
Note 16, “Employee Benefit Plans,” in the Notes
to Consolidated Financial Statements) and other factors. Actual
results that differ from our assumptions are accumulated and are
amortized generally over the estimated future working life of
the plan participants.
Significant
Assumptions
Management develops
each assumption using relevant Company experience in conjunction
with market-related data for each individual country in which
such plans exist. All assumptions are reviewed periodically with
third party actuarial consultants and adjusted as necessary. A
summary of the significant assumptions used to estimate our
defined benefit pension costs and obligations are as follows:
| WEIGHTED AVERAGE ASSUMPTIONS | 2009 | 2008 | ||||||||
|
Expected rate of return on plan assets used to determine net
periodic benefit cost
|
8.87 | % | 8.87 | % | ||||||
|
Discount rate used to determine net periodic benefit cost
|
6.24 | % | 6.19 | % | ||||||
|
Discount rate used to determine benefit obligation at December 31
|
5.98 | % | 6.24 | % | ||||||
|
Rate of future compensation increase used to determine benefit
obligation at December 31
|
3.99 | % | 3.97 | % | ||||||
We determine our
expected return on plan assets assumption by evaluating both
historical returns and estimates of future returns.
Specifically, we analyze the plan’s actual historical
annual return on assets over the past 10, 15, 20 and
25 years; make estimates of future returns using a Capital
Asset Pricing Model; and evaluate historical broad market
returns over the past 75 years based on our strategic asset
allocation, which is detailed in Note 16, “Employee
Benefit Plans,” in the Notes to Consolidated Financial
Statements.
Based on the
approach described above, we estimate the long-term annual rate
of return on assets for domestic pension plans at 9.0%. For
reference, our actual geometric average annual return on plan
assets for domestic pension plans were 4.4%, 9.3%, 9.3% and
10.8%, for the past 10, 15, 20, and 25 year periods,
respectively.
The chart below
shows actual returns versus the expected long-term returns for
our U.S. pension plans that were utilized in the calculation of
the net periodic pension cost for each respective year. See
Note 16, “Employee Benefit Plans,” in the Notes
to Consolidated Financial Statements for more information.
| 2009 | 2008 | 2007 | |||||||||||||
|
Expected long-term rate of return on plan assets
|
9.0 | % | 9.0 | % | 9.0 | % | |||||||||
|
Actual rate of return on plan assets
|
24.1 | % | (31.2 | )% | 12.7 | % | |||||||||
For the recognition
of net periodic pension cost, the calculation of the expected
return on plan assets is generally derived using a
market-related value of plan assets based on average asset
values at the measurement date over the last five years. The use
of fair value, rather than a calculated value could materially
effect net periodic pension cost. Our weighted average expected
return on plan assets for all pension plans, including foreign
affiliate plans, at December 31, 2009 is 8.88%.
The discount rate
reflects our expectation of the present value of expected future
cash payments for benefits at the measurement date. A decrease
in the discount rate increases the present value of benefit
obligations and increases pension expense. We base the discount
rate assumption on current investment yields of high quality
fixed income investments during the retirement benefits maturity
period. The pension discount rate was determined by considering
an interest rate yield curve comprising AAA/AA bonds with
maturities between zero and thirty years developed by the
plan’s actuaries. Annual benefit payments are then
discounted to present value using this yield curve to develop a
single-point discount rate matching the plan’s
characteristics. Our weighted average discount rate for all
pension plans, including foreign affiliate plans, at
December 31, 2009, is 5.98%.
The rate of future
compensation increase assumptions
38
Table of Contents
reflect our
long-term actual experience and future and near-term outlook. At
December 31, 2009, our expected rate of future compensation
of 4.0% for U.S. plan participants was unchanged from the prior
year.
Pension
Expense
A 25 basis
point change in the expected rate of return on plan assets,
discount rate, or rate of future compensation increases, would
have the following effect on 2010 pension expense:
|
INCREASE/(DECREASE)
|
||||||||||
| IN PENSION EXPENSE | ||||||||||
|
25 BASIS
|
25 BASIS
|
|||||||||
| POINT INCREASE | POINT DECREASE | |||||||||
|
Long-term rate of return on assets used to determine net
periodic benefit cost |
$ | (10.1 | ) | $ | 10.1 | |||||
|
Discount rate used to determine
net periodic benefit cost |
(12.5 | ) | 12.6 | |||||||
|
Rate of future compensation increases used to determine
net periodic pension cost |
3.3 | (3.0 | ) | |||||||
Funded
Status
Funded status is
derived by subtracting the respective year-end values of the
projected benefit obligations from the fair value of plan
assets. ITT’s U.S. Salaried Pension Plan represents
approximately 77% of the total pension obligation, and therefore
the funded status of the U.S. Salaried Retirement Plan has
a considerable impact on the overall funded status of our
pension plans.
We estimate that
every 25 basis point change in the discount rate impacts
the funded status of the U.S. Salaried Pension Plan by
approximately $113. Similarly, every five percentage point
change in the actual 2010 rate of return on assets impacts the
same plan by approximately $176.
Fair Value of
Plan Assets
The plan assets of
our postretirement plans are comprised of a broad range of
investments including domestic and foreign equity securities,
interests in private equity and hedge funds, fixed income
investments, commodities, real estate and cash and cash
equivalents.
A substantial
portion of our postretirement benefit plan assets portfolio is
comprised of investments in private equity and hedge funds. The
private equity and hedge fund investments are generally measured
at net asset value. However, in certain instances, the values
reported by the asset managers were not current at the
measurement date. Accordingly, management has estimated
adjustments to the last reported value were necessary to measure
the assets at fair value at the measurement date.
These adjustments
consider information received from the asset managers, as well
as general market information. The adjustment recorded for these
assets represented approximately one percent of total plan
assets. Asset values for other positions were generally measured
using market observable prices.
See Note 16,
“Employee Benefit Plans” in the Notes to Consolidated
Financial Statements for further information.
Revenue
Recognition
ITT recognizes
revenue as services are rendered and when title transfers for
products, subject to any special terms and conditions of
specific contracts. For the majority of our product sales, title
transfers when products are shipped. Under certain
circumstances, title passes when products are delivered.
Further, some sales are recognized when the customer picks up
the product. In the Defense segment, certain contracts require
the delivery, installation, testing, certification and customer
acceptance before revenue can be recorded.
The Defense segment
and certain businesses in our Fluid segment generally recognize
sales and anticipated profits under long-term fixed-price
contracts based on units of delivery, completion of scheduled
performance milestones, or percentage of costs incurred to total
costs. Estimated contract profits are recorded into earnings in
proportion to recorded sales. During the performance of such
contracts, estimated final contract prices and costs are
periodically reviewed and revisions are made as required. The
effect of these revisions to estimates is included in earnings
in the period in which the revisions are made. Sales under
cost-reimbursement contracts are recorded as costs are incurred
and include estimated earned fees or profits calculated on the
basis of the relationship between costs incurred and total
estimated costs. For
time-and-material
contracts, revenue is recognized to the extent of billable rates
times hours incurred plus material and other reimbursable costs
incurred. Anticipated losses on contracts are recorded when
first identified by ITT. Revenue arising from the claims process
is not recognized either as income or as an offset against a
potential loss until it can be reliably estimated and
realization is probable.
Income
Taxes
Deferred tax assets
and liabilities are determined based on temporary differences
between the financial reporting and tax bases of assets and
liabilities, applying enacted tax rates that we expect to be in
effect for the year in which we expect the differences will
reverse. Based on the evaluation of available evidence, we
recognize future tax benefits, such as net operating loss
carryfowards, to the extent that we believe it is more likely
than not we will realize these benefits. We periodically
39
Table of Contents
assess the
likelihood that we will be able to recover our deferred tax
assets and reflect any changes in our estimates in the valuation
allowance, with a corresponding adjustment to earnings or other
comprehensive income (loss), as appropriate.
In assessing the
need for a valuation allowance, we look to the future reversal
of existing taxable temporary differences, taxable income in
carryback years, the feasibility of tax planning strategies and
estimated future taxable income. The valuation allowance can be
affected by changes to tax laws, changes to statutory tax rates
and changes to future taxable income estimates.
The calculation of
our tax liabilities involves dealing with uncertainties in the
application of complex tax regulations in a multitude of
jurisdictions across our global operations. We recognize
potential liabilities and record tax liabilities for anticipated
tax audit issues in the U.S. and other tax jurisdictions
based on our estimate of whether, and to the extent to which,
additional taxes will be due. Furthermore, we recognize the tax
benefit from an uncertain tax position only if it is more likely
than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial
statements from such a position are measured based on the
largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement.
We adjust our
liability for uncertain tax positions in light of changing facts
and circumstances; however, due to the complexity of some of
these uncertainties, the ultimate resolution may result in a
payment that is materially different from our current estimate
of the tax liabilities. If our estimate of tax liabilities
proves to be less than the ultimate assessment, an additional
tax expense would result. If a payment of these amounts
ultimately proves to be less than the recorded amounts, the
reversal of the liabilities would result in tax benefits being
recognized in the period when we determine the liabilities are
no longer necessary.
Goodwill and
Other Intangible Assets
We review goodwill
and purchased indefinite-lived intangible assets for impairment
annually and whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable.
We conduct our annual impairment test as of the first day of the
fourth quarter. We perform a two-step impairment test for
goodwill. In the first step, we compare the fair value of each
reporting unit to its carrying value. If the fair value of the
reporting unit exceeds the carrying value of the net assets
assigned to that reporting unit, goodwill is not impaired and we
are not required to perform further testing. If the carrying
value of the net assets assigned to the reporting unit exceed
its fair value, then we must perform the second step of the
impairment test in order to measure the impairment loss to be
recorded. If the carrying value of a reporting unit’s
goodwill exceeds its implied fair value, then we record an
impairment loss equal to the difference. We also compare the
fair value of purchased intangible assets with indefinite lives
to their carrying value. We recognize an impairment loss when
the estimated fair value of the intangible asset is less than
the carrying value. We estimate the fair value of our reporting
units and purchased intangible assets with indefinite lives
using an income approach. Under the income approach, we
calculate fair value based on the present value of estimated
future cash flows.
Determining the fair
value of a reporting unit or an indefinite-lived purchased
intangible asset is judgmental in nature and involves the use of
significant estimates and assumptions, particularly related to
future operating results. These estimates and assumptions
include, but are not limited to, revenue growth rates and
operating margins used to calculate projected future cash flows,
risk-adjusted discount rates, assumed royalty rates, future
economic and market conditions and identification of appropriate
market comparable data. In addition, the identification of
reporting units and the allocation of assets and liabilities to
reporting units to determine the carrying value of each
reporting unit also requires judgment. The fair value of our
reporting units and purchased intangible assets are based on
estimates and assumptions that are believed to be reasonable.
Significant changes to these estimates and assumptions could
adversely impact our conclusions. Actual future results may
differ from those estimates.
Our 2009 annual
goodwill impairment analysis, did not result in an impairment
charge. In 2009, the fair value of our reporting units
significantly exceeded the carrying value. In order to evaluate
the sensitivity of the fair value calculations on the goodwill
impairment test, we applied a hypothetical 100 basis point
increase to the discount rates utilized and a 100 basis
point decrease to the assumed future growth rates of each
reporting unit. This hypothetical change would not result in any
reporting unit failing step one of the impairment test.
New Accounting
Pronouncements
See Note 2,
“New Accounting Pronouncements,” in the Notes to the
Consolidated Financial Statements for a complete discussion of
recent accounting pronouncements. There were no new
pronouncements which we expect to have a material impact on our
financial condition and results of operations in future periods.
Forward-Looking
Statements
Certain statements
contained in this document, including within this
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (most particularly, material
40
Table of Contents
presented under
“Executive Summary,” “2009 Outlook,”
“Known Trends and Uncertainties,” “Restructuring
and Asset Impairment Charges,” “Employee Benefit
Plans,” “Liquidity and Capital Resources,” and
“Critical Accounting Estimates,” that are not
historical facts, constitute “Forward-Looking
Statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements, in
general, predict, forecast, indicate or imply future results,
performance or achievements and generally use words so
indicative. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause
the actual results or performance of ITT and its businesses to
be materially different from that expressed or implied by such
forward-looking statements. Such factors may be described or
referred to from time to time in filings made by ITT with the
Securities and Exchange Commission. Included in those factors
are the following:
| n | General economic and business conditions; | |
| n | Economic, political and social conditions in the countries in which we conduct our businesses; | |
| n | Changes in government defense budgets; | |
| n | Decline in consumer spending; | |
| n | Sales and revenues mix and pricing levels; | |
| n | Availability of adequate labor, commodities, supplies and raw materials; | |
| n | Interest and foreign currency exchange rate fluctuations; | |
| n | Competition and industry capacity and production rates; | |
| n | Ability of third parties, including our commercial partners, counterparties, financial institutions and insurers, to comply with their commitments to us; | |
| n | Our ability to borrow or refinance our existing indebtedness and availability of liquidity sufficient to meet our needs; | |
| n | Acquisitions or divestitures; | |
| n | Personal injury claims; | |
| n | Uncertainties with respect to our estimation of asbestos liability exposure and related insurance recoveries; | |
| n | Our ability to affect restructuring and cost reduction programs and realize savings from such actions; | |
| n | Government regulations and compliance therewith; | |
| n | Changes in technology; | |
| n | Intellectual property matters; | |
| n | Governmental investigations; | |
| n | Potential future employee benefit plan contributions and other employment and pension matters; | |
| n | Contingencies related to actual or alleged environmental contamination, claims and concerns; and | |
| n | Changes in generally accepted accounting principles. |
In addition to these
factors, our business segments may be affected by the more
specific factors referred to below and as included in this
Management’s Discussion and Analysis and under
Item 1A. “Risk Factors.”
The Defense segment
will be affected by factors, including the level of defense
funding by domestic and foreign governments; changes in the
portion of the U.S. Defense budget devoted to products and
services of the types of products we provide; our ability to
receive contract awards; government investigations; government
contracts subject to security and facility clearances; our
ability to obtain and maintain export licenses; our ability to
sell to international markets and our ability to develop and
market products and services for customers outside of
traditional markets.
The Fluid segment
will be affected by factors including broad economic conditions
in markets served; governmental funding levels; raw material
prices; international demand for fluid management products; the
ability to successfully expand into new geographic markets;
weather conditions; and continued demand for replacement parts
and servicing.
The
Motion & Flow segment will be affected by the cyclical
nature of the transportation industry; economic conditions in
its major markets; weather conditions; production levels of
major auto producers; and demand for replacement parts.
ITT assumes no
obligation to update forward-looking statements to reflect
actual results or changes in or additions to the factors
affecting such forward-looking statements.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our
business activities necessarily involves the management of
various financial and market risks, including those related to
changes in interest rates, currency exchange rates, and
commodity prices. ITT uses derivative financial instruments to
mitigate or eliminate some of those risks. We do not hold or
issue derivative instruments for trading or speculative
purposes. Our credit risk associated with these derivative
contracts is generally limited to the unrealized gain on those
contracts with a positive fair market value, should any
counterparty fail to perform as contracted. The counterparties
to our derivative contracts consist of a number of major,
international financial institutions. ITT continually monitors
the credit quality of these financial institutions and does not
expect non-performance by any counterparty.
ITT, at times, uses
interest rate swaps to manage its debt portfolio, the related
financing costs and interest rate structure. As of
December 31, 2009, we did not have any material open
interest rate swap contracts. We consider our current risk
related to market fluctuations in interest rates to be minimal
when considering our debt is largely long-term and fixed-rate in
nature. At December 31, 2009, our short-term debt,
including current maturities of long-term debt and our long-term
debt obligations totaled $75.0 and $1,430.8, respectively. Our
long-term debt almost entirely consists of fixed-rate debt
instruments, with a weighted average interest rate of 5.87% as
of
41
Table of Contents
December 31,
2009. Our variable-rate debt at year’s end included $55.0
of outstanding commercial paper instruments, and had a weighted
average interest rate on December 31, 2009 of 0.21%.
Effective
January 1, 2010,Venezuela was determined to be a highly
Inflationary economy. In addition, on January 8, 2010,
Venezuela announced the devaluation of the Bolivar. Given our
limited presence in Venezuela, the devaluation, as well as the
highly inflationary accounting treatment, is not expected to
have a material impact on our results of operations, financial
position or cash flows.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
See Index to
Consolidated Financial Statements and Schedule herein.
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Attached as exhibits
to the
Form 10-K
are certifications of the Company’s Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), which are required in
accordance with
Rule 13a-14
of the Securities Exchange Act of 1934 (Act), as amended.
| (a) | Evaluation of Disclosure Controls and Procedures |
The Company, with
the participation of various levels of management, including the
CEO and CFO, conducted an evaluation of effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in the
Rules 13a-15(e)
and
15d-15(e)
of
the Act) as of December 31, 2009.
On the basis of this
review, management, including the CEO and the CFO, concluded
that our disclosure controls and procedures are designed, and
are effective, to give reasonable assurance that the information
required to be disclosed in our reports filed under the Act is
assembled, recorded, processed, summarized and reported within
the time periods specified in the SEC’s forms and reports,
and to ensure that information required to be disclosed in the
reports submitted under the Act is accumulated and communicated
to our management, including our CEO and CFO, in a manner that
allows timely decisions regarding required disclosure.
In 2002, the Company
established a Disclosure Committee with responsibility for
considering and evaluating the materiality of information and
reviewing disclosure obligations on a timely basis. The
Disclosure Committee meets regularly, reports to the General
Counsel and the CFO and assists the CEO and the CFO in
designing, establishing, reviewing and evaluating the
Company’s disclosure controls and procedures.
| (b) | Management’s Report on Internal Control Over Financial Reporting |
The Company’s
management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Act. The Company’s internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America.
Internal control
over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in
reasonable detail, completely, accurately and fairly reflect the
transactions and dispositions of the Company’s assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of the financial
statements in accordance with accounting principles generally
accepted in the United States of America; (iii) provide
reasonable assurance that Company receipts and expenditures are
made only in accordance with the authorization of management and
the directors of the Company, and (iv) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of assets that
could have a material effect on the Consolidated Financial
Statements. Internal control over financial reporting includes
the controls themselves, monitoring and internal auditing
practices and actions taken to correct deficiencies as
identified.
Management assessed
the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009. Management
based this assessment on criteria for effective internal control
over financial reporting described in “Internal
Control – Integrated Framework” issued by the
Committee of Sponsoring Organizations (COSO) of the Treadway
Commission. Management’s assessment included an evaluation
of the design of the Company’s internal control over
financial reporting and testing of the operational effectiveness
of its internal control over financial reporting. Management
reviewed the results of its assessment with the Audit Committee
of our Board of Directors.
Based on this
assessment, management determined that, as of December 31,
2009, the Company maintained effective internal control over
financial reporting.
The Company’s
management, including the CEO and the CFO, does not expect that
our internal controls over financial
42
Table of Contents
reporting, because
of inherent limitations, will prevent or detect all errors and
all fraud. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may be
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management’s
assessment, included herein, should be read in conjunction with
the certifications and the report issued by Deloitte &
Touche LLP (Deloitte & Touche), an independent
registered public accounting firm, as stated in their report,
which appears subsequent to Item 9A(d) in this Annual
Report on
Form 10-K.
| (c) | Changes in Internal Control over Financial Reporting |
There have been no
changes in our internal control over financial reporting during
the last fiscal quarter that have materially affected or are
reasonably likely to materially affect the Company’s
internal control over financial reporting, except for continued
enhancements related to the second quarter upgrade to our
financial consolidation system which was used to produce
information contained in this Annual Report on
Form 10-K.
The upgrade was subject to comprehensive testing and review and
we believe that appropriate internal controls are in place with
the upgraded system.
43
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and Shareholders of
ITT Corporation
White Plains, New York
ITT Corporation
White Plains, New York
We have audited the
internal control over financial reporting of ITT Corporation and
subsidiaries (the “Company”) as of December 31,
2009, based on criteria established in
Internal
Control – Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based
on our audit.
We conducted our
audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s
internal control over financial reporting is a process designed
by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons
performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the
inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness
of the internal control over financial reporting to future
periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009,
based on the criteria established in
Internal
Control – Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also
audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated
financial statements as of and for the year ended
December 31, 2009 of the Company and our report dated
February 26, 2010 expressed an unqualified opinion on those
financial statements.
/s/
Deloitte
&
Touche
New York, New York
February 26, 2010
44
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| ITEM 9B. | OTHER INFORMATION |
None.
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information
called for by Item 10 with respect to directors is
incorporated herein by reference to the portions of the
definitive proxy statement for the Company’s 2009 annual
meeting of shareholders to be filed pursuant to
Regulation 14A of the Exchange Act set forth under the
captions “Election of Directors,” “Information
About the Board of Directors” and “Report of the Audit
Committee.”
The information
called for by Item 10 with respect to executive officers is
set forth above in Part I under the caption “Executive
Officers of the Registrant.”
ITT has adopted
corporate governance principles and charters for each of its
standing committees. The principles address director
qualification standards, election and selection of an
independent presiding director as well as responsibilities,
access to management and independent advisors, compensation,
orientation and continuing education, management succession
principles and board and committee self-evaluation. The
corporate governance principles and charters are available on
the company’s website at
www.itt.com/responsibility/governance/ principles-charters. A
copy of the corporate governance principles and charters is also
available to any shareholder who requests a copy from the
Company’s secretary.
ITT has also adopted
a written code of ethics, the “Code of Corporate
Conduct,” which is applicable to all ITT directors,
officers and employees, including the Company’s Chief
Executive Officer, Chief Financial Officer, and Chief Accounting
Officer and other executive officers identified pursuant to this
Item 10 (collectively, the “Selected Officers”).
In accordance with the SEC’s rules and regulations, a copy
of the code was filed as an exhibit to the 2002
Form 10-K
and has been posted on our website and a copy of the code is
also available to any shareholder who requests it. ITT intends
to disclose any changes in or waivers from its code of ethics
applicable to any Selected Officer or director on its website at
www.itt.com.
Pursuant to New York
Stock Exchange (NYSE) Listing Company Manual
Section 303A.12(a), the Company submitted a
Section 12(a) CEO Certification to the NYSE in 2009. The
Company also filed with the SEC, as exhibits to the
Company’s current Annual Report on
Form 10-K,
the certifications required under Section 302 of the
Sarbanes-Oxley Act for its Chief Executive Officer and Chief
Financial Officer.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information
called for by Item 11 is incorporated herein by reference
to the portions of the definitive proxy statement referred to in
Item 10 set forth under the caption “Executive
Compensation.”
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information
called for by Item 12 is incorporated herein by reference
to the portions of the definitive proxy statement referred to in
Item 10 set forth under the captions “Beneficial
Ownership of ITT Corporation Common Stock” and “Equity
Compensation Plan Information.”
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information
called for by Item 13 is incorporated herein by reference
portions to the definitive proxy statement referred to in
Item 10.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The information
called for by Item 14 is incorporated herein by reference
to the portions of the definitive proxy statement referred to in
Item 10 set forth under the caption “Independent
Auditor Fees.”
45
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PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULE
(a) Documents
filed as a part of this report:
| 1. | See Index to Consolidated Financial Statements appearing on page 47 for a list of the financial statements filed as a part of this report. | |
| 2. | See Exhibit Index beginning on pages II-2 for a list of the exhibits filed or incorporated herein as a part of this report. |
| (b) | Financial Statement Schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements filed as part of this report. |
46
Table of Contents
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
| PAGE | ||
| 48 | ||
| 49 | ||
| 50 | ||
| 51 | ||
| 52 | ||
| 53 | ||
|
Notes to Consolidated Financial Statements:
|
||
| 54 | ||
| 57 | ||
| 59 | ||
| 60 | ||
| 63 | ||
| 63 | ||
| 65 | ||
| 66 | ||
| 66 | ||
| 66 | ||
| 67 | ||
| 67 | ||
| 68 | ||
| 68 | ||
| 69 | ||
| 69 | ||
| 75 | ||
| 79 | ||
| 79 | ||
| 85 | ||
| 85 | ||
| 88 | ||
| 89 | ||
47
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and Shareholders of
ITT Corporation
White Plains, New York
ITT Corporation
White Plains, New York
We have audited the
accompanying consolidated balance sheets of ITT Corporation and
subsidiaries (the “Company”) as of December 31,
2009 and 2008, and the related consolidated statements of
income, comprehensive income, cash flows and changes in
shareholders’ equity for each of the three years in the
period ended December 31, 2009. These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such
consolidated financial statements present fairly, in all
material respects, the financial position of ITT Corporation and
subsidiaries as of December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the
United States of America.
We have also
audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s
internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal Control – Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 26, 2010 expressed an
unqualified opinion on the Company’s internal control over
financial reporting.
/s/
DELOITTE
&
TOUCHE
New York, New York
February 26,
2010
48
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
INCOME STATEMENTS
|
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
|
|||||||||||||||
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
Product revenue
|
$ | 8,243.5 | $ | 9,181.2 | $ | 7,057.5 | |||||||||
|
Service revenue
|
2,661.0 | 2,513.6 | 1,945.8 | ||||||||||||
|
Total revenue
|
10,904.5 | 11,694.8 | 9,003.3 | ||||||||||||
|
Costs of product revenue
|
5,527.6 | 6,255.1 | 4,746.4 | ||||||||||||
|
Costs of service revenue
|
2,316.2 | 2,184.3 | 1,688.6 | ||||||||||||
|
Total costs of revenue
|
7,843.8 | 8,439.4 | 6,435.0 | ||||||||||||
|
Gross profit
|
3,060.7 | 3,255.4 | 2,568.3 | ||||||||||||
|
Selling, general and administrative expenses
|
1,576.4 | 1,709.2 | 1,328.9 | ||||||||||||
|
Research and development expenses
|
258.1 | 244.3 | 182.3 | ||||||||||||
|
Asbestos-related costs, net
|
237.5 | 14.3 | 13.8 | ||||||||||||
|
Restructuring and asset impairment charges, net
|
79.3 | 77.5 | 66.1 | ||||||||||||
|
Operating income
|
909.4 | 1,210.1 | 977.2 | ||||||||||||
|
Interest expense
|
99.5 | 140.8 | 114.9 | ||||||||||||
|
Interest income
|
24.3 | 31.3 | 49.6 | ||||||||||||
|
Miscellaneous expense, net
|
9.0 | 13.1 | 13.4 | ||||||||||||
|
Income from continuing operations before income tax expense
|
825.2 | 1,087.5 | 898.5 | ||||||||||||
|
Income tax expense
|
174.5 | 312.3 | 265.5 | ||||||||||||
|
Income from continuing operations
|
650.7 | 775.2 | 633.0 | ||||||||||||
|
Discontinued operations:
|
|||||||||||||||
|
(Loss) income from discontinued operations, including tax
benefit of $5.1, $6.9 and $26.1, respectively
|
(7.0 | ) | 19.5 | 109.1 | |||||||||||
|
Net income
|
$ | 643.7 | $ | 794.7 | $ | 742.1 | |||||||||
|
Earnings Per Share:
|
|||||||||||||||
|
Income from continuing operations:
|
|||||||||||||||
|
Basic
|
$ | 3.56 | $ | 4.26 | $ | 3.49 | |||||||||
|
Diluted
|
$ | 3.54 | $ | 4.21 | $ | 3.43 | |||||||||
|
Discontinued operations:
|
|||||||||||||||
|
Basic
|
$ | (0.03 | ) | $ | 0.11 | $ | 0.60 | ||||||||
|
Diluted
|
$ | (0.04 | ) | $ | 0.11 | $ | 0.59 | ||||||||
|
Net income:
|
|||||||||||||||
|
Basic
|
$ | 3.53 | $ | 4.37 | $ | 4.09 | |||||||||
|
Diluted
|
$ | 3.50 | $ | 4.32 | $ | 4.02 | |||||||||
|
Cash dividends declared per common share
|
$ | 0.85 | $ | 0.70 | $ | 0.56 | |||||||||
|
Average Common Shares – Basic
|
182.5 | 181.9 | 181.5 | ||||||||||||
|
Average Common Shares – Diluted
|
183.9 | 184.0 | 184.5 | ||||||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements.
49
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
(IN MILLIONS)
|
|||||||||||||||
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
Net income
|
$ | 643.7 | $ | 794.7 | $ | 742.1 | |||||||||
|
Other comprehensive income:
|
|||||||||||||||
|
Net foreign currency translation adjustments
|
126.2 | (221.2 | ) | 276.1 | |||||||||||
|
Changes in postretirement benefit plans, net of tax expense
(benefit) of $88.8, $(781.1) and $126.3, respectively
|
145.9 | (1,337.7 | ) | 300.9 | |||||||||||
|
Unrealized gain (loss) on investment securities, net of tax
expense of $7.5, $0.0 and $0.5, respectively
|
11.5 | (0.1 | ) | 1.0 | |||||||||||
|
Other comprehensive income (loss)
|
283.6 | (1,559.0 | ) | 578.0 | |||||||||||
|
Comprehensive income (loss)
|
$ | 927.3 | $ | (764.3 | ) | $ | 1,320.1 | ||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements.
50
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
|
||||||||||
| DECEMBER 31 | 2009 | 2008 | ||||||||
|
Assets
|
||||||||||
|
Current assets:
|
||||||||||
|
Cash and cash equivalents
|
$ | 1,215.6 | $ | 964.9 | ||||||
|
Receivables, net
|
1,796.7 | 1,961.1 | ||||||||
|
Inventories, net
|
802.3 | 803.8 | ||||||||
|
Deferred income taxes
|
234.1 | 203.4 | ||||||||
|
Other current assets
|
207.1 | 131.0 | ||||||||
|
Total current assets
|
4,255.8 | 4,064.2 | ||||||||
|
Plant, property and equipment, net
|
1,051.0 | 993.9 | ||||||||
|
Deferred income taxes
|
583.2 | 608.5 | ||||||||
|
Goodwill
|
3,864.0 | 3,831.3 | ||||||||
|
Other intangible assets, net
|
518.9 | 616.5 | ||||||||
|
Asbestos-related assets
|
604.3 | 201.2 | ||||||||
|
Other non-current assets
|
251.9 | 164.6 | ||||||||
|
Total non-current assets
|
6,873.3 | 6,416.0 | ||||||||
|
Total assets
|
$ | 11,129.1 | $ | 10,480.2 | ||||||
|
Liabilities and Shareholders’ Equity
|
||||||||||
|
Current liabilities:
|
||||||||||
|
Accounts payable
|
$ | 1,291.3 | $ | 1,234.6 | ||||||
|
Accrued expenses
|
1,034.7 | 991.2 | ||||||||
|
Accrued taxes
|
105.0 | 30.2 | ||||||||
|
Short-term debt and current maturities of long-term debt
|
75.0 | 1,679.0 | ||||||||
|
Postretirement benefits
|
73.2 | 68.8 | ||||||||
|
Deferred income taxes
|
36.4 | 26.7 | ||||||||
|
Total current liabilities
|
2,615.6 | 4,030.5 | ||||||||
|
Postretirement benefits
|
1,788.5 | 2,141.6 | ||||||||
|
Long-term debt
|
1,430.8 | 467.9 | ||||||||
|
Asbestos-related liabilities
|
867.2 | 225.9 | ||||||||
|
Other non-current liabilities
|
548.7 | 554.4 | ||||||||
|
Total non-current liabilities
|
4,635.2 | 3,389.8 | ||||||||
|
Total liabilities
|
7,250.8 | 7,420.3 | ||||||||
|
Shareholders’ Equity:
|
||||||||||
|
Common stock: Authorized – 500 shares,
$1 par value per share, outstanding –
182.9 shares and 181.7 shares,
respectively
(1)
|
181.6 | 180.6 | ||||||||
|
Retained earnings
|
4,736.8 | 4,203.0 | ||||||||
|
Accumulated other comprehensive (loss) income:
|
||||||||||
|
Postretirement benefits
|
(1,388.2 | ) | (1,534.1 | ) | ||||||
|
Cumulative translation adjustments
|
336.0 | 209.8 | ||||||||
|
Unrealized gain on investment securities
|
12.1 | 0.6 | ||||||||
|
Total accumulated other comprehensive loss
|
(1,040.1 | ) | (1,323.7 | ) | ||||||
|
Total shareholders’ equity
|
3,878.3 | 3,059.9 | ||||||||
|
Total liabilities and shareholders’ equity
|
$ | 11,129.1 | $ | 10,480.2 | ||||||
| (1) | Shares outstanding include unvested restricted common stock of 1.3 and 1.1 at December 31, 2009 and 2008, respectively. |
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements.
51
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(IN MILLIONS)
|
|||||||||||||||
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
Operating Activities
|
|||||||||||||||
|
Net income
|
$ | 643.7 | $ | 794.7 | $ | 742.1 | |||||||||
|
Less: (Loss) income from discontinued operations
|
(7.0 | ) | 19.5 | 109.1 | |||||||||||
|
Income from continuing operations
|
650.7 | 775.2 | 633.0 | ||||||||||||
|
Adjustments to income from continuing operations:
|
|||||||||||||||
|
Depreciation and amortization
|
292.6 | 278.3 | 185.4 | ||||||||||||
|
Stock-based compensation
|
31.3 | 30.8 | 34.6 | ||||||||||||
|
Asbestos-related costs, net
|
237.5 | 14.3 | 13.8 | ||||||||||||
|
Restructuring and asset impairment charges, net
|
79.3 | 77.5 | 66.1 | ||||||||||||
|
Payments for restructuring
|
(81.9 | ) | (54.1 | ) | (51.5 | ) | |||||||||
|
Contributions to pension plans
|
(161.0 | ) | (24.1 | ) | (83.1 | ) | |||||||||
|
Change in receivables
|
187.2 | (112.9 | ) | (236.7 | ) | ||||||||||
|
Change in inventories
|
20.9 | 70.4 | 111.8 | ||||||||||||
|
Change in accounts payable
|
29.9 | (40.4 | ) | 153.0 | |||||||||||
|
Change in accrued expenses
|
3.0 | 101.7 | (15.8 | ) | |||||||||||
|
Change in accrued and deferred taxes
|
(9.2 | ) | 19.7 | (34.1 | ) | ||||||||||
|
Change in other assets
|
(21.2 | ) | (6.0 | ) | (9.1 | ) | |||||||||
|
Change in other liabilities
|
(13.1 | ) | (6.9 | ) | 19.6 | ||||||||||
|
Other, net
|
23.7 | (3.9 | ) | 11.1 | |||||||||||
|
Net Cash – Operating activities
|
1,269.7 | 1,119.6 | 798.1 | ||||||||||||
|
Investing Activities
|
|||||||||||||||
|
Capital expenditures
|
(271.6 | ) | (248.7 | ) | (239.3 | ) | |||||||||
|
Acquisitions, net of cash acquired
|
(34.3 | ) | (275.7 | ) | (2,009.2 | ) | |||||||||
|
Proceeds from sale of assets and businesses
|
20.6 | 21.6 | 283.6 | ||||||||||||
|
Other, net
|
0.2 | (0.1 | ) | 6.8 | |||||||||||
|
Net Cash – Investing activities
|
(285.1 | ) | (502.9 | ) | (1,958.1 | ) | |||||||||
|
Financing Activities
|
|||||||||||||||
|
Short-term debt, net
|
(1,603.0 | ) | (1,229.0 | ) | 2,311.9 | ||||||||||
|
Long-term debt repaid
|
(29.3 | ) | (23.3 | ) | (15.2 | ) | |||||||||
|
Long-term debt issued
|
992.5 | 0.6 | 0.5 | ||||||||||||
|
Repurchase of common stock
|
– | (75.0 | ) | (299.0 | ) | ||||||||||
|
Proceeds from issuance of common stock
|
14.7 | 34.4 | 65.4 | ||||||||||||
|
Dividends paid
|
(147.9 | ) | (120.9 | ) | (96.6 | ) | |||||||||
|
Tax benefit from stock option exercises and restricted stock
award lapses
|
3.0 | 6.7 | 15.0 | ||||||||||||
|
Other, net
|
(1.9 | ) | (0.9 | ) | (0.9 | ) | |||||||||
|
Net Cash – Financing activities
|
(771.9 | ) | (1,407.4 | ) | 1,981.1 | ||||||||||
|
Exchange Rate Effects on Cash and Cash Equivalents
|
40.0 | (73.4 | ) | 103.0 | |||||||||||
|
Net Cash – Discontinued Operations:
|
|||||||||||||||
|
Operating Activities
|
(2.0 | ) | (9.1 | ) | (16.2 | ) | |||||||||
|
Investing Activities
|
– | (1.9 | ) | (4.0 | ) | ||||||||||
|
Financing Activities
|
– | – | (1.0 | ) | |||||||||||
|
Net change in cash and cash equivalents
|
250.7 | (875.1 | ) | 902.9 | |||||||||||
|
Cash and cash equivalents – beginning of year
|
964.9 | 1,840.0 | 937.1 | ||||||||||||
|
Cash and Cash Equivalents – End of Year
|
$ | 1,215.6 | $ | 964.9 | $ | 1,840.0 | |||||||||
|
Supplemental Disclosures of Cash Flow Information
|
|||||||||||||||
|
Cash paid during the year for:
|
|||||||||||||||
|
Interest
|
$ | 89.6 | $ | 135.5 | $ | 96.0 | |||||||||
|
Income taxes (net of refunds received)
|
$ | 181.7 | $ | 281.6 | $ | 313.6 | |||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements.
52
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
(IN MILLIONS)
|
SHARES | DOLLARS | ||||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
Common Stock
|
||||||||||||||||||||||||||||
|
Beginning balance
|
180.6 | 180.7 | 182.6 | $ | 180.6 | $ | 180.7 | $ | 182.6 | |||||||||||||||||||
|
Stock incentive plans
|
1.0 | 1.1 | 2.2 | 1.0 | 1.1 | 2.2 | ||||||||||||||||||||||
|
Repurchases
|
– | (1.2 | ) | (4.1 | ) | – | (1.2 | ) | (4.1 | ) | ||||||||||||||||||
|
Ending balance
|
181.6 | 180.6 | 180.7 | $ | 181.6 | $ | 180.6 | $ | 180.7 | |||||||||||||||||||
|
Retained Earnings
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$ | 4,203.0 | $ | 3,528.8 | $ | 3,029.5 | ||||||||||||||||||||||
|
Net income
|
643.7 | 794.7 | 742.1 | |||||||||||||||||||||||||
|
Cash dividends declared on common stock
|
(155.1 | ) | (127.3 | ) | (101.7 | ) | ||||||||||||||||||||||
|
Repurchase of common stock
|
– | (75.0 | ) | (251.2 | ) | |||||||||||||||||||||||
|
Stock-based award activity
|
45.2 | 81.8 | 110.1 | |||||||||||||||||||||||||
|
Ending balance
|
$ | 4,736.8 | $ | 4,203.0 | $ | 3,528.8 | ||||||||||||||||||||||
|
Accumulated Other Comprehensive (Loss) Income
|
||||||||||||||||||||||||||||
|
Postretirement benefit plans:
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$ | (1,534.1 | ) | $ | (196.4 | ) | $ | (497.3 | ) | |||||||||||||||||||
|
Changes in postretirement benefit plans, net of tax
|
145.9 | (1,337.7 | ) | 300.9 | ||||||||||||||||||||||||
|
Ending balance
|
$ | (1,388.2 | ) | $ | (1,534.1 | ) | $ | (196.4 | ) | |||||||||||||||||||
|
Cumulative translation adjustments:
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$ | 209.8 | $ | 431.0 | $ | 154.9 | ||||||||||||||||||||||
|
Reclassification adjustment for (gains) losses included in net
income
|
– | (6.5 | ) | 40.4 | ||||||||||||||||||||||||
|
Foreign currency translation
|
126.2 | (214.7 | ) | 235.7 | ||||||||||||||||||||||||
|
Ending balance
|
$ | 336.0 | $ | 209.8 | $ | 431.0 | ||||||||||||||||||||||
|
Unrealized gain (loss) on investment securities:
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$ | 0.6 | $ | 0.7 | $ | (0.3 | ) | |||||||||||||||||||||
|
Unrealized gain (loss)
|
11.5 | (0.1 | ) | 1.0 | ||||||||||||||||||||||||
|
Ending balance
|
$ | 12.1 | $ | 0.6 | $ | 0.7 | ||||||||||||||||||||||
|
Total accumulated other comprehensive (loss) income
|
$ | (1,040.1 | ) | $ | (1,323.7 | ) | $ | 235.3 | ||||||||||||||||||||
|
Total Shareholders’ Equity
|
$ | 3,878.3 | $ | 3,059.9 | $ | 3,944.8 | ||||||||||||||||||||||
The
accompanying Notes to Consolidated Financial Statements are an
integral part of the above statements.
53
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS AND SHARE AMOUNTS IN MILLIONS, UNLESS OTHERWISE STATED)
(DOLLARS AND SHARE AMOUNTS IN MILLIONS, UNLESS OTHERWISE STATED)
NOTE 1
Summary of
Significant Accounting Policies
Consolidation
Principles
ITT Corporation is a
global multi-industry leader in high-technology engineering and
manufacturing, operating through three principal business
segments; Defense Electronics & Services (Defense
segment), Fluid Technology (Fluid segment) and
Motion & Flow Control (Motion & Flow
segment). The Consolidated Financial Statements include the
accounts of ITT Corporation and all majority-owned subsidiaries,
and are prepared in conformity with accounting principles
generally accepted in the United States of America (GAAP).
Unless the context otherwise indicates, references herein to
“ITT,” “the Company,” and such words as
“we,” “us,” and “our” include ITT
Corporation and its subsidiaries. ITT consolidates companies in
which it owns more than 50% of the voting shares or we are
considered the primary beneficiary. The results of companies
acquired or disposed of during the fiscal year are included in
the Consolidated Financial Statements from the effective date of
acquisition or up to the date of disposal. All intercompany
transactions have been eliminated. Certain prior year amounts
have been reclassified to conform to the current year
presentation.
Use of
Estimates
The preparation of
financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements,
and the reported amounts of revenue and expenses during the
reporting period. Estimates are revised as additional
information becomes available. Significant estimates and
assumptions are used for, but not limited to, revenue
recognition, pension benefits, income tax contingency accruals
and valuation allowances, asbestos-related liabilities and
insurance recoveries, asset impairment, and product liability
and other litigation-related accruals. Actual results could
differ from these estimates.
Revenue
Recognition
ITT recognizes
revenue as services are rendered and when title transfers for
products, subject to any special terms and conditions of
specific contracts. The Defense segment and certain businesses
within the Fluid segment generally recognize revenue and
anticipated profits under long-term fixed-price contracts based
on the units of delivery, the completion of scheduled
performance milestones, or percentage of costs incurred to total
costs. Estimated contract profits are recorded into earnings in
proportion to recorded revenue. During the performance of such
contracts, estimated final contract prices and costs are
periodically reviewed and revisions are made as required. The
effect of these revisions to estimates is included in earnings
in the period in which the revisions are made. Revenue under
cost-reimbursement contracts are recorded as costs are incurred
and include estimated earned fees or profits calculated on the
basis of the relationship between costs incurred and total
estimated costs. For
time-and-material
contracts, revenue is recognized to the extent of billable rates
times hours incurred plus material and other reimbursable costs
incurred. The fees under certain contracts may be increased or
decreased in accordance with cost or performance incentive
provisions which measure actual performance against established
targets or other criteria. Such incentive fee awards or
penalties are included in sales when there is sufficient
information to reasonably assess anticipated contract
performance. Anticipated losses on contracts are recorded when
first identified by ITT. Revenue arising from the claims process
is not recognized either as income or as an offset against a
potential loss until it can be reliably estimated and
realization is probable.
Accruals for
estimated expenses related to warranties are made at the time
products are sold or services are rendered and are recorded as a
component of cost of revenue. These accruals are established
using historical information on the nature, frequency and
average cost of warranty claims and estimates of future costs.
Research and
Development
Significant costs
are incurred each year in connection with research and
development (R&D) programs that are expected to contribute
to future earnings. R&D costs not specifically covered by
contracts are charged to expense as incurred and totaled $258.1,
$244.3 and $182.3 for 2009, 2008 and 2007, respectively.
R&D costs incurred under contracts with customers are
charged directly to the related contracts and are reported as a
component of costs of revenue.
Cash and Cash
Equivalents
ITT considers all
highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. Included within
cash and cash equivalents are marketable securities of $72.3 and
$28.3 as of December 31, 2009 and 2008, respectively.
54
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Inventories
Inventories are
recorded at the lower of cost or market generally on a
first-in,
first-out (FIFO) basis or estimated net realizable value. A full
absorption policy is employed using standard cost techniques
that are periodically reviewed and adjusted when required.
Potential losses from obsolete and slow-moving inventories are
recorded when identified. Domestic inventories valued under the
last-in,
first-out (LIFO) method represent 6.4% and 7.6% of total 2009
and 2008 inventories, respectively. There would not have been a
material difference in the value of inventories if the FIFO
method had been used to value all inventories.
Inventoried costs
related to long-term contracts are stated at the actual
production cost, including overhead and other related
non-recurring costs incurred to date reduced by amounts
identified with revenue recognized on units delivered or
progress completed. General and administrative costs applicable
to cost-reimbursement type contracts are also included in
inventories. Inventoried costs relating to long-term contracts
and programs are reduced by charging any amounts in excess of
estimated realizable value to cost of sales.
Plant,
Property and Equipment
Plant, property and
equipment, including capitalized interest applicable to major
project expenditures, are recorded at cost. For financial
reporting purposes, depreciation is provided on a straight-line
basis over the economic useful lives of the assets involved as
follows: buildings and improvements – five to
40 years, machinery and equipment – two to
10 years, furniture and office equipment – three
to seven years, and other – five to 40 years.
Fully depreciated assets are retained in property and
accumulated depreciation accounts until disposal.
Plant, property and
equipment are tested for impairment whenever events or changes
in circumstances indicate the carrying value of an asset may not
be recoverable. We assess the recoverability of long-lived
assets based on the undiscounted future cash flow the assets are
expected to generate and recognize an impairment loss when
estimated undiscounted future cash flows expected to result from
the use of the asset plus net proceeds expected from disposition
of the asset, if any, are less than the carrying value of the
asset. When an impairment is identified, we reduce the carrying
amount of the asset to its estimated fair value based on a
discounted cash flow approach or, when available and
appropriate, to comparable market values.
Goodwill and
Intangible Assets
Goodwill represents
purchase consideration paid in a business combination that
exceeds the values assigned to the net assets of acquired
businesses. Intangible assets include customer relationships,
proprietary technology, trademarks, patents and other intangible
assets. Certain of our intangible assets have an indefinite
life, namely brands and trademarks. Intangible assets with a
finite life are amortized on a straight-line basis over an
estimated economic useful life, which generally ranges from
15-20 years.
Goodwill and
indefinite-lived intangibles are not amortized, but instead are
reviewed for impairment annually (or more frequently if
impairment indicators arise, such as changes to the reporting
unit structure, significant adverse changes in the business
climate or an adverse action or assessment by a regulator). We
conduct our annual impairment testing on the first day of the
fourth quarter. The impairment test is a two-step test for
goodwill. In the first step, the fair value of each reporting
unit is compared to its carrying value. If the fair value of the
reporting unit exceeds the carrying value of the net assets
assigned to that reporting unit, goodwill is not impaired and we
are not required to perform further testing. If the carrying
value of the net assets assigned to the reporting unit exceed
its fair value, then the second step of the impairment test is
performed in order to measure the impairment loss to be
recorded. If the carrying value of a reporting unit’s
goodwill exceeds its implied fair value, then we record an
impairment loss equal to the difference. We estimate the fair
value of our reporting units and purchased intangible assets
with indefinite lives using an income approach. Under the income
approach, we calculate fair value based on the present value of
estimated future cash flows.
Foreign
Currency Translation
Balance sheet
accounts are translated at the exchange rate in effect at the
end of each period; income statement accounts are translated at
the average rates of exchange prevailing during the period.
Gains and losses on foreign currency translations are reflected
in the cumulative translation adjustments component of
shareholders’ equity. The national currencies of our
foreign companies are generally the functional currencies. Net
(losses)/gains from foreign currency transactions are reported
currently in selling, general and administrative expenses
(SG&A) and were ($1.2), $3.9 and $1.7 in 2009, 2008, and
2007, respectively.
Postretirement
Plans
ITT sponsors
numerous pension and other employee-related defined benefit
plans (collectively, postretirement benefit plans) for employees
around the world. The determination of projected benefit
obligations and the recognition of expenses related to
postretirement plans are dependent on various
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ITT CORPORATION AND
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
assumptions. The
major assumptions primarily relate to discount rates, long-term
expected rates of return on plan assets, rate of future
compensation increases, mortality, termination, health care
inflation trend rates and other factors. Management develops
each assumption using relevant company experience in conjunction
with market-related data for each individual country in which
such plans exist. All assumptions are reviewed periodically with
third-party actuarial consultants and adjusted as necessary. For
the recognition of net periodic pension cost, the calculation of
the long-term expected return on plan assets is generally
derived using a market-related value of plan assets based on
yearly average asset values at the measurement date over the
last five years. Actual results that differ from our assumptions
are accumulated and amortized over the estimated future working
life of the plan participants.
The funded or
unfunded position of each plan is recorded on our balance sheet.
Actuarial gains and losses and prior service costs or credits
that have not yet been recognized through net income are
recorded in accumulated other comprehensive income within
shareholders’ equity, net of taxes, until they are
amortized as a component of net periodic postretirement cost.
The fair value of plan assets is determined based on market
prices or estimated fair value at the measurement date.
Stock-Based
Compensation
Stock-based awards
issued to employees and non-employee directors include
non-qualified stock options, restricted stock awards and certain
liability-based awards. Compensation costs resulting from
share-based payment transactions are recognized primarily within
SG&A, at fair value over the requisite service period
(typically three years). The calculated compensation cost is
adjusted based on an estimate of awards ultimately expected to
vest. The fair value of a non-qualified stock option is
determined on the date of grant using a binomial lattice pricing
model incorporating multiple and variable assumptions over time,
including assumptions such as employee exercise patterns, stock
price volatility and changes in dividends. The fair value of
restricted stock awards are determined using the closing price
of the Company’s common stock on date of grant. The fair
value of our liability-based awards, including cash awards under
our Long-Term Incentive Plan, is reassessed at the end of each
reporting period. Similarly the liability maintained at the end
of each reporting period corresponds to the fair value of the
liability-based awards ultimately expected to vest.
Income
Taxes
We determine the
provision for income taxes using the asset and liability
approach. Under this approach, deferred income taxes represent
the expected future tax consequences of temporary differences
between the carrying amounts and tax basis of assets and
liabilities. We record a valuation allowance to reduce deferred
tax assets when uncertainty regarding their realizability exists.
We recognize tax
benefits from uncertain tax positions only if it is more likely
than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the Consolidated
Financial Statements from such positions are measured based on
the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement.
Asbestos-Related
Contingencies and Insurance Receivables
ITT is a defendant
in product liability lawsuits alleging personal injury due to
asbestos exposure. We recognize an undiscounted liability for
any asbestos-related contingency that is probable of occurrence
and reasonably estimable. We have accrued for the estimated
value of current pending claims and unasserted claims to be
filed over the next 10 years, including legal fees. Factors
utilized in determining the liability for both pending and
unasserted claims include: disease type, average settlement
costs, percentage of claims settled or dismissed, and the number
of new claims filed against the Company. In light of the
uncertainties and variables inherent in the long-term projection
of the Company’s total asbestos liability, although it is
probable that the Company will incur additional costs for
asbestos claims filed beyond the next 10 years, we do not
believe there is a reasonable basis for estimating those costs
at this time. As part of our ongoing review of asbestos claims,
each quarter we will reassess the projected liability of
unasserted asbestos claims to be filed over the next
10 years based upon the trends we are experiencing in those
factors to which the liability is most sensitive, maintaining a
rolling 10-year projection. Annually, in the third quarter each
year, we will conduct a detailed study with the assistance of an
outside consultant to review and update as appropriate the
underlying assumptions used in our liability estimate.
Additionally, we will periodically reassess the time horizon
over which a reasonable estimate of unasserted claims can be
projected.
In connection with
the recognition of liabilities for asbestos-related matters, we
record asbestos-related insurance recoveries that are probable.
In assessing the probability of
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ITT CORPORATION AND
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
insurance recovery,
we make judgments concerning insurance coverage that we believe
are reasonable and consistent with our historical experience
with our insurers, our knowledge of any pertinent solvency
issues surrounding insurers, various judicial determinations
relevant to our insurance programs and our consideration of the
impacts of any settlements with our insurers.
Commitments
and Contingencies
We record accruals
for commitments and loss contingencies for those which are both
probable and the amount can be reasonably estimated. In
addition, legal fees are accrued for cases where a loss is
probable and the related fees can be reasonably estimated.
Accruals for
environmental matters are recorded on a site by site basis when
it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated, based on current
law and existing technologies. Our estimated liability is
reduced to reflect the anticipated participation of other
potentially responsible parties in those instances where it is
probable that such parties are legally responsible and
financially capable of paying their respective shares of the
relevant costs. These accruals are adjusted periodically as
assessment and remediation efforts progress or as additional
technical or legal information becomes available. Actual costs
to be incurred at identified sites in future periods may vary
from the estimates, given inherent uncertainties in evaluating
environmental exposures. Accruals for environmental liabilities
are primarily included in other liabilities at undiscounted
amounts and exclude claims for recoveries from insurance
companies or other third parties. Recoveries from insurance
companies or other third parties are included in other assets
when the recovery is probable.
Earnings Per
Share
Basic earnings per
common share considers the weighted average number of common
shares outstanding, as well as outstanding unvested share-based
payment awards that contain rights to nonforfeitable dividends.
Diluted earnings per share considers the outstanding shares
utilized in the basic earnings per share calculation as well as
the dilutive effect of outstanding stock options and restricted
stock that do not contain rights to nonforfeitable dividends.
Fair Value
Measurements
We determine fair
value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction. We use a
hierarchical structure to prioritize the inputs to valuation
techniques used to measure fair value into three broad levels.
The fair value hierarchy gives the highest priority to quoted
prices in active markets for identical assets or liabilities
(Level 1), then to quoted market prices for similar assets
or liabilities in active markets (Level 2) and gives
the lowest priority to unobservable inputs (Level 3).
Derivative
Financial Instruments
The nature of our
business activities necessarily involves the management of
various financial and market risks, including those related to
changes in currency exchange rates, interest rates and commodity
prices. ITT uses derivative financial instruments to mitigate or
eliminate some of those risks. We do not hold or issue
derivative instruments for trading or speculative purposes. Our
counterparty credit risk associated with these derivative
contracts is generally limited to the net unrealized gain on
those contracts with a positive fair market value, should any
counterparty fail to perform as contracted. The counterparties
to our derivative contracts consist of a number of major,
international financial institutions.
We record
derivatives at their fair value as either a current asset or
current liability. We include adjustments to reflect changes in
fair values of derivatives in earnings. At December 31,
2009 and 2008, we had foreign currency forward contracts with
notional amounts of $177.7 and $153.1, respectively, to hedge
the value of recognized assets, liabilities and firm
commitments. The fair values associated with the foreign
currency contracts have been determined using the net position
of the contracts and the applicable spot rates and forward rates
as of the reporting date. The amount of gains and losses
recorded related to our foreign currency exchange contracts and
the net fair value of our outstanding contracts were not
material as of and for the years ended 2009, 2008 and 2007.
ITT, at times, uses
interest rate swaps to manage its debt portfolio, the related
financing costs and interest rate structure. Interest rate swaps
involve the periodic exchange of payments without the exchange
of underlying principal or notional amounts. Net payments are
recognized as an adjustment to interest expense. When the swaps
are terminated, unrealized gains or losses are deferred and
amortized over the shorter of the remaining original term of the
hedging instrument or the remaining life of the underlying debt
instrument. Such gains or losses are reflected in net interest
expense. As of December 31, 2009 and 2008 we did not have
any material open interest rate swap contracts.
NOTE 2
New Accounting
Pronouncements
On July 1,
2009, the GAAP hierarchy was codified under the Accounting
Standards Codification (Codification or ASC). The Codification
is now considered the single source of
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ITT CORPORATION AND
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
authoritative
U.S. accounting and reporting standards, except for
additional authoritative rules and interpretive releases issued
by the Securities and Exchange Commission (SEC). The
Codification was developed to provide a logical organization of
GAAP pronouncements by topic.
Pronouncements
Not Yet Adopted
In October 2009, the
Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU)
2009-13,
which amended the accounting requirements for multiple element
arrangements under the
Revenue Recognition Topic
, ASC
605-25.
The
objective of this update is to address the accounting for
multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than
as a combined unit. The amendments establish a hierarchy for
determining the selling price of a deliverable and will allow
for the separation of products and services in more instances
than previously permitted. The guidance provided within ASU
2009-13
is
effective for fiscal years beginning on or after June 15,
2010 and allows for either prospective or retrospective
application, with early adoption permitted. We are currently
evaluating the impact that adoption of this guidance will have
on our Consolidated Financial Statements.
In October 2009, the
FASB issued ASU
2009-14
which amended the accounting requirements for revenue
recognition under the
Software Topic
, ASC
985-605.
The
objective of this update is to address the accounting for
revenue arrangements that contain tangible products and
software. Specifically, products that contain software that is
“more than incidental” to the product as a whole will
be removed from the scope of ASC subtopic
985-605.
The
amendments align the accounting for these revenue transaction
types with the amendments under ASU
2009-13
mentioned above. The guidance provided within ASU
2009-14
is
effective for fiscal years beginning on or after June 15,
2010 and allows for either prospective or retrospective
application, with early adoption permitted. We are currently
evaluating the impact that adoption of this guidance will have
on our Consolidated Financial Statements.
Effective
January 1, 2010, the
Consolidation Topic
, ASC
810-10
Variable Interest Entities, amends requirements pertaining to
the consolidation of variable interest entities (VIE(s)). The
amendments include replacing the quantitative-based risks and
rewards calculation for determining which enterprise, if any,
has a controlling financial interest in a VIE(s) with an
approach focused on identifying which enterprise has the power
to direct the activities of a VIE(s) that most significantly
impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right
to receive benefits from the entity. In addition, the amended
guidance will require ongoing assessments of whether an
enterprise is the primary beneficiary of a VIE(s) and requires
additional disclosures about an enterprise’s involvement in
VIE(s). This pronouncement was adopted on January 1, 2010
and will not have a material impact on our Consolidated
Financial Statements based on our current involvement in
variable interest entities.
Recently
Adopted Accounting Pronouncements
In September 2009,
the FASB issued ASU
2009-12
which provides guidance under the
Fair Value Measurements and
Disclosures Topic
, ASC
820-10.
The
new guidance provides investors a practical expedient for
measuring the fair value of investments in certain entities that
calculate net asset value per share (NAV). This ASU is effective
for periods ending after December 15, 2009. Adoption did
not have a material effect on our Consolidated Financial
Statements.
In August 2009, the
FASB issued ASU
2009-05
which provides additional guidance on the application of fair
value techniques for liabilities under the
Fair Value
Measurements and Disclosures Topic
, ASC
820-10.
The
guidance clarifies that the quoted price for the liability when
traded as an asset in an active market is a Level 1
measurement, when no adjustment to the quoted price is required.
In the absence of a Level 1 (quoted price) measurement, an
entity must use one or more valuation techniques to estimate
fair value in a manner consistent with the principles in ASC
820. The requirements under this ASU were effective for our
fourth quarter period beginning October 1, 2009. Adoption
did not have a material effect on our Consolidated Financial
Statements.
Effective
January 1, 2009, the
Earnings Per Share Topic
, ASC
260, clarified that all outstanding unvested share-based payment
awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders
and therefore are considered participating securities for
purposes of computing earnings per share. Entities that have
participating securities that are not convertible into common
stock are required to use the “two-class” method of
computing earnings per share. The two-class method is an
earnings allocation formula that determines earnings per share
for each class of common stock and participating security
according to dividends declared (or accumulated) and
participation rights in undistributed earnings. Application of
the clarifying guidance did not have a material effect on our
financial statements. For comparability purposes, prior period
earnings per share
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
amounts have been
adjusted to reflect the impact of adoption as follows:
| 2008 | 2007 | |||||||||
|
Earnings Per Share – As Previously Reported
|
||||||||||
|
Basic earnings per share from continuing operations
|
$ | 4.29 | $ | 3.51 | ||||||
|
Basic earnings per share from net income
|
$ | 4.40 | $ | 4.11 | ||||||
|
Average common shares outstanding – Basic
|
180.7 | 180.6 | ||||||||
|
Diluted earnings per share from continuing operations
|
$ | 4.23 | $ | 3.44 | ||||||
|
Diluted earnings per share from net income
|
$ | 4.33 | $ | 4.03 | ||||||
|
Average common shares outstanding – Diluted
|
183.4 | 184.0 | ||||||||
|
Earnings Per Share – As Adjusted
|
||||||||||
|
Basic earnings per share from continuing operations
|
$ | 4.26 | $ | 3.49 | ||||||
|
Basic earnings per share from net income
|
$ | 4.37 | $ | 4.09 | ||||||
|
Average common shares outstanding – Basic
|
181.9 | 181.5 | ||||||||
|
Diluted earnings per share from continuing operations
|
$ | 4.21 | $ | 3.43 | ||||||
|
Diluted earnings per share from net income
|
$ | 4.32 | $ | 4.02 | ||||||
|
Average common shares outstanding – Diluted
|
184.0 | 184.5 | ||||||||
Effective
January 1, 2009, the
Business Combinations Topic
,
ASC 805, provided amended guidance pertaining to the method of
applying the acquisition method of accounting in a number of
significant areas. These amendments included that acquisition
costs will generally be expensed as incurred; noncontrolling
interests will be valued at fair value at the acquisition date;
in-process research and development will be recorded at fair
value as an indefinite-lived intangible asset at the acquisition
date; restructuring costs associated with a business combination
will generally be expensed subsequent to the acquisition date;
and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date generally
will affect income tax expense. While the new business
combination accounting guidance did not have a material impact
on our Consolidated Financial Statements upon adoption, the
effects on future periods will depend upon the nature and
significance of future business combinations.
Effective
January 1, 2009, the
Consolidations Topic
, ASC
810-10-45,
Nature and Classification of the Noncontrolling Interest in the
Consolidated Statement of Financial Position, requires the
recognition of a noncontrolling interest (previously a minority
interest) as a separate component of the equity section within
the consolidated balance sheet. This guidance also requires the
amount of consolidated net income attributable to the parent and
the noncontrolling interest be clearly identified and presented
within the consolidated statement of income, as well as amends
certain consolidation requirements to conform with ASC 805,
Business Combinations. Adoption did not have a material effect
on our Consolidated Financial Statements.
NOTE 3
Acquisitions
2009
Acquisitions
During 2009, we
spent $34.3, net of cash acquired, on acquisitions that were not
material individually or in the aggregate to our results of
operations or financial position. The most significant of these
acquisitions was Laing GmbH (Laing), which we acquired in May of
2009. Laing, a privately held producer of energy-efficient
circulator pumps primarily used in residential and commercial
plumbing and heating, ventilating and air conditioning systems,
was fully integrated into the Fluid segment during 2009.
2008
Acquisitions
During 2008, we
spent $49.2, net of cash acquired, on acquisitions that were not
material individually or in the aggregate to our results of
operations or financial position. Additionally, we spent $226.5
in connection with companies acquired during 2007. See below for
further information.
2007
Acquisitions
EDO
Corporation
On December 20
,
2007, ITT acquired all of the outstanding shares of EDO
Corporation (EDO), a global aerospace and defense company, for
$56 per outstanding share of EDO plus the assumption of debt,
which valued the transaction at approximately $1.8 billion.
There was no contingent consideration related to the acquisition.
EDO designs and
manufactures a diverse range of products for defense,
intelligence and commercial markets, and provides related
engineering and professional services. The addition of EDO
allows our Defense segment to provide a broader set of solutions
to a wider band of customers and improved our position to play
an important role in some of the U.S. military’s vital
transformational initiatives.
ITT’s results
of operations for the year ended December 31, 2007 reflect
the impact of results of operations for EDO from
December 20, 2007.
Goodwill of $1,237.0
was recorded within the Defense
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
segment, in
connection with the EDO acquisition, representing the excess of
the purchase price over the fair value of net assets acquired.
Intangible assets relating to this acquisition totaled $410.9,
entirely consisting of customer relationships, with a weighted
average amortization period of approximately 6 years.
The following table
summarizes the fair values of the assets acquired and
liabilities assumed in connection with the EDO acquisition.
|
TOTAL
|
|||||
| IMPACT | |||||
|
Current assets
|
$ | 534.6 | |||
|
Goodwill and intangible assets
|
1,647.9 | ||||
|
Other non-current assets
|
107.4 | ||||
|
Total assets acquired
|
$ | 2,289.9 | |||
|
Current liabilities
|
$ | 321.8 | |||
|
Long-term debt
|
567.0 | ||||
|
Pension and other benefit plan obligations, long-term
|
60.8 | ||||
|
Other long-term liabilities
|
151.8 | ||||
|
Net assets acquired
|
$ | 1,188.5 | |||
Other 2007
Acquisitions
During 2007, we
spent $410.5, net of cash acquired, on acquisitions that were
not material individually or in the aggregate to our results of
operations or financial position. The most significant of these
acquisitions was International Motion Control, Inc. (IMC), which
we acquired on September 10, 2007 for $390.5. IMC is a
global developer of motion control products, and is a market
leader in the manufacture of specialty energy absorption,
industrial and aviation control and automation technology. IMC,
which had 2006 revenue of approximately $200, adds a
complementary mix of highly engineered, mission-critical
products to ITT’s Motion & Flow segment.
NOTE 4
Restructuring and
Asset Impairment Charges
2009
Restructuring Activities
During 2009, we
recorded a net restructuring charge of $79.3, reflecting costs
of $70.7 related to new actions and $11.4 related to prior
years’ plans, as well as the reversal of $2.8 of
restructuring accruals that management determined would not be
required. The charges associated with actions announced during
2009 primarily represent severance costs for reductions in
headcount associated with the strategic relocation of certain
production operations within our Fluid and Motion &
Flow segments to lower cost regions, as well as other various
planned reductions in headcount associated with our lean
fulfillment initiative. Planned position eliminations total
1,092, including 528 factory workers, 530 office workers and 34
management employees. The costs recognized during 2009 related
to prior years’ plans of $11.4 primarily reflect additional
severance and lease cancellation related costs. The following
table details the components of restructuring charges recorded
during 2009.
| 2009 ACTIONS |
PRIOR
|
|||||||||||||||||||||||||||||||||||||||
|
OTHER
|
LEASE
|
PLANNED
|
YEARS’
PLANS
|
|||||||||||||||||||||||||||||||||||||
|
EMPLOYEE-
|
CANCELLATION
&
|
ASSET
|
POSITION
|
ADDITIONAL
|
REVERSAL OF
|
|||||||||||||||||||||||||||||||||||
| COMPONENTS OF CHARGES | SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | ||||||||||||||||||||||||||||||||
|
Fluid
|
$ | 31.0 | $ | 0.4 | $ | 2.4 | $ | 0.4 | $ | 34.2 | 506 | $ | 3.9 | $ | (1.3 | ) | ||||||||||||||||||||||||
|
Motion & Flow
|
31.3 | 0.5 | 1.5 | 0.7 | 34.0 | 496 | 3.3 | (0.7 | ) | |||||||||||||||||||||||||||||||
|
Defense
|
1.3 | – | 0.3 | – | 1.6 | 79 | 4.2 | (0.6 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
0.6 | 0.2 | 0.1 | – | 0.9 | 11 | – | (0.2 | ) | |||||||||||||||||||||||||||||||
| $ | 64.2 | $ | 1.1 | $ | 4.3 | $ | 1.1 | $ | 70.7 | 1,092 | $ | 11.4 | $ | (2.8 | ) | |||||||||||||||||||||||||
2008
Restructuring Activities
During 2008, we
recorded a net restructuring charge of $74.6, reflecting costs
of $66.9 related to new actions and $9.3 related to prior
years’ plans, as well as the reversal of $1.6 of
restructuring accruals that management determined would not be
required. The charges associated with actions announced during
2008 primarily represent a reduction of structural costs in all
business segments and the planned closure of a facility in the
Motion & Flow segment and a facility in the Defense
segment. Planned position eliminations total 1,360, including
614 factory workers, 704 office workers and 42 management
employees. The costs associated with the prior years’ plans
primarily reflect severance and lease cancellation related
costs. The following table details the components of
restructuring charges recorded during 2008.
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
| 2008 ACTIONS | ||||||||||||||||||||||||||||||||||||||||
|
PRIOR
|
||||||||||||||||||||||||||||||||||||||||
|
OTHER
|
LEASE
|
PLANNED
|
YEARS’ PLANS
|
|||||||||||||||||||||||||||||||||||||
|
EMPLOYEE-
|
CANCELLATION
&
|
ASSET
|
POSITION
|
ADDITIONAL
|
REVERSAL OF
|
|||||||||||||||||||||||||||||||||||
| COMPONENTS OF CHARGES | SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | ||||||||||||||||||||||||||||||||
|
Fluid
|
$ | 30.7 | $ | 0.4 | $ | 0.9 | $ | 0.1 | $ | 32.1 | 600 | $ | 3.2 | $ | (1.0 | ) | ||||||||||||||||||||||||
|
Motion & Flow
|
20.5 | 0.6 | 0.4 | 0.8 | 22.3 | 589 | 6.0 | (0.4 | ) | |||||||||||||||||||||||||||||||
|
Defense
|
9.6 | 0.7 | 0.6 | – | 10.9 | 157 | 0.1 | (0.2 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
1.4 | 0.1 | 0.1 | – | 1.6 | 14 | – | – | ||||||||||||||||||||||||||||||||
| $ | 62.2 | $ | 1.8 | $ | 2.0 | $ | 0.9 | $ | 66.9 | 1,360 | $ | 9.3 | $ | (1.6 | ) | |||||||||||||||||||||||||
2008 Asset
Impairment Charges
During 2008, we
recognized $2.9 of charges related to the impairment of
long-lived assets. During the fourth quarter of 2008, we
recognized an asset impairment charge of $1.8 related to the
write-down of software due to a decision to cancel a project as
a result of an organizational realignment. During the third
quarter of 2008, we recognized an impairment charge of $1.1
related to one of our Motion & Flow Control
businesses, reflecting the reduction of our expected future
earnings for this business.
2007
Restructuring Activities
During 2007, we
recorded a net restructuring charge of $61.1, reflecting costs
of $57.9 related to new actions and $7.4 related to prior year
plans, as well as the reversal of $4.2 of restructuring accruals
that management determined would not be required. The charges
associated with actions announced during 2007 represent a
reduction of structural costs in all business segments and the
planned closure of four facilities in the Fluid segment, one
facility in the Motion & Flow segment and two
facilities in the Defense segment. Planned position eliminations
total 729, including 341 factory workers, 345 office workers and
43 management employees. The costs associated with prior
years’ plans primarily reflect additional costs related to
an adjustment to the write-off of leased space as well as asset
write-offs and severance costs. The following table details the
components of restructuring charges recorded during 2007.
| 2007 ACTIONS | ||||||||||||||||||||||||||||||||||||||||
|
PRIOR
|
||||||||||||||||||||||||||||||||||||||||
|
OTHER
|
LEASE
|
PLANNED
|
YEARS’ PLANS
|
|||||||||||||||||||||||||||||||||||||
|
EMPLOYEE-
|
CANCELLATION
&
|
ASSET
|
POSITION
|
ADDITIONAL
|
REVERSAL OF
|
|||||||||||||||||||||||||||||||||||
| COMPONENTS OF CHARGES | SEVERANCE | RELATED COSTS | OTHER COSTS | WRITE-OFFS | TOTAL | ELIMINATIONS | COSTS | ACCRUALS | ||||||||||||||||||||||||||||||||
|
Fluid
|
$ | 32.7 | $ | 0.5 | $ | 1.4 | $ | 2.1 | $ | 36.7 | 410 | $ | 3.5 | $ | (1.1 | ) | ||||||||||||||||||||||||
|
Motion & Flow
|
9.5 | – | 0.3 | 0.4 | 10.2 | 201 | 1.0 | (0.5 | ) | |||||||||||||||||||||||||||||||
|
Defense
|
6.2 | – | 1.5 | – | 7.7 | 115 | 2.9 | (0.9 | ) | |||||||||||||||||||||||||||||||
|
Corporate and Other
|
3.3 | – | – | – | 3.3 | 3 | – | (1.7 | ) | |||||||||||||||||||||||||||||||
| $ | 51.7 | $ | 0.5 | $ | 3.2 | $ | 2.5 | $ | 57.9 | 729 | $ | 7.4 | $ | (4.2 | ) | |||||||||||||||||||||||||
2007 Asset
Impairment Charges
During the fourth
quarter of 2007, we recognized $5.0 of charges related to the
impairment of long-lived assets. The impairment was the result
of our determination that two businesses, one within the
Motion & Flow segment and one within the Fluid
segment, were experiencing lower than expected financial
results, and as a result certain long-lived assets of those
businesses may be impaired. After revising the earnings
forecasts for those businesses to reflect current business
conditions, asset impairment charges of $4.2 and $0.8 were
recorded within the Motion & Flow and Fluid segments,
respectively.
61
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Rollforward of
restructuring accrual
|
MOTION
|
CORPORATE
|
||||||||||||||||||||||
| FLUID | & FLOW | DEFENSE | AND OTHER | TOTAL | |||||||||||||||||||
|
Balance, January 1 2007
|
$ | 22.4 | $ | 7.3 | $ | 3.3 | $ | 1.6 | $ | 34.6 | |||||||||||||
|
Additional charges for prior year plans
|
3.5 | 1.0 | 2.9 | – | 7.4 | ||||||||||||||||||
|
Cash payments and other related to prior charges
|
(17.9 | ) | (5.3 | ) | (2.0 | ) | (1.2 | ) | (26.4 | ) | |||||||||||||
|
Charges for 2007 actions
|
36.7 | 10.2 | 7.7 | 3.3 | 57.9 | ||||||||||||||||||
|
Reversal of prior charges
|
(1.1 | ) | (0.5 | ) | (0.9 | ) | (1.7 | ) | (4.2 | ) | |||||||||||||
|
Cash payments and other related to 2007 charges
|
(20.5 | ) | (3.2 | ) | (3.1 | ) | – | (26.8 | ) | ||||||||||||||
|
Asset write-offs
|
(2.1 | ) | (0.4 | ) | – | – | (2.5 | ) | |||||||||||||||
|
Balance December 31, 2007
|
21.0 | 9.1 | 7.9 | 2.0 | 40.0 | ||||||||||||||||||
|
Additional charges for prior year plans
|
3.2 | 6.0 | 0.1 | – | 9.3 | ||||||||||||||||||
|
Cash payments and other related to prior charges
|
(20.8 | ) | (10.4 | ) | (5.1 | ) | (1.5 | ) | (37.8 | ) | |||||||||||||
|
Charges for 2008 actions
|
32.1 | 22.3 | 10.9 | 1.6 | 66.9 | ||||||||||||||||||
|
Reversal of prior charges
|
(1.0 | ) | (0.4 | ) | (0.2 | ) | – | (1.6 | ) | ||||||||||||||
|
Cash payments and other related to 2008 charges
|
(8.5 | ) | (5.5 | ) | (3.1 | ) | (0.4 | ) | (17.5 | ) | |||||||||||||
|
Asset write-offs
|
(0.1 | ) | (0.8 | ) | – | – | (0.9 | ) | |||||||||||||||
|
Balance December 31, 2008
|
25.9 | 20.3 | 10.5 | 1.7 | 58.4 | ||||||||||||||||||
|
Additional charges for prior year plans
|
3.9 | 3.3 | 4.2 | – | 11.4 | ||||||||||||||||||
|
Cash payments and other related to prior charges
|
(25.8 | ) | (17.7 | ) | (8.7 | ) | (1.4 | ) | (53.6 | ) | |||||||||||||
|
Charges for 2009 actions
|
34.2 | 34.0 | 1.6 | 0.9 | 70.7 | ||||||||||||||||||
|
Reversal of prior charges
|
(1.3 | ) | (0.7 | ) | (0.6 | ) | (0.2 | ) | (2.8 | ) | |||||||||||||
|
Cash payments and other related to 2009 charges
|
(18.3 | ) | (7.7 | ) | (2.7 | ) | (0.5 | ) | (29.2 | ) | |||||||||||||
|
Asset write-offs
|
(0.4 | ) | (0.7 | ) | (0.5 | ) | – | (1.6 | ) | ||||||||||||||
|
Balance December 31, 2009
|
$ | 18.2 | $ | 30.8 | $ | 3.8 | $ | 0.5 | $ | 53.3 | |||||||||||||
The accrual balance
as of December 31, 2009 of $53.3 includes $46.3 for
severance and $7.0 for facility carrying costs and other.
We expect that the
remaining planned headcount reductions as of the end of 2009
from our past restructuring activities will be substantially
completed by mid-2010.
As of the end of
2009, there are no planned facility closures remaining
associated with the actions taken during 2009 or prior.
The following is a
reconciliation of employee position eliminations associated with
restructuring activities through 2009:
|
Planned reductions as of December 31, 2006
|
270 | ||||
|
Planned reductions from 2007 actions
|
729 | ||||
|
Actual reductions, January 1 – December 31, 2007
|
(686 | ) | |||
|
Planned reductions as of December 31, 2007
|
313 | ||||
|
Planned reductions from 2008 actions
|
1,360 | ||||
|
Actual reductions, January 1 – December 31, 2008
|
(1,163 | ) | |||
|
Planned reductions as of December 31, 2008
|
510 | ||||
|
Planned reductions from 2009 actions
|
1,092 | ||||
|
Actual reductions, January 1 – December 31,
2009
|
(1,195 | ) | |||
|
Planned reductions as of December 31, 2009
|
407 | ||||
62
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
NOTE 5
Divestitures
We have not engaged
in any divestiture actions that were material individually or in
the aggregate to our results of operations or financial
position, in either 2009 or 2008. We received proceeds from the
sale of assets and businesses of $20.6 and $21.6 during 2009 and
2008, respectively. Amounts reported as discontinued operations
within the Consolidated Income Statements for these years
pertain to costs incurred on previously divested businesses that
were reported as discontinued operations in the period of
divestiture.
During 2007, we sold
the majority of the Switches businesses to a private equity
firm, for net proceeds of $223.2, and an after-tax gain of
$84.4. During the third quarter of 2008, we completed the sale
of the remaining component of the Switches businesses to the
same buyer, for net proceeds of $5.1. As a result, we recorded
an after-tax gain on sale of $5.4 for the year ended
December 31, 2008. Revenue and operating income for the
Switches businesses reported in discontinued operations were as
follows:
| YEAR ENDED DECEMBER 31 | 2008 | 2007 | |||||||
|
Revenue
|
$ | 7.7 | $ | 177.8 | |||||
|
Operating income
|
$ | 0.2 | $ | 11.0 | |||||
NOTE 6
Income
Taxes
Income tax data from
continuing operations is as follows:
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
Income components:
|
|||||||||||||||
|
U.S.
|
$ | 447.1 | $ | 662.6 | $ | 454.9 | |||||||||
|
Foreign
|
378.1 | 424.9 | 443.6 | ||||||||||||
| $ | 825.2 | $ | 1,087.5 | $ | 898.5 | ||||||||||
|
Current provision:
|
|||||||||||||||
|
U.S. federal
|
$ | 130.9 | $ | 160.2 | $ | 89.8 | |||||||||
|
State and local
|
8.2 | 4.8 | 8.1 | ||||||||||||
|
Foreign
|
108.6 | 130.6 | 133.5 | ||||||||||||
| $ | 247.7 | $ | 295.6 | $ | 231.4 | ||||||||||
|
Deferred benefit:
|
|||||||||||||||
|
U.S. federal
|
$ | (41.6 | ) | $ | 23.0 | $ | 21.8 | ||||||||
|
State and local
|
(13.7 | ) | (0.4 | ) | 4.1 | ||||||||||
|
Foreign
|
(17.9 | ) | (5.9 | ) | 8.2 | ||||||||||
| (73.2 | ) | 16.7 | 34.1 | ||||||||||||
|
Total income tax expense
|
$ | 174.5 | $ | 312.3 | $ | 265.5 | |||||||||
A reconciliation of
the tax provision for continuing operations at the
U.S. statutory rate to the effective income tax expense
rate as reported is as follows:
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
Tax provision at U.S. statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | |||||||||
|
International restructurings
|
(7.0 | ) | — | — | |||||||||||
|
Foreign tax rate differential
|
(4.3 | ) | (2.2 | ) | (1.4 | ) | |||||||||
|
Effect of repatriation of foreign earnings
|
(0.4 | ) | (0.4 | ) | (0.7 | ) | |||||||||
|
State and local income tax
|
(1.3 | ) | 0.4 | 1.4 | |||||||||||
|
Research credit
|
(0.8 | ) | (0.2 | ) | (0.3 | ) | |||||||||
|
Tax examinations
|
– | – | (4.9 | ) | |||||||||||
|
Domestic manufacturing deduction
|
(1.3 | ) | (0.3 | ) | (1.0 | ) | |||||||||
|
Tax account validation adjustment
|
– | (3.8 | ) | – | |||||||||||
|
Other
|
1.2 | 0.2 | 1.4 | ||||||||||||
|
Effective income tax expense rate
|
21.1 | % | 28.7 | % | 29.5 | % | |||||||||
Deferred income
taxes are established for temporary differences between the
amount of assets and liabilities recognized for financial
reporting purposes and for tax reporting purposes and for
carryforwards.
Deferred tax assets
and liabilities include the following:
| DECEMBER 31 | 2009 | 2008 | ||||||||
|
Deferred Tax Assets:
|
||||||||||
|
Employee benefits
|
$ | 736.0 | $ | 936.5 | ||||||
|
Accruals
|
281.3 | 198.3 | ||||||||
|
Loss carryforwards
|
199.7 | 293.0 | ||||||||
|
Uniform capitalization
|
13.0 | 11.7 | ||||||||
|
State credit carryforwards
|
11.5 | 7.8 | ||||||||
|
Foreign tax credit
|
– | 1.1 | ||||||||
|
Other
|
14.1 | – | ||||||||
|
Subtotal
|
1,255.6 | 1,448.4 | ||||||||
|
Valuation allowance
|
(149.9 | ) | (265.4 | ) | ||||||
|
Net deferred tax assets
|
$ | 1,105.7 | $ | 1,183.0 | ||||||
|
Deferred Tax Liabilities:
|
||||||||||
|
Intangibles
|
$ | 324.2 | $ | 322.4 | ||||||
|
Accelerated depreciation
|
46.7 | 6.3 | ||||||||
|
Investment
|
15.7 | 108.5 | ||||||||
|
Other
|
– | 22.3 | ||||||||
|
Total deferred tax liabilities
|
$ | 386.6 | $ | 459.5 | ||||||
63
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Deferred taxes in
the Consolidated Balance Sheets consist of the following:
| DECEMBER 31 | 2009 | 2008 | ||||||||
|
Current assets
|
$ | 234.1 | $ | 203.4 | ||||||
|
Non-current assets
|
583.2 | 608.5 | ||||||||
|
Current liabilities
|
(36.4 | ) | (26.7 | ) | ||||||
|
Other non-current liabilities
|
(61.8 | ) | (61.7 | ) | ||||||
| $ | 719.1 | $ | 723.5 | |||||||
No provision was
made for U.S. taxes payable on accumulated undistributed
foreign earnings of certain subsidiaries amounting to
approximately $1,744.6 because these amounts are indefinitely
reinvested. While the amount of federal income taxes, if such
earnings are distributed in the future, cannot be determined,
such taxes may be reduced by tax credits and other deductions.
Taxes have not been provided for other basis differences since
these differences are not expected to reverse in the foreseeable
future.
We have the
following attributes available for utilization:
| ATTRIBUTE: | AMOUNT | FIRST YEAR OF EXPIRATION | ||||||||
|
U.S. net operating loss
|
$ | 22.9 | December 31, 2020 | |||||||
|
State net operating losses
|
$ | 3,041.2 | December 31, 2010 | |||||||
|
Federal and state capital loss
|
$ | 109.0 | December 31, 2012 | |||||||
|
State tax credits
|
$ | 11.5 | December 31, 2012 | |||||||
|
Foreign net operating loss
|
$ | 309.7 | December 31, 2010 | |||||||
As of
December 31, 2009, a valuation allowance of approximately
$149.9 had been established to reduce the deferred income tax
asset related to certain U.S. state and foreign net
operating losses and US federal capital loss carryforwards.
During 2009, the valuation allowance decreased by $115.5
resulting from the following: decrease of $9.8 attributable to
foreign net operating loss carryforwards and foreign
investments, decrease of $93.7 attributable to state net
operating loss and credit carryforwards (see statement below for
main components of this amount) and a decrease of $12.0
attributable to U.S. federal capital loss carryforwards
that were utilized in 2009.
During 2009, the
Company completed a study of its state tax attributes. As a
result of the study, the Company determined that $21.6 of state
deferred tax assets are unrecognized tax benefits, approximately
$20.5 of state deferred tax assets are attributable to excess
tax benefits on stock-based compensation that have not been
realized, identified additional state net operating losses of
$15.6 and refined the state tax attributable to minimum pension
liability by $57.0 and has, accordingly, changed its valuation
allowance. In addition, the Company, as a result of expected
future income, has determined that it is more likely than not
that a portion of its state deferred tax assets, in the amount
of $13.7, will be realized and a valuation allowance is not
necessary.
Shareholders’
equity at December 31, 2009 and 2008 reflects excess tax
benefits related to stock-based compensation in 2009 and 2008 of
approximately $3.0 and $8.6, respectively.
Uncertain Tax
Positions
We recognize tax
benefits from uncertain tax positions only if it is more likely
than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the Consolidated
Financial Statements from such positions are measured based on
the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement.
A reconciliation of
the beginning and ending amount of unrecognized tax benefits as
of December 31, 2009 and 2008 is as follows:
| 2009 | 2008 | 2007 | |||||||||||||
|
Balance at January 1
|
$ | 144.9 | $ | 103.3 | $ | 88.8 | |||||||||
|
Additions based on tax positions related to the current year
|
5.3 | 6.6 | 11.2 | ||||||||||||
|
Additions for tax positions of prior years
|
28.0 | 66.2 | 45.3 | ||||||||||||
|
Reductions for tax positions of prior years
|
(6.0 | ) | (13.5 | ) | (39.6 | ) | |||||||||
|
Settlements
|
(1.3 | ) | (15.3 | ) | (12.1 | ) | |||||||||
|
Additions based on tax positions related to purchase accounting
|
– | 2.4 | 9.7 | ||||||||||||
|
Reductions based on tax positions related to purchase accounting
|
– | (2.2 | ) | – | |||||||||||
|
Lapse of statute of limitations
|
– | (2.6 | ) | – | |||||||||||
|
Balance at December 31
|
$ | 170.9 | $ | 144.9 | $ | 103.3 | |||||||||
Subsequent
recognition, if any, of a previously unrecognized tax position
will be reflected in tax expense attributable to continuing or
discontinued operations. As of December 31, 2009, the
recognition of the uncertain tax positions that would affect the
effective tax rate is $81.3. Included in the balance at
December 31, 2009 are tax positions of $81.4, which,
because of deferred tax accounting would not impact the annual
effective rate, but could accelerate the payment of cash to the
taxing authority. In
64
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
addition, tax
positions of $8.2 attributable to discontinued operations would
not impact the annual effective tax rate.
We do not believe
that the unrecognized tax benefits will significantly change
within twelve months of the reporting date.
In many cases,
uncertain tax positions are related to tax years that remain
subject to examination by the relevant taxing authorities. The
following table summarizes these open tax years by major
jurisdiction:
| JURISDICTION | EARLIEST OPEN YEAR | ||||
|
Austria
|
2004 | ||||
|
Canada
|
2004 | ||||
|
Germany
|
2000 | ||||
|
Italy
|
2004 | ||||
|
Netherlands
|
2005 | ||||
|
Sweden
|
2004 | ||||
|
United Kingdom
|
2003 | ||||
|
United States
|
2004 | ||||
We classify interest
relating to tax matters as a component of interest expense and
tax penalties as a component of income tax expense in our
Consolidated Income Statement. During 2009 and 2008, we
recognized net interest income of $2.9 primarily due to an
interest settlement claim with the IRS and $9.7 of interest
expense, respectively. We had $23.2 and $28.1 for the payment of
interest accrued as of December 31, 2009 and 2008,
respectively.
NOTE 7
Earnings Per
Share
A reconciliation of
the data used in the calculation of basic and diluted earnings
per share computations for income from continuing operations is
as follows:
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
Basic Earnings Per Share:
|
|||||||||||||||
|
Income from continuing operations
|
$ | 650.7 | $ | 775.2 | $ | 633.0 | |||||||||
|
Average common shares outstanding
|
182.5 | 181.9 | 181.5 | ||||||||||||
|
Basic earnings per share
|
$ | 3.56 | $ | 4.26 | $ | 3.49 | |||||||||
|
Diluted Earnings Per Share:
|
|||||||||||||||
|
Income from continuing operations
|
$ | 650.7 | $ | 775.2 | $ | 633.0 | |||||||||
|
Average common shares outstanding
|
182.5 | 181.9 | 181.5 | ||||||||||||
|
Add: Impact of stock options and restricted stock
|
1.4 | 2.1 | 3.0 | ||||||||||||
|
Average common shares outstanding on a diluted basis
|
183.9 | 184.0 | 184.5 | ||||||||||||
|
Diluted earnings per share
|
$ | 3.54 | $ | 4.21 | $ | 3.43 | |||||||||
Shares underlying
stock options excluded from the computation of diluted earnings
per share because they were anti-dilutive were as follows:
| DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
Stock options
|
1.7 | 4.1 | 0.5 | ||||||||||||
|
Average exercise price
|
$ | 54.49 | $ | 49.29 | $ | 56.78 | |||||||||
|
Years of expiration
|
2012- | 2012- | 2012- | ||||||||||||
| 2016 | 2015 | 2014 | |||||||||||||
The amounts of
anti-dilutive restricted common stock excluded from the
computation of diluted earnings per share for 2009, 2008 and
2007 were insignificant.
65
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
NOTE 8
Receivables,
Net
| DECEMBER 31 | 2009 | 2008 | ||||||||
|
Trade accounts receivable
|
$ | 1,390.7 | $ | 1,479.5 | ||||||
|
Unbilled contract receivable
|
404.1 | 465.9 | ||||||||
|
Other
|
56.2 | 57.0 | ||||||||
|
Receivables, gross
|
1,851.0 | 2,002.4 | ||||||||
|
Less – allowance for doubtful accounts and cash
discounts
|
(54.3 | ) | (41.3 | ) | ||||||
|
Receivables, net
|
$ | 1,796.7 | $ | 1,961.1 | ||||||
Unbilled amounts
represent revenue recognized on long-term contracts that arise
based on performance attainment, though appropriately
recognized, cannot be billed as of the balance sheet date. We
expect to bill and collect substantially all of the
December 31, 2009 unbilled contract receivables during 2010
as scheduled performance milestones are completed or units are
delivered.
Our outstanding
accounts receivable balance from the U.S. Government was
$337.5 and $400.0 as of December 31, 2009 and 2008,
respectively.
NOTE 9
Inventories,
Net
| DECEMBER 31 | 2009 | 2008 | ||||||||
|
Finished goods
|
$ | 176.7 | $ | 184.1 | ||||||
|
Work in process
|
56.7 | 74.9 | ||||||||
|
Raw materials
|
253.2 | 303.1 | ||||||||
| 486.6 | 562.1 | |||||||||
|
Inventoried costs related to long-term contracts
|
390.4 | 322.6 | ||||||||
|
Less – progress payments
|
(74.7 | ) | (80.9 | ) | ||||||
|
Inventoried costs related to long-term contracts, net
|
315.7 | 241.7 | ||||||||
|
Inventories, net
|
$ | 802.3 | $ | 803.8 | ||||||
Deferred production
costs incurred within the Defense segment on in-process and
delivered units in excess of the aggregate estimated average
cost of those units was $21.4 and $34.2 as of December 31,
2009 and 2008, respectively.
NOTE 10
Plant, Property
and Equipment, Net
| DECEMBER 31 | 2009 | 2008 | ||||||||
|
Land and improvements
|
$ | 57.0 | $ | 59.0 | ||||||
|
Buildings and improvements
|
609.5 | 575.9 | ||||||||
|
Machinery and equipment
|
1,686.4 | 1,620.2 | ||||||||
|
Furniture, fixtures and office equipment
|
221.0 | 230.9 | ||||||||
|
Construction work in progress
|
156.6 | 132.4 | ||||||||
|
Other
|
96.8 | 82.3 | ||||||||
| 2,827.3 | 2,700.7 | |||||||||
|
Less – accumulated depreciation and amortization
|
(1,776.3 | ) | (1,706.8 | ) | ||||||
|
Plant, property and equipment, net
|
$ | 1,051.0 | $ | 993.9 | ||||||
66
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
NOTE 11
Goodwill and
Other Intangible Assets, Net
Changes in the
carrying amount of goodwill for the years ended
December 31, 2009 and 2008 by business segment are as
follows:
|
MOTION &
|
CORPORATE
|
||||||||||||||||||||||
| DEFENSE | FLUID | FLOW | AND OTHER | TOTAL | |||||||||||||||||||
|
Balance as of January 1, 2008
|
$ | 2,176.8 | $ | 1,167.4 | $ | 480.5 | $ | 5.0 | $ | 3,829.7 | |||||||||||||
|
Goodwill acquired during the period
|
– | 7.0 | 16.2 | – | 23.2 | ||||||||||||||||||
|
Adjustments to purchase price allocations
|
34.0 | – | 3.0 | – | 37.0 | ||||||||||||||||||
|
Foreign currency translation
|
– | (52.0 | ) | (5.2 | ) | – | (57.2 | ) | |||||||||||||||
|
Other
|
(0.2 | ) | (0.1 | ) | (1.1 | ) | – | (1.4 | ) | ||||||||||||||
|
Balance as of December 31, 2008
|
$ | 2,210.6 | $ | 1,122.3 | $ | 493.4 | $ | 5.0 | $ | 3,831.3 | |||||||||||||
|
Goodwill acquired during the period
|
– | 17.3 | – | – | 17.3 | ||||||||||||||||||
|
Foreign currency translation
|
– | 26.1 | 2.4 | – | 28.5 | ||||||||||||||||||
|
Other
|
(2.2 | ) | (0.7 | ) | (10.2 | ) | – | (13.1 | ) | ||||||||||||||
|
Balance as of December 31, 2009
|
$ | 2,208.4 | $ | 1,165.0 | $ | 485.6 | $ | 5.0 | $ | 3,864.0 | |||||||||||||
Goodwill acquired
during 2009 relates to the Laing acquisition. Amounts reported
as “Other” relate primarily to the write-off of
goodwill associated with various immaterial business
divestitures occurring during 2009 and 2008.
Information
regarding our other intangible assets is as follows:
|
GROSS
|
|||||||||||||||
|
CARRYING
|
ACCUMULATED
|
NET
|
|||||||||||||
| AMOUNT | AMORTIZATION | INTANGIBLES | |||||||||||||
|
2009
|
|||||||||||||||
|
Finite-lived
intangibles:
|
|||||||||||||||
|
Customer
relationships
|
$ | 649.8 | $ | (243.1 | ) | $ | 406.7 | ||||||||
|
Proprietary
technology
|
65.9 | (23.9 | ) | 42.0 | |||||||||||
|
Trademarks
|
35.1 | (7.9 | ) | 27.2 | |||||||||||
|
Patents and
other
|
44.7 | (20.0 | ) | 24.7 | |||||||||||
|
Indefinite-lived
intangibles- Brands and trademarks
|
18.3 | – | 18.3 | ||||||||||||
|
Balance as of
December 31, 2009
|
$ | 813.8 | $ | (294.9 | ) | $ | 518.9 | ||||||||
|
2008
|
|||||||||||||||
|
Finite-lived
intangibles:
|
|||||||||||||||
|
Customer
relationships
|
$ | 643.7 | $ | (149.9 | ) | $ | 493.8 | ||||||||
|
Proprietary
technology
|
68.4 | (20.2 | ) | 48.2 | |||||||||||
|
Trademarks
|
32.1 | (4.9 | ) | 27.2 | |||||||||||
|
Patents and other
|
54.7 | (25.7 | ) | 29.0 | |||||||||||
|
Indefinite-lived
intangibles- Brands and trademarks
|
18.3 | – | 18.3 | ||||||||||||
|
Balance as of
December 31, 2008
|
$ | 817.2 | $ | (200.7 | ) | $ | 616.5 | ||||||||
Customer
relationships, proprietary technology, trademarks, and patents
and other are amortized over weighted average lives of
approximately 7 years, 13 years, 17 years and
21 years, respectively.
Amortization expense
related to intangible assets for 2009, 2008 and 2007 was $103.9,
$100.0 and $35.3, respectively. Estimated amortization expense
for each of the five succeeding years is as follows:
| 2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||
|
$84.5
|
$ | 68.2 | $ | 57.2 | $ | 42.6 | $ | 40.6 | ||||||||||||
NOTE 12
Other Non-Current
Assets
| DECEMBER 31 | 2009 | 2008 | ||||||||
|
Other employee benefit-related assets
|
$ | 86.8 | $ | 61.2 | ||||||
|
Capitalized software costs
|
65.1 | 26.4 | ||||||||
|
Other long-term third party
receivables-net
|
44.4 | 43.8 | ||||||||
|
Equity method investments
|
27.4 | 8.4 | ||||||||
|
Pension assets and prepaid benefit plan costs
|
16.3 | 1.7 | ||||||||
|
Other
|
11.9 | 23.1 | ||||||||
|
Other non-current assets
|
$ | 251.9 | $ | 164.6 | ||||||
ITT recorded sales
to unconsolidated affiliates during 2009, 2008 and 2007 totaling
$42.5, $17.3 and $13.7, respectively. Additionally, ITT
purchased $33.5 of products from unconsolidated affiliates
during 2009. For all investments in
67
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
unconsolidated
companies, our exposure is limited to the amount of the
investment. All investments accounted for under the cost method
generally represent voting rights interests of less than 20%.
NOTE 13
Leases and
Rentals
ITT leases certain
offices, manufacturing buildings, land, machinery, automobiles,
aircraft, computers and other equipment. Such leases expire at
various dates and may include renewal and payment escalation
clauses. ITT often pays maintenance, insurance and tax expense
related to leased assets. Rental expenses under operating leases
were $141.3, $133.3 and $99.2, for 2009, 2008 and 2007,
respectively. Future minimum operating lease payments under
long-term operating leases as of December 31, 2009 are
shown below.
|
2010
|
$ | 147.7 | |||
|
2011
|
114.6 | ||||
|
2012
|
97.6 | ||||
|
2013
|
67.4 | ||||
|
2014
|
58.3 | ||||
|
2015 and thereafter
|
235.6 | ||||
|
Total minimum lease payments
|
$ | 721.2 | |||
NOTE 14
Debt
During 2009 we
modified our debt structure through the issuance of
$1.0 billion of long-term debt and the repayment of a
majority of our outstanding commercial paper balance. Further
details surrounding the issuance are provided below. The
following table provides outstanding debt balances by type as of
December 31, 2009 and 2008.
| 2009 | 2008 | |||||||||
|
Commercial
paper
(a)
|
$ | 55.0 | $ | 1,618.7 | ||||||
|
Short-term loans
|
9.5 | 47.0 | ||||||||
|
Current maturities of long-term debt and other
|
10.5 | 13.3 | ||||||||
|
Short-term debt and current maturities of long-term debt
|
$ | 75.0 | $ | 1,679.0 | ||||||
|
Non-current maturities of long-term debt
|
1,391.8 | 417.3 | ||||||||
|
Non-current capital leases
|
3.7 | 4.3 | ||||||||
|
Deferred gain on interest rate
swaps
(b)
|
50.2 | 54.7 | ||||||||
|
Unamortized discounts and debt issuance costs
|
(14.9 | ) | (8.4 | ) | ||||||
|
Long-term debt
|
1,430.8 | 467.9 | ||||||||
|
Total debt
|
$ | 1,505.8 | $ | 2,146.9 | ||||||
| (a) | Our commercial paper program is performed under a five-year revolving credit agreement in the aggregate principal amount of $1.75 billion. The intended purpose of this credit agreement is to provide additional liquidity as a source of funding for the commercial paper program, if needed. The interest rate for borrowings under the agreement is generally based on the London Interbank Offered Rate (LIBOR), plus a spread, which reflects ITT’s debt rating. The weighted average interest rate for short-term borrowings was 0.21% and 6.17% at December 31, 2009 and 2008, respectively. The commitment fee on the credit facility is 0.08% of the total commitment. The provisions of this agreement require that we maintain an adjusted EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) to interest expense ratio greater than 3.5:1. At December 31, 2009 and 2008, we were in compliance with our financial covenants. |
| (b) | Deferred gain on terminated interest rate swaps is accreted into income over the remaining terms of the underlying debt, which mature at various dates through 2025. |
The following table
summarizes the carrying and fair value of our long-term
outstanding notes and debentures by maturity
68
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
date for both
December 31, 2009 and 2008. The fair value of our
short-term loans approximates carrying value.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||
|
Interest
|
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||||||||||
| Rate | Value | Value | Value | Value | ||||||||||||||||||
|
Notes and debentures:
|
||||||||||||||||||||||
|
Maturity date
|
||||||||||||||||||||||
|
May 2011
|
6.50 | % | $ | 31.7 | $ | 31.8 | $ | 31.7 | $ | 31.7 | ||||||||||||
|
July 2011
|
7.50 | % | 37.4 | 40.3 | 37.4 | 39.8 | ||||||||||||||||
|
May
2014
(c)
|
4.90 | % | 500.0 | 515.0 | – | – | ||||||||||||||||
|
May
2019
(c)
|
6.125 | % | 500.0 | 521.1 | – | – | ||||||||||||||||
|
November 2025
|
7.40 | % | 250.0 | 285.2 | 250.0 | 265.3 | ||||||||||||||||
|
August 2048
|
(e | ) | 1.0 | 1.0 | 17.3 | 17.3 | ||||||||||||||||
|
Annual maturities December
2010-2014
(d)
|
4.70 | % | 74.1 | 75.6 | 82.2 | 80.3 | ||||||||||||||||
|
Various 2010 — 2022
|
(f | ) | 11.8 | 11.8 | 16.3 | 16.0 | ||||||||||||||||
| $ | 1,406.0 | $ | 1,481.8 | $ | 434.9 | $ | 450.4 | |||||||||||||||
Principal payments
required per year on our outstanding long-term notes and
debentures for the next five years and thereafter are $10.5,
$79.9, $10.0, $13.1, $538.0 and $754.5, respectively. The book
value of assets pledged as collateral amounted to $53.8 as of
December 31, 2009.
| (c) | In May 2009, the Company issued $500.0 of 4.9% Senior Notes due May 1, 2014 and $500.0 of 6.125% Senior Notes due May 1, 2019 (collectively, the “Notes”). The issuance resulted in gross proceeds of $998.3, offset by $6.2 in debt issuance costs. We may redeem the Notes in whole or in part at any time at a redemption price equal to the greater of (i) 100% of the principal amount of such Notes and (ii) the sum of the present value of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis at the Treasury Rate plus 50 basis points, plus in each case accrued and unpaid interest to the date of redemption. If the Company experiences a change of control, the Company will be required to offer to repurchase the Notes at a price equal to 101% of the principal amount plus accrued interest. The Notes are senior unsecured obligations and rank equally with all existing and future senior unsecured indebtedness. |
| (d) | As of December 31, 2009, ITT had a $74.1 obligation associated with a ten-year agreement involving the sale and the subsequent lease back of certain properties. Under the terms of the agreement, we are required to make annual payments of principal and interest. At the end of the agreement in 2014, ITT has the option to repurchase the applicable properties for a nominal fee. This transaction is reflected as debt. |
| (e) | Variable rate debt with an interest rate of 0.16% as of December 31, 2009 and 2008. |
| (f) | Includes individually immaterial notes, bonds and capital leases. The weighted average interest rate was 5.24% and 5.38% at December 31, 2009 and 2008, respectively. |
NOTE 15
Other Non-Current
Liabilities
| DECEMBER 31 | 2009 | 2008 | |||||||||||||
|
Deferred income taxes and other tax-related accruals
|
$ | 182.2 | $ | 182.9 | |||||||||||
|
Environmental
|
128.1 | 119.5 | |||||||||||||
|
Compensation and other employee-related benefits
|
122.9 | 133.8 | |||||||||||||
|
Product liability, guarantees and other legal matters
|
62.5 | 58.8 | |||||||||||||
|
Other
|
53.0 | 59.4 | |||||||||||||
|
Other non-current liabilities
|
$ | 548.7 | $ | 554.4 | |||||||||||
NOTE 16
Employee Benefit
Plans
Defined
Contribution Plans
ITT sponsors
numerous defined contribution savings plans, which allow
employees to contribute a portion of their pre-tax
and/or
after-tax income in accordance with specified guidelines.
Several of the plans require us to match a percentage of the
employee contributions up to certain limits. Matching
contributions charged to income amounted to $53.3, $55.0 and
$36.6 for 2009, 2008 and 2007, respectively.
The ITT Stock Fund,
an investment option under the ITT Salaried Investment and
Savings Plan, is considered an Employee Stock Ownership Plan
and, as a result, participants in the ITT Stock Fund may receive
dividends in cash or may reinvest such dividends into the ITT
Stock Fund. The ITT Stock Fund held approximately
9.2 shares of ITT common stock at December 31, 2009.
Defined Benefit
Plans
Pension
Plans
ITT sponsors
numerous defined benefit pension plans around the world, the
most significant of which is the U.S. Salaried Retirement Plan.
We fund employee pension benefits, except in some countries
outside the U.S., where funding is not required. In addition to
sponsored pension plans, certain employees participate in
multi-employer pension plans sponsored by local or national
unions. Our contribution to such plans amounted to $0.8, $0.6
and $0.8 for 2009, 2008 and 2007, respectively.
Postretirement
Health and Life Insurance Plans
ITT provides health
care and life insurance benefits for certain eligible employees
upon retirement. We have pre-funded a
69
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
portion of the
health care and life insurance obligations, where such
pre-funding can be accomplished on a tax-effective basis.
Balance Sheet and
Income Statement Items
Changes in projected
benefit obligations, plan assets, and funded status of the
pension and other employee-related benefit plans (collectively,
postretirement benefit plans) for the years ended 2009 and 2008
were as follows:
| PENSION | OTHER BENEFITS | |||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||
|
Change in benefit obligation
|
||||||||||||||||||
|
Benefit obligation at beginning of year
|
$ | 5,323.0 | $ | 5,380.7 | $ | 702.7 | $ | 740.9 | ||||||||||
|
Service cost
|
98.7 | 98.9 | 6.9 | 7.6 | ||||||||||||||
|
Interest cost
|
329.3 | 324.7 | 42.0 | 41.9 | ||||||||||||||
|
Amendments made during the year/other
|
2.5 | 3.5 | (11.7 | ) | (2.4 | ) | ||||||||||||
|
Actuarial loss (gain)
|
286.9 | (9.9 | ) | 6.8 | (36.6 | ) | ||||||||||||
|
Benefits paid
|
(383.1 | ) | (359.8 | ) | (46.0 | ) | (48.7 | ) | ||||||||||
|
Effect of currency translation
|
42.4 | (115.1 | ) | – | – | |||||||||||||
|
Benefit obligation at end of year
|
$ | 5,699.7 | $ | 5,323.0 | $ | 700.7 | $ | 702.7 | ||||||||||
|
Change in plan assets
|
||||||||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 3,611.6 | $ | 5,653.5 | $ | 205.4 | $ | 310.6 | ||||||||||
|
Actual return on plan assets
|
823.5 | (1,654.8 | ) | 47.4 | (98.6 | ) | ||||||||||||
|
Employer contributions
|
161.0 | 24.1 | – | – | ||||||||||||||
|
Employee contributions
|
2.0 | 3.4 | – | – | ||||||||||||||
|
Benefits paid
|
(319.5 | ) | (333.6 | ) | (5.6 | ) | (6.6 | ) | ||||||||||
|
Effect of currency translation
|
29.2 | (81.0 | ) | – | – | |||||||||||||
|
Fair value of plan assets at end of year
|
$ | 4,307.8 | $ | 3,611.6 | $ | 247.2 | $ | 205.4 | ||||||||||
|
Funded status at end of year
|
$ | (1,391.9 | ) | $ | (1,711.4 | ) | $ | (453.5 | ) | $ | (497.3 | ) | ||||||
Amounts recognized
in the Consolidated Balance Sheets as of December 31, 2009
and 2008 consist of:
| PENSION | OTHER BENEFITS | |||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||
|
Other non-current assets
|
$ | 16.3 | $ | 1.7 | $ | – | $ | – | ||||||||||
|
Current liabilities
|
(24.1 | ) | (23.2 | ) | (49.1 | ) | (45.6 | ) | ||||||||||
|
Non-current liabilities
|
(1,384.1 | ) | (1,689.9 | ) | (404.4 | ) | (451.7 | ) | ||||||||||
| $ | (1,391.9 | ) | $ | (1,711.4 | ) | $ | (453.5 | ) | $ | (497.3 | ) | |||||||
Amounts recognized
in accumulated other comprehensive loss at December 31,
2009 and 2008 consist of:
| PENSION | OTHER BENEFITS | |||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||
|
Net loss
|
$ | 2,033.9 | $ | 2,219.5 | $ | 161.6 | $ | 200.0 | ||||||||||
|
Prior service cost
|
28.8 | 25.6 | (7.5 | ) | 6.4 | |||||||||||||
| $ | 2,062.7 | $ | 2,245.1 | $ | 154.1 | $ | 206.4 | |||||||||||
The estimated net
loss and prior service cost that will be amortized from
accumulated other comprehensive loss into net periodic benefit
cost over the next fiscal year is as follows:
| PENSION | OTHER BENEFITS | |||||||||
|
Net loss
|
$ | 80.9 | $ | 11.2 | ||||||
|
Prior service cost
|
4.2 | (1.8 | ) | |||||||
The accumulated
benefit obligation for all defined benefit pension plans was
$5,377.7 and $5,075.4 at December 31, 2009 and 2008,
respectively.
Information for
pension plans with an accumulated benefit obligation in excess
of plan assets:
| DECEMBER 31 | 2009 | 2008 | ||||||||
|
Projected benefit obligation
|
$ | 5,465.1 | $ | 5,139.9 | ||||||
|
Accumulated benefit obligation
|
5,171.2 | 4,898.2 | ||||||||
|
Fair value of plan assets
|
4,057.6 | 3,426.3 | ||||||||
70
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Components of net
periodic benefit cost and other amounts recognized in other
comprehensive income (loss) for the years 2009, 2008 and 2007,
were as follows:
| PENSION | OTHER BENEFITS | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||||||
|
Net periodic benefit cost
|
||||||||||||||||||||||||||||
|
Service cost
|
$ | 98.7 | $ | 98.9 | $ | 97.8 | $ | 6.9 | $ | 7.6 | $ | 7.6 | ||||||||||||||||
|
Interest cost
|
329.3 | 324.7 | 297.4 | 42.0 | 41.9 | 41.9 | ||||||||||||||||||||||
|
Expected return on plan assets
|
(432.9 | ) | (445.2 | ) | (399.5 | ) | (18.1 | ) | (27.5 | ) | (25.1 | ) | ||||||||||||||||
|
Amortization of net actuarial loss
|
48.0 | 17.6 | 63.3 | 15.1 | 3.8 | 2.4 | ||||||||||||||||||||||
|
Amortization of prior service cost
|
4.1 | 3.7 | 2.7 | 3.5 | 2.8 | 5.3 | ||||||||||||||||||||||
|
Net periodic benefit cost (income)
|
47.2 | (0.3 | ) | 61.7 | 49.4 | 28.6 | 32.1 | |||||||||||||||||||||
|
Effect of curtailment
|
2.5 | – | – | (0.6 | ) | – | – | |||||||||||||||||||||
|
Total net periodic benefit cost (income)
|
49.7 | (0.3 | ) | 61.7 | 48.8 | 28.6 | 32.1 | |||||||||||||||||||||
|
Other changes in plan assets and benefit obligations
recognized in other comprehensive income (loss)
|
||||||||||||||||||||||||||||
|
Net (gain) loss
|
(137.6 | ) | 2,059.5 | (365.9 | ) | (23.3 | ) | 89.7 | (4.8 | ) | ||||||||||||||||||
|
Prior service cost (benefit)
|
7.3 | – | 13.2 | (10.4 | ) | (2.5 | ) | 4.0 | ||||||||||||||||||||
|
Amortization of net actuarial loss
|
(48.0 | ) | (17.6 | ) | (63.3 | ) | (15.1 | ) | (3.8 | ) | (2.4 | ) | ||||||||||||||||
|
Amortization of prior service cost
|
(4.1 | ) | (3.7 | ) | (2.7 | ) | (3.5 | ) | (2.8 | ) | (5.3 | ) | ||||||||||||||||
|
Total (income) loss recognized in other comprehensive income
(loss)
|
(182.4 | ) | 2,038.2 | (418.7 | ) | (52.3 | ) | 80.6 | (8.5 | ) | ||||||||||||||||||
|
Total change recognized in net periodic benefit cost and
other comprehensive income (loss)
|
$ | (132.7 | ) | $ | 2,037.9 | $ | (357.0 | ) | $ | (3.5 | ) | $ | 109.2 | $ | 23.6 | |||||||||||||
Assumptions
Weighted-average
assumptions used to determine benefit obligations at December 31:
| PENSION | OTHER BENEFITS | |||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||
|
Discount rate
|
5.98 | % | 6.24 | % | 6.00 | % | 6.25 | % | ||||||||||
|
Rate of future compensation increase
|
3.99 | % | 3.97 | % | 4.00 | % | 4.00 | % | ||||||||||
Weighted-average
assumptions used to determine net periodic benefit cost for the
years ended December 31:
| PENSION | OTHER BENEFITS | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||||||
|
Discount rate
|
6.24 | % | 6.19 | % | 5.87 | % | 6.25 | % | 6.00 | % | 6.00 | % | ||||||||||||||||
|
Expected return on plan assets
|
8.87 | % | 8.87 | % | 8.87 | % | 9.00 | % | 9.00 | % | 9.00 | % | ||||||||||||||||
|
Rate of future compensation increase
|
3.97 | % | 4.45 | % | 4.48 | % | 4.00 | % | 4.50 | % | 4.50 | % | ||||||||||||||||
Management develops
each assumption using relevant company experience in conjunction
with market-related data for each individual country in which
such plans exist. Assumptions are reviewed annually and adjusted
as necessary.
The expected
long-term rate of return on assets reflects the expected returns
for each major asset class in which the plans invest, the weight
of each asset class in the target mix, the correlations among
asset classes and their expected volatilities. Our expected
return on plan assets is estimated by evaluating both historical
returns and estimates of future returns. Specifically, we
analyze the plan’s actual historical annual return on
assets, net of fees, over the past 10, 15, 20 and 25 years;
make estimates of future returns using a Capital Asset Pricing
Model; and evaluate historical broad market returns over the
past 75 years based on our asset allocation range. Based on
this approach, our estimate of the long-term annual rate of
return on assets for domestic pension plans is 9.0%. For
reference, our actual geometric average annual return on plan
assets for domestic pension plans as of December 31, 2009
were
71
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
4.4%, 9.3%, 9.3% and
10.8%, for the past 10, 15, 20, and 25 year periods,
respectively.
The chart below
shows actual versus the expected long-term returns for our
domestic pension plans that are utilized in the calculation of
the net periodic benefit cost.
| 2009 | 2008 | 2007 | ||||||||||||||||
|
Expected rate of return on plan assets
|
9.0 | % | 9.0 | % | 9.0 | % | ||||||||||||
|
Actual rate of return on plan assets
|
24.1 | % | (31.2 | )% | 12.7 | % | ||||||||||||
The assumed rate of
future increases in the per capita cost of health care (the
health care trend rate) is 7.0% for 2010, decreasing ratably to
5.0% in 2016. Increasing the health care trend rates by one
percent per year would have the effect of increasing the benefit
obligation by $38.0 and the aggregate annual service and
interest cost components by $3.0. A decrease of one percent in
the health care trend rate would reduce the benefit obligation
by $32.4 and the aggregate annual service and interest cost
components by $2.5. To the extent that actual experience differs
from these assumptions, the effect will be amortized over the
average future service of the covered active employees.
The determination of
the assumptions shown in the table above and the discussion of
health care trend rates are based on the provisions of the
applicable accounting pronouncements, the review of various
market data and discussion with our actuaries. Changes in these
assumptions could materially affect the financial position and
results of operations.
Investment
Policy
The investment
strategy for managing worldwide postretirement benefit plan
assets is to seek an optimal rate of return relative to an
appropriate level of risk for each plan. Investment strategies
vary by plan, depending on the specific characteristics of the
plan, such as plan size and design, funded status, liability
profile and legal requirements.
Substantially all of
the postretirement benefit plan assets are attributable to its
U.S. salaried and hourly pension plans, which are managed
on a commingled basis in a master investment trust. With respect
to these U.S. plans, the Company allows itself broad
discretion to invest tactically to respond to changing market
conditions, while staying reasonably within the asset allocation
ranges prescribed by its investment guidelines. In making these
asset allocation decisions, the Company takes into account
recent and expected returns and volatility of returns for each
asset class, the expected correlation of returns among the
different investments, as well as anticipated funding and cash
flows. To enhance returns and mitigate risk, the Company
diversifies its investments by strategy, asset class, geography
and sector. The Company engages a large number of managers to
gain broad exposure to the markets, while generating
excess-of-market
returns and mitigating manager-concentration risk.
The asset
allocations of these U.S. plans, as of December 31,
2009 and 2008, and the related asset allocation ranges were as
follows:
|
ACTUAL
|
ASSET
|
||||||||||||||
| ALLOCATION | ALLOCATION | ||||||||||||||
| ASSET CATEGORY | 2009 | 2008 | Range | ||||||||||||
|
Domestic equities
|
25 | % | 24 | % | 25%-75% | ||||||||||
|
Alternative investments
|
47 | 53 | 20%-45% | ||||||||||||
|
International equities
|
17 | 14 | 10%-45% | ||||||||||||
|
Fixed income
|
4 | 3 | 0%-60% | ||||||||||||
|
Cash and other
|
7 | 6 | 0%-30% | ||||||||||||
| 100 | % | 100 | % | ||||||||||||
The strategies and
allocations of plan assets outside of the U.S. are managed
locally and may differ significantly from those in the
U.S. In general and as of December 31, 2009,
non-U.S. plans
are managed closely to their strategic allocations.
Fair Value of
Plan Assets
In measuring plan
assets at fair value, a fair value hierarchy is applied which
categorizes and prioritizes the inputs used to estimate fair
value into three levels. The fair value hierarchy is based on
maximizing the use of observable inputs and minimizing the use
of unobservable inputs when measuring fair value. Classification
within the fair value hierarchy is based on the lowest level
input that is significant to the fair value measurement. The
three levels of the fair value hierarchy are defined as follows:
| n | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. | |
| n | Level 2 inputs are other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices (in non-active markets or in active markets for similar assets or liabilities), inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or other means. | |
| n | Level 3 inputs are unobservable inputs for the assets or liabilities. |
72
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
In certain
instances, fair value is estimated using quoted market prices
obtained from external pricing services. In obtaining such data
from the pricing service, the Company has evaluated the
methodologies used to develop the estimate of fair value in
order to assess whether such valuations are representative of
fair value, including net asset value (NAV). Additionally, in
certain circumstances, the Company may adjust NAV reported by an
asset manager when sufficient evidence indicates NAV is not
representative of fair value.
The following is a
description of the valuation methodologies and inputs used to
measure fair value for major categories of investments.
| n | Equity securities – Equities (including common and preferred shares, domestic listed and foreign listed, closed end mutual funds and exchange traded funds) are generally valued at the closing price reported on the major market on which the individual securities are traded at the measurement date. As all equity securities held by the Company are publicly traded in active markets, the securities are classified within Level 1 of the fair value hierarchy. | |
| n | Open ended mutual funds, collective trusts and commingled funds – Open ended mutual funds, collective trusts and commingled funds are measured at net asset value (NAV). These funds are generally classified within Level 2 of the fair value hierarchy. | |
| n | Private equity – The valuation of limited partnership interests in private equity funds may require significant management judgment. The NAV reported by the asset manager is adjusted when management determines that NAV is not representative of fair value. In making such an assessment, a variety of factors are reviewed by management, including, but not limited to, the timeliness of NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported by the asset manager. These funds are generally classified within Level 3 of the fair value hierarchy. | |
| n | Absolute return (hedge funds) – The valuation of limited partnership interests in hedge funds may require significant management judgment. The NAV reported by the asset manager is adjusted when management determines that NAV is not representative of fair value. In making such an assessment, a variety of factors are reviewed by management, including, but not limited to, the timeliness of NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported by the asset manager. Depending on how quickly ITT can redeem these investments and the extent of any adjustments to NAV, hedge funds are classified within either Level 2 (redeemable within 90 days) or Level 3 (redeemable beyond 90 days) of the fair value hierarchy. | |
| n | Fixed income – U.S. government securities are generally valued using quoted prices of securities with similar characteristics. Corporate bonds and notes are generally valued by using pricing models (e.g. discounted cash flows), quoted prices of securities with similar characteristics or broker quotes. Fixed income securities are generally classified in Level 2 of the fair value hierarchy. |
73
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
The fair value of
plan assets held by our postretirement benefit plans, at
December 31, 2009, by asset class were as follows:
| PENSION | OTHER BENEFITS | |||||||||||||||||||||||||||||||||||||
| FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2009 | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||
|
Asset Category
|
||||||||||||||||||||||||||||||||||||||
|
Equities Securities:
|
||||||||||||||||||||||||||||||||||||||
|
Domestic
|
$ | 956.8 | $ | 737.0 | $ | 141.8 | $ | 78.0 | $ | 74.7 | $ | 63.4 | $ | 7.3 | $ | 4.0 | ||||||||||||||||||||||
|
Developed markets
|
455.5 | 339.3 | 23.0 | 93.2 | 15.2 | 10.1 | 0.3 | 4.8 | ||||||||||||||||||||||||||||||
|
Emerging markets
|
396.6 | 157.4 | 210.8 | 28.4 | 19.9 | 7.7 | 10.8 | 1.4 | ||||||||||||||||||||||||||||||
|
ITT Stock
|
49.3 | 49.3 | – | – | 2.5 | 2.5 | – | – | ||||||||||||||||||||||||||||||
|
Subtotal – equity securities
|
1,858.2 | 1,283.0 | 375.6 | 199.6 | 112.3 | 83.7 | 18.4 | 10.2 | ||||||||||||||||||||||||||||||
|
Private equity:
|
||||||||||||||||||||||||||||||||||||||
|
Buyout
funds
(a)
|
884.2 | – | 1.4 | 882.8 | 44.3 | – | 0.1 | 44.2 | ||||||||||||||||||||||||||||||
|
Distressed
funds
(b)
|
180.6 | – | – | 180.6 | 8.9 | – | – | 8.9 | ||||||||||||||||||||||||||||||
|
Venture/growth equity
funds
(c)
|
33.2 | – | – | 33.2 | 1.7 | – | – | 1.7 | ||||||||||||||||||||||||||||||
|
Mezzanine
funds
(d)
|
28.2 | – | – | 28.2 | 1.4 | – | – | 1.4 | ||||||||||||||||||||||||||||||
|
Subtotal – private equity
|
1,126.2 | – | 1.4 | 1,124.8 | 56.3 | – | 0.1 | 56.2 | ||||||||||||||||||||||||||||||
|
Absolute return (hedge funds):
|
||||||||||||||||||||||||||||||||||||||
|
Fund of
funds
(e)
|
318.8 | – | 57.0 | 261.8 | 14.8 | – | 1.4 | 13.4 | ||||||||||||||||||||||||||||||
|
Fixed
income/multi-strat
(f)
|
319.7 | – | 146.5 | 173.2 | 16.4 | – | 7.5 | 8.9 | ||||||||||||||||||||||||||||||
|
Equity
long/short
(g)
|
119.9 | – | 79.6 | 40.3 | 6.1 | – | 4.1 | 2.0 | ||||||||||||||||||||||||||||||
|
Macro
(h)
|
37.8 | – | 37.8 | – | 1.9 | – | 1.9 | – | ||||||||||||||||||||||||||||||
|
Subtotal – absolute return
|
796.2 | – | 320.9 | 475.3 | 39.2 | – | 14.9 | 24.3 | ||||||||||||||||||||||||||||||
|
Fixed Income:
|
||||||||||||||||||||||||||||||||||||||
|
Fixed income
|
231.0 | 13.0 | 218.0 | – | 23.4 | 0.7 | 14.5 | 8.2 | ||||||||||||||||||||||||||||||
|
Other:
|
||||||||||||||||||||||||||||||||||||||
|
Commodities
|
179.2 | – | 153.0 | 26.2 | 9.1 | – | 7.8 | 1.3 | ||||||||||||||||||||||||||||||
|
Cash and other, net
|
117.0 | 109.2 | (6.1 | ) | 13.9 | 6.9 | 6.6 | (0.5 | ) | 0.8 | ||||||||||||||||||||||||||||
|
Subtotal – other
|
296.2 | 109.2 | 146.9 | 40.1 | 16.0 | 6.6 | 7.3 | 2.1 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 4,307.8 | $ | 1,405.2 | $ | 1,062.8 | $ | 1,839.8 | $ | 247.2 | $ | 91.0 | $ | 55.2 | $ | 101.0 | ||||||||||||||||||||||
| (a) | Private equity buyout funds, included within postretirement benefit plan assets, are partnership investment vehicles that take a controlling interest primarily in private companies with the intent of developing them for future sale at a higher price to a strategic or financial buyer or through an initial public offering. These investments include $482.4 where ownership of the partnership interest is directly held and $362.2 invested through funds of private equity funds. | |
| (b) | Private equity distressed funds are partnership investment vehicles that purchase debt or preferred equity instruments of companies that are distressed, near bankrupt or bankrupt. | |
| (c) | Venture and growth equity private equity funds are partnership investment vehicles that provide seed or growth capital to start-ups and early stage companies, usually in high growth industries, such as information and clean technology, health care and biotechnology. | |
| (d) | Mezzanine private equity funds provide mezzanine loans to companies that need capital but do not want to sell or dilute their equity interests. Mezzanine loans are subordinated debt or preferred equity securities that represent a claim on the borrower’s assets which is senior to the common equity but subordinate to senior secured and unsecured debt. | |
| (e) | Absolute return fund of funds include partnership investment vehicles that invest in a diversified portfolio of other hedge funds that employ a range of investment strategies. | |
| (f) | Fixed income/multi-strat absolute return funds are partnership investment vehicles that invest in multiple investment strategies, such as macro, equity long/short, convertible arbitrage and event driven, often with the intent to diversify risk and reduce volatility. | |
| (g) | Equity long/short absolute return funds include partnership investment vehicles that can purchase both long and short positions of publicly traded equities. Management of the fund has the ability to shift investments from value to growth strategies, from small to large capitalization companies, and from a net long position to a net short position. | |
| (h) | Macro absolute return funds include partnership investment vehicles that make investments predicated on the managers views, either fundamentally or quantitatively derived, on different global factors, such as asset allocation (e.g., stocks vs. bonds) interest rates, currency, sovereign risk and commodities over a span of different time frames. |
74
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
The following table
presents a reconciliation of the beginning and ending balances
of fair value measurement within our pension plans using
significant unobservable inputs (Level 3):
|
EQUITY
|
PRIVATE
|
HEDGE
|
FIXED
|
|||||||||||||||||||||||||
| SECURITIES | EQUITY | FUNDS | INCOME | OTHER | TOTAL | |||||||||||||||||||||||
|
Beginning balance at December 31, 2008
|
$ | 274.2 | $ | 987.6 | $ | 783.5 | $ | 39.7 | $ | 125.5 | $ | 2,210.5 | ||||||||||||||||
|
Relating to assets sold during the period (realized gains and
(losses))
|
(0.2 | ) | 25.7 | 2.7 | – | 1.0 | 29.2 | |||||||||||||||||||||
|
Relating to assets still held at the reporting date (unrealized
gains and (losses))
|
70.2 | 19.6 | 83.6 | – | 2.3 | 175.7 | ||||||||||||||||||||||
|
Purchases, sales, and settlements, net
|
5.1 | 89.2 | (185.9 | ) | – | 7.9 | (83.7 | ) | ||||||||||||||||||||
|
Transfers in and/or out of Level 3
|
(149.7 | ) | – | (208.6 | ) | (39.7 | ) | (96.6 | ) | (494.6 | ) | |||||||||||||||||
|
Foreign currency impact
|
– | 2.7 | – | – | – | 2.7 | ||||||||||||||||||||||
|
Ending balance at December 31, 2009
|
$ | 199.6 | $ | 1,124.8 | $ | 475.3 | $ | – | $ | 40.1 | $ | 1,839.8 | ||||||||||||||||
The following table
presents a reconciliation of the beginning and ending balances
of fair value measurement within our other postretirement
welfare plans using significant unobservable inputs
(Level 3):
|
EQUITY
|
PRIVATE
|
HEDGE
|
FIXED
|
|||||||||||||||||||||||||
| SECURITIES | EQUITY | FUNDS | INCOME | OTHER | TOTAL | |||||||||||||||||||||||
|
Beginning balance at December 31, 2008
|
$ | 14.0 | $ | 49.8 | $ | 40.1 | $ | 9.6 | $ | 6.4 | $ | 119.9 | ||||||||||||||||
|
Relating to assets sold during the period (realized gains and
(losses))
|
– | 1.3 | 0.1 | 1.0 | 0.1 | 2.5 | ||||||||||||||||||||||
|
Relating to assets still held at the reporting date (unrealized
gains and (losses))
|
3.6 | 0.8 | 4.3 | (0.1 | ) | 0.1 | 8.7 | |||||||||||||||||||||
|
Purchases, sales, and settlements, net
|
0.3 | 4.3 | (9.5 | ) | (0.3 | ) | 0.4 | (4.8 | ) | |||||||||||||||||||
|
Transfers in and/or out of Level 3
|
(7.7 | ) | – | (10.7 | ) | (2.0 | ) | (4.9 | ) | (25.3 | ) | |||||||||||||||||
|
Ending balance at December 31, 2009
|
$ | 10.2 | $ | 56.2 | $ | 24.3 | $ | 8.2 | $ | 2.1 | $ | 101.0 | ||||||||||||||||
Contributions
Funding requirements
under Internal Revenue Service rules are a major consideration
in making contributions to our post-retirement plans. With
respect to qualified pension plans, we intend to contribute
annually not less than the minimum required by applicable law
and regulations. We made contributions of $161.0 to pension
plans during 2009, including a voluntary contribution to the
U.S. Salaried Retirement Plan of $100.0 during the fourth
quarter. We currently anticipate making contributions to our
pension plans in the range of $10.0 to $15.0 during 2010, of
which $3.0 is expected to be made in the first quarter.
Estimated Future
Benefit Payments
The following
benefit payments covering pension and other benefit plans have
been projected based on benefits earned to date and the
expectation that certain future service will be earned by
currently active employees:
|
OTHER
|
||||||||||
| PENSION | BENEFITS | |||||||||
|
2010
|
$ | 364.8 | $ | 54.7 | ||||||
|
2011
|
369.7 | 55.4 | ||||||||
|
2012
|
374.9 | 55.9 | ||||||||
|
2013
|
382.9 | 56.6 | ||||||||
|
2014
|
391.9 | 57.4 | ||||||||
|
2015 – 2019
|
2,090.8 | 291.0 | ||||||||
NOTE 17
Long-Term
Incentive Employee Compensation
Our long-term
incentive awards program is comprised of three components:
non-qualified stock options (NQOs), restricted stock awards and
units (RSAs and RSUs, respectively), and a target cash award
(TSR). We account for NQOs and RSAs as equity-based compensation
awards. RSU and TSR awards are cash settled and accounted for as
liability-based compensation.
75
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
The NQO and RSA
incentive plans provide for the awarding of options on common
shares and restricted common shares to employees and
non-employee directors. The ITT Amended and Restated 2003 Equity
Incentive Plan (2003 Equity Incentive Plan) was approved by
shareholders and established in May of 2003. The number of
shares initially available for awards under this plan was 12.2.
As of December 31, 2009, 3.6 shares were available for
future grants. ITT makes available for the exercise of stock
options or vesting of restricted shares by purchasing shares in
the open market or by issuing shares from Treasury.
The 2003 Equity
Incentive Plan replaced the 2002 ITT Stock Option Plan for
Non-Employee Directors, the ITT 1996 Restricted Stock Plan for
Non-Employee Directors and the 1994 ITT Incentive Stock Plan on
a prospective basis. All outstanding awards granted under these
prior plans are vested and exercisable. No future grants will be
made under these prior plans.
Long-term incentive
employee compensation costs are primarily recorded within
SG&A expenses, and are reduced by an estimated forfeiture
rate. These costs impacted our consolidated results of
operations as follows:
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
Compensation costs on equity-based awards
|
$ | 29.4 | $ | 31.5 | $ | 35.5 | |||||||||
|
Compensation costs on liability-based awards
|
4.1 | 23.7 | 22.4 | ||||||||||||
|
Total compensation costs, pre-tax
|
$ | 33.5 | $ | 55.2 | $ | 57.9 | |||||||||
|
Future tax benefit
|
$ | 10.4 | $ | 18.2 | $ | 19.0 | |||||||||
At December 31,
2009, there was $38.1 of total unrecognized compensation cost
related to non-vested awards granted under the stock option and
restricted stock plans. This cost is expected to be recognized
ratably over a weighted-average period of 1.7 years. RSU
compensation costs and the related number of units granted,
settled and outstanding for each of the periods presented are
not considered material.
Non-Qualified
Stock Options
Options generally
vest over or at the conclusion of a three year period and are
exercisable in seven or ten-year periods, except in certain
instances of death, retirement or disability. The exercise price
per share is the fair market value of the underlying common
stock on the date each option is granted.
A summary of the
status of our stock option and restricted stock shares as of
December 31, 2009, 2008 and 2007 and changes during the
years then ended is presented below.
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||
|
WEIGHTED-
|
WEIGHTED-
|
WEIGHTED-
|
||||||||||||||||||||||||||
|
AVERAGE
|
AVERAGE
|
AVERAGE
|
||||||||||||||||||||||||||
|
EXERCISE
|
EXERCISE
|
EXERCISE
|
||||||||||||||||||||||||||
| STOCK OPTIONS | SHARES | PRICE | SHARES | PRICE | SHARES | PRICE | ||||||||||||||||||||||
|
Outstanding at beginning of year
|
8.1 | $ | 39.83 | 8.7 | $ | 38.13 | 10.6 | $ | 35.50 | |||||||||||||||||||
|
Granted
|
0.9 | 33.59 | 0.6 | 53.57 | 0.5 | 58.52 | ||||||||||||||||||||||
|
Exercised
|
(0.8 | ) | 26.32 | (1.0 | ) | 32.82 | (2.2 | ) | 29.92 | |||||||||||||||||||
|
Canceled or expired
|
(0.1 | ) | 45.94 | (0.2 | ) | 44.31 | (0.2 | ) | 42.14 | |||||||||||||||||||
|
Outstanding at end of year
|
8.1 | $ | 40.29 | 8.1 | $ | 39.83 | 8.7 | $ | 38.13 | |||||||||||||||||||
|
Options exercisable at end of year
|
6.4 | $ | 39.49 | 6.8 | $ | 37.02 | 6.4 | $ | 33.83 | |||||||||||||||||||
The intrinsic value
of options exercised (which is the amount by which the stock
price exceeded the exercise price of the options on the date of
exercise) during 2009, 2008 and 2007 was $17.5, $29.5 and $70.7,
respectively.
The amount of cash
received from the exercise of stock options was $20.2 and $34.4
for 2009 and 2008, respectively. The tax benefit realized during
2009 and 2008 associated with stock option exercises and lapses
of restricted stock was $10.7 and $12.1, respectively. We
classify, as a financing activity, the cash flows attributable
to excess tax benefits arising from stock option exercises and
restricted stock lapses. Cash provided by operating activities
decreased and cash provided by financing activities increased by
$3.0, $6.7 and $15.0 for 2009, 2008 and 2007, respectively. The
following table summarizes information about ITT’s stock
options at December 31, 2009:
76
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
| OPTIONS OUTSTANDING | OPTIONS EXERCISABLE | |||||||||||||||||||||||||||||||||||||||
|
WEIGHTED-
|
WEIGHTED-
|
|||||||||||||||||||||||||||||||||||||||
|
AVERAGE
|
WEIGHTED-
|
AVERAGE
|
WEIGHTED-
|
|||||||||||||||||||||||||||||||||||||
|
REMAINING
|
AVERAGE
|
AGGREGATE
|
REMAINING
|
AVERAGE
|
AGGREGATE
|
|||||||||||||||||||||||||||||||||||
|
CONTRACTUAL
|
EXERCISE
|
INTRINSIC
|
CONTRACTUAL
|
EXERCISE
|
INTRINSIC
|
|||||||||||||||||||||||||||||||||||
| RANGE OF EXERCISE PRICES | NUMBER | LIFE (IN YEARS) | PRICE | VALUE | NUMBER | LIFE (IN YEARS) | PRICE | VALUE | ||||||||||||||||||||||||||||||||
| $ | 10-$20 | 0.4 | 0.9 | $ | 18.26 | $ | 11.4 | 0.4 | 0.9 | $ | 18.26 | $ | 11.4 | |||||||||||||||||||||||||||
| $ | 20-$30 | 0.5 | 2.1 | 25.36 | 13.4 | 0.5 | 2.1 | 25.36 | 13.4 | |||||||||||||||||||||||||||||||
| $ | 30-$40 | 3.1 | 3.4 | 34.34 | 48.2 | 2.3 | 3.8 | 34.75 | 34.2 | |||||||||||||||||||||||||||||||
| $ | 40-$50 | 2.5 | 2.8 | 45.08 | 11.5 | 2.3 | 2.7 | 45.20 | 10.7 | |||||||||||||||||||||||||||||||
| $ | 50-$60 | 1.5 | 4.1 | 54.46 | (7.2 | ) | 0.9 | 3.6 | 54.01 | (3.8 | ) | |||||||||||||||||||||||||||||
| $ | 60-$70 | 0.1 | 5.0 | 66.79 | (0.8 | ) | – | – | – | – | ||||||||||||||||||||||||||||||
| 8.1 | 3.2 | 40.29 | $ | 76.5 | 6.4 | 3.1 | 39.49 | $ | 65.9 | |||||||||||||||||||||||||||||||
The aggregate
intrinsic value in the preceding table represents the total
pre-tax intrinsic value, based on ITT’s closing stock price
of $49.74 as of December 31, 2009, which would have been
received by the option holders had all option holders exercised
their options as of that date. The number of options
“out-of-the-money” as of December 31, 2009,
included as exercisable in the preceding table was
0.9 million.
As of
December 31, 2009, the total number of stock options
expected to vest (including those that have already vested) was
7.9 million. These stock options have a weighted-average
exercise price of $40.09, an aggregate intrinsic value of $80.1,
and a weighted-average remaining contractual life of
3.5 years.
The fair value of
each option grant was estimated on the date of grant using the
binomial lattice pricing model, as this is considered the
preferred method, incorporating multiple and variable
assumptions over time, including assumptions such as employee
exercise patterns, stock price volatility and changes in
dividends. The following are weighted-average assumptions for
2009, 2008 and 2007:
| 2009 | 2008 | 2007 | ||||||||||||
|
Dividend yield
|
2.54 | % | 1.31 | % | 0.96 | % | ||||||||
|
Expected volatility
|
38.77 | % | 28.69 | % | 23.09 | % | ||||||||
|
Expected life (in years)
|
4.7 | 4.7 | 4.8 | |||||||||||
|
Risk-free rates
|
2.20 | % | 2.31 | % | 4.39 | % | ||||||||
|
Weighted-average grant date fair value
|
$ | 9.60 | $ | 13.46 | $ | 14.68 | ||||||||
Expected
volatilities are based on ITT’s stock price history,
including implied volatilities from traded options on our stock.
ITT uses historical data to estimate option exercise and
employee termination behavior within the valuation model.
Employee groups and option characteristics are considered
separately for valuation purposes. The expected life represents
an estimate of the period of time options are expected to remain
outstanding. The expected life provided above represents the
weighted average of expected behavior for certain groups of
employees who have historically exhibited different behavior.
The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of option grant.
Restricted Stock
Awards
RSAs typically vest
three years from the date of grant. ITT makes shares available
for the vesting of restricted shares by purchasing shares in the
open market or by issuing shares from Treasury. Holders of RSAs
have the right to receive dividends and vote on the shares. If
an employee leaves the Company prior to vesting, whether through
resignation or termination for cause, the restricted stock is
forfeited. If an employee retires or is terminated other than
for cause, a pro rata portion of the RSA may vest.
Restricted shares
and restricted stock unit awards were granted during
December 31, 2009, 2008, and 2007 with fair market values
based on ITT’s stock price on the date of grant.
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
| YEAR ENDED DECEMBER 31, 2009 | ||||||||||||||||||||
| UNVESTED | OUTSTANDING | |||||||||||||||||||
|
WEIGHTED-
|
WEIGHTED-
|
|||||||||||||||||||
|
AVERAGE
|
AVERAGE
|
|||||||||||||||||||
|
GRANT DATE
|
GRANT DATE
|
|||||||||||||||||||
| RESTRICTED SHARES/STOCK UNITS | AWARDS | FAIR VALUE | AWARDS | FAIR VALUE | ||||||||||||||||
|
Unvested/outstanding at beginning of year
|
1.2 | $ | 53.75 | 1.5 | $ | 51.96 | ||||||||||||||
|
Granted
|
0.7 | 33.88 | 0.7 | 33.88 | ||||||||||||||||
|
Vested/lapsed
|
(0.4 | ) | 53.07 | (0.4 | ) | 52.83 | ||||||||||||||
|
Canceled or expired
|
(0.1 | ) | 54.94 | (0.1 | ) | 54.94 | ||||||||||||||
|
Unvested/outstanding at end of year
|
1.4 | $ | 44.69 | 1.7 | $ | 44.36 | ||||||||||||||
| YEAR ENDED DECEMBER 31, 2008 | ||||||||||||||||||||
| UNVESTED | OUTSTANDING | |||||||||||||||||||
|
WEIGHTED-
|
WEIGHTED-
|
|||||||||||||||||||
|
AVERAGE
|
AVERAGE
|
|||||||||||||||||||
|
GRANT DATE
|
GRANT DATE
|
|||||||||||||||||||
| RESTRICTED SHARES/STOCK UNITS | AWARDS | FAIR VALUE | AWARDS | FAIR VALUE | ||||||||||||||||
|
Unvested/outstanding at beginning of year
|
1.1 | $ | 52.64 | 1.3 | $ | 50.93 | ||||||||||||||
|
Granted
|
0.4 | 53.57 | 0.4 | 53.57 | ||||||||||||||||
|
Vested/lapsed
|
(0.2 | ) | 47.65 | (0.1 | ) | 45.76 | ||||||||||||||
|
Canceled or expired
|
(0.1 | ) | 55.89 | (0.1 | ) | 55.89 | ||||||||||||||
|
Unvested/outstanding at end of year
|
1.2 | $ | 53.75 | 1.5 | $ | 51.96 | ||||||||||||||
| YEAR ENDED DECEMBER 31, 2007 | ||||||||||||||||||||
| UNVESTED | OUTSTANDING | |||||||||||||||||||
|
WEIGHTED-
|
WEIGHTED-
|
|||||||||||||||||||
|
AVERAGE
|
AVERAGE
|
|||||||||||||||||||
|
GRANT DATE
|
GRANT DATE
|
|||||||||||||||||||
| RESTRICTED SHARES/STOCK UNITS | AWARDS | FAIR VALUE | AWARDS | FAIR VALUE | ||||||||||||||||
|
Unvested/outstanding at beginning of year
|
0.9 | $ | 48.45 | 1.0 | $ | 46.87 | ||||||||||||||
|
Granted
|
0.4 | 59.16 | 0.4 | 59.16 | ||||||||||||||||
|
Vested/lapsed
|
(0.2 | ) | 45.89 | (0.1 | ) | 44.08 | ||||||||||||||
|
Unvested/outstanding at end of year
|
1.1 | $ | 52.64 | 1.3 | $ | 50.93 | ||||||||||||||
The outstanding
restricted shares include 0.1 shares issued to non-employee
directors in payment for part of their annual retainer. This
cost is expected to be recognized ratably over a weighted
average period of 1.0 years.
Total Shareholder
Return Awards
The TSR award plan
is a performance-based cash award incentive program provided to
key employees of ITT. TSR awards are accounted for under
stock-compensation principles of accounting as liability-based
awards. The fair value of outstanding awards is determined at
the conclusion of the three-year performance period by measuring
ITT’s total shareholder return percentage against the total
shareholder return performance of other stocks generally
comprising the S&P Industrials Index. The number of
companies included in the applicable benchmark group range from
305 to 357 as of December 31, 2009. We reassess the fair
value of our TSR awards on a quarterly basis at the end of each
reporting period using actual total shareholder
78
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
return data over the
elapsed performance period as well as a Monte Carlo simulation.
The fair value of the outstanding awards at December 31,
2009 and 2008 was $27.3 and $46.0, respectively.
Payment, if any, is
based on the TSR performance comparison measured against targets
established at the time of the award. The total cash paid to
settle the TSR liability was $21.1, $19.3 and $17.6, during the
years ended 2009, 2008 and 2007, respectively. At
December 31, 2009, total unrecognized compensation costs
projected to be incurred, based on current performance
measurements, over the remaining vesting period is $7.1. This
cost is expected to be recognized ratably over a
weighted-average period of 1.3 years.
NOTE 18
Capital
Stock
ITT has authority to
issue an aggregate of 550 shares of capital stock, of which
500 shares have been designated as “Common Stock”
having a par value of $1 per share and 50 shares have been
designated as “Preferred Stock” not having any par or
stated value. There was no Preferred Stock outstanding as of
December 31, 2009 and 2008.
As of
December 31, 2009 and 2008, 24.0 and 25.2 shares of
Common Stock were held in Treasury, respectively.
NOTE 19
Commitments and
Contingencies
From time to time we
are involved in legal proceedings that are incidental to the
operation of our businesses. Some of these proceedings allege
damages relating to environmental liabilities, intellectual
property matters, copyright infringement, personal injury
claims, employment and pension matters, government contract
issues and commercial or contractual disputes, sometimes related
to acquisitions or divestitures. We will continue to vigorously
defend itself against all claims. Although the ultimate outcome
of any legal matter cannot be predicted with certainty, based on
present information including our assessment of the merits of
the particular claim, as well as our current reserves and
insurance coverage, we do not expect that such legal proceedings
will have any material adverse impact on our cash flow, results
of operations, or financial condition on a consolidated basis in
the foreseeable future, unless otherwise noted below.
Asbestos
Matters
ITT, including its
subsidiary Goulds Pumps, Inc. (Goulds), has been joined as a
defendant with numerous other companies in product liability
lawsuits alleging personal injury due to asbestos exposure.
These claims allege that certain of our products sold prior to
1985 contained a part manufactured by a third party, e.g., a
gasket, which contained asbestos. To the extent these
third-party parts may have contained asbestos, it was
encapsulated in the gasket (or other) material and was
non-friable. In certain other cases, it is alleged that former
ITT companies were distributors for other manufacturers’
products that may have contained asbestos.
As of
December 31, 2009, there were 104,679 open claims against
ITT filed in various state and federal courts alleging injury as
a result of exposure to asbestos. Activity related to these
asserted asbestos claims during the period was as follows:
| 2009 | 2008 | |||||||||
|
Open claims* – January 1
|
103,006 | 102,568 | ||||||||
|
New claims
|
4,274 | 6,332 | ||||||||
|
Settlements
|
(1,081 | ) | (1,736 | ) | ||||||
|
Dismissals
|
(4,728 | ) | (4,158 | ) | ||||||
|
Adjustment**
|
3,208 | – | ||||||||
|
Open claims* – December 31
|
104,679 | 103,006 | ||||||||
| * | Excludes 34,813 claims related to maritime actions that have been placed on inactive dockets, which the Company believes will not be litigated. Almost all of these claims were filed in the United States District Court for the Northern District of Ohio and transferred to the Eastern District of Pennsylvania pursuant to an order by the Federal Judicial Panel on Multi-District Litigation (MDL). |
| ** | Reflects an adjustment to increase the number of open claims as a result of our transition to our own comprehensive database as we have assumed responsibility for administering our asbestos claims from our primary insurance companies. |
Frequently, the
plaintiffs are unable to identify any ITT or Goulds product as a
source of asbestos exposure. In addition, in a large majority of
the 104,679 pending claims against the Company, the plaintiffs
are unable to demonstrate any injury. Many of those claims have
been placed on inactive dockets (including 44,303 claims in
Mississippi). Our experience to date is that a substantial
portion of resolved claims have been dismissed without payment
by the Company. As a result, management believes that
approximately 90 percent of the 104,679 open claims have
little or no value. The average payment per resolved claim for
the year ended December 31, 2009 and 2008 was $11.6
thousand and $7.7 thousand, respectively. Because claims are
sometimes dismissed in large groups, the average cost per
resolved claim as well as the number of open claims can
fluctuate significantly from period to period.
Historically, we
have recorded a liability for pending asbestos claims only. As
previously disclosed in our 2008 Annual Report on
Form 10-K,
while it was probable that we would incur
79
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
additional costs for
future claims to be filed against the Company, a liability for
potential future claims was not reasonably estimable due to a
number of factors. To begin with, our primary insurance carriers
managed and paid all settlements and legal costs directly. This
was compounded by the fact that, as part of their claims
administration processes, the insurance companies maintained
limited claims information and insufficient detail critical to
estimate potential liability for future claims, such as disease
type. Lastly, the insurers restricted our access to claim
filings and related information.
Over the past
several years, we have negotiated
coverage-in-place
agreements with several of our insurers under which we have
assumed responsibility for administering the asbestos claims.
Since taking over the claims administration process, we have,
over time, gained considerable knowledge of the claims. In
addition, at the end of 2008 we engaged an outside consultant to
construct a comprehensive database of claims filed against the
Company. With the completion of this work in early third quarter
of 2009, we were able to develop and analyze key data, such as
the settlements and dismissals by disease type, necessary to
estimate our exposure to potential future asbestos claims. In
the third quarter of 2009, we engaged a leading consultant of
asbestos-related professional services to assist us in
estimating our asbestos liability for both pending and
unasserted claims. This firm reviewed information provided by
the Company concerning claims filed, settled and dismissed,
amounts paid in settlements, and relevant claim information such
as the nature of the asbestos-related disease asserted by the
claimant and the time lag from filing to disposition of claims.
Specifically, the
methodology used to estimate our total liability for pending and
unasserted future asbestos claims relied upon and included the
following key factors:
| n | interpretation of a widely accepted forecast of the population likely to have been occupationally exposed to asbestos; | |
| n | widely accepted epidemiological studies estimating the number of people likely to develop mesothelioma and lung cancer from exposure to asbestos; | |
| n | the Company’s historical experience with the filing of non-malignant claims against it and the historical relationship between non-malignant and malignant claims filed against the Company; | |
| n | analysis of the number of likely asbestos personal injury claims to be filed against the Company based on such epidemiological and historical data and the Company’s most recent claims experience history; | |
| n | an analysis of the Company’s pending cases, by disease type; | |
| n | an analysis of the Company’s most recent history to determine the average settlement and resolution value of claims, by disease type; | |
| n | an analysis of the Company’s defense costs in relation to its settlement costs and resolved claims; | |
| n | an adjustment for inflation in the future average settlement value of claims and defense costs at a 2.2% annual rate; and | |
| n | an analysis of the time over which the Company is likely to resolve asbestos claims. |
The liability
estimate is most sensitive to those factors surrounding
mesothelioma claims as these claims represent nearly
90 percent of the total liability. These factors include
the number of new mesothelioma claims filed against the Company,
the average settlement costs for mesothelioma claims, and the
percentage of mesothelioma claims dismissed against the Company.
These factors are interdependent, and no one factor predominates
in determining the liability estimate.
The methodology used
to project future asbestos costs is based largely on the
Company’s experience in a reference period including the
last few years for claims filed, settled and dismissed. This
experience is compared to the results of previously conducted
epidemiological studies by estimating the number of individuals
likely to develop asbestos-related diseases. Those studies were
undertaken in connection with an independent analysis of the
population of U.S. workers across eleven different industry
and occupation categories believed to have been exposed to
asbestos. Using that information for the industry and occupation
categories relevant to the Company, an estimate was developed of
the number of future claims to be filed against the Company, as
well as the aggregate settlement costs that would be incurred to
resolve both pending and future claims based upon the average
settlement costs by disease during the reference period. In
addition, the estimate is augmented for the costs of defending
asbestos claims in the tort system using a forecast based on
recent experience as well as discussions with the Company’s
defense counsel. The methodology to project future asbestos
costs is one in which the underlying assumptions are separately
assessed for their reasonableness and then each is used as an
input in estimating the liability. Our assessment of the
underlying assumptions is based upon recent experience and
future expectations, yielding only one value for each assumption.
Based on this
methodology, in the third quarter of 2009, we increased our
estimated total undiscounted asbestos liability, including legal
fees, by $686.1, reflecting costs that the Company is estimated
to incur to resolve all pending claims, as well as unasserted
claims estimated to be filed over the next 10 years. While
there are other potential estimates, our
80
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
methodology does not
create a range of estimates of reasonably possible outcomes as
we have determined our point estimate based upon our assessment
of the value of each underlying assumption. Projecting future
asbestos costs is subject to numerous variables and
uncertainties that are inherently difficult to predict. In
addition to the uncertainties surrounding the key factors
discussed above, other factors include the long latency period
prior to the manifestation of the
asbestos-related
disease, costs of medical treatment, the impact of bankruptcies
of other companies that are co-defendants, uncertainties
surrounding the litigation process from jurisdiction to
jurisdiction and from case to case, and the impact of potential
legislative or judicial changes. Furthermore, any predictions
with respect to the variables impacting the estimate of the
asbestos liability are subject to even greater uncertainty as
the projection period lengthens. In light of the uncertainties
and variables inherent in the long-term projection of the
Company’s total asbestos liability, although it is probable
that the Company will incur additional costs for asbestos claims
filed beyond the next 10 years, we do not believe there is
a reasonable basis for estimating those costs at this time. As
part of our ongoing review of asbestos claims, each quarter we
will reassess the projected liability of unasserted asbestos
claims to be filed over the next 10 years based upon the
trends we are experiencing in those factors to which the
liability is most sensitive, maintaining a rolling
10-year
projection. Annually, in the third quarter each year, we will
conduct a detailed study with the assistance of an outside
consultant to review and update as appropriate the underlying
assumptions used in our liability estimate. Additionally, we
will periodically reassess the time horizon over which a
reasonable estimate of unasserted claims can be projected.
In the third quarter
of 2009, the Company recorded a $450.3 increase in its
asbestos-related assets. These assets are comprised of an
insurance asset, as well as receivables from former ITT entities
for their portion of the asbestos liability related to a former
business whose liability is shared in accordance with the
Distribution Agreement (refer to ITT’s 2009 Annual Report
on
Form 10-K,
Item 1. “— Company History and Certain
Relationships” for a description of the Distribution and
the Distribution Agreement). We will update our assessment of
the asbestos-related assets on a quarterly and annual basis in
conjunction with the aforementioned update of the asbestos
liability.
The insurance asset
represents our best estimate of probable insurance recoveries
for the asbestos liabilities for pending claims, as well as
unasserted claims to be filed over the next 10 years. In
developing this estimate, the Company considered its
coverage-in-place
and other settlement agreements with its insurers, as well as a
number of additional factors. These additional factors include
current levels of recovery experience, the financial viability
of the insurance companies, the method by which losses will be
allocated to the various insurance policies and the years
covered by those policies, and interpretation of the various
policy terms and limits and their interrelationships. The timing
and amount of reimbursements will vary due to differing policy
terms and certain gaps in coverage as a result of some insurer
insolvencies. In addition, the Company retained an insurance
consulting firm to assist management in the estimation of
probable insurance recoveries based upon the analysis of policy
terms, the likelihood of recovery provided by our legal counsel
assuming the continued viability of those insurance carriers
which are currently solvent and incorporating risk mitigation
judgments where policy terms or other factors were not certain.
We have estimated
that we have insurance which will cover 69 percent of the
asbestos costs (defense and settlement costs) for pending claims
as well as unasserted claims to be filed over the next
10 years. However, because there are gaps in our coverage,
reflecting certain uninsured periods and prior insurance
settlements, and we expect that certain policies from some of
our primary insurers will exhaust within the next 10 years,
the insurance coverage percent is expected to decline for
potential additional asbestos liabilities. The tenth year of our
projection of the unasserted asbestos claims liability against
the related insurance asset declines to approximately
25 percent. Future recoverability rates may also be
impacted by other factors, such as future insurance settlements,
insolvencies and judicial determinations relevant to our
coverage program, which are difficult to predict and subject to
a high degree of uncertainty.
The resultant third
quarter 2009 net asbestos charge to income is summarized as
follows:
| PRE-TAX | AFTER-TAX | |||||||||
|
Continuing operations
|
$ | 222.9 | $ | 138.9 | ||||||
|
Discontinued operations
|
12.9 | 8.0 | ||||||||
|
Total
|
$ | 235.8 | $ | 146.9 | ||||||
The $222.9 pre-tax
charge to continuing operations was comprised of $13.3 ($8.2
after-tax) for the updated assessment of the net liability for
pending claims and $209.6 ($130.7 after-tax) for the initial
recording in the quarter of the net liability for the estimated
future claims to be filed over the next 10 years.
The Company’s
estimated asbestos exposure, net of expected insurance
recoveries and other recoveries from former ITT entities, for
the resolution of all pending and estimated unasserted asbestos
claims to be filed within the next 10 years
81
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
was $266.9 as of
December 31, 2009. The Company’s estimate of the cost
of pending claims, net of insurance recoveries, was $26.9 as of
December 31, 2008. A certain portion of the liability and
corresponding asbestos asset relates to a business which we
disposed of a number of years ago that is treated as
discontinued operations.
The following table
provides a rollforward of the asbestos liability and related
assets for 2009.
| LIABILITY | ASSET | NET | ||||||||||||
|
Beginning balance, January 1, 2009
|
$ | 228.1 | $ | 201.2 | $ | 26.9 | ||||||||
|
Third quarter charge
|
686.1 | 450.3 | $ | 235.8 | (a) | |||||||||
|
Other accruals added during the period
|
81.2 | 70.5 | 10.7 | (a) | ||||||||||
|
Cash activity
|
(62.2 | ) | (55.7 | ) | (6.5 | ) | ||||||||
|
Ending balance, December 31, 2009
|
$ | 933.2 | $ | 666.3 | $ | 266.9 | ||||||||
| (a) | The total of these amounts of $246.5 is comprised of a $237.5 charge to continuing operations and a $9.0 charge to discontinued operations. |
Subject to the
qualifications regarding uncertainties previously described, it
is expected that future annual net cash outflows related to
pending claims and unasserted claims to be filed over the next
10 years will extend through approximately 2023 due to the
time lag between the filing of a claim and its resolution. These
annual net cash outflows are projected to be $10 to $15 over the
next several years, relatively constant with recent levels, and
increase to $30 to $40 by 2019.
The underlying
asbestos liability and corresponding insurance asset are based
upon current, known information. However, future events
affecting the key factors and other variables for either the
asbestos liability or the insurance asset could cause the actual
costs and insurance recoveries to be higher or lower than
currently estimated. Due to these uncertainties, as well as our
inability to reasonably estimate any additional asbestos
liability for claims filed beyond the next 10 years, it is
not possible to predict the ultimate outcome of the cost of
resolving the pending and all unasserted asbestos claims. We
believe it is possible that the cost of asbestos claims filed
beyond the next 10 years, net of expected insurance
recoveries, could have a material adverse effect on our
financial position and on the results of operations or cash
flows for a particular period.
Environmental
Matters
In the ordinary
course of business, ITT is subject to federal, state, local, and
foreign environmental laws and regulations. ITT is responsible,
or is alleged to be responsible, for ongoing environmental
investigation and remediation of sites in various countries.
These sites are in various stages of investigation
and/or
remediation and in many of these proceedings ITT’s
liability is considered de minimis. ITT has received
notification from the U.S. Environmental Protection Agency,
and from similar state and foreign environmental agencies, that
a number of sites formerly or currently owned
and/or
operated by ITT, and other properties or water supplies that may
be or have been impacted from those operations, contain disposed
or recycled materials or wastes and require environmental
investigation
and/or
remediation. These sites include instances where ITT has been
identified as a potentially responsible party under federal and
state environmental laws and regulations.
Accruals for
environmental matters are recorded on a site by site basis when
it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated, based on current
law and existing technologies. ITT’s accrued liabilities
for these environmental matters represent the best estimates
related to the investigation and remediation of environmental
media such as water, soil, soil vapor, air and structures, as
well as related legal fees. These estimates, and related
accruals, are reviewed periodically and updated for progress of
investigation and remediation efforts and changes in facts and
legal circumstances. Liabilities for these environmental
expenditures are recorded on an undiscounted basis.
It is difficult to
estimate the final total costs of investigation and remediation
due to various factors, including incomplete information
regarding particular sites and other potentially responsible
parties, uncertainty regarding the extent of investigation or
remediation and our share, if any, of liability for such
conditions, the selection of alternative remedial approaches,
and changes in environmental standards and regulatory
requirements. In management’s opinion, the total amount
accrued is appropriate based on existing facts and
circumstances. Management does not anticipate these liabilities
will have a material adverse effect on the consolidated
financial position, results of operations or cash flows.
82
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
The following table
illustrates the activity related to ITT’s accrued
liabilities for these environmental matters.
| 2009 | 2008 | |||||||||
|
Beginning balance January 1
|
$ | 135.0 | $ | 124.7 | ||||||
|
Additional accruals attributable to acquisitions in the period
|
– | 8.1 | ||||||||
|
Accruals added during the period
|
1.0 | 0.5 | ||||||||
|
Change in estimates for pre-existing accruals
|
17.6 | 19.6 | ||||||||
|
Payments
|
(13.9 | ) | (17.9 | ) | ||||||
|
Ending balance December 31
|
$ | 139.7 | $ | 135.0 | ||||||
The following table
illustrates the low- and high-end range of estimated liability,
and number of active sites for these environmental matters as of
December 31, 2009.
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | ||||||||
|
Low-end range
|
$ | 113.4 | $ | 101.2 | ||||||
|
High-end range
|
$ | 248.6 | $ | 229.3 | ||||||
|
Number of active environmental investigation and remediation
sites
|
98 | 102 | ||||||||
Other
Matters
The Company is
involved in coverage litigation with various insurers seeking
recovery of costs incurred in connection with certain
environmental and product liabilities. In a suit filed in 1991,
ITT Corporation, et al. v. Pacific Indemnity Corporation
et al
, Sup. Ct., Los Angeles County, we are seeking recovery
of costs related to environmental losses. Discovery, procedural
matters, changes in California law, and various appeals have
prolonged this case. For several years, the case was on appeal
before the California Court of Appeals from a decision by the
California Superior Court dismissing certain claims made by ITT.
The case is now back before the Superior Court and the parties
are engaged in further discovery.
On February 13,
2003, we commenced an action,
Cannon Electric, Inc. v.
Affiliated FM Ins. Co
., Sup. Ct., Los Angeles County,
seeking recovery of costs related to asbestos product liability
loses described above. During this coverage litigation, ITT has
entered into
coverage-in-place
settlement agreements with ACE, Wausau and Utica Mutual dated
April 2004, September 2004, and February 2007, respectively.
These agreements provide specific coverage for the
Company’s legacy asbestos liabilities. The Company is
prepared to pursue legal remedies against the remaining
defendants where reasonable negotiations are not productive.
We provide an
indemnity to U.S. Silica Company for silica personal injury
suits filed prior to September 12, 2005 against our former
subsidiary Pennsylvania Glass Sand (PGS). ITT sold the stock of
PGS to U.S. Silica Company in 1985. Over the past several
years, the majority of the silica cases involving PGS have been
dismissed without payment. Currently there are less than 4,000
cases pending against PGS. The Company expects that the majority
of the remaining cases will also be dismissed. Our indemnity had
been paid in part by our historic product liability carrier,
however, in September 2005, the carrier communicated to us that
it would no longer provide insurance for these claims. On
October 4, 2005, we filed a suit against the insurer,
ITT v. Pacific Employers Insurance Co., CA No. 05CV
5223
, in the Superior Court for Los Angeles, CA, seeking
defense costs and indemnity from the insurance carrier for PGS
product liabilities. In April 2007, the Court granted our motion
for summary judgment on the carrier’s duty to defend the
silica cases; however, that decision was overturned on appeal.
The matter was returned to the Superior Court in part for
determination of several factual issues. We will continue to
seek past and future defense costs for these cases from this
carrier. We believe that these matters will not have a material
adverse effect on our consolidated financial position, results
of operations or cash flows. All silica-related costs, net of
insurance recoveries, are shared pursuant to the Distribution
Agreement. Further information on the Distribution Agreement is
provided within the “Business — Company History
and Certain Relationships” section of our 2009 Annual
Report on
Form 10-K.
On October 25,
2006, Fencourt Reinsurance Company (Fencourt), a subsidiary of
The Hartford, filed a contribution claim against ITT for losses
incurred by Fencourt as a result of a reinsurance contract
obligation it owes to Century Indemnity Company, in the
U.S. District Court for the Eastern District of
Pennsylvania,
Fencourt Reinsurance Co., Ltd. v. ITT
Industries, Inc. (C.A.
No. 06-4786
U.S. D.Ct E.D.PA)
. Century Indemnity Company was an
insurer of ITT’s Domestic Casualty Program from 1978
through 1992. Fencourt, formed in 1978, was a captive insurer of
the predecessor ITT Corporation and provided reinsurance to
Century for certain ITT self-insured losses. Fencourt was
transferred to The Hartford in the demerger of ITT in 1995. This
matter is covered by the 1995 Distribution Agreement and that
agreement contains clear language that The Hartford agreed to
assume the liabilities of Fencourt and indemnify ITT against all
claims against Fencourt. The case is stayed pending the
resolution of an arbitration proceeding pending before the
American Arbitration Association in New Jersey. On
January 20, 2009, the arbitrator issued a favorable
decision that ITT is not liable for the losses incurred by
Fencourt. In a subsequent decision on Fencourt’s second
Motion for Summary Judgment, the arbitrator agreed with our
position and ruled that certain liabilities are shared
liabilities under the terms of the
83
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
Distribution
Agreement. The parties have asked the arbitrator to resolve
several other issues related to the interpretation of the
Distribution Agreement. Management believes that this matter
will not have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
On March 27,
2007, we reached a settlement relating to an investigation of
our ITT Night Vision Division’s compliance with the
International Traffic in Arms Regulations (ITAR) pursuant to
which we pled guilty to two violations based on the export of
defense articles without a license and the omission of material
facts in required export reports. The Company was assessed a
total of $50.0 in fines, forfeitures and penalties, which was
accrued for fully as of December 31, 2006. We also entered
into a Deferred Prosecution Agreement with the
U.S. Government which deferred action regarding a third
count of violations related to ITAR pending our implementation
of a remedial action plan, including the appointment of an
independent monitor. ITT was also assessed a deferred
prosecution monetary penalty of $50.0 which ITT will reduce for
monies spent over the five years following the date of the Plea
Agreement, to accelerate and further the development and
fielding of advanced night vision technology. On
October 11, 2007, ITT and the Department of Defense
finalized an Administrative Compliance Agreement wherein we
agreed to take certain remedial actions including implementing
compliance programs and appointing an independent monitor for
the oversight of our compliance programs. On December 28,
2007, we finalized a Consent Agreement with the Department of
State wherein we agreed to undertake certain remedial actions,
including appointment of a Special Compliance Official. The
Company continues to perform under the terms of the agreements.
On February 22, 2010, the Department of State issued a
notice that it terminated the ineligible status and statutory
debassment which it had previously imposed on the Company on
April 11, 2007. 75 Fed. Reg. 7650 (2010). Management
believes that these matters will not have a material adverse
effect on our consolidated financial position, results of
operations or cash flows.
On April 17,
2007, ITT’s Board of Directors received a letter on behalf
of a shareholder requesting that the Board take appropriate
action against the employees responsible for the violations at
our Night Vision facility described above, which were disclosed
on
Form 8-K
filed on March 30, 2007. The Board of Directors appointed a
Special Litigation Committee to evaluate the request. The
Special Litigation Committee conducted an investigation with the
assistance of independent counsel and concluded that no legal
actions should be brought by ITT.
During 2007 and
2008, the Company received notice of four shareholder derivative
actions each filed in the U.S. District Court for the
Southern District of New York, known variously as,
Sylvia
Piven trustee under trust agreement dated April 3, 1973
f/b/o Sylvia B. Piven, derivatively on behalf of ITT
Corporation v. Steven R. Loranger et al. and ITT
Corporation
(the
Piven
action),
Norman Levy,
derivatively on behalf of ITT Industries, Inc. v. Steven R.
Loranger et al. and ITT Industries, Inc.
,
Anthony
Reale v. Steven R. Loranger et al. and ITT Company
[sic]
, and
Robert Wilkinson v. Steven R. Loranger et
al. and ITT Corporation
. The cases allege that ITT’s
Board of Directors breached their fiduciary duties by failing to
properly oversee ITT’s compliance programs at its Night
Vision business. The Complaints seeks compensatory and punitive
damages for ITT from its Directors, the removal of the
Directors, and the election of new directors. Three cases were
consolidated into one action
In Re ITT Corporation Derivative
Litigation
, CA
No. 07-CV-2878
(CLB) (the Levy complaint was dropped on consolidation). On
motion by the Company, the Piven action was dismissed for lack
of diversity. On April 10, 2008, the Court denied the
Company’s Motion to Dismiss the consolidated Complaint. ITT
filed a Motion for Reconsideration and on November 25,
2008, the Court granted that motion and dismissed the matter
without prejudice. The Court provided the plaintiffs the
opportunity to refile the case upon the development of certain
additional facts. The plaintiffs refiled the case on
December 23, 2008. In its order dated September 8,
2009, the Court granted the Company’s subsequent Motion to
Dismiss and dismissed the Wilkinson complaint. The Defendants
filed a Motion to Terminate the Reale action based on the
Special Litigation Committee’s report referenced above.
Also in its September 8, 2009 order, the Court denied the
Defendants’ motion. The Defendants then filed a Motion for
Reconsideration or, in the alternative, requested that the
matter be certified to the Indiana Supreme Court for its
interpretation of the Indiana Business Code. On October 9,
2009, the Court denied the Motion for Reconsideration, however,
it certified the matter for appeal. The matter is now pending
before the Indiana Supreme Court. Management believes that the
derivative suit will not have a material adverse effect on our
consolidated financial position, results of operations or cash
flows.
84
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
NOTE 20
Guarantees,
Indemnities and Warranties
Guarantees &
Indemnities
Since ITT’s
incorporation in 1920, we have acquired and disposed of numerous
entities. The related acquisition and disposition agreements
contain various representation and warranty clauses and may
provide indemnities for a misrepresentation or breach of the
representations and warranties by either party. The indemnities
address a variety of subjects; the term and monetary amounts of
each such indemnity are defined in the specific agreements and
may be affected by various conditions and external factors. Many
of the indemnities have expired either by operation of law or as
a result of the terms of the agreement. We do not have a
liability recorded for the historic indemnifications and are not
aware of any claims or other information that would give rise to
material payments under such indemnities.
In December of 2007,
we entered into a sale leaseback type agreement for our
corporate aircraft, with the aircraft leased back under a
five-year operating lease. We have provided, under the lease, a
residual value guarantee to the counterparty in the amount of
$41.7. We would have to make payments under the residual value
guarantee only if the fair value of the aircraft was less than
the residual value guarantee upon termination of the agreement.
At December 31, 2009, the projected fair value of the
aircraft at the end of the lease is estimated to be $3.9 less
than the residual value guarantee. However, since this estimated
loss does not exceed the $5.4 gain we realized from the sale of
the aircraft which has been deferred as a loss contingency for
the residual value guarantee, we have not recorded any
additional accrual in our financial statements.
ITT has a number of
individually immaterial guarantees outstanding at
December 31, 2009, that may be affected by various
conditions and external forces, some of which could require that
payments be made under such guarantees. We do not believe these
payments will have any material adverse impact on the financial
position, results of operations or cash flow on a consolidated
basis in the foreseeable future.
Product
Warranties
ITT warrants
numerous products, the terms of which vary widely. In general,
ITT warrants its products against defect and specific
non-performance. In the automotive businesses, liability for
product defects could extend beyond the selling price of the
product and could be significant if the defect interrupts
production or results in a recall. Changes in the product
warranty accrual for December 31, 2009 and 2008 were as
follows:
| 2009 | 2008 | |||||||||
|
Beginning balance January 1
|
$ | 57.4 | $ | 52.1 | ||||||
|
Accruals for product warranties issued in the period
|
45.7 | 38.0 | ||||||||
|
Changes in pre-existing
warranties
(1)
|
(7.6 | ) | (0.3 | ) | ||||||
|
Payments
|
(29.3 | ) | (30.8 | ) | ||||||
|
Foreign currency translation
|
1.1 | (1.6 | ) | |||||||
|
Ending balance December 31
|
$ | 67.3 | $ | 57.4 | ||||||
| (1) | Includes changes in estimates |
NOTE 21
Business Segment
Information
The Company’s
business segments are reported on the same basis used internally
for evaluating performance and for allocating resources. Our
three reporting segments are referred to as: Defense
Electronics & Services (Defense segment), Fluid
Technology (Fluid segment), and Motion & Flow Control
(Motion & Flow segment). Corporate and Other consists
of corporate office expenses including compensation, benefits,
occupancy, depreciation, and other administrative costs, as well
as charges which occur from time to time related to certain
matters, such as asbestos and environmental liabilities, that
are managed at a corporate level and are not included in the
business segments in evaluating performance or allocating
resources. Assets of the business segments exclude general
corporate assets, which principally consist of cash, deferred
tax assets, insurance receivables, certain property, plant and
equipment, and certain other assets.
Defense –
The
businesses in this segment are those that directly serve the
military and government agencies with products and services.
These include air traffic control systems, jamming devices that
guard military planes against radar-guided missiles, digital
combat radios, night vision devices, satellite instruments,
defense electronics, communications, aircraft armament systems,
undersea warfare, integrated composite structures, and
professional and engineering services. Approximately 39% of the
sales and revenues in this business segment are generated
through contracts for technical and support services which ITT
provides for the military and other government agencies. The
Defense segment had revenue from the U.S. Government of
$5,789.8, $5,893.8 and $3,920.3, for 2009, 2008 and 2007,
respectively. Apart from the U.S. Government, no other
government or commercial customer accounted for more than 10% of
revenue. The Defense
85
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
segment comprises
approximately 58% of consolidated revenue and 60% of segment
operating income in 2009.
Fluid —
Our Fluid
segment is a provider of water and wastewater treatment systems,
pumps and related technologies, and other water and fluid
control products with residential, commercial, and industrial
applications. This segment comprises approximately 31% of
consolidated revenue and approximately 31% of segment operating
income for 2009.
Motion &
Flow —
Our
Motion & Flow segment is comprised of a group of
businesses providing products and services for the areas of
transportation, defense, aerospace, industrial, computer,
telecommunications, marine and beverage. The Motion &
Flow businesses primarily serve the high end of their markets,
with highly engineered products, high brand recognition, a focus
on new product development and operational excellence. The
Motion & Flow segment comprises approximately 11% of
consolidated revenue and approximately 9% of segment operating
income for 2009.
|
MOTION &
|
CORPORATE
|
|||||||||||||||||||||||||||
| DEFENSE | FLUID | FLOW | AND OTHER | ELIMINATIONS | TOTAL | |||||||||||||||||||||||
|
2009
|
||||||||||||||||||||||||||||
|
Product revenue
|
$ | 3,786.5 | $ | 3,220.4 | $ | 1,245.2 | $ | – | $ | (8.6 | ) | $ | 8,243.5 | |||||||||||||||
|
Service revenue
|
2,510.3 | 142.9 | 7.8 | – | – | 2,661.0 | ||||||||||||||||||||||
|
Total revenue
|
6,296.8 | 3,363.3 | 1,253.0 | – | (8.6 | ) | 10,904.5 | |||||||||||||||||||||
|
Operating income (loss)
|
776.0 | 392.9 | 118.2 | (377.7 | ) | – | 909.4 | |||||||||||||||||||||
|
Plant, property and equipment, net
|
402.9 | 392.9 | 235.1 | 20.1 | – | 1,051.0 | ||||||||||||||||||||||
|
Total assets
|
4,292.3 | 2,929.9 | 1,322.9 | 2,584.0 | – | 11,129.1 | ||||||||||||||||||||||
|
Capital expenditures
|
115.8 | 74.2 | 55.9 | 25.7 | – | 271.6 | ||||||||||||||||||||||
|
Depreciation
|
66.9 | 57.3 | 45.9 | 3.3 | – | 173.4 | ||||||||||||||||||||||
|
Amortization
|
90.5 | 16.2 | 10.7 | 1.8 | – | 119.2 | ||||||||||||||||||||||
|
2008
|
||||||||||||||||||||||||||||
|
Product revenue
|
$ | 3,924.9 | $ | 3,692.7 | $ | 1,575.1 | $ | – | $ | (11.5 | ) | $ | 9,181.2 | |||||||||||||||
|
Service revenue
|
2,357.4 | 147.9 | 8.3 | – | – | 2,513.6 | ||||||||||||||||||||||
|
Total revenue
|
6,282.3 | 3,840.6 | 1,583.4 | – | (11.5 | ) | 11,694.8 | |||||||||||||||||||||
|
Operating income (loss)
|
727.0 | 468.7 | 191.7 | (177.3 | ) | – | 1,210.1 | |||||||||||||||||||||
|
Plant, property and equipment, net
|
369.3 | 372.3 | 229.1 | 23.2 | – | 993.9 | ||||||||||||||||||||||
|
Total assets
|
4,464.5 | 2,878.3 | 1,357.8 | 1,779.6 | – | 10,480.2 | ||||||||||||||||||||||
|
Capital expenditures
|
88.0 | 80.5 | 63.7 | 16.5 | – | 248.7 | ||||||||||||||||||||||
|
Depreciation
|
65.8 | 63.0 | 48.7 | 2.1 | – | 179.6 | ||||||||||||||||||||||
|
Amortization
|
85.2 | 6.4 | 7.3 | (0.2 | ) | – | 98.7 | |||||||||||||||||||||
|
2007
|
||||||||||||||||||||||||||||
|
Product revenue
|
$ | 2,381.7 | $ | 3,358.2 | $ | 1,332.1 | $ | – | $ | (14.5 | ) | $ | 7,057.5 | |||||||||||||||
|
Service revenue
|
1,794.5 | 150.9 | 0.4 | – | – | 1,945.8 | ||||||||||||||||||||||
|
Total revenue
|
4,176.2 | 3,509.1 | 1,332.5 | – | (14.5 | ) | 9,003.3 | |||||||||||||||||||||
|
Operating income (loss)
|
502.7 | 432.7 | 187.4 | (145.6 | ) | – | 977.2 | |||||||||||||||||||||
|
Plant, property and equipment, net
|
353.5 | 394.8 | 224.9 | 7.1 | – | 980.3 | ||||||||||||||||||||||
|
Total assets
|
4,466.2 | 3,106.4 | 1,364.5 | 2,615.6 | – | 11,552.7 | ||||||||||||||||||||||
|
Capital expenditures
|
57.7 | 88.6 | 45.2 | 47.8 | – | 239.3 | ||||||||||||||||||||||
|
Depreciation
|
48.4 | 61.1 | 44.6 | 1.4 | – | 155.5 | ||||||||||||||||||||||
|
Amortization
|
20.7 | 6.1 | 2.9 | 0.2 | – | 29.9 | ||||||||||||||||||||||
86
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
|
PLANT, PROPERTY
AND
|
||||||||||||||||||||||||||||
| REVENUE (a) | EQUIPMENT, NET | |||||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31 | DECEMBER 31 | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||||||
|
Geographical Information
|
||||||||||||||||||||||||||||
|
United States
|
$ | 7,592.3 | $ | 7,998.0 | $ | 5,814.3 | $ | 603.9 | $ | 581.4 | $ | 557.5 | ||||||||||||||||
|
Western Europe
|
1,814.0 | 2,098.3 | 1,896.4 | 317.2 | 313.7 | 337.1 | ||||||||||||||||||||||
|
Asia Pacific
|
576.8 | 603.6 | 474.4 | 64.7 | 64.5 | 58.3 | ||||||||||||||||||||||
|
Other
|
921.4 | 994.9 | 818.2 | 65.2 | 34.3 | 27.4 | ||||||||||||||||||||||
|
Total
|
$ | 10,904.5 | $ | 11,694.8 | $ | 9,003.3 | $ | 1,051.0 | $ | 993.9 | $ | 980.3 | ||||||||||||||||
(a) Revenue
to external customers is attributed to individual regions based
upon the destination of product or service delivery.
Revenue by product
category, net of intercompany balances, is as follows:
| YEAR ENDED DECEMBER 31 | 2009 | 2008 | 2007 | ||||||||||||
|
Pumps & Complementary Products
|
$ | 3,363.2 | $ | 3,840.3 | $ | 3,508.9 | |||||||||
|
Defense Products
|
3,784.7 | 3,923.6 | 2,380.1 | ||||||||||||
|
Defense Services
|
2,510.3 | 2,357.4 | 1,794.5 | ||||||||||||
|
Connectors
|
335.2 | 444.6 | 417.1 | ||||||||||||
|
Flow Control
|
342.4 | 382.0 | 243.5 | ||||||||||||
|
Friction Materials
|
386.2 | 447.8 | 393.4 | ||||||||||||
|
Marine Products
|
78.4 | 185.7 | 121.5 | ||||||||||||
|
Shock Absorbers
|
104.1 | 113.4 | 144.3 | ||||||||||||
|
Total
|
$ | 10,904.5 | $ | 11,694.8 | $ | 9,003.3 | |||||||||
87
Table of Contents
ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
NOTE 22
Quarterly Results
for 2009 and 2008 (Unaudited)
|
FULL
|
|||||||||||||||||||||||
| THREE MONTHS ENDED | MAR. 31 | JUNE 30 | SEPT. 30 (a) | DEC. 31 | YEAR | ||||||||||||||||||
|
2009
|
|||||||||||||||||||||||
|
Revenue
|
$ | 2,557.1 | $ | 2,780.0 | $ | 2,697.7 | $ | 2,869.7 | $ | 10,904.5 | |||||||||||||
|
Gross
profit
|
669.1 | 778.8 | 768.6 | 844.2 | 3,060.7 | ||||||||||||||||||
|
Income from
continuing operations
|
186.5 | 202.6 | 66.0 | 195.6 | 650.7 | ||||||||||||||||||
|
Net
income
|
184.1 | 201.4 | 59.0 | 199.2 | 643.7 | ||||||||||||||||||
|
Income from
continuing operations per share
|
|||||||||||||||||||||||
|
– Basic
|
$ | 1.02 | $ | 1.11 | $ | 0.36 | $ | 1.07 | $ | 3.56 | |||||||||||||
|
– Diluted
|
$ | 1.02 | $ | 1.10 | $ | 0.36 | $ | 1.06 | $ | 3.54 | |||||||||||||
|
Net income per
share
|
|||||||||||||||||||||||
|
– Basic
|
$ | 1.01 | $ | 1.10 | $ | 0.32 | $ | 1.09 | $ | 3.53 | |||||||||||||
|
– Diluted
|
$ | 1.01 | $ | 1.10 | $ | 0.32 | $ | 1.08 | $ | 3.50 | |||||||||||||
|
Common stock
information price per share range:
|
|||||||||||||||||||||||
|
High
|
$ | 51.42 | $ | 46.91 | $ | 52.71 | $ | 56.95 | $ | 56.95 | |||||||||||||
|
Low
|
$ | 31.94 | $ | 37.26 | $ | 41.15 | $ | 48.43 | $ | 31.94 | |||||||||||||
|
Close
|
$ | 38.47 | $ | 44.50 | $ | 52.15 | $ | 49.74 | $ | 49.74 | |||||||||||||
|
Dividends per
share
|
$ | 0.2125 | $ | 0.2125 | $ | 0.2125 | $ | 0.2125 | $ | 0.85 | |||||||||||||
|
2008
|
|||||||||||||||||||||||
|
Revenue
|
$ | 2,806.4 | $ | 3,064.1 | $ | 2,879.3 | $ | 2,945.0 | $ | 11,694.8 | |||||||||||||
|
Gross profit
|
760.9 | 867.1 | 810.7 | 816.7 | 3,255.4 | ||||||||||||||||||
|
Income from
continuing operations
|
170.9 | 224.3 | 204.5 | 175.5 | 775.2 | ||||||||||||||||||
|
Net income
|
171.9 | 221.0 | 216.3 | 185.5 | 794.7 | ||||||||||||||||||
|
Income from
continuing operations per share
|
|||||||||||||||||||||||
|
– Basic
|
$ | 0.94 | $ | 1.23 | $ | 1.12 | $ | 0.97 | $ | 4.26 | |||||||||||||
|
– Diluted
|
$ | 0.93 | $ | 1.21 | $ | 1.11 | $ | 0.96 | $ | 4.21 | |||||||||||||
|
Net income per share
|
|||||||||||||||||||||||
|
– Basic
|
$ | 0.95 | $ | 1.21 | $ | 1.19 | $ | 1.02 | $ | 4.37 | |||||||||||||
|
– Diluted
|
$ | 0.93 | $ | 1.19 | $ | 1.17 | $ | 1.01 | $ | 4.32 | |||||||||||||
|
Common stock
information price per share range:
|
|||||||||||||||||||||||
|
High
|
$ | 66.01 | $ | 67.62 | $ | 69.73 | $ | 56.15 | $ | 69.73 | |||||||||||||
|
Low
|
$ | 50.94 | $ | 52.05 | $ | 52.25 | $ | 34.75 | $ | 34.75 | |||||||||||||
|
Close
|
$ | 51.81 | $ | 63.33 | $ | 55.61 | $ | 45.99 | $ | 45.99 | |||||||||||||
|
Dividends per share
|
$ | 0.175 | $ | 0.175 | $ | 0.175 | $ | 0.175 | $ | 0.70 | |||||||||||||
(a) Third
quarter 2009 results include a $138.9 net after-tax charge to
income from continuing operations primarily associated with the
establishment of an estimated asbestos-related liability, net of
expected recoveries, for claims projected to be filed against
the company over the next ten years. See Note 19,
“Commitments and Contingencies” for further
information.
The above table
reflects the range of market prices of ITT’s common stock
for 2009 and 2008. The prices are as reported in the
consolidated transaction reporting system of the New York Stock
Exchange, the principal market in which ITT’s common stock
is traded, under the symbol “ITT.” Our common stock is
listed on the New York and Euronext exchanges.
During the period
from January 1, 2010 through January 31, 2010, the
high and low reported market prices of ITT’s common stock
were $51.79 and $48.05, respectively. ITT declared dividends of
$0.25 per common share in the first quarter of 2010. There were
20,510 holders of record of ITT’s common stock on
January 29, 2010.
88
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ITT CORPORATION AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS – (Continued)
NOTE 23
Subsequent
Events
On February 17,
2010, the Company announced that it signed an agreement to
purchase Nova Analytics Corporation (Nova), a privately held
company. The purchase price is approximately $390, subject to
normal and customary closing conditions. We expect that the
purchase price will be funded through a mix of cash and
commercial paper. Nova is a leading manufacturer of premium
quality field, portable, on-line and laboratory analytical
instruments used in water and wastewater, environmental,
industrial, food and beverage, pharmaceutical and medical
applications.
Nova provides ITT
brands, technologies, distribution and aftermarket content in
the $6 billion analytical instrumentation market. The
addition of Nova will broaden the solutions we offer customers
in key markets such as municipal water and wastewater,
industrial processing, and food & beverage.
The transaction is
projected to be completed by the end of March 2010 pending
customary regulatory approvals. Nova employs approximately
725 people across Germany, Norway, France, the United
Kingdom, the United States and China.
89
Table of Contents
SIGNATURES
Pursuant to the
requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, and
by the undersigned in the capacity indicated.
ITT Corporation
(Registrant)
| By: |
/s/
Janice
M.
Klettner
|
Janice M.
Klettner
Vice President
and Chief Accounting Officer
(Principal
accounting officer)
February
26, 2010
II-1
Table of Contents
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
| SIGNATURE | TITLE | DATE | ||||
|
/s/
Steven
R. Loranger
|
Chairman, President and
Chief Executive Officer and Director |
February 26, 2010 | ||||
|
/s/
Denise
L. Ramos
|
Senior Vice President and
Chief Financial Officer |
February 26, 2010 | ||||
|
/s/
Curtis
J. Crawford
|
Director | February 26, 2010 | ||||
|
/s/
Christina
A. Gold
|
Director | February 26, 2010 | ||||
|
/s/
Ralph
F. Hake
|
Director | February 26, 2010 | ||||
|
/s/
John
J. Hamre
|
Director | February 26, 2010 | ||||
|
/s/
Paul
J. Kern
|
Director | February 26, 2010 | ||||
|
/s/
Frank
T. MacInnis
|
Director | February 26, 2010 | ||||
|
/s/
Surya
N. Mohapatra
|
Director | February 26, 2010 | ||||
|
/s/
Linda
S. Sanford
|
Director | February 26, 2010 | ||||
|
/s/
Markos
I. Tambakeras
|
Director | February 26, 2010 | ||||
II-2
Table of Contents
EXHIBIT INDEX
|
EXHIBIT
|
||||||
| NUMBER | DESCRIPTION | LOCATION | ||||
| (3 | ) | (a) ITT Corporation’s Articles of Amendment of the Restated Articles of Incorporation, effective as of May 13, 2008 | Incorporated by reference to Exhibit 3.1 of ITT Corporation’s Form 8-K Current Report dated May 14, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (b) ITT Corporation’s By-laws, as amended July 15, 2009 | Incorporated by reference to Exhibit 3.1 of ITT Corporation’s Form 8-K Current Report dated July 15, 2009 (CIK No. 216228, File No. 1-5672). | |||||
| (4 | ) | Instruments defining the rights of security holders, including indentures | Not required to be filed. The Registrant hereby agrees to file with the Commission a copy of any instrument defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries upon request of the Commission. | |||
| (10 | ) | Material contracts | ||||
| (10.1 | )* | Separation Agreement between Nicholas P. Hill and ITT Corporation dated February 20, 2009 | Incorporated by reference to Exhibit 10.1 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.2 | )* | Employment Agreement dated as of June 28, 2004 between ITT Industries, Inc. and Steven R. Loranger (amended as of December 18, 2008) | Incorporated by reference to Exhibit 99.1 of ITT Corporation’s Form 8-K dated December 19, 2008. (CIK No. 216228, File No. 1-5672). | |||
| (10.3 | )* | Form of Non-Qualified Stock Option Award Agreement for Band A Employees | Incorporated by reference to Exhibit 10.3 of ITT Industries’ Form 10-K for the year ended December 31, 2004 (CIK No. 216228, File No. 1-5672). | |||
| (10.4 | )* | Form of Non-Qualified Stock Option Award Agreement for Band B Employees | Incorporated by reference to Exhibit 10.4 of ITT Industries’ Form 10-K for the year ended December 31, 2004 (CIK No. 216228, File No. 1-5672). | |||
| (10.5 | )* | ITT 2003 Equity Incentive Plan, amended and restated as of February 15, 2008 and approved by shareholders on May 13, 2008 (previously amended and restated as of July 13, 2004 and subsequently amended as of December 18, 2006) and previously known as ITT Industries, Inc. 2003 Equity Incentive Plan | Incorporated by reference to Exhibit 10.5 of ITT Corporation’s Form 10-Q for the quarter ended June 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.6 | )* | ITT Corporation 1997 Long-Term Incentive Plan, amended and restated as of February 15, 2008 and approved by shareholders on May 13, 2008 (previously amended and restated as of July 13, 2004) and formerly known as ITT Industries, Inc. 1997 Long-Term Incentive Plan | Incorporated by reference to Exhibit 10.6 of ITT Corporation’s Form 10-Q for the quarter ended June 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.7 | )* | ITT Corporation Annual Incentive Plan for Executive Officers, amended and restated as of February 15, 2008 and approved by shareholders on May 13, 2008 previously known as 1997 Annual Incentive Plan for Executive Officers (amended and restated as of July 13, 2004) and also previously known as ITT Industries, Inc. 1997 Annual Incentive Plan for Executive Officers (amended and restated as of July 13, 2004) | Incorporated by reference to Exhibit 10.7 of ITT Corporation’s Form 10-Q for the quarter ended June 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.8 | )* | 1994 ITT Incentive Stock Plan (amended and restated as of July 13, 2004 and subsequently amended as of December 19, 2006) formerly known as 1994 ITT Industries Incentive Stock Plan (amended and restated as of July 13, 2004) | Incorporated by reference to Exhibit 10.8 of ITT Corporation’s Form 10-K for the year ended December 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.9 | )* | ITT Corporation Special Senior Executive Severance Pay Plan amended and restated as of December 31, 2008 (previously amended and restated as of July 13, 2004) and formerly known as ITT Industries Special Senior Executive Severance Pay Plan | Incorporated by reference to Exhibit 10.9 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.10 | )* | ITT 1996 Restricted Stock Plan for Non-Employee Directors (amended and restated as of July 13, 2004 and subsequently amended as of December 19, 2006) formerly known as ITT Industries 1996 Restricted Stock Plan for Non-Employee Directors (amended and restated as of July 13, 2004) | Incorporated by reference to Exhibit 10.10 of ITT Corporation’s Form 10-K for the year ended December 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.11 | )* | ITT Corporation Enhanced Severance Pay Plan (amended and restated as of July 13, 2004) and formerly known as ITT Industries Enhanced Severance Pay Plan (amended and restated as of July 13, 2004). Amended and restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.11 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
II-3
Table of Contents
|
EXHIBIT
|
||||||
| NUMBER | DESCRIPTION | LOCATION | ||||
| (10.12 | )* | ITT Deferred Compensation Plan (Effective as of January 1, 1995 including amendments through July 13, 2004) formerly known as ITT Industries Deferred Compensation Plan (Effective as of January 1, 1995 including amendments through July 13, 2004). Amended and restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.12 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.13 | )* | ITT 1997 Annual Incentive Plan (amended and restated as of July 13, 2004) formerly known as ITT Industries 1997 Annual Incentive Plan (amended and restated as of July 13, 2004) | Incorporated by reference to Exhibit 10.13 of ITT Industries’ Form 10-Q for the quarter ended September 30, 2004 (CIK No. 216228, File No. 1-5672). | |||
| (10.14 | )* | ITT Excess Pension Plan IA formerly known as ITT Industries Excess Pension Plan IA. Originally effective as of July 1, 1975. Amended and restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.14 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.15 | )* | ITT Excess Pension Plan IB formerly known as ITT Industries Excess Pension Plan IB. Originally effective as of January 1, 1996. Amended and restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.15 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.16 | )* | ITT Excess Pension Plan IIA formally known as ITT Excess Pension Plan II, and ITT Industries Excess Pension Plan II (as amended and restated as of July 13, 2004) originally effective as of January 1, 1988. Amended and restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.16 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.17 | )* | ITT Excess Savings Plan (as amended and restated as of July 13, 2004) formerly known as ITT Industries Excess Savings Plan (as amended and restated as of July 13, 2004). Amended and restated effective December 31, 2008 | Incorporated by reference to Exhibit 10.17 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.18 | )* | ITT Industries Excess Benefit Trust | Incorporated by reference to Exhibit 10.18 of ITT Industries’ Form 10-Q for the quarter ended September 30, 2004 (CIK No. 216228, File No. 1-5672). | |||
| (10.19 | ) | Form of indemnification agreement with directors | Incorporated by reference to Exhibit 10(h) to ITT Industries’ Form 10-K for the fiscal year ended December 31, 1996 (CIK No. 216228, File No. 1-5672). | |||
| (10.20 | ) | Distribution Agreement among ITT Corporation, ITT Destinations, Inc. and ITT Hartford Group, Inc. | Incorporated by reference to Exhibit 10.1 listed under ITT Industries’ Form 8-B dated December 20, 1995 (CIK No. 216228, File No. 1-5672). | |||
| (10.21 | ) | Intellectual Property License Agreement between and among ITT Corporation, ITT Destinations, Inc. and ITT Hartford Group, Inc. | Incorporated by reference to Exhibit 10.2 to ITT Industries’ Form 8-B dated December 20, 1995 (CIK No. 216228, File No. 1-5672). | |||
| (10.22 | ) | Tax Allocation Agreement among ITT Corporation, ITT Destinations, Inc. and ITT Hartford Group, Inc. | Incorporated by reference to Exhibit 10.3 to ITT Industries’ Form 8-B dated December 20, 1995 (CIK No. 216228, File No. 1-5672). | |||
| (10.23 | ) | Employee Benefit Services and Liability Agreement among ITT Corporation, ITT Destinations, Inc. and ITT Hartford Group, Inc. | Incorporated by reference to Exhibit 10.7 to ITT Industries’ Form 8-B dated December 20, 1995 (CIK No. 216228, File No. 1-5672). | |||
| (10.24 | ) | Five-year Competitive Advance and Revolving Credit Facility Agreement dated as of November 10, 2005 | Incorporated by reference to Exhibit 10.1 to ITT Industries’ Form 8-K Current Report dated November 10, 2005 (CIK No. 216228, File No. 1-5672). | |||
| (10.25 | ) | Agreement with Valeo SA with respect to the sale of the Automotive Electrical Systems Business | Incorporated by reference to Exhibit 10(b) to ITT Industries’ Form 10-Q Quarterly Report for the quarterly period ended September 30, 1998 (CIK No. 216228, File No. 1-5672). | |||
| (10.26 | ) | Agreement with Continental AG with respect to the sale of the Automotive Brakes and Chassis Business | Incorporated by reference to Exhibit 2.1 to ITT Industries’ Form 8-K Current Report dated October 13, 1998 (CIK No. 216228, File No. 1-5672). | |||
| (10.27 | ) | Participation Agreement among ITT Industries, Rexus L.L.C. (Rexus) and Air Bail S.A.S. and RBS Lombard, Inc., as investors, and master lease agreement, lease supplements and related agreements between Rexus as lessor and ITT Industries, as lessee | Incorporated by reference to Exhibits listed under Item 9.01 to ITT Industries Form 8-K Current Report dated December 20, 2004 (CIK No. 216228, File No. 1-5672). | |||
| (10.28 | )* | Form of Restricted Stock Award for Non-Employee Directors | Incorporated by reference to Exhibit 10.28 of ITT Industries’ Form 10-Q for the quarter ended September 30, 2005 (CIK No. 216228, File No. 1-5672). | |||
II-4
Table of Contents
|
EXHIBIT
|
||||||
| NUMBER | DESCRIPTION | LOCATION | ||||
| (10.29 | )* | Form of Restricted Stock Award for Employees | Incorporated by reference to Exhibit 10.29 of ITT Industries’ Form 10-Q for the quarter ended September 30, 2005 (CIK No. 216228, File No. 1-5672). | |||
| (10.30 | ) | Amended and Restated 364-day Revolving Credit Agreement | Incorporated by reference to Exhibits 10.1 and 10.2 to ITT Industries’ Form 8-K dated March 28, 2005 (CIK No. 216228, File No. 1-5672). | |||
| (10.31 | )* | Transition Memorandum and Separation Agreement dated February 23, 2009 between Vincent A. Maffeo and ITT Corporation. | Incorporated by reference to Exhibit 10.31 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.32 | )* | ITT Corporation Senior Executive Severance Pay Plan. (previously known as the ITT Industries, Inc. Senior Executive Severance Pay Plan, dated December 20, 1995, amended and restated as of December 31, 2008) | Incorporated by reference to Exhibit 10.32 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.33 | ) | Non-Employee Director Compensation Agreement | Incorporated by reference to Exhibit 10.1 to ITT Industries’ Form 8-K Current Report dated December 1, 2005 (CIK No. 216228, File No. 1-5672). | |||
| (10.34 | )* | Form of 2006 Non-Qualified Stock Option Award Agreement for Band A Employees | Incorporated by reference to Exhibit 10.34 of ITT Industries’ Form 10-Q for the quarter ended March 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.35 | )* | Form of 2006 Non-Qualified Stock Option Award Agreement for Band B Employees | Incorporated by reference to Exhibit 10.35 of ITT Industries’ Form 10-Q for the quarter ended March 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.36 | )* | Form of 2006 Restricted Stock Award Agreement for Employees | Incorporated by reference to Exhibit 10.36 of ITT Industries’ Form 10-Q for the quarter ended March 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.37 | ) | Form of 2006 Non-Qualified Stock Option Award Agreement for Non-Employee Directors | Incorporated by reference to Exhibit 10.37 of ITT Industries’ Form 10-Q for the quarter ended March 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.38 | ) | 2002 ITT Stock Option Plan for Non-Employee Directors formerly known as the 2002 ITT Industries, Inc. Stock Option Plan for Non-Employee Directors (as amended on December 19, 2006) | Incorporated by reference to Exhibit 10.38 of ITT Corporation’s Form 10-K for the year ended December 31, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (10.39 | )* | Employment Agreement dated as of May 21, 2007 and effective as of July 1, 2007 between ITT Corporation and Denise L. Ramos. | Incorporated by reference to Exhibit 99.1 to ITT Corporation Form 8-K dated July 2, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (10.40 | )* | Separation Memorandum dated July 10, 2007 and effective as of July 18, 2007 between ITT Corporation and George E. Minnich | Incorporated by reference to Exhibit 10.1 to ITT Corporation Form 8-K Current Report dated July 19, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (10.41 | ) | Agreement and Plan of Merger | Incorporated by reference to Exhibit 2.1 and 2.2 to ITT Corporation’s Form 8-K dated September 18, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (10.42 | ) | Accession Agreement to Five-Year Competitive Advance and Revolving Credit Facility | Incorporated by reference to Exhibit 2.03 to ITT Corporation’s Form 8-K dated November 8, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (10.43 | ) | Summary of material terms of amendments to ITT Excess Pension Plan 1A and the ITT Excess Pension Plan 1B, the ITT Excess Pension Plan II, the ITT Excess Savings Plan, the ITT Deferred Compensation Plan and the severance plans and policies of the Company and its subsidiaries and other affiliates | Incorporated by reference to Exhibit 5.02 to ITT Corporation’s Form 8-K dated December 19, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (10.44 | ) | Senior Notes Offering | Incorporated by reference to Exhibit 9.01(d) to ITT Corporations Form 8-K dated April 28, 2009 (CIK No. 216228, File No. 1-5672). | |||
| (10.45 | ) | Issuance of Commercial Paper | Incorporated by Reference to Exhibit 2.03 to ITT Corporation’s Form 8-K dated December 20, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (10.46 | ) | ITT Corporation 2003 Equity Incentive Plan Restricted Stock Unit Award Agreement — Non-Employee Director | Incorporated by reference to Exhibit 10.46 of ITT Corporation’s Form 10-Q for the quarter ended June 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
II-5
Table of Contents
|
EXHIBIT
|
||||||
| NUMBER | DESCRIPTION | LOCATION | ||||
| (10.47 | ) | ITT Corporation 2003 Equity Incentive Plan Director Restricted Stock Unit Award Deferral Election Form | Incorporated by reference to Exhibit 10.47 of ITT Corporation’s Form 10-Q for the quarter ended June 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.48 | ) | ITT Corporation Deferred Compensation Plan for Non-Employee Directors | Incorporated by reference to Exhibit 10.48 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.49 | ) | ITT Corporation Deferred Compensation Plan for Non-Employee Directors Deferral Election Form for those Directors without a Specified Distribution Date for Non-Grandfathered Deferrals | Incorporated by reference to Exhibit 10.49 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.50 | ) | ITT Corporation Deferred Compensation Plan for Non-Employee Directors Deferral Election Form for those Directors with a Specified Distribution Date for Non-Grandfathered Deferrals | Incorporated by reference to Exhibit 10.50 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.51 | ) | ITT Corporation Deferred Compensation Plan for Non-Employee Directors Subsequent Election Form | Incorporated by reference to Exhibit 10.51 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.52 | ) | ITT 2003 Equity Incentive Plan Director Restricted Stock Unit Award Deferral Election Form | Incorporated by reference to Exhibit 10.52 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.53 | ) | ITT Corporation Non-Employee Director Deferred Restricted Stock Unit Award Subsequent Election Form | Incorporated by reference to Exhibit 10.53 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.54 | ) | ITT Director Consent Letter — Required Modifications to Prior Annual Retainer Deferrals. | Incorporated by reference to Exhibit 10.54 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.55 | )* | ITT Excess Pension Plan IIB. Effective as of January 1, 1988. As Amended and Restated as of December 31, 2008 | Incorporated by reference to Exhibit 10.55 of ITT Corporation’s Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | |||
| (10.56 | )* | ITT Corporation Form of Non-Qualified Stock Option Agreement (Band A) | Incorporated by reference to Exhibit 10.56 of ITT Corporation’s Form 10-Q for the quarter ended March 31, 2009 (CIK No. 216228, File No. 1-5672). | |||
| (10.57 | )* | ITT Corporation Form of Non-Qualified Stock Option Agreement (Non Band A) | Incorporated by reference to Exhibit 10.57 of ITT Corporation’s Form 10-Q for the quarter ended March 31, 2009 (CIK No. 216228, File No. 1-5672). | |||
| (11 | ) | Statement re computation of per share earnings | Not required to be filed. | |||
| (12 | ) | Statement re computation of ratios | Filed herewith. | |||
| (18 | ) | Letter re change in accounting principles | Incorporated by reference to Exhibit 18 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2006 (CIK No. 216228, File No. 1-5672). | |||
| (21 | ) | Subsidiaries of the Registrant | Filed herewith. | |||
| (22 | ) | Published report regarding matters submitted to vote of Security holders | Not required to be filed. | |||
| (23.1 | ) | Consent of Deloitte & Touche LLP | Filed herewith. | |||
| (24 | ) | Power of attorney | None | |||
| (31.1 | ) | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | |||
| (31.2 | ) | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | |||
| (32.1 | ) | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference. | |||
II-6
Table of Contents
|
EXHIBIT
|
||||||
| NUMBER | DESCRIPTION | LOCATION | ||||
| (32.2 | ) | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference. | |||
| (99.1 | ) | Deferred Prosecution Agreement filed March 28, 2007 between ITT Corporation and the United States Attorney’s Office for the Western District of Virginia | Incorporated by reference to Exhibit 99.4 of ITT Corporation’s Form 8-K dated March 30, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (99.2 | ) | Administrative Compliance Agreement filed October 11, 2007 between ITT Corporation and The United States Agency (Suspensions’ Department Affiliate for the U.S. Army) on behalf of the U.S. Government | Incorporated by reference to Exhibit 99.1 of ITT Corporation’s Form 8-K dated October 12, 2007 (CIK No. 216228, File No. 1-5672). | |||
| (101 | ) | The following materials from ITT Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Income Statements, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of changes in Shareholders’ Equity and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text | Submitted electronically with this report. | |||
* Management
compensatory plan
II-7
TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. Submission Of Matters To A Vote Of Security HoldersprintPart IIprintItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintPart OfprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintPart IIIprintItem 10. Directors, Executive Officers and Corporate GovernanceprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions and Director IndependenceprintItem 14. Principal Accounting Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement Scheduleprint