UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
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þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
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| | ¨ | For the fiscal year ended December 31, 2010 |
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| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the Transition period from to |
For the Transition period from to
Commission FileNo. 1-5672
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| Incorporated in the State of Indiana | | 13-5158950
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| | (I.R.S. Employer Identification No.) |
1133 Westchester Avenue, White Plains, NY 10604
(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:
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 ofRegulation 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 ofRegulation 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 thisForm 10-K or any amendment to thisForm 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” inRule 12b-2 of the Exchange Act. (Check one):
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| 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 inRule 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, 2010December 31, 2011 was approximately $8.3$1.8 billion.
The December 31, 2011 measurement date was utilized due to the aggregate market value impact from the distribution of Exelis Inc. common stock and Xylem Inc. common stock on October 31, 2011.As of February 11, 2011,10, 2012, there were outstanding 183.794.9 million shares of common stock, $1 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for its 20112012 Annual Meeting of Shareholders are incorporated by reference in Part II and Part III of thisForm 10-K.
TABLE OF CONTENTS
* Included pursuant to Instruction 3 to Item 401(b) ofRegulation S-K.
| * | Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K. |
PART I
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| ITEM 1. | | DESCRIPTION OF BUSINESS |
(In millions, except per share amounts, unless otherwise stated)
ITT Corporation is a diversified manufacturer of highly engineered critical components and customized solutions for growing industrial end-markets such as energy infrastructure, electronics, aerospace and transportation. Building on its heritage of innovation, ITT partners with 2010 revenueits customers to deliver enduring solutions to key industries. Founded in 1920, ITT is headquartered in White Plains, N.Y. with approximately 8,500 employees in 31 countries and sales in more than 100 countries. The company generated 2011 revenues of $11.0 billion,$2.1 billion.
We manufacture key components that are integral to the operation of systems and manufacturing processes in the electronics, energy & mining, transportation, aerospace, and industrial markets. Our products provide enabling functionality for applications where reliability and performance are critically important for our customers and the end users of their products. For example, our industrial pumps serve the critical function of transporting inorganic fluids throughout chemical processes at petrochemical plants. The pumps are critical to the production requirements of the customer’s plant and their reliability helps our customers meet the delivery time and quality expectations of the end users of the petro-chemicals they produce.
ITT is a global multi-industry high-technology engineeringcompany with a balanced and manufacturing organization,diversified portfolio, positioned to capitalize on secular macro trends such as urbanization and the growing middle class in emerging economies. In 2011, 63% of our sales were outside the United States, including 28% directly from emerging growth market economies. Further, approximately 30% of our revenue is derived from aftermarket products and services where we often capture repeat sales because of our large installed base of specialized products. Additionally, approximately 45% of our revenue is derived from positions our products hold on long-lived customer platforms. Similar to the aftermarket, these are also long-term recurring revenues.
Our product and service offerings are organized in four operating segments: Industrial Process, Motion Technologies, Interconnect Solutions (ICS), and Control Technologies. These businesses generally operate with approximately 40 thousand employees, operationsstrong niche positions in more than 60 countries,large, attractive markets where specialized engineered solutions are required to support large industrial and sales presencetransportation customer needs.
Industrial Process manufactures engineered fluid process equipment serving a diversified mix of customers in more than 125 countries. global infrastructure industries such as oil & gas, mining, power
generation, chemical and other process markets and is an aftermarket service provider.
Motion Technologies manufactures brake pad, shock absorber and damping technologies for the global automotive, truck, trailer and public bus and rail transportation markets.
Interconnect Solutions manufactures a wide range of highly specialized connector products that make it possible to transfer signal and power in various electronic devices that are utilized in aerospace, industrial, defense and oil & gas markets.
Control Technologies manufactures specialized equipment, including actuation, valves, switches, vibration isolation, custom-energy absorption, and regulators for the aerospace, military and industrial markets.
The table included below provides revenue results by segment for each of the last three years. See section titled “Segment Information” for further information about each of our business segments.
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| (In Millions) | | 2011 | | 2010 | | 2009 |
Industrial Process | | | $ | 767 | | | | $ | 694 | | | | $ | 719 | |
Motion Technologies | | | | 634 | | | | | 548 | | | | | 491 | |
Interconnect Solutions | | | | 418 | | | | | 413 | | | | | 341 | |
Control Technologies | | | | 318 | | | | | 275 | | | | | 243 | |
Eliminations | | | | (18 | ) | | | | (22 | ) | | | | (24 | ) |
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Total consolidated revenue | | | $ | 2,119 | | | | $ | 1,908 | | | | $ | 1,770 | |
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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 Corporation was incorporated as ITT Industries, Inc. on September 5, 1995 in the State of Indiana. On July 1, 2006, ITT Industries, Inc. changed its name to ITT Corporation.
We generate revenue through the design, manufacture, and sale of a wide range of products that are engineered to deliver extraordinary solutions to meet life’s most essential needs – more livable environments, better protection and safety, and breakthrough communications that connect our world. Our products and services provide solutions in three vital markets: global defense and security, water and fluids management, and motion and flow control. Our portfolio includes three core businesses focused on making a difference in 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 business comprises three principal business segments that are aligned with the markets they serve: Defense & Information Solutions (Defense segment), Fluid Technology (Fluid segment), and Motion & Flow Control (Motion & Flow segment). Our Defense segment is a major United States aerospace and defense contractor delivering advanced systems and providing technical and operational services. Our Fluid segment is a leading supplier of pumps and systems to transport and control water and other fluids. Our Motion and Flow segment is a manufacturer of highly engineered critical components for multiple growth markets. The following chart depicts the 2010 revenue on a percentage basis generated by business segment.
See Note 21, “Business Segment Information” in the Notes to Consolidated Financial Statements for financial information about segments and geographic areas.
Recent Acquisitions and Divestitures
Over the past five years, we have spent in excess of $3.4 billion acquiring businesses that provide a strategic fit with businesses we presently conduct. During this period we have acquired 25 businesses that have provided approximately $2 billion in annual revenue at the time of acquisition. Our most significant acquisition during the past five years was that of EDO Corporation (EDO) in December 2007 for approximately $1.8 billion. The acquisition of EDO provided additional product offerings in the defense and security market and approximately $1.1 billion in annual revenue. In 2010, we completed the acquisitions of Nova Analytics Corporation (Nova) and Godwin Pumps of America, Inc. and Godwin Holdings Limited (collectively referred to as Godwin). Nova, a manufacturer of premium quality laboratory, field, portable and on-line analytical instruments used in water and wastewater, environmental, medical, and food and beverage applications, provides us with brands, technologies, distribution and after-market content in the analytical instrumentation market. Godwin is a supplier and servicer of automatic self-priming and on-demand pumping solutions serving the global industrial, construction, mining, municipal, oil and gas dewatering markets. The addition of Godwin’s specialized products and skills complements our Fluid segment’s broad submersible pump portfolio and global sales and distribution network.
Over the past five years we have received proceeds of approximately $800 from the divestiture of ten businesses with combined annual revenue of approximately $1.2 billion at the time of divestiture. The most significant divestitures that occurred during the five-year period were our CAS Inc. (CAS), Switches and Automotive Fluid Handling Systems (FHS) businesses. On September 8, 2010 we completed the sale of CAS for $237. CAS was a component of our Defense segment engaging in systems engineering and technical
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assistance (SETA) for the U.S. Government. On July 26, 2007, we completed the sale of substantially all of our Switches business, with the remaining portion of the business sold during 2008. The two-part sale generated aggregate proceeds of $228. On February 26, 2006, we completed the sale of FHS, for $188. The financial position and results of operations from these businesses have been presented as discontinued operations.
2011 Announcement of Company Transformation
On January 12,11, 2011, the Company announced that its Board of Directors had unanimouslyof ITT approved a plan to separate the Company’s businessesITT into three distinct,independent, publicly traded companies. On October 31, 2011 (the Distribution Date), ITT completed the tax-free spin-off of its Defense and Information Solutions business, Exelis Inc. (Exelis), and its water-related businesses, Xylem Inc. (Xylem) (referred to herein as the Distribution). We believe these three businesses are well-positioned to create value for shareholders as standalone companies.
ITT’s Board of Directors determined that the Distribution would provide benefits to the Company, including: (i) greater strategic focus of financial resources and management’s efforts, (ii) enhanced customer focus, (iii) direct and differentiated access to capital resources, (iv) enhanced investor choices by offering investment opportunities in separate entities, (v) improved management incentive tools, and
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(vi) greater potential for utilization of stock as an acquisition currency.
Greater Strategic Focus of Financial Resources and Management’s Efforts. Prior to the Distribution, ITT’s businesses exhibited different financial and operating characteristics. In particular, the Exelis business was generally characterized by cycles that are comparatively lengthy relative to those of Xylem and ITT. This resulted in different capital expenditure and acquisition strategies. It was believed that management resources could be efficiently utilized if each management company concentrated solely on its set of businesses.
The Distribution allows management to more closely align their time and resources to operating each of these businesses.
Enhanced Customer Focus. As a unified, commonly managed set of industrial businesses, our management will be more able to focus on the needs of our customers and the specific end-markets and geographies they serve.
Direct and Differentiated Access to Capital Resources.Following completionthe Distribution, we have the ability to focus our capital resource deployment on the remaining businesses. As a global industrial business with strong global cash flow generation potential, our business has different financial and operating characteristics from Exelis and Xylem. We believe that direct and differentiated access to capital resources will allow each company to better align each of their financial and operational characteristics with investor and market expectations.
Enhanced Investor Choices by Offering Investment Opportunities in Separate Entities. After the Distribution, investors should be better able to evaluate our financial performance, as well as our strategy within the context of our markets. We believe that the investment characteristics of ITT following the spin may appeal to different types of investors. As a result of the transaction,Distribution, our management should be able to implement goals and evaluate strategic opportunities in light of investor expectations within our various industries. In addition, we should be able to focus our public and investor relations efforts on cultivating a new identity.
Utilization of Stock as an Acquisition Currency. The Distribution will enable Exelis and Xylem to use their stock as currency to pursue certain financial and strategic objectives, including tax-free merger transactions. In addition, future strategic transactions with similar businesses will be more easily facilitated through the use of our stand-alone stock as consideration.
On October 31, 2011 (the Distribution Date), ITT will continuecompleted the Distribution of Exelis and Xylem by way of a distribution of all of the issued and outstanding shares of Exelis common stock and Xylem common stock, on a pro rata basis, to tradeITT shareholders of record on October 17, 2011. Exelis and Xylem are now independent companies trading on the New York Stock Exchange under the symbols “XLS” and “XYL”, respectively. The Distribution was made pursuant to a Distribution Agreement, dated October 25, 2011, among ITT, Exelis and Xylem (the Distribution Agreement). On the Distribution Date, ITT also affected a one-for-two reverse stock split of its common stock (the 1:2 Reverse Stock Split).
Following the Distribution, ITT did not own any shares of common stock of Exelis or Xylem. All information herein has been restated to reflect the Distribution, and the results of the distributed businesses are presented as discontinued operations for all periods.
Business Strengths and Strategies
Management believes that the Company has several distinct competitive advantages that allow it to sustain and grow its market positions.
ITT is a diversified industrial technology company with established businesses that share five unifying characteristics:
| 1. | The design and manufacture of highly engineered products for critical applications |
| 2. | Leaders in attractive and defensible niches |
| 3. | Global footprint & highly diversified |
| 4. | Longstanding brands and operating history |
| 5. | Proven management system and leadership |
As a result, these businesses share a common, repeatable operating model. Each business is a leader in applying its technology and engineering expertise to solve some of the most pressing challenges of our customers. Our applied engineering adeptness provides a strong business fit with our customers given the critical nature of their applications. This in turn provides us with a strong degree of knowledge of our customer’s requirements and allows us to better determine how we can help them to achieve their business goals. Our technology and customer intimacy in tandem produce opportunities to capture recurring revenue streams, aftermarket opportunities and long lived original equipment manufacturer (OEM) platforms. ITT possesses a core competency at operating this unified model across businesses in order to create value. These businesses also tend to operate in varying economic business cycles, which reduces exposures to any one cycle.
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The oil & gas business in our Industrial Process segment is representative of the capability that many of ITT’s businesses have to generate profitable growth from our common operating model. In 2007 Industrial Process began to pursue growth in the oil & gas market because of its long-term attractiveness, our existing engineering capabilities, brand strength and the aftermarket potential. We started by investing in our technology through our product line expansion. We increased our footprint to achieve strategic proximity to our customers, including facilities in India in 2008, Saudi Arabia in 2009, and the acquisition of Canberra Pumps in Brazil in 2010. Additionally, we invested in upgrading and expanding our global test capabilities to accommodate high horsepower pumps that are used in this market. We have just recently completed a significant upgrade and expansion of our plant in Brazil and acquired our distributor in Australia to cover the expanding oil & gas market in that region. As a result of our operating model, over this time we have signed global oil & gas strategic account agreements with five globally recognized oil & gas customers.
ITT possesses leading brands in many of its niche markets such as Goulds Pumps, Cannon, KONI, Enidine and ITT. These brands are associated with quality, reliability, durability, and engineering excellence. Recently, the Company has extended its branding efforts internationally. As a result, the ITT brand is very well recognized in emerging markets including China, India, Brazil and Saudi Arabia.
In addition to branding efforts, we collectively utilize the well-established ITT Management System (IMS), which is a framework for running our businesses in a measureable, data-driven manner and is a guide for the behaviors, decisions and actions of our employees. The IMS consists of four core integrated processes:
| 1. | Profitable Growth – Value based approach to organic growth through strategic planning, market segmentation, and new product development |
| 2. | Operational Excellence – Value Based Lean Six Sigma and goal deployment process for continuous, sustained cost reduction |
| 3. | Resource Optimization – Alignment of our production, sourcing, and footprint with our growth strategies |
| 4. | Leadership & Learning – Continuous training and development of our employees |
We deploy the IMS in each of our operating segments and at each of our major facilities. In addition, we have implemented a system of integrated councils comprised of leaders from each business that focus on core growth and efficiency improvement areas across ITT. The focus areas are 1) Commercial Excellence; 2) Operational Excellence; 3) Technology; and 4) Global Sourcing. This collaborative
approach provides us with the opportunity to leverage best practices and key resources in customer relationship management, coordinated sourcing initiatives, innovation, and technology sharing.
ITT’s long-term objectives are to increase the Company’s earnings and financial returns through a balanced operating strategy. The elements of this strategy are disciplined organic growth through global market expansion and new product development, combined with operational improvements through the ITT Management System that focus on reducing costs and cycle times and improving our productivity on a continual basis. We believe we can drive growth by helping our existing customers grow while seeking new customers by expanding our geographic and product markets. With the external focus of the ITT Management System our efforts at continuous improvement are centered on meeting and exceeding customer requirements.
Our long-term goals are to drive average annual organic revenue growth of approximately 5%-7%, with corresponding operating margin expansion of 50-70 basis points, achieve free cash flow conversion of greater than 105%, and adjusted EPS growth of 10%-15% per year. We intend to leverage our niche market positions, continue to expand globally by following and supporting our customers and their growth, introduce new products, and drive down costs and increase productivity to reach these goals.
ITT’s growth strategy consists of the following six key elements, which collectively are expected to grow revenues, expand margins, and drive increased profitability and cash flow:
1. Premier Customer Experience
ITT places significant focus on managing the relationships it has with its customers through a formalized process known as Value-Based Commercial Excellence (VBCE). VBCE is a continuous improvement process which our businesses use to strategically price our products and services, develop our value propositions, and assist our customers to solve their toughest business challenges. ITT is able to accomplish this by providing an efficient and productive customer experience through advanced order configuration, on-time delivery initiatives, and reliable products and services. In addition, ITT has key strategic account relationships throughout the industries we serve. Strategic accounts are customer partnerships, often global in scale, which promote the shared benefits of improved business processes between ITT and its customers. Our strategic account agreements promote customer intimacy, optimized service and delivery performance, and provide growth and profit improvement opportunities. In some instances we are able to leverage these relationships across segments. For example, both Industrial Process and ICS supply products and services to certain oil & gas customers through Industrial Process’s
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strategic account relationships. Additionally, ITT’s Global Supply Chain Services (GSCS) capabilities and operational excellence initiatives are key supporting elements to the premier customer experience. The Company views its customer relationships as its primary vehicle for growth and technological advancement. Understanding our customer’s growth plans and challenges allows ITT’s businesses to tailor and deliver reliable and timely products and services.
2. Investment in Technology and Research & Development
The company has a core competency in application engineering because a majority of our products feature leading technologies that operate in harsh environments. Harsh environments reflect challenging surrounding conditions such as the extreme cold and darkness of outer space, the high pressure of the ocean floor or within the confines of hand held communication devices that oftentimes are dropped on hard surfaces. For example, our electrical connectors are built specifically for service on satellites in space, in oil & gas drilling operations under sea and on land, and in popular mobile devices such as smart phones.
ITT has differentiated itself in the critical arena of technology and research & development (R&D). ITT has a strong track record in new product development and introduction. As a result of our investments, R&D as a percentage of sales has exceeded three percent during each of the last three years. ITT’s approach to technology is to work with its customers in tailoring the right approach to a particular customer need or problem. In our Industrial Process business, our engineers work with our customers in a number of highly challenging environments to improve the way our pumps are installed and operated. This allows the customer to run their processes more reliably and use less energy since energy is the largest component of pump life cycle operating costs.
3. Focused Expansion in Growth Markets
ITT is a global company with 63% of its 2011 revenue derived from international markets, including 28% from emerging growth market economies. Accordingly, ITT has located approximately half of its manufacturing facilities outside of the United States to lower costs, achieve strategic proximity to its customers and to further increase international sales and market share. For example, ITT’s ICS segment has had a long-term presence at its Shenzhen, Guangdong Province, China facility. Shenzhen is a low cost manufacturing site that also possesses component fabrication capabilities such as metal stamping, plating, machining and injection molding. Shenzhen produces products for both domestic consumption in China and for global customers. The plant and its experienced, skilled workforce produce a number of ICS products such as universal contacts, electric vehicle connectors, and medical connectors. In
addition, the Shenzhen site is staffed with engineers who design specific products for the Asia Pacific and China region.
ITT’s businesses are in a position to grow with its customers in these rapidly expanding global markets. Many of these markets are bolstered by secular trends driving development throughout the emerging economies such as a growing middle class and urbanization. These trends are fueling increased consumer consumption of energy, durable goods, automobiles, rail and air travel. For example, Goulds Pumps are used in processing petrochemicals in Saudi Arabia for use in a host of consumer goods such as plastics. Our Motion Technologies’ brake pads are installed on Shanghai General Motors and Mercedes automobiles in China, and KONI rail dampers are making high speed trains more comfortable for passengers in China.
We have and expect to continue to expand our R&D capabilities to make products that are relevant to local markets. Our focus is on products where reliability and engineered solutions are valued. We recently added R&D technology centers in key markets such as India and China. In early 2012, we plan to begin development on another R&D center in China that will be focused on expanding and enhancing braking technologies for the local market. Industrial Process is developing localized ISO and multistage ring section pumps at our Baroda, India plant for the growing chemical process, oil & gas, and general industrial pump markets in India.
4. Increased Aftermarket Capture and Platform Expansion
Aftermarket sources accounted for approximately 30% of our 2011 revenue. Our Industrial Process, Motion Technologies, and Control Technologies segments benefit from repeat sales of original products, consumable spare parts, and services as a result of our large, global, and growing installed base of products. Aftermarket business generally carries higher margins than original sale products and tends to be a more stable, recurring revenue stream than project-based businesses. The key drivers of aftermarket demand are the wear and tear on critical components in harsh environmental applications. We develop our aftermarket business through our end user sales channels and dedicated service personnel. The Company views this as a valuable source of future earnings and is actively marketing its capabilities while investing in technologies that reduce the customer’s total life cycle cost. For example, our Industrial Process business has an established international service center network with eight Pump Repair and Overhaul shops (PRO shops) in the United States and facilities in Australia, Brazil, Chile, Saudi Arabia, Thailand, and Venezuela.
Our Motion Technologies segment also has recurring revenue streams from automotive and rail platform content. Its products generally serve on long-term platforms whereby once
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the original equipment products are sold, aftermarket parts are needed to replace and extend the life of a vehicle. Our up-front investments to gain positions on automotive platforms provide long-term sustainable revenue. Another example of this is on various aerospace platforms where ICS has been supplying content for many decades.
5. Margin Expansion through Operational Excellence
The Company strives to increase its profit margins and improve its competitive position in all of its business segments through its operational excellence strategy. The core elements of this strategy are Value Based Lean Six Sigma (VBLSS), GSCS and shared service utilization. These strategies enable the company to realize operating efficiencies, increased customer satisfaction, and increased free cash flow while lowering operating costs, streamlining processes, eliminating waste and improving cycle times.
The ITT culture has long embraced Lean as its central operating tenet. VBLSS encompasses Lean manufacturing as well as continuous process improvement in other critical areas such as customer service and order entry and fulfillment. Our intent is to drive ever increasing levels of quality, speed, and efficiency.
GSCS which includes low cost region sourcing and production, has enabled us to mitigate inflation and increasing material costs in order to maintain or improve profitability during periods of rising costs. ITT produces its array of engineered products in key low-cost and emerging growth countries such as China, India, Brazil, Saudi Arabia, South Korea, Czech Republic and Mexico. Certain operations, including shared services are leveraged between the Company’s operating segments which have resulted in additional cost savings and synergies through the consolidation of operations and reduced general and administrative expenses.
6. Effective Capital Deployment to Drive Organic and Inorganic Growth
ITT’s businesses operate in growing and highly fragmented markets. ITT estimates the sum of its served addressable markets to be approximately $31 billion worldwide. Given these dynamics and ITT’s technology investments, global reach and strong brands, the Company believes it has the opportunity to continue to expand geographically, broaden its product lines, improve its market share positions, and increase earnings through sales growth and operational efficiencies on an organic basis and through acquisition. We strive to effectively deploy our capital by combining strategic filters with rigorous financial criteria. ITT’s acquisition strategy generally targets firms in
similar businesses and end-markets that suppliesproduce unique and differentiated products and technologies. A disciplined focus on liquidity and cash management is a major part of how we will manage ITT’s financial performance.
Targeted Leverage Of Our Capabilities
In addition to the six key elements of the growth strategy described above, ITT will leverage its diverse set of resources and capabilities across its businesses in order to maximize the Company’s value creation potential. The Company is continually evaluating cross business revenue growth and cost saving opportunities and views the following assets and capabilities as core to this mission:
| n | | ITT Brand – The ITT brand is well regarded and widely recognized, particularly in global growth markets. This provides our segments with brand recognition for new products in key emerging growth market economies such as Brazil, China, and India. |
| n | | IMS – Increased performance and productivity through the common application of the ITT Management System. |
| n | | Shared Services – North American, Chinese and other regional shared services initiatives; including information technology. |
| n | | Councils – Cross value center operational councils in areas such as operations, commercial excellence, and technology and new product development. While our technologies vary significantly between each of our segments, our engineering leaders across the businesses leverage our collective strengths through collaboration and cooperation in areas such as design tooling, specific technologies and best practices including our long-standing, results-driven value-based product development process. |
| n | | Strategic Accounts – Further development and expansion of our global strategic account program to bring the combined technical capabilities of multiple ITT businesses to address incremental customer opportunities. |
| n | | Sourcing – Indirect sourcing activities across ITT’s businesses are managed centrally to better leverage our third-party spending and vendor performance levels. ITT’s global indirect sourcing group also provides services to Exelis and Xylem on a third-party contract basis. Generally these third-party contracts last for one to two years, but may be terminated earlier if either Exelis or Xylem source the services from an alternative provider. |
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Segment Information
Industrial Process
The Industrial Process segment is a global manufacturer of industrial pumps, valves and related equipment, and is a provider of plant optimization and efficiency solutions and aftermarket services and parts. Headquartered in Seneca Falls, New York, its operations include four product categories:
Goulds Pumps, Inc. is the largest operating division in the Industrial Process segment and is a market leader with over 160 years of product design history and is focused on customer needs primarily in the chemical, oil & gas, mining, power, pulp & paper, and general industrial markets. The Goulds Pumps brand is among the most widely recognized brands in the global pump industry. We have a broad portfolio of centrifugal pumps including ANSI and ISO chemical pumps, API (American Petroleum Institute) pumps for the petrochemical and oil & gas industry, slurry and process pumps for the mining industry and paper stock pumps for the pulp & paper industry. Our portfolio also includes vertical, axial flow, multi-stage and other pumps that are used in a multitude of industries.
ITT Engineered Valves is a manufacturer of process valves for the biopharmaceutical, mining, power, pulp and paper and general industrial markets. ITT Engineered Valves has 65 years of experience in design, fabrication and engineering of market leading industrial knife-gate (Fabri-Valve) and sanitary diaphragm valves (Pure-Flo). Pure-Flo is a leading provider of sanitary valves to the global biopharmaceutical market.
ITT PRO Services is the aftermarket solutions offering of Industrial Process which strives to extend equipment life in its customers’ facilities. PRO Services provides an array of services focused on reducing equipment total cost of ownership (TCO) and increasing plant output. The typical services provided include parts supply, inventory optimization, field service, energy and reliability assessments, repairs, upgrades and overall equipment maintenance. PRO Services offerings include Goulds Pumps Parts, ProShop Repair and Upgrades, ProSmart, PumpSmart, ProCast and Plant Performance Services.
ITT C’treat is a leading provider of water treatment systems for offshore oil and gas production platforms and has been in business since 1980. Its skid-mounted, reverse osmosis water makers convert seawater to drinking water and process water for the world’s largest offshore oil and gas exploration and production corporations.
Industrial Process services an extensive base of customers from large multi-national companies, engineering, procurement and construction firms (EPC) to regional distributors with thousands of end-user customers. We estimate this segment’s served addressable market is
approximately $12 billion worldwide. In 2011, the end-use markets that these customers operated in include oil & gas (29%), chemical & petrochemical (23%), mining (13%), and general industrial (35%). These customers are geographically distributed with a regional mix of North America (57%), Latin America (16%), Middle East & Africa (10%), Asia Pacific (12%) and Europe (5%).
Industrial Process has transformed its Goulds Pumps business considerably over the past five years. Goulds Pumps is an industry leader in the chemical, power, mining, paper and other pump segments, including food & beverage, biofuels, steel and many other industries. Key products include ANSI and ISO process pumps, paper stock, horizontal split case, sump, slurry and vertical turbine pumps. Investments have been made in this segment to automate the product selection and order entry process to drive highly efficient transactions and accuracy. In order to support more complex industrial pump segments which includes engineered to order API products for the global oil & gas, petro-chemical and power generation markets a great deal of investment has been made over the last decade. Industrial Process has been successful in penetrating this segment by investing in upgrading existing products and infrastructure, increasing engineering resources globally, enhancing global product and project management and driving operational excellence. Order fulfillment for the more complex segment often involves customization and multiple customer milestone meetings as they progress from order entry, manufacturing, testing, shipment, and installation and start-up.
Industrial Process recognizes that serving the customer before, during and after installation is critical. Our success in the marketplace is largely due to our global and diversified channel structures. End-users are serviced by an extensive network of independent industrial distributors and representatives which complement our customer-focused direct sales and service organization. We also have focused channels dedicated to supporting the EPC firms as their needs are often different from other end-user customers.
The pump and valve markets Industrial Process serves are highly competitive. For most of our products there are hundreds of regional competitors and a limited number of larger global peers. We consider our larger competitors to include Flowserve, Sulzer Pump, ClydeUnion (SPX), Ebara, Weir and Tyco (valves). Primary customer decision drivers include price, delivery, brand recognition/ reputation, perceived quality, broad product offerings, commercial terms, technical support and localization. Pricing is typically very competitive for large projects because of the increased potential for aftermarket opportunities for the original equipment provider.
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Our ability to compete is based upon having a wide range of engineered industrial pumps to meet many of our customers’ most demanding applications and on our capability to provide our customers with an array of after sale services and support. For larger projects, breadth of product offering is an important factor as it simplifies the customer procurement process. Industrial Process’ ability to expand our product portfolio has historically been a competitive strength.
We benefit from our large global installed base of products, and because of the processes in which they are installed, require frequent maintenance, repair and replacement parts. The frequency of repair and maintenance services is dependent on utilization levels and the conditions and environment in which they operate. Our direct and distributor channels provide market leading service to our customers. As we increase the number our global installations, we continue to add service centers and personnel. By positioning our presence closer to customers, we are able to provide quick responses to their growing aftermarket needs.
We believe our Industrial Process segment demonstrates ITT’s competency in Premier Customer Experience because the organization works with its customers over the life cycle of the installation and operation of its products in the customers’ facilities or its customers’ end users in the case of an EPC firm. Industrial Process is able to accomplish this because of its extensive global customer relationships, breadth of product offering, product availability, project management skills, and aftermarket and reliability services.
Motion Technologies
Motion Technologies, headquartered in Lainate, Italy, is a global manufacturer of highly engineered solutionsand durable components, consisting of brake pads, shock absorbers and damping technologies for the transportation industry. The transportation industry encompasses both personal and public transport equipment, such as passenger cars, light and heavy-duty commercial vehicles, buses and rail transportation. Motion Technologies consists of two businesses, Friction Technologies and KONI. Through its Friction Technologies business, Motion Technologies provides the automotive market with high-performance, high-quality brake pads and through its KONI business, Motion Technologies provides the transportation industry with shock absorber and damping equipment. The Motion Technologies revenue composition is split approximately 80% from Friction Technologies and 20% from KONI. Motion Technologies primarily serves the high-end of the transportation industry, with a strong reputation for quality products and a focus on new product development and operational excellence.
We believe that Motion Technologies is positioned and structured to benefit from the anticipated growth in the
transportation industry. Growth that we believe will be driven by increasing urban and middle class populations, creating a significant need for additional mass transit infrastructure and individual desire for automobile ownership.
Friction Technologies
Our Friction Technologies business applies innovative research of new friction materials and the identification of highly productive technologies to produce a range of brake pads installed as original equipment (OE pads) on cars and light to heavy duty commercial vehicles. OE pads are sold either directly to original equipment manufacturers (OEM) or to Tier-1 and Tier-2 brake manufacturers. Our OE pads are designed to meet specific customer specifications and environmental regulations, and to satisfy an array of geographic applications. Most automobile OEM platforms (car model) require specific brake pad formulations based the customer’s specifications, including demanding delivery and volume schedules.
Friction Technologies also manufactures aftermarket brake pads destined to the automotive service and repairs market. This market consisting of both OEM dealers, also referred to as original equipment service (OES) networks, and independent aftermarket (AM) networks. Brake pads sold within the OES network generally match the exact specifications of an original auto platform OE brake pad, while our robust catalogue of AM pads features technology designed to provide up to the highest levels of braking performance. Within the service and repairs market, pads are sold either directly to OEM manufacturers and to the Tier-1/Tier-2 brake manufacturers or indirectly through European distributors, primarily Continental. Combined sales to Continental and TRW, Motion Technologies’ largest customers were 41% of 2011 revenue and 12% of consolidated ITT revenue.
Our dedication to customers and to the advancement of braking technologies has built a legacy of quality, reliable products that meet the demands of customers across the globe, creating our leadership position in the European OE pad and AE pad markets. Historically, revenue for Friction Technologies has been generally balanced between OE pads and AM pads.
KONI
The KONI business organizes its various performance shock absorber products into three main product market groups: railway rolling stock; car & racing; and bus truck & trailer. Each product market group is handled by its own dedicated team for product development and engineering, assembly lines and sales & marketing, thus assuring the best possible concentration of product specialization and know-how.
Railway Rolling Stock – The railway rolling stock market group provides a wide range of equipment for passenger rail, locomotives, freight cars, high speed trains and light rail.
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Offerings include hydraulic shock absorbers (primary, lateral and inter-car), yaw dampers as well as visco-elastic and hydraulic buffers. This market group also engages in the revamping of air springs which are primarily used on high speed trains and light rail in the United States. Revenue opportunities for our rail damping systems are balanced between OE and AM customers. Sales are either directly to train manufacturers and train operators carrying out scheduled train maintenance programs or indirectly through distributors.
Car & Racing –The car & racing market group features performance shock absorbers using our Frequency Selective Damping (FSD) technology. FSD products are popular with car and racing enthusiasts who desire to modify their shock absorbers for increased handling performance. KONI car shock absorbers are sold all over the world, through a distribution network that markets KONI products into specific geographies or customer groups.
Bus, Truck & Trailer –The bus, truck and trailer market group manufactures shock absorbers and bus dampers, destined to both OE and AM customers.
The rail damping systems and bus dampers market, have attractive growth prospects because mass transit systems are benefiting from ongoing large-scale urbanization trends and infrastructure investments. The long-term, enduring nature of these factors fosters a market environment that tends to demonstrate mitigated levels of cyclicality. In addition, train and bus vehicles are sustainable transport modes that reduce traffic congestion and smog levels in urban areas.
Motion Technologies has a strong market reputation derived from many years of mutual collaboration with major OE manufacturers and is focused on customer satisfaction, quality and on-time delivery. Motion Technologies has a global manufacturing footprint, with production facilities in Western Europe, Eastern Europe, North America and Asia. Although 41% of Motion Technologies revenue is derived from its top two customers, demand for its products stems from a variety of end customers all over the world.
Motion Technologies competes in markets primarily constituted by large and well-established national and global companies. The brake pads and linings market, which exceeds $6 billion, includes companies such as Nisshinbo, Honeywell, Akebono and Federal Mogul. Key competitive drivers within the OE pad business include technical expertise, formulation development capabilities, scale production, product performance, high-quality standards, customer intimacy and reputation. OEM customers usually require long-lasting and well-established relationships, based on mutual trust, local proximity and a wide range of cooperative activities, starting
from the design to the sampling, prototyping and testing phases of brake pads. Within the AM pads market, Motion Technologies is a leading European provider in a highly fragmented global market.
Competitive drivers in the rail damping systems business include price, technical expertise and product performance. Rail damping systems are considered critical components because of safety requirements and thus they have to be specifically designed according to many different train applications, and must satisfy strict compliance requirements. We estimate the rail damping systems and bus dampers segments have a combined available market of approximately $500. Motion Technologies is a global leader in the rail dampers component of the complete rail damper system.
Interconnect Solutions
Headquartered in Santa Ana, California, ICS designs and manufactures a broad range of highly engineered connectors and cable assemblies for critical applications in harsh environments that make it possible to transfer signal and power in an increasingly connected world. Through our brands that include Cannon, VEAM and BIW, this segment serves customers in the aerospace, oil and gas, medical, handheld electronics, industrial, alternative energy, transportation energy and industrialdefense markets. Under the plan, ITT shareholders will own shares in all three corporations following the completionThe connectors market is large and fragmented but ICS is generally one of the transaction. leading companies in our served markets due to our technology, strong customer relationships, cost performance and global footprint. ICS has seven production facilities, including two in the United States, and one in Mexico, Italy, Germany, England, and China that provide geographic proximity to our key global customers.
Our products and solutions are generally focused in various applications, characterized as harsh environments or telecom, computer and consumer connectors.
| n | | Harsh Environment Connectors |
We design, manufacture and sell high performance, military-specification, and commercial electrical connectors of the following types: Circular, Rectangular, Radio Frequency, Fiber Optic, D-sub Miniature, Micro-Miniature and cable assemblies. Based on our technological capabilities in filtering, sealing, contact geometry, composite materials and plating, we focus on product solutions for harsh operating environments. These products are used in aerospace, oil & gas, industrial, defense and transportation markets. Applications include avionics equipment, civil aircraft, industrial automation and production equipment, electric vehicles, medical imaging and diagnostics equipments, rail, construction and agriculture equipment, military equipment, navigation devices and smart phones.
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| n | | Telecom, Computer, Consumer Connectors |
We design, manufacture and sell high-bandwidth, high density connectors that are used in entertainment equipment, lighting, telecom transmission and switching equipment, cellular base stations, cable and satellite set-top boxes and high end servers. Applications include broadcasting equipment, stage lighting, voice and VoIP telecom equipment, computer workstations, and cellular towers.
ICS products are used in a wide variety of applications throughout the world. ICS sells its products to over 2,500 customers and the four largest customers represent approximately 8% of net sales for the year ended December 31, 2011. ICS’s products are sold directly to OEM’s, Contract Manufacturers and cable system operators and through its global distribution channel. ICS has a global distribution network and is engaged with the leading distribution companies throughout the world. Many of these distributors have been distributing ICS products for over 70 years. ICS’s sales to distributors account for approximately 32% of 2011 sales. ICS also provides custom products for unique applications using its engineering expertise to solve difficult connectivity problems and reliability challenges.
The transactionglobal market for connectors and related products is anticipatedestimated to be completedin excess of $48 billion in 2011. ICS competes with a large number of competitors in a fragmented market. Based on our technological capabilities, we focus mostly on product solutions for harsh operating environments and estimate ouraddressable market to be approximately $6 billion in 2011. The major competitors for these products are Amphenol, Deutsch, Souriau (Esterline) and Glenair. ICS is one of the leading companies in our served market driven by the endour technology, our customer relationships, cost performance and global footprint. Our major customers consist of 2011.
Under the plan, ITT would execute tax-free spinoffs to shareholders of its water-related businessesmajor aerospace and
its Defense & Information Solutions segment. The water-related business will include the Water & Wastewater division and the Residential & Commercial Water divisiondefense companies, as well as
other handheld electronics and industrial companies.Control Technologies
Control Technologies, headquartered in Valencia, California, specializes in highly engineered aerospace components and industrial products. We offer an extensive portfolio of qualified products such as fuel management, actuation and noise absorption components in the Flowaerospace market and a range of products that manage motion and absorb energy in a variety of industrial markets. Our application expertise allows us to offer customized solutions using modular platforms that effectively deliver our technologies into various customer applications. We have strong aftermarket opportunities, particularly in our aerospace business, and a broad customer base with no single customer accounting for more than 10% of Control divisionTechnologies revenue.
CT Aerospace
CT Aerospace designs and manufactures flow control and actuation components, motion control, energy absorption and vibration isolation products primarily for commercial aerospace, military and other markets. We estimate the served addressable market for CT Aerospace is approximately $2.4 billion worldwide. Our aircraft component products consist of fuel and water pumps, valves, electro-mechanical rotary and linear actuators, and pressure, temperature, limit, and flow switches for various aircraft systems. Our aircraft interior products include stowage bin rate controls, rotary hinge dampers and actuators, seat recline locks and control cables and a variety of engineered elastomer aircraft interior isolators to protect equipment and keep the interior of the aircraft quiet. We also provide electromechanical seat actuation systems for premium seating products. Military products generally include energy absorption applications. Most of our products are sold direct to the customer by our in-house sales force. We utilize a small third-party business for government spare parts distribution, thereby eliminating extensive administrative costs. CT Aerospace also has a well-established Federal Aviation Agency (FAA) certified repair station which focuses on the aftermarket. The repair station also carries ISO9001/AS9100 and European Aviation Safety Agency (EASA) accreditations.
Our products are custom designed for specific customer applications. We have a highly skilled engineering group for R&D, application engineering and qualification. We conduct fundamental research internally, with universities, and with our customers. We leverage our technical capability to provide innovative and reliable solutions for our customers. Our flow control and actuation products deliver reliability requirements through a unique patented shunt disc technology for pressure and temperature switch applications for hostile environments. In addition, our actuator utilizes a patented optical technology for enhanced reliability. Our pumps have the ability to run dry for extended periods, eliminating potential fire ignition sources in fuel system applications and provide high reliability. Our energy absorption products use patented technology to provide innovative solutions, such as self compensation for load variations. Our noise/vibration isolation products use patented innovations to improve noise control, reduce weight, and reduce installation time.
CT Aerospace sells a wide range of products to the aerospace industry and has many customers globally. Our customers are predominantly commercial airframe manufacturers, airframe systems manufacturers, interior systems, seat manufacturers, commercial airlines and defense contractors. We have strong positions with the leading commercial airframe and systems manufacturers such as Boeing, Parker, Eaton and Honeywell. We have significant
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content in a number of large commercial transport platforms. We also have significant content on regional and business aircrafts. These platforms provide a long life cycle of original equipment and aftermarket sales.
We serve the aircraft interior market for overhead bins and seating components. The seat actuation market typically sells over 60% of annual sales to modernize existing commercial aircraft fleets. Our business is neither dependent on one or a small number of customers.
In the highly regulated Aerospace Market we benefit from our large installed base of products. We compete by offering a wide portfolio of reliable products, coupled with advanced application expertise and customer support. We believe application expertise and our reputation for quality significantly enhance our market position. Our ability to collaborate with our customers to deliver wide product offerings has allowed us to compete effectively, to cultivate and maintain customer relationships, and to expand into many new markets.
Competitors range from large multi-national corporations to small privately held firms. Our markets are often fragmented and thus there are several types of companies who choose to play in the field. Aviation competitors include Circo, Hydra Electric, Eaton, Lord Corporation, Hutchinson, Ro-RA General Aerospace and Crane. Competition in these markets focuses on application expertise with effective solutions, product delivery and performance, previous installation history, quality, price and customer support. We have been successful in establishing long-term supply agreements with a number of our larger customers, thereby increasing opportunities to win future business.
Given the highly fragmented nature of the Aerospace Repair & Overhaul industry, CT Aerospace competes with a large number of Maintenance Repair and Overhaul (MRO) businesses. Some airlines have established repair and overhaul capabilities which makes them competitors as well. We compete in the repair and overhaul segment of our business by offering a high quality service with increased reliability, coupled with advanced technical expertise.
CT Industrial
CT Industrial designs and manufactures energy absorption, motion control, and general industrial products primarily for the heavy industrial, medical, automation, energy, and shape cutting markets. We estimate the served addressable market for CT Industrial is approximately $4.3 billion globally. Our energy absorption products consist of customized shocks, dampers, and wire rope. CT Industrial possesses a specialized set of skills and capabilities in the energy absorption business. Our motion control products consist of servomotors, actuators, and controllers. Our general industrial products include gas regulators, pressure switches, and web tensioning equipment.
We also provide the controls, torches, power supply, and torch tip consumables for the plasma shape cutting industry.
CT Industrial has solid positions in China, Europe, and North America. It has a broad customer base including end users, OEM’s, and distribution. Channels to market include direct, commissioned representation and buy-resell distributors. CT Industrial competes by offering a wide portfolio of reliable products that are brought to specific markets as a basket of tools to solve applications for customers. Historically, we have focused on product delivery, quality, performance and application engineering.
Our ability to collaborate with our customers to deliver comprehensive product offerings has allowed us to compete effectively. Two recent examples of this include collaborating with a customer to design a unique solution for under water remote operated vehicles serving off shore oil platforms in our motion control business. Another example includes working with a Chinese customer to develop a unique solution for life extension and efficiency of hydro electric plants in our energy absorption business.
Competitors change depending on the product line and range from large multi-national corporations to small privately held firms. CT Industrial has a leading position in our energy absorption business. Our position in the top three manufacturers in energy absorption is currently reported withinsignificant in the Motion & Flow Control segment. automation, heavy industrial and energy markets.
The Industrial Process division whichmotion control and general industrial businesses are highly fragmented and we compete with a group of industry participants. The main competitor in the servo motor product line is currently reported withinDanaher. Parker is a leading competitor in the Fluid segmentpneumatic actuation. This is a diverse, global market. The shape cutting markets are led by Hypertherm, followed by Kjellberg and Thermal Dynamics.
CT Industrial will continue to operatefocus on delivery lead times, quality and performance while enhancing our already strong application engineering offering. The development of new customer service strategies will create a differentiated service offering and improve turnaround time in product, quotations and service communications.
Other Company Information
Materials
All of our businesses require various raw materials, the availability and prices of which may fluctuate. The principal raw materials used in manufacturing our products include steel, iron, aluminum, nickel, tin and copper, as a divisionwell as specialty alloys, including titanium. Materials are purchased in various forms, such as bar, rod and wire stock, pellets, metal powders, shims, springs, fabricated parts including motors, and machined castings.
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Our global sourcing initiatives continue to expand and are designed to capitalize on sources in emerging markets and other low-cost sources of ITT Corporation. The following chart provides an overview of the planned company transformationpurchased goods balanced with efficient coordinated global logistics. Raw materials, supplies and estimated 2011 pro forma revenue, without other adjustment.
The balance of the disclosures in this Annual Report onForm 10-K relate to the current operations of ITT, except as may be specifically described otherwise.
Salesproduct subassemblies are purchased from third-party suppliers, contract manufacturers, and Distribution
We manage our business and report our financial results based on our current principal business segments mentioned above. Our customers are organized by defense and commercial customer groups, and distributioncommodity dealers. For most of our products, occurs by direct
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sales to end customers and indirectly through our channel partners. Our channel partners include:
| | |
| • | Resellers that sell our products, frequently with their own value-added products or services, to targeted customer groups |
| • | Distribution partners that supply our solutions to smaller resellers with which we do not have direct relationships |
| • | Independent distributors that sell our products into specific geographies or customer segments in which we have little or no presence |
Our distribution mix differs substantially by business and region. We believe that customer buying patterns and different regional market conditions necessitate sales, marketing and distribution efforts to be tailored accordingly. Wewe have existing alternate sources of supply, or such materials are focused on driving the depth and breadth of our sales footprint in addition to efficiencies and productivity gains in both the direct and indirect business.
Materials
Our business relies on third-party suppliers, contract manufacturing and commodity markets to secure raw materials, parts and components used in our products.readily available. In some instances we depend on a single source of supply, manufacturing or assembly or participate in commodity markets that may be subject to a limited number of suppliers.
AllWe continually monitor the business conditions of our businesses require various raw materials, the availabilitysupply chain to maintain our market position 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 fixed-priced contracts with suppliers and various other programs, such as our global strategic sourcing initiative.avoid potential supply disruptions. There have been no raw materials shortages that have had a material adverse impact on our business as a whole.
For most of our products,whole, and we have
existing alternate sourcesbeen able to develop a robust supply chain such that we do not anticipate shortages of
supply, or such
sourcesmaterials in the future.Although some cost increases may be recovered through increased prices to customers, our operating results are readily available.generally exposed to such fluctuations. We attempt to control such costs through fixed-priced contracts with suppliers and various other cost containment strategies, such as our GSCS initiative. We typically acquire materials and components through a combination of blanket and scheduled purchase orders to support our materials requirements for an average of four to eight weeks, with the exception of some specialty material.materials. From time to time, we may experience significant price volatility or supply constraints for materials that are not available from multiple sources. Frequently,sources such as certain rare earth minerals. In limited circumstances, we are ablemay have to obtain scarce components for somewhat higher prices on the openspot market, which may have ana negative impact on gross margin but does not disrupt production.and can periodically create a disruption to production and delivery. We also acquire certain inventory in anticipation of supply constraints or enter into longer-term pricing commitments with vendors to improve the priority, price and availability of supply.
We evaluate hedging opportunities to mitigate or minimize the risk of operating margin erosion resulting from the volatility of commodity prices.Manufacturing Methods
We utilize two primary methods of fulfilling demand for products:build-to-order andengineer-to-order. Build-to-order assembly consists of building a group of products with the same pre-defined specifications, generally for our OEM customers’ inventory. Engineer-to-order assembly consists of building a customized system for a customer’s individual order specifications. In both cases, we offer design, integration, test and other production value-added services. We employbuild-to-order capabilities to maximize manufacturing and
logistics efficiencies by producing high volumes of basic product configurations. Engineering products to order permits the configuration of units to meet the customizationcustomized requirements of our customers. Our inventory management and distribution practices in bothbuild-to-order andengineer-to-order seek to minimize inventory holding periods by taking delivery of the inventoryperiods.
Backlog
Delivery schedules vary from customer to customer based on their requirements. For example, large complex projects in specialized markets such as oil and manufacturing immediately prior to the sale or distribution of products to our customers.
Significant Customers
The U.S. Government is our only customer that accounts for greater than 10% of consolidated revenue. The operations of our Defense segment represent the substantial majority of our sales to the U.S. Government. In total, the U.S. Government represented 46%, 52%gas and 51% of our consolidated revenue results during 2010, 2009mining at Industrial Process require longer lead times and 2008, respectively.
Research and Development
Research and development is a key element of ITT’s engineering culture and is generally focused on the design and development of products and solutions that anticipate customer needs and emerging trends. Our businesses invest substantial resources for research and development (R&D) activities. We anticipate our investments in future R&D activities will be consistent with recent spending levels to ensure a continuing flow of innovative, high-quality products and maintain our competitive positionproduction cycles. Delivery delays could arise from changes in the markets we serve. Such activities are conducted in laboratorycustomer’s requirements or technical difficulties. Total backlog, representing firm orders that have been received, acknowledged and engineering facilitiesentered into our production systems, was $850 and $682 at severalDecember 31, 2011 and 2010, respectively. Total backlog at December 31, 2011 was comprised of our major manufacturing locations. During 2010, 200957% from Industrial Process, 19% from Motion Technologies and 2008, we recognized Company-funded R&D expenses of $253, $258,12% from each ICS and $236, respectively, within operating expenses.
Control Technologies. We also conduct R&D activities pursuantexpect to contracts with the U.S. Government, generally related to the design of systems and equipment, as well as studies and experimentation to accomplish specific technical objectives. The knowledge gained from such R&D activities may be used in future production activities, including follow-on contracts for full-scale production of products based on the prototypes or models developedsatisfy nearly all December 31, 2011 backlog commitments during the R&D phase. Costs incurred in connection with these activities are not included in the Company-funded R&D amounts noted above. R&D costs attributable to contracts with customers are recognized within costs of revenue when the expense is incurred.
2012.Intellectual Property
We generally seek patent protection for those inventions and improvements that are likely to be incorporated into our products or where proprietary rights willare expected to improve our competitive position. We believe
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that our patents and applications are important for maintaining the competitive differentiation ofThe highly customized application engineering embedded within our products,
our proprietary rights and
improving our
return on research and development investments. knowledge capabilities all contribute to enhancing our competitive position.While we own and control a significant 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, as well as each of our core business segments, is not materially dependent on any one intellectual property right or related group of such rights.
Patents, patent applications, and license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. As the portfolio of our patents, patent applications, and license agreements has evolved over a long period of time, we do not expect the expiration of any specific patent or other intellectual property right to have a material adverse effect on our financial position, results of operations or cash flows.
Research and Development
R&D is a key element of ITT’s engineering culture and is generally focused on the design and development of products and solutions that anticipate customer needs and emerging trends. In addition, our R&D is based on taking technology
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quickly to the tangible phase, increasing the competitive offering, and increasing the customer service level through application engineered solutions.
Product development efforts at Industrial Process focus on technologies that reduce customer’s total cost of ownership. We have significantly expanded our API pump coverage to service the oil & gas market. During 2011, we introduced some key new products, including two slurry valves and a slurry pump to service the mining market and a high pressure ring section pump for reverse osmosis and general industrial applications.
Motion Technologies R&D activities focus on the design and development of our patents, we are licensed to use certain patents, technology,products and other intellectual property rights ownedsolutions that either meet specific customers’ needs or anticipate new market trends and controlled by others,environmental regulations. During 2011, Motion Technologies introduced key new products, including a low-copper content brake pad, new friction materials for the North American market and similarly, the U.S. Governmentand/or other entities may be licensed to use certain patents, technology,Ceramic product line for high-performance European aftermarket. Additionally, in 2012 Motion Technologies will begin construction of a new R&D and other intellectual property rights owned and controlled by us, under U.S. Government contracts or otherwise when we consider such licensesproduction center in Wuxi, China. The facility, expected to be completed in mid-2012, will be focused on driving development of friction materials suited to performance requirements specific of the Chinese market, to better serve local demands and to be included in all new projects currently restricted to local suppliers.
ICS’s R&D programs are focused on bringing products to market that satisfy the present and future needs of the connectors industry. Our product designs attempt to deliver solutions to size reduction and bandwidth expansion challenges, while providing reliable power and signal connections that meet and exceed the requirements of our customers. Our new J1772 Electric Vehicle connector was the first in the industry to receive approval from UL, the electrical safety testing and certification organization, and won product of the year awards in 2011. Our new QLC miniature high density connector, used in medical ultrasound equipment, was selected by a leading medical equipment company as their choice for all new ultrasound equipment.
Control Technologies R&D efforts are aimed at producing innovative technologies that solve our customer’s critical issues. During 2011, we introduced Enidamp(tm), a vibration control product that significantly reduces vibrations on commercial aircraft that allows critical overheat detection system to function properly. Other important developments in 2011 were an environmentally friendly shock absorber and an actuator for gate valves that addresses two critical customer concerns. First, it is extremely light in weight, and second, it can meet or exceed customer lead time requirements.
We anticipate our investments in future R&D activities will moderately increase from current spending levels to ensure a continuing flow of innovative, high quality products and maintain our competitive position in the markets we serve. Such activities are conducted in laboratory and engineering facilities at several of our major manufacturing locations, as well as in our best interests.dedicated R&D facilities strategically positioned close to our customers. During 2011, 2010 and 2009, we recognized R&D expenses of $66, $61, and $53, respectively, within operating expenses, which is 3.1%, 3.2% and 3.0% as a percent of revenues, respectively.
Cyclicality and Seasonality
Many of the businesses in which we operate are subject to specific industry and general economic cycles. Our connectors business tends to be impacted more in the early portion of an economic cycle, while the automotive and aerospace components businesses tend to expand in the middle portion of the economic cycle and the industrial pump business typically benefits from late cycle expansion.
Our businesses experience limited seasonal variations, with demand generally at an annual low during summer months (our third quarter) mainly attributable to European automotive manufacturing shutdowns and the planned industrial maintenance activities of our customers. Revenue impacts from the limited seasonal variations are typically mitigated by our backlog of orders that allow us to adjust levels of production across the summer months.
Environmental Matters
We are subject to stringent federal, state, local, and foreign environmental laws and regulations concerning air emissions, water discharges and waste disposal. In the United States, such environmental laws and regulationsthese include but are not limited to 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 allour operations. We have established an internal program to assess compliance with applicable environmental requirements for all of our facilities. The program, which includes periodic audits of many of our locations, including our major operating facilities, 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 believe we closely monitor our environmental responsibilities, together with trends in the environmental laws. WhileIn addition, we
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have purchased insurance protection against certain environmental risks arising out of our business. Environmental laws and regulations are subject to change, however, the nature of such is inherently unpredictable and the timing of potential changes is uncertain. However, the effect of legislative or regulatory changes couldwhich may be materialdifficult to the Company’s financial condition or results of operations. In addition, we have purchased insurance protection against certain unknown environmental risks.
predict.Accruals for environmental mattersliabilities are recorded on asite-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 undiscounted and 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 share of the relevant costs. At December 31, 2010,2011, we had accrued $139$102 related to environmental matters. Such estimates are subject to change and may be affected by many factors, such as new information about a site, evolving scientific knowledge about risk associated with any contamination involved, developments affecting remediation technology, and attitudes of regulatory authorities.
Employees
As of December 31, 2011, we had approximately 8,500 employees, of which approximately 3,500 were located in the United States. Approximately 15% of our U.S. employees are represented by unions. We also have unionized employees in Italy and Brazil. No one unionized facility accounts for more than 20% of ITT total revenues. Although our relations with our employees are strong and we have not experienced any material strikes or work stoppages recently, no assurances can be made that we will not experience these or other types of conflicts with labor unions, works councils, other groups representing employees or our employees generally, or that any future negotiations with our labor unions will not result in significant increases in our cost of labor. On July 28, 2012, our contract with the United Steelworkers at our Seneca Falls, NY location will expire. Negotiations to renew this contract have not yet begun. This union contract covered 387 employees as of December 31, 2011.
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 onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 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 at1-800-SEC-0330.
OVERVIEW OF BUSINESS SEGMENTS
Defense and Information Solutions
Our Defense segment is a major defense contractor and trusted provider of mission-critical products and services that support the Armed Services of the U.S. Government and its allies, as well as manufacturer of highly-engineered innovative technologies to meet the emerging requirements of U.S. government agencies and commercial customers. Our products are designed to serve needs around safety, security, intelligence and communication.
During 2010, we executed a strategic realignment of the Defense segment to better align with the emerging needs of its expanding global customer base, which is increasingly integrated and network-centric. The Defense segment was renamed ITT Defense and Information Solutions and the previous organizational structure, consisting of seven divisions, was consolidated into three larger divisions. The realignment
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provided for better product portfolio integration, encouraging a more coordinated market approach while providing reductions in overhead costs. The realigned Defense segment divisions are: Electronic Systems (ES), Information Systems (IS), and Geospatial Systems (GS). The following table illustrates the annual revenue for the Defense segment and the percentage of revenue by segment division.
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | 2008 | |
| Defense segment revenue | | | $ | 5,897 | | | | $ | 6,067 | | | | $ | 6,064 | |
| Percentage of revenue by division: | | | | | | | | | | | | | | | |
| Electronic Systems | | | | 41 | % | | | | 43 | % | | | | 46 | % |
| Information Systems | | | | 39 | | | | | 38 | | | | | 36 | |
| Geospatial Systems | | | | 20 | | | | | 19 | | | | | 18 | |
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Customers
The principal customer for our Defense segment is the U.S. Government, specifically the U.S. Department of Defense (DoD). 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, 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.
We also serve as a contractor and supplier for other U.S. government agencies, including the intelligence community, National Aeronautics and Space Administration (NASA), Federal Aviation Administration (FAA), Department of Homeland Security, and several first-responder agencies. In addition, we provide certain products to international governments through direct channels and the U.S. foreign military sales program. A smaller, but growing portion of our business is with commercial customers. The following table illustrates annual revenue for the Defense segment, as well as the approximate percentage of revenue by customer class.
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| | | | 2010 | | | | 2009 | |
| Percentage of revenue by customer class: | | | | | | | | | | |
| U.S. Government – DoD | | | | 73 | % | | | | 77 | % |
| U.S. Government – Other Agencies | | | | 13 | % | | | | 11 | % |
International governments(a) | | | | 10 | % | | | | 9 | % |
| Commercial | | | | 4 | % | | | | 3 | % |
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(a) | Includes revenue derived through the U.S. Government’s foreign military sales program (FMS). The FMS program is thegovernment-to-government method for selling U.S. defense equipment, services, and training. |
Defense Segment Divisions
Electronic Systems Division (ES) – This division develops tactical communications equipment, electronic warfare and force protection equipment, radar systems and integrated structures equipment, providing the U.S. Armed Forces and its allies the ability to sense and deny threats to manned and unmanned platforms, ships, submarines and ground vehicles, and provides soldiers with secure and reliable networked communications. The realigned ES division, based in Clifton, New Jersey, consists of the businesses that previously were included within the prior Electronic Systems and Communication Systems divisions, as well as a portion of the Intelligence & Information Warfare division. Further details on the types of programs supported by the division include:
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| ITEM 1A. | n | Communication systems equipment including Single Channel Ground and Airborne Radio (SINCGARS) equipment and Advanced Tactical Communications Systems (ATCS) as well as the development of Soldier Radio Waveform (SRW), the U.S. next generation capability to support network-centric operations. Other programs include SpearNet systems for the individual soldier, and fully programmable radio systems, including Soldier and Sensor Radios. |
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| | n | Force protection equipment including electronic countermeasures, interference mitigation technology, secure voice, data link and command and control systems and products. Countermeasure technology include CREW 2.1 which is equipment designed to neutralize certain improvised explosive devices from detonating. |
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| n | Integrated electronic warfare systems, including Advanced Integrated Defensive Electronic Warfare Suite (AIDEWS) and Integrated Defensive Electronic Countermeasures (IDECM), allowing pilots and unmanned aerial vehicles to detect, deny, and evade battlefield threats. |
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| n | Integrated structures equipment related to the carriage and release of weapons from an aircraft and lightweight advanced fiber-reinforced composite products. |
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| n | Radar systems providing area surveillance and precision-approach control capabilities in fixed-site, transportable and mobile configurations including the integrated tactical Air Traffic Control System and the GCA-2000.RISK FACTORS |
Information Systems Division (IS) – This division provides world-class integrated networked solutions across a broad spectrum of customers including military, intelligence, civil and commercial organizations. IS provides advanced systems and technologies in the areas of air traffic management, information and cyber solutions, large-scale systems engineering and integration and defense technologies. We provide the U.S. Government with both the advanced technologies that will manage their data flow and the personnel they need to run their sophisticated
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communications centers and systems. The realigned IS division, based in Herndon, Virginia, consists of the businesses that previously were included within the prior Advanced Engineering & Sciences and Systems divisions, as well as a portion of the Intelligence & Information Warfare division. Further details on the types of programs and services provided by the division include:
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| n | Providing 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. |
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| n | Providing total systems support solutions for combat equipment, tactical information systems and facilities management. |
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| n | Developing and deploying the Automatic Dependent Surveillance – Broadcast (ADS-B) system, a key component of the FAA’s program to modernize the nation’s air transportation system; |
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| n | Providing NASA’s Goddard Space Flight Center with telemetry, tracking and command services for near-Earth missions by supporting NASA’s Space and Near Earth Networks, which provide most of the communications and tracking services for a wide range of Earth-orbiting spacecraft, including the International Space Station, the space shuttle, the Hubble Space Telescope and the Earth Observing System satellites. |
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| n | Providing information sharing, protection and integration solutions for intelligence and military customers for enhanced situational clarity by building intelligent core environments that transform data into actionable knowledge – in real-time. |
Geospatial Systems Division (GS) – This division develops sophisticated digital imaging and sensor equipment systems that provide sight and situational awareness at the space, airborne, ground and soldier levels. Imaging and sensor equipment includes night vision goggles, as well as weather, location, surveillance and other related technologies. GS’s systems process and distribute information through defined networks, such that battlefield command posts and planning headquarters have the capabilities of viewing images provided byon-the-ground troops. The realigned GS division, based in Rochester, New York, consists of the businesses that previously were included within the prior Space Systems and Night Vision divisions.
The GS division serves a broad range of customers that include NASA, National Oceanic and Atmospheric Administration (NOAA), U.S. Air Force, U.S. Allied Military Forces and the U.S. Army. The products and services provided encompass: night vision goggles, sensor fused night vision goggles, monocular and weapon sights for ground forces, and image intensifier tubes required for all of these systems; satellite-based imaging payloads for intelligence, surveillance and reconnaissance solutions; high-resolution commercial imaging systems with earth and space science applications, climate and environmental monitoring sensors and systems, GPS navigation and software applications designed for image and data processing and dissemination.
Order Backlog
Funded order backlog, which represents unfilled firm orders for which funding has been authorized and appropriated by the customer, was $4.1 billion at December 31, 2010 compared to $5.1 billion at December 31, 2009. Certain defense programs have contract periods in excess of one year, as such we do not expect to fulfill all funded order backlog obligations during 2011; however, we do expect to satisfy a substantial portion. Unfunded order backlog, which represents unfunded firm orders and potential options on multi-year contracts, excluding protested awards and potential orders under indefinite delivery/indefinite quantity (ID/IQ) contracts, was approximately $7.4 billion at December 31, 2010 as compared to approximately $4.9 billion at December 31, 2009. The level of order activity and related backlog associated with programs within the Defense segment can be affected by project evaluation cycles, the timing of government funding authorizations, the general timing of the budget approval process and non-linear sales fluctuations associated with certain long-term production contracts.Year-over-year comparisons could, at times, be impacted by these factors, among others.
U.S. Government Regulatory Matters
We act as a prime contractor or major subcontractor for numerous U.S. Government programs. As a result, we are subject to extensive regulations and requirements of the U.S. Government agencies and entities which govern these programs, including with respect to the award, administration and performance of contracts under such programs. We are also subject to certain unique business risks associated with U.S. Government program funding and appropriations and U.S. Government contracts, and with supplying technologically advanced, cutting-edge defense-related products and services to the U.S. Government.
U.S. Government contracts generally are subject to the Federal Acquisition Regulation (FAR), which sets forth policies, procedures and requirements for the acquisition of goods and services by the U.S. Government, agency-specific regulations that implement or supplement FAR, such as the DoD’s Defense Federal Acquisition Regulation Supplement (DFARS) and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement,
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import and export, security, contract pricing and cost, contract termination and adjustment, and audit requirements. A contractor’s failure to comply with these regulations and requirements could result in reductions to the value of contracts, contract modifications or termination, and the assessment of penalties and fines and lead to suspension or debarment, for cause, from government contracting or subcontracting for a period of time. In addition, government contractors are also subject to routine audits and investigations by U.S. Government agencies such as the Defense Contract Audit Agency (DCAA). These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The DCAA also reviews the adequacy of and a contractor’s compliance with its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems.
U.S. Government contracts include both cost reimbursement and fixed-price contracts. Cost reimbursement contracts, subject to a contract-ceiling amount in certain cases, provide for the reimbursement of allowable costs plus the payment of a fee. These contracts fall into three basic types: (i) cost plus fixed fee contracts which provide for the payment of a fixed fee irrespective of the final cost of performance, (ii) cost plus incentive fee contracts which provide for increases or decreases in the fee, within specified limits, based upon actual results as compared to contractual targets relating to such factors as cost, performance and delivery schedule, and (iii) cost plus award fee contracts which provide for the payment of an award fee determined at the discretion of the customer based upon the performance of the contractor against pre-established criteria. Under cost reimbursement type contracts, the contractor is reimbursed periodically for allowable costs and is paid a portion of the fee based on contract progress. Some costs incident to performing contracts have been made partially or wholly unallowable for reimbursement by statute, FAR or other regulation. Examples of such costs include charitable contributions, certain merger and acquisition costs, lobbying costs, interest expense and certain litigation defense costs.
Fixed-price contracts are either firm fixed-price contracts or fixed-price incentive contracts. Under firm fixed-price contracts, the contractor agrees to perform a specific scope of work for a fixed price and as a result, benefits from cost savings and carries the burden of cost overruns. Under fixed-price incentive contracts, the contractor shares with the government savings accrued from contracts performed for less than target costs and costs incurred in excess of targets up to a negotiated ceiling price (which is higher than the target cost) and carries the entire burden of costs exceeding the negotiated ceiling price. Accordingly, under such incentive contracts, the contractor’s profit may also be adjusted up or down depending upon whether specified performance objectives are met. Under firm fixed-price and fixed-price incentive type contracts, the contractor usually receives either milestone payments based on a percentage of the total contract price or monthly progress payments generally based on a percentage of costs incurred. The remaining amount, including profits or incentive fees, is billed upon delivery and acceptance of end items under the contract.
U.S. Government contracts generally also permit the government to terminate the contract, in whole or in part, without prior notice, at the government’s convenience or for default based on performance. If a contract is terminated for convenience, the contractor is generally entitled to payments for its allowable costs and will receive some allowance for profit on the work performed. If a contract is terminated for default, the contractor is generally entitled to payments for its work that has been accepted by the government. The U.S. Government’s right to terminate its contracts has not had a material adverse effect upon our results of operations or financial condition.
U.S. Government programs generally are implemented by the award of individual contracts and subcontracts. Congress generally appropriates funds on a fiscal year basis even though a program may extend across several fiscal years. Consequently, programs are often only partially funded initially and additional funds are committed only as Congress makes further appropriations. The contracts and subcontracts under a program generally are subject to termination for convenience or adjustment if appropriations for such programs are not available or change. The U.S. Government is required to equitably adjust a contract price for additions or reductions in scope or other changes ordered by it.
We are also involved in U.S. Government programs which are classified by the U.S. Government and cannot be specifically described in this Annual Report onForm 10-K. The operating results of these classified programs are included in our Consolidated Financial Statements. The business risks and considerations associated with these classified programs generally do not differ materially from those of our other U.S. Government programs and products, and are subject to the same oversight and internal controls as other U.S. Government programs.
We are subject to government regulations and contract requirements which may differ from U.S. Government regulation with respect to our sales tonon-U.S. customers. Sales and income from international operations and investments are subject to U.S. Government laws, regulations and policies, including the International Traffic in Arms Regulations (ITAR) and the Foreign Corrupt Practices Act (FCPA) and export laws and
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regulations, as well as foreign government laws, regulations and procurement policies and practices, which may differ from U.S. Government regulation, including import-export control, investments, exchange controls, repatriation of earnings and requirements to expend a portion of program funds in-country. The export from the U.S. of many of our products may require the issuance of a license by either the U.S. Department of State under the Arms Export Control Act of 1976 (formerly the Foreign Military Sales Act) and its implementing regulations under the ITAR, the U.S. Department of Commerce under the Export Administration Act and its implementing regulations as kept in force by the International Emergency Economic Powers Act of 1977 (IEEPA),and/or the U.S. Department of the Treasury under IEEPA or the Trading with the Enemy Act of 1917. Such licenses may be denied for reasons of U.S. national security or foreign policy. In the case of certain exports of defense equipment and services, the Department of State must notify Congress at least15-60 days (depending on the identity of the importing country that will utilize the equipment and services) prior to authorizing such exports. During that time, Congress may take action to block or delay a proposed export by joint resolution which is subject to Presidential veto.
Competitive Conditions
We compete with many companies in the U.S. defense industry for a number of programs, both large and small, but primarily with Lockheed Martin Corporation, The Boeing Company, Raytheon Company, General Dynamics Corporation, L-3 Communications Corporation, SAIC Inc., Northrop Grumman Corporation, Harris Corporation and BAE Systems, Inc. Intense competition and long operating cycles are both key characteristics of our business and the defense industry. We also compete internationally against these same companies, as well as Thales Group, EADS N.V., Finmeccanica S.p.A., SAAB and many others. It is common in this industry for work on major programs to be shared among a number of companies. A company competing to be a prime contractor may, upon ultimate award of the contract to another party, serve as a subcontractor for the ultimate prime contracting party. It is not uncommon to compete for a contract award with a peer company and, simultaneously, perform as a supplier to or a customer of such competitor on other contracts. The nature of major defense programs, conducted under binding contracts, allows companies that perform well to benefit from a level of program continuity not common in many industries.
Our success in the competitive defense industry depends upon our ability to develop and market our products and services, as well as our ability to provide the people, technologies, facilities, equipment, and financial capacity needed to deliver those products and services with maximum efficiency. We must continue to maintain sources for raw materials, fabricated parts, electronic components, and major subassemblies. In this manufacturing and systems integration environment, effective oversight of subcontractors and suppliers is as vital to success as managing internal operations.
Similarly, there is intense competition among many companies in the information and services markets. Programs within the information and services market as compared to product-based programs are generally shorter in duration, more labor intensive and have extremely competitive margin rates. Competitors in the information and services markets include the defense industry participants mentioned above, as well as many other large and small entities with expertise in various specialized areas. Our ability to compete successfully in the information and services markets depends on a number of factors; most important is the capability to deploy skilled professionals, many requiring security clearances, at competitive prices across the diverse spectrum of these markets. Accordingly, we have implemented various workforce initiatives to ensure our success in attracting, developing and retaining sufficient resources to maintain or improve our competitive position within these markets.
Fluid Technology
Our Fluid segment provides critical products and services in markets that are driven by population growth, urbanization, increasing environmental concerns and regulation, and global infrastructure trends. Products include water transport and wastewater treatment systems, pumps and related technologies, and other water and fluid control products with municipal, residential, commercial and industrial applications. 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. This 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 for the Fluid segment and the percentage of revenue by segment division.
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| | | | 2010 | | | | 2009 | | | | 2008 | |
| Fluid segment revenue | | | $ | 3,670 | | | | $ | 3,363 | | | | $ | 3,841 | |
| Percentage of revenue by division: | | | | | | | | | | | | | | | |
| Water & Wastewater | | | | 52 | % | | | | 49 | % | | | | 47 | % |
| Residential & Commercial Water | | | | 29 | | | | | 30 | | | | | 32 | |
| Industrial Process | | | | 19 | | | | | 21 | | | | | 21 | |
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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. For example, our Fluid segment’s product offerings extend from its core of submersible pumps and mixers to complete systems with intelligent control technologies that manage plant operation, technologies that analyze the waste stream, and products and systems to treat water through biological, filtration, oxidation and disinfection processes.
Geographic Profile
The Fluid segment’s primary geographic markets are the United States and Western Europe; however we have and may continue to make investments in areas that align with our strategy for growth in emerging markets. For example, during the past three years, we have invested in production and assembly facilities in Eastern Europe, China, India and Brazil. 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. The following chart provides an overview of the Fluid segment’s geographic profile depicted as a percentage of 2010 revenue by customer location.
In addition to the listing of significant locations provided in Item 2, “Properties,” the Fluid segment maintains a global network of service centers providing after-market 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.
Fluid Segment Divisions
Water & Wastewater Division (WWW) – based in Stockholm, Sweden, WWW is a leader in water and wastewater handling and treatment. We provide global direct sales and service capabilities, working close to our customers to deliver energy-efficient and reliable solutions to customers in more than 140 countries. Our portfolio of products offers a full range of advanced treatment systems to clean and disinfect water, intelligent pumps and controls to transport water and wastewater, and full-service dewatering capabilities including pump sales, rental and onsite services to remove unwanted water. 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. We are also a manufacturer of analytic instrumentation used to provide precise analysis and measurement for water and wastewater, environmental, medical, industrial, and food and beverage applications. Our brands include Flygt, Lowara, Sanitaire, Wedeco, Grindex, A-C Pump, Engineered Valves, ABJ, Well Point, WET, Leopold, PCI, Godwin Pumps, Royce Technologies, Secomam, ebro, SI Analytics, STM, WTW, AADI, Bellingham + Stanley, OI Analytical, CMS Research, and Global Water.
Residential & Commercial Water Division (RCW) – based in Morton Grove, Illinois, RCW manufactures pumps, systems and accessories which provide energy-efficient solutions for building heating, ventilation and air conditioning (HVAC) systems, pressure booster systems for building service and irrigation applications, turnkey fire pump packages, and residential pumps. Our brands include Goulds Pumps, Bell & Gossett, Vogel, Lowara, McDonnell & Miller, Red Jacket, Flowtronex, A-C Fire Pumps, Domestic Pump, Hoffman Specialty, Marlow Pumps, ITT Standard, WET, and Laing. Our portfolio of products includes those that promote “Green building” and Leadership in Energy and Environmental Design (LEED) applications.
Industrial Process Division (IP) – based in Seneca Falls, New York, IP manufactures pumps, valves, reverse osmosis units, heat exchangers and control systems. Our industrial portfolio of specialized technologies provides solutions with oil and gas, mining, power generation, chemical, paper and biopharmaceutical applications. Our products are engineered for challenging environments and offer reduced maintenance costs and energy-saving solutions. ITT’s industrial pump products are paired with our desalination reverse osmosis units to create additional resources in areas of the world where availability to water is extremely limited. Our brands include Goulds Pumps, Centripro, Pure-Flo, C’treat, PPS, and Pro Services.
Order Backlog
Order backlog as of December 31, 2010 and 2009 was $903 and $824, respectively. Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycle and delays can occur from time to time. We expect the majority of our current backlog will be recognized as revenue within 2011.
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Competitive Conditions
We compete against large and well-established national and global competitors and, in some markets, against regional and local companies. The markets for our products are fragmented and highly competitive, with primary competitive drivers being price, reputation, quality, energy efficiency, timeliness of delivery and technical expertise, as well as contractual terms and previous installation history. Our ability to use our portfolio of products, solutions and services to meet customer needs is a competitive strength.
Our market approach is to create value for our customers throughout their procurement cycle. We continue to explore and develop potential new offerings in conjunction with our customers. In the early phases of project design, we endeavor to create value in optimizing the selection of equipment for the customer’s specific application, as we are capable of providing technical expertise on product and system capabilities even outside the scope of our specific products, solutions and services. After the equipment is constructed and delivered to the customer’s site, we continue to create value through our after-market capabilities by optimizing the performance of the equipment over its operational life.
Competition in the water transport and treatment technologies markets focuses on product performance and design, quality, delivery, and price. In the sale of products and services, we benefit from our large installed base of pumps, valves and other equipment, which continually require maintenance, repair and replacement parts due to the nature of the products and the conditions under which they operate. Timeliness of delivery, quality and the proximity of service centers are important customer considerations when selecting a provider for after-market products and services. In geographic regions where we are locally positioned to provide a quick response, customers have traditionally relied on us, rather than our competitors, for after-market products relating to our highly engineered and customized products.
Competition in commercial and residential technologies markets focuses on trade names, product performance, quality, and price. We compete by offering a wide variety of innovative and high-quality products, which are competitively priced. We believe our distribution channels and reputation for quality also contribute to our market position.
In the pursuit of large industrial capital projects, competitive drivers and competition vary depending on the application and products involved. Industries experiencing slow growth generally tend to have a competitive environment more heavily influenced by price due to supply outweighing demand, and price competition tends to be more significant for original equipment orders than after-market services. Considering the domestic and global economic environments in 2010 and current forecasts for 2011, pricing was and, we believe, may continue to be a particularly influential competitive factor.
Motion & Flow Control
Our Motion & Flow segment delivers highly engineered, durable components that succeed in challenging environments where the cost of failure is high. The segment manufactures high-performance shock absorbers and brake friction materials for the transportation industry, switch applications for the industrial and aerospace industries, electrical connectors used in telecommunications, computers, aerospace, medical and industrial applications, and a wide range of pumpsfactors that could materially affect future developments and tailored products for marine, food & beverageperformance. Because of these factors, past performance may not be a reliable indicator of future results. Set forth below and general industrial markets. The segment primarily serves the high end of its markets, with brand recognition and a focus on new product development and operational excellence. The following table illustrates the annual revenue for the Motion & Flow segment and the percentage of revenue by segment division.
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| | | | 2010 | | | | 2009 | | | | 2008 | |
| Motion & Flow segment revenue | | | $ | 1,441 | | | | $ | 1,253 | | | | $ | 1,583 | |
| Percentage of revenue by division: | | | | | | | | | | | | | | | |
| Motion Technologies | | | | 38 | % | | | | 39 | % | | | | 35 | % |
| Interconnect Solutions | | | | 28 | | | | | 27 | | | | | 29 | |
| Control Technologies | | | | 19 | | | | | 19 | | | | | 20 | |
| Flow Control | | | | 15 | | | | | 15 | | | | | 16 | |
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The Motion & Flow segment’s financial resultselsewhere in this document are driven by economic conditions in its major markets, the cyclical naturedescriptions 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. Revenue opportunities are balanced between original equipment manufacturing (OEM) and after-market customers. 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.
Geographic Profile
In addition to the traditional markets of the U.S. and Western Europe, opportunities in emerging markets within Asia Pacific, Eastern Europe and Latin America are increasing. The following chart provides an overview of the Motion & Flow segment’s geographic profile depicted as a percentage of 2010 revenue by customer location.
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Motion & Flow Segment Divisions
Motion Technologies Division (MT) – based in Lainate, Italy, MT, through its Friction Technologies and Koni businesses, is a leader in brake pad, shock absorber and damping technology for the automotive and public transportation industries. Our Friction Technologies business applies innovative research of new friction materials and the identification of highly productive technologies to produce a range of automotive brake products to satisfy the precise needs of global manufacturers of car parts, motor vehicles, commercial vehicles, and trucks, from light-weight to severe duty. Our Koni business manufactures performance shock absorbers and railway equipment, using its Frequency Selective Damping (FSD) and Continuously Variable Damping (CVD) technologies, for use in three main customer groups: Car; Bus, Truck & Trailer; and Railway.
Interconnect Solutions Division (ICS) – based in Santa Ana, California, ICS designs and manufactures a wide range of highly specialized products that make it possible to connect with our electronic world, including connectors, interconnects, cable assemblies, multi-function grips, input/output card kits and smart card systems. Through our brands that include Cannon, VEAM and BIW, this division serves customers in the defense, aerospace, industrial, oil and gas, medical, handheld electronics, alternative energy and transportation markets.
Control Technologies Division (CT) – based in Valencia, California, CT is a worldwide supplier of valves, actuators, pumps and switches for the commercial, military, regional, business jet and general aviation markets. Products are sold globally to OEM and after-market customers. CT also sells switches, regulators, custom energy absorption and vibration isolation, and shape-cutting products for industrial applications in the oil and gas, fluid power, power generation, chemical, transportation, and general industrial markets. CT brands include ITT Aerospace, Jarret, Neo-Dyn, Conoflow, Enidine, Enivate, Cleveland Motion Controls, Burny, and Kaliburn.
Flow Control Division (FC) – based in Gloucester, Massachusetts, FC is a leading producer of pumps and related products for the marine, food & beverage and general industrial markets. Products are sold worldwide under the brand names Jabsco, Rule, Flojet, Midland-ACS, LVM, and Alcon. FC, 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.
Order Backlog
Order backlog as of December 31, 2010 and 2009 was $398 and $376, respectively. Orders are filled based on customer delivery schedules that typically cover no longer than three months. We expect that substantially all backlog will be recognized as revenue during 2011.
Competitive Conditions
In Motion & Flow, competition is encountered in substantially all areas of its business and is therefore a significant factor. This competitive environment has resulted in increased pressure to reduce pricing and maintain a continuous focus on cost structures. We compete against large and well-established national and global competitors and, in some markets, against regional and local companies. The markets for our products are fragmented and highly competitive, with primary competitive drivers being price, product capability, product quality, delivery, customer service and technical expertise. We are focused on differentiated new product development and leveraging our strong customer relationships and improved cost structures, striving to maintain our competitive advantage.
The automotive and public transportation industries are highly competitive in nature. We compete with many manufacturers and distributors globally to supply OEMs and to serve the after-market. Competition is driven by price, technology, product quality, timeliness of delivery, customer service and breadth of products. Our customer and product-specific product range has allowed us to satisfy the precise technical needs of our customers. Through our continuous pursuit and development of market-leading friction materials andstate-of-the-art manufacturing processes, we have become a leading supplier to global automotive manufacturers.
The worldwide connectors industry is fragmented and highly competitive. Competition is mainly driven by technological innovation, price, delivery and customer service. We compete against many companies of varied size and scope by offering a broad range of differentiated and high-quality products, which are competitively priced. We believe our robust design and value-based product development, coupled with our global engineering, manufacturing and distribution
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capabilities, drive a focus on our customers from design inception through production to final delivery and allow for continued new market expansion.
As a world leader in the design, manufacturing and supply of commercial, military, industrial and aerospace products such as switches, actuators, pumps and valves, Motion & Flow faces competition from many different companies or divisions thereof in substantially all areas of business. We compete primarily on the basis of product quality and innovation, reputation, customer service and price competitiveness. Sales of our reliable and high-quality products in the industrial and aerospace markets are made to both end-users and our large client base of OEMs andsub-tier suppliers who trust our products to support their program applications as designed. Relationships developed with these key customers based on our technological and engineering capabilities, quality performance, delivery, and service have enabled us to obtain business on OEM programs for their systems and components and subsequently obtain the follow-on after-market business.
Motion & Flow also produces and sells pumps and related products for the marine & leisure, food & beverage and general industrial markets. A focus on product reliability and new product innovation and development has allowed us to compete effectively, to cultivate and maintain key customer relationships and to serve and to expand into many niche and new markets.
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. 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.
Spinoff Transactions
The proposed spinoffs of our water and defense businesses are contingent upon the satisfaction of a number of conditions, may require significant time and attention of our management, may not achieve the intended results, and may present difficulties that could have an adverse effect on us.
We expectcause our actual results to file a Registration Statement on Form 10 with the Securities and Exchange Commission (SEC) with respect to the distribution to our stockholders of all of the shares of common stock of two of our subsidiaries that would hold, directly or indirectly, the assets and liabilities for our water-related and defense-related businesses, respectively. Completion of the spinoff transactions will be contingent upon the approval of our Board of Directors, a favorable rulingdiffer materially from the Internal Revenue Service (IRS),results contemplated by the effectiveness of each of the Registration Statements on Form 10 and other conditions. For these and other reasons, the spinoff transactions may not be completed or may not be completed prior to the end of the year. Additionally, execution of the proposed spinoff transactions may requireforward-looking statements contained in this document. The most significant time and attention from management, which could distract management from the operation offactors affecting our business and operations include the execution of our other strategic initiatives. Our employees may also be distracted due to uncertainty about their future roles with each of the separate companies pending the completion of the spinoff transactions. Further, if the spinoff transactions are completed, each of these transactions may not achieve the intended results. Any such difficulties could have an adverse effect on our business, results of operations or financial condition.
The spinoff transactions could result in substantial tax liability.following:
We will request a private letter ruling from the IRS substantially to the effect that, for U.S. federal income tax purposes, each of the spinoff transactions and certain related transactions will qualify under Sections 355and/or 368 of the Internal Revenue Code (the Code). Our receipt of the private letter ruling will be a condition to the completion of the spinoffs. If the factual assumptions or representations made in the private letter ruling request are inaccurate or incomplete in any material respect, then we will not be able to rely on the ruling. Furthermore, the IRS will not rule on whether a distribution such as the spinoff satisfies certain requirements necessary to obtain tax-free treatment under Section 355 of the Code. Rather, the private letter ruling will be based on representations by us that those requirements have been satisfied, and any inaccuracy in those representations could invalidate the ruling. The spinoffs will also be conditioned on our receipt of an opinion of outside counsel, in form and substance satisfactory to us, substantially to the effect that, for U.S. federal income tax purposes, the spinoffs and certain related transactions will qualify under Sections 355and/or 368 of the Code. The opinion will rely on, among other things, the continuing validity of the private letter ruling and various assumptions and representations as to factual matters made by each of the spinoff companies and us which, if inaccurate or incomplete in any material respect, would jeopardize the conclusions reached by such counsel in its opinion. The opinion will not be binding on the IRS or the courts, and there can be no assurance that the IRS or the courts will not challenge
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the conclusions stated in the opinion or that any such challenge would not prevail.
If, notwithstanding receipt of the private letter ruling and opinion, the spinoff transactions were determined to be a taxable transaction, each U.S. holder of our common stock who receives shares of the spinoff companies in the spinoff transactions would generally be treated as receiving a taxable distribution of property in an amount equal to the fair market value of the shares of the spinoff company received. That distribution would be taxable to each such stockholder as a dividend to the extent of our current and accumulated earnings and profits. For each such stockholder, any amount that exceeded our earnings and profits would be treated first as a non-taxable return of capital to the extent of such stockholder’s tax basis in our shares of common stock with any remaining amount being taxed as a capital gain. In addition, if certain related transactions were to fail to qualify for tax-free treatment, the spinoff companies would be treated as if they had each sold part of their respective assets (which will be retained by us) in a taxable sale for fair market value and we would be treated as receiving such assets from the spinoff companies as a taxable dividend.
Under the terms of the tax sharing agreement we will determine which company will be responsible for any taxes imposed by the spinoff transactions.
If the spinoff transactions are completed, our operational and financial profile will change and we will be a smaller, less diversified company than ITT’s current operations.
If consummated, the proposed spinoff transactions will result in ITT being a smaller, less diversified company than we currently are with a narrower business focus than we currently have. We will have a more limited business with greater concentration in the industrial products market and may be more vulnerable to changing market conditions, which could materially and adversely affect our business, financial condition and results of operations. In addition, the diversification of revenues, costs, and cash flows will diminish. As such, it is possible that our results of operations, cash flows, working capital and financing requirements may be subject to increased volatility. Our operations may also be impacted by a limited ability to attract new employees in a timely manner.
If the proposed spinoff transactions are consummated, there may be substantial changes in our stockholder base, which may cause the price of our common stock to fluctuate following the proposed spinoffs.
Investors holding our common stock may hold our common stock because of a decision to invest in a company that operates in multiple markets with a diversified commercial and defense portfolio. If the proposed spinoff transactions are consummated, shares of our common stock will represent an investment in a smaller company with its business concentrated in the engineered industrial products industry. These changes may not match some holders’ investment strategies or meet minimum criteria for inclusion in stock market indices, which could cause investors to sell their shares of our common stock. Excessive selling pressure could cause the market price of our common stock to decrease following the consummation of the proposed spinoff.
Business and Operating Risks
We are dependent on the U.S. Government for a substantial portion of our revenue.
Approximately 46% of our 2010 revenue was derived from products and services ultimately sold to the U.S. Government, including the Department of Defense (DoD), and our results are therefore affected by, among other things, the annual federal budget, appropriations made to defense programs, spending levels and the timing of appropriations for defense programs. 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 regulatory compliance and could have a negative effect on our brand name and on our ability to win new business.
Our exposure to pending and future asbestos claims and related assets, liabilities, and cash flows are subject to significant uncertainties, which could have
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adverse effects on our financial condition,position, 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. We record an estimated liability related to pending claims and claims estimated to be received over the next ten years based on a number of key assumptions, including the plaintiffs’ propensity to sue, claim acceptance rates, disease type, settlement values and defense costs. These assumptions are derived from ITT’s recent experience and reflect the Company’s expectations about future claim activities. These assumptions about the future may or may not prove accurate, and accordingly, the Company may incur additional liabilities in the future. A change in one or more of the inputs used to estimate the asbestos liability could materially change the estimated liability and associated cash flows for pending claims and those estimated 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.
We record an asset that represents our best estimate of probable recoveries from insurers or other responsible parties for the estimated asbestos liabilities. There are significant assumptions made in developing estimates of asbestos-related recoveries, such as policy triggers, policy or contract interpretation, the methodology for allocating claims to
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policies, and the continued solvency of the Company’s insurers or other responsible parties. Certain of our primary coverage in place agreements are expected to exhaust in the next twelve months, which may result in higher net cash outflows for the short-term. The assumptions underlying the recorded asset may not prove accurate, and as such, actual performance by our insurers and other responsible parties could result in lower receivables or cash flows expected to reduce the Company’s asbestos costs.
Due to these uncertainties, as well as our inability to reasonably estimate any additional asbestos liability for claims that may be filed beyond the next 10 years, it is not possible to predict the ultimate outcome of the cost, nor potential recoveries, 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 recoveries, could have a material adverse effect on our financial position, results of operations orand cash flows.
Many uncertainties exist surrounding asbestos litigation, and the Company will continue to evaluate its estimated asbestos-related liability and corresponding estimated insurance reimbursement as well as the underlying assumptions and process used to derive these amounts. Changes in estimates related to these uncertainties may result in increases or decreases to the net asbestos liability, particularly if the quality or number of claims or settlement or defense costs change significantly, or if there are significant developments in the trend of case law or court procedures, or if legislation or another alternative solution is implemented; however, the Company is currently unable to estimate such future changes. Although the resolution of asbestos claims takes many years, the effect of changes in our estimates related to our pending or estimated future claims in any given period could be material to our results of operations, financial position and cash flow.
In addition, as part of the Distribution, ITT indemnified Exelis and Xylem with respect to asserted and unasserted asbestos claims that relate to the presence or alleged presence of asbestos in products manufactured, repaired or sold prior to the Distribution Date, subject to limited exceptions.
Our operating results and our ability to maintain liquidity or procure capital may be adversely affected by unfavorable economic and capital market conditions and the uncertain geopolitical environment.
We have experienced and expect to continue to experience fluctuations in revenues and operating results due to economic and business cycles. 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 2011, approximately 63% of our total sales were to customers operating outside of the United States.
Important factors impacting our businesses include the overall strength of these economies and our customers’ confidence in both local and global macro economic conditions, industrial spending, interest rates, availability of commercial financing for our customers and end-users and unemployment rates. A slowdown or downturn in these financial or macro economic conditions could have a significant adverse effect on our business, financial position, results of operations and cash flow.
We may be adversely affected by disruptions in financial markets or downturns in economic activity in specific countries or regions, or in the various industries in which the Company operates or be subject to adverse changes in the availability and cost of capital, interest rates, tax rates, or regulations in the jurisdictions in which the Company operates. Many of the industries in which we operate are subject to specific industry and general economic cycles. We serve a diverse mix of customers in global infrastructure industries which can be volatile. The industries on which our business is most reliant include oil & gas, energy & mining, automotive, truck, trailer and public bus and rail transportation, aerospace and defense, electronics, and related industrial markets each of which are impacted.
Instability in the global credit markets, including the recent European economic and financial turmoil related to sovereign debt issues in certain countries and the instability in the geopolitical environment in many parts of the world, may continue to put pressure on global economic conditions. The world has recently experienced a global macroeconomic downturn, and if global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, we may experience material impacts on our business, financial position, results of operations and cash flow. 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 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 and customers. We closely monitor the credit worthiness of our insurers and customers and evaluate their ability to service their obligations to us. The tightening of credit markets may reduce funds available to our customers to pay for or buy our products and services for an unknown, but perhaps lengthy, period. As it relates to our customers’ ability to pay for products and services, we have not experienced any significant negative consequences as a result of the recent economic downturn.
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Should market conditions deteriorate, it may result in the delay or cancellation of orders from our customers or potential customers and adversely affect our revenues and our ability to collect insurer and customer receivables, manage inventory levels, and maintain current levels of profitability. Restrictive credit markets may also result in customers extending terms for payment and may result in our having higher customer receivables with increased default rates.
Economic and other risks associated with international sales and operations could adversely affect our business.
Both our sales from international operations and export sales are subject in varying degrees to risks inherent to doing business outside the United States. These risks include the following:
| n | | Possibility of unfavorable circumstances arising from host country laws or regulations; |
| n | | Currency exchange rate fluctuations and restrictions on currency repatriation; |
| n | | Potential negative consequences from changes to taxation policies; |
| n | | The disruption of operations from labor and political disturbances; |
| n | | Our ability to hire and maintain qualified staff in these regions; and |
| n | | Changes in tariff and trade barriers and import and export licensing requirements. |
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.
In addition to the general risks that we face outside the United States, we now conduct more of our operations in emerging markets than we have in the past, which could involve additional uncertainties for us, including risks that governments may impose limitations on our ability to repatriate funds; governments may impose withholding or other taxes on remittances and other payments to us, or the amount of any such taxes may increase; governments may seek to nationalize our assets; or governments may impose or increase investment barriers or other restrictions affecting our business. In addition, emerging markets pose other uncertainties, including the protection of our intellectual property, pressure on the pricing of our products, and risks of political instability.
A substantial portion of our cash is generated by our foreign subsidiaries and repatriation of that cash to the United
States may be inefficient from a tax perspective. Any payment of distributions, loans or advances to us by our foreign subsidiaries could be subject to restrictions on, or taxation of, dividends on repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate.
We are exposed to fluctuations in foreign currency exchange rates, particularly with respect to the Euro, Czech Kurona, Chinese Renminbi, South Korean Won, Mexican Peso, British Pound, Brazilian Real, Australian Dollar and Canadian Dollar. 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. Any significant change in the value of currencies of the countries in which we do business relative to the value of the U.S. Dollar could affect our ability to sell products competitively and control our cost structure, which could have a material adverse effect on our business, financial position, results of operations and cash flow.
Failure to compete successfully in our markets could adversely affect our business.
We provide products and services into competitive markets. We believe the principal points of competition in our markets are product performance, reliability and innovation, application expertise, brand reputation, energy efficiency, product life cycle cost, timeliness of delivery, proximity of service centers, effectiveness of our distribution channels and price.
Maintaining and improving our competitive position will require continued investment by us in manufacturing, research and development, engineering, marketing, customer service and support, and our distribution networks. We may not be successful in maintaining our competitive position. Our competitors may develop products that are superior to our products, or may develop more efficient or effective methods of providing products and services or may adapt more quickly than we do to new technologies or evolving customer requirements. Pricing pressures also could cause us to adjust the prices of certain products to stay competitive. We may not be able to compete successfully with existing or new competitors.
Our operating costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials, energy and related utilities, freight, and cost of labor. In order to remain competitive, we may not be able to recuperate all or a portion of these higher costs from our customers through product price increases. Further, our ability to realize financial benefits from Six Sigma and Lean projects may not be able to mitigate fully or in part these manufacturing and operating cost increases and, as a result, could negatively impact our profitability.
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If we fail to manage the distribution of our products and services properly, our revenue, gross margin and profitability could suffer.
We use a variety of distribution methods to sell our products and services, including third-party distributors and resellers. Successfully managing the interaction of our distributors and resellers is a complex process as we sell a broad mix of products through a network of over 500 distributors and resellers. Moreover, since each distribution method has distinct risks and gross margins, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenue and gross margins and therefore our profitability.
Our financial results could be materially adversely affected due to the loss of a distributor, channel conflicts or if the financial conditions of our channel partners were to weaken. Our future operating results may be adversely affected by any conflicts that might arise between our various sales channels, the loss or deterioration of any distribution or reseller arrangement. In particular, one distributor accounts for approximately 31% of Motion Technologies revenues and approximately 9% of consolidated ITT revenue. Our contract with this distributor consists of several subcontracts which are scheduled to expire at various times between 2014 and 2018. Moreover, some of our distributors may have insufficient financial resources and may not be able to withstand changes in business conditions, including economic weakness. Considerable trade receivables are outstanding with our distribution partners. Revenue from indirect sales could suffer, and we could experience disruptions in distribution if our distributors’ financial conditions, abilities to borrow funds in the credit markets or operations weaken.
Further, we must manage inventory effectively, particularly with respect to sales to distributors, which involves forecasting demand and potential pricing issues. Distributors may increase orders during periods of product shortages, cancel orders if their inventory is too high or delay orders in anticipation of new products. Distributors also may adjust their orders in response to the supply of our products and the products of our competitors and seasonal fluctuations in end-user demand. Our reliance on indirect distribution methods may reduce visibility to demand and potential pricing issues, and therefore make forecasting more difficult. If we have excess or obsolete inventory, we may have to reduce our prices and write down inventory. Moreover, our use of indirect distribution channels may limit our willingness or ability to adjust prices quickly and otherwise to respond to pricing changes by competitors.
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 for raw materials, components, and contract manufacturing services to produce our products. The supply of raw materials to the Company and to its component parts suppliers and the supply of castings, motors, and other critical components could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect the Company’s results of operations and profit margins. Due to pricing pressure or other factors, the Company may not be able to pass along increased raw material and components parts prices to its customers in the form of price increases or its ability to do so could be delayed. Consequently, its results of operations and financial condition may be adversely affected.
For most of our products, we have existing alternate sources of supply, or such materials are readily available. In some instances we depend on a single source of supply, manufacturing or assembly or participate in commodity markets that may be subject to a limited number of suppliers. Delays in obtaining supplies may result from a number of factors affecting our suppliers, including production interruptions at suppliers, capacity constraints, labor disputes, the impaired financial condition of a particular supplier, the ability of suppliers to meet regulatory requirements, and suppliers’ allocations to other purchasers. Any delay in our suppliers’ abilities to provide us with sufficient quality and flow of 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 an adverse effect on our business, results of operations and financial position.
Changes in our effective tax rates as a result of changes in the geographic earnings mix, tax examinations or disputes, tax authority rulings, or changes in the tax laws applicable to us may adversely affect our financial results.
The Company is subject to income taxes in the United States and in various foreign jurisdictions. We exercise significant judgment in calculating our provision for income taxes and other tax liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Furthermore, changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain sales or the deductibility of certain expenses, thereby affecting our income tax expense and profitability.
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Given the global nature of our business, a number of factors may increase our future effective tax rates, including:
| n | | Decisions to repatriate non-U.S. earnings for which we have not previously provided for U.S. income taxes; |
| n | | Changes in the geographic mix of our profits among jurisdictions with differing statutory income tax rates; |
| n | | Sustainability of historical income tax rates in the jurisdictions in which we conduct business; |
| n | | Changes in tax laws applicable to us; |
| n | | The resolution of issues arising from tax audits with various tax authorities; and |
| n | | Changes in the valuation of our deferred tax assets and liabilities, and changes in deferred tax valuation allowances. |
The amount of income taxes and other taxes are subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from amounts recorded, future financial results may include unfavorable tax adjustments. We are currently under examination by the U.S. Internal Revenue Service and other tax authorities, and we may be subject to additional examinations in the future. The tax authorities may disagree with our tax treatment of certain material items and thereby increase our tax liability. Failure to sustain our position in these matters could result in a material and adverse effect on our cash flow and financial position.
Any significant increase in our future effective tax rates could reduce net income for future periods.
The level of returns on postretirement 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-economicmacroeconomic factors, such as interest rates, that are beyond our control. The cost of our postretirement plans is 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 liquidity, financial position, including shareholders’ equity, and results of operations could be materially affected by significant changes in key economic indicators, financial market volatility, future legislation and other governmental regulatory actions.
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 and the minimum funding requirements established by local government funding or taxtaxing authorities, or established by other agreement, 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 significantincreased funding contributions and could affect cash flows in future periods.
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 expect to continue to seek reimbursement from the DoD for a portion of our postretirement costs and plan contributions.
We rely on our information systems in our operations. Security breaches could adversely affect our business and results of operations. Our information system structure could make it more difficult to cost-effectively implement changes.
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 those by those computer hackers and cyber terrorists. The unavailability of theour 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
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increased overhead costs, causing an adverse effect on our business, and the consolidated results of operations or financial condition.
position.Our information systems infrastructure is centralized, but our information system applications are both centralized and decentralized. The centralized infrastructure presents a risk in that a potential security breach could have a company-wide impact. The decentralized whichapplications could result in significant replacement costs were the company to decide to replace a number of the independent operating systems or consolidate operating systems. The inter-relationship of information systems also presents various risks, includingan additional risk when upgrading or replacing information systems.
Risk Relating to the Distribution
Following the Distribution, we are a smaller, more focused company and may be more susceptible to market fluctuations, increased costs and less favorable purchasing terms.
As a larger company prior to the Distribution we were able to enjoy certain benefits from operating diversity and purchasing leverage. Following the Distribution, we are a smaller company and as a result there is a risk that we may be slower or less ablemore susceptible to identify or react to problems affecting a key businessmarket fluctuations and other adverse events than we would have otherwise been if we were still a part of a larger and more operationally diverse company. We may also experience
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increased costs and less favorable terms as a result of our inability to continue to leverage the purchasing spend of our former businesses. Prior to the Distribution we negotiated favorable pricing terms with many of our suppliers, some of which have volume-based pricing. In the future, as we establish new pricing terms, our reduced volume demand could negatively impact future pricing from suppliers. All of these outcomes may result in our products being more costly to manufacture and less competitive. Although we cannot predict the extent of any such increased costs, it is possible that such costs could have a negative impact on our business and results of operations.
In connection with the Distribution, Exelis and Xylem indemnified us for certain liabilities and we indemnified Exelis and Xylem for certain liabilities. This indemnity may not be sufficient to insure us against the full amount of the liabilities assumed by each of Exelis and Xylem and each of Exelis and Xylem may be unable to satisfy its indemnification obligations to us in a more centralized environment.the future.
As part of the Distribution Agreement, ITT, Exelis, and Xylem indemnified each other with respect to such parties’ assumed or retained liabilities pursuant to the Distribution Agreement and breaches of the Distribution Agreement or related spin agreements. There can be no assurance that the indemnity from Exelis and Xylem will be sufficient to protect us against the full amount of these and other liabilities, or that each of Exelis and Xylem will be able to fully satisfy its indemnification obligations. Third-parties could also seek to hold us responsible for any of the liabilities that each of Exelis and Xylem has agreed to assume. Even if we ultimately succeed in recovering from Exelis and Xylem any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. In addition, “company-wide” business initiatives, such as the integrationperformance on indemnities that we provided Exelis and Xylem may be significant and could negatively impact our business. Each of information technology systems, or the formation of a technology system impacting different parts of our business, 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 failurethese risks could materially adverselynegatively affect our business, results of operations and financial conditionposition.
We may be responsible for U.S. Federal income tax liabilities that relate to the Distribution.
In connection with the Distribution, we received an U.S. Internal Revenue Service (IRS) Ruling stating that ITT and its shareholders will not recognize any taxable income, gain, or loss for U.S. Federal income tax purposes as a result of the Distribution. The IRS Ruling, while generally binding upon the IRS, is based on certain factual statements and representations. If any such factual statements or representations were incomplete or untrue in any material respect, or if the facts on which the IRS Ruling was based are materially different from the facts at the time of the Distribution, the IRS could modify or revoke the IRS Ruling retroactively.
Certain requirements for tax-free treatment that are not covered in the IRS Ruling are addressed in an opinion of counsel delivered in connection with the Distribution. An opinion of counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the Distribution that are different from the conclusions reached in the opinion. Like the IRS Ruling, the opinion is based on certain factual statements and representations, which, if incomplete or untrue in any material respect, could alter counsel’s conclusions.
If all or a portion of the Distribution does not qualify as a tax-free transaction because any of the factual statements or representations in the IRS Ruling or the legal opinion are incomplete or untrue, or because the facts upon which the IRS Ruling is based are materially different from the facts at the time of the Distribution, ITT would recognize a substantial gain for U.S. Federal income tax purposes. In such case, under U.S. Treasury regulations, each member of the ITT consolidated group at the time of the Distribution would be severally liable for the resulting entire amount of any U.S. Federal income tax liability.
Even if the Distribution otherwise qualifies as a tax-free transaction for U.S. Federal income tax purposes, the Distribution will be taxable to ITT (but not to ITT shareholders) pursuant to Section 355(e) of the Internal Revenue Code if there are one or more acquisitions (including issuances) of the stock of ITT, Exelis Inc. or Xylem Inc., representing 50% or more, measured by vote or value, of the then-outstanding stock of any such corporation, and the acquisition or acquisitions are deemed to be part of a plan or series of related transactions that include the Distribution. Any acquisition of ITT, Exelis Inc. or Xylem Inc. common stock within two years before or after the Distribution (with exceptions, including public trading by less-than-5% shareholders and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted. The tax liability resulting from the application of Section 355(e) would be substantial. In addition, under U.S. Treasury regulations, each member of the ITT consolidated group at the time of the Distribution would be severally liable for the resulting U.S. Federal income tax liability.
Each of Exelis and Xylem has agreed not to enter into any transaction that could cause any portion of the Distribution to be taxable to ITT, including under Section 355(e). Pursuant to the Tax Matters Agreement entered into in connection with the Distribution, ITT, Exelis and Xylem have agreed to indemnify each other for any tax liabilities resulting from such transactions, and ITT, Exelis and Xylem have agreed to indemnify each other for any tax liabilities resulting from such transactions entered into by them. These obligations may discourage, delay or prevent a change of control of our company.
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The Distribution may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal distribution requirements.
While unlikely, the Distribution could also be challenged under state corporate distribution statutes. Under the Indiana Business Corporation Law, a corporation may not make distributions to its shareholders if, after giving effect to the distribution, (i) the corporation would not be able to pay its debts as they become due in the usual course of business; or (ii) the corporation’s total assets would be less than the sum of its total liabilities. No assurance can be given that a court will not later determine that the distribution of our shares in connection with the Distribution was unlawful.
No assurance can be given as to what standard a court would apply to determine insolvency or that a court would determine that we were solvent at the time of or after giving effect to the Distribution.
Under the Distribution Agreement, from and after the Distribution, we will be responsible for the debts, liabilities and other obligations related to the business or businesses which we own and operate following the consummation of the Distribution. Although we do not expect to be liable for any of these or other obligations not expressly assumed by us pursuant to the Distribution Agreement, it is possible that we could be required to assume responsibility for certain obligations retained by Exelis or Xylem should Exelis or Xylem fail to pay or perform its retained obligations. In addition, we will be subject to additional liability if we are unsuccessful in defending the complaint brought by the Ad Hoc Committee of Bondholders alleging breach of the early redemption provisions of bonds issued in 2009.
Other Risks, Including Litigation and Regulatory Risk
Long-lived assets, including goodwill and other intangible assets, represent a significant portion of our assets and any impairment of these assets could negatively impact our results of operations.
Our business couldAt December 31, 2011, our long-lived assets, representing fixed assets, goodwill and other intangible assets, were approximately $922, net of accumulated amortization, which represented approximately 25% of our total assets. Goodwill and indefinite-lived intangible assets are tested for impairment on an annual basis, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be adversely affected by raw material price volatilityrecoverable. We also review the carrying value of finite-lived tangible and intangible assets for impairment when impairment indicators arise. We estimate the inabilityfair value 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 componentsreporting units used in the goodwill impairment test and indefinite-lived intangible assets using an income approach, and as a result the fair value measurements depend on revenue
growth rates, future operating margin assumptions, risk-adjusted discount rates, assumed royalty rates, future economic and market conditions, and identification of appropriate market comparable data. Because of the significance of our products. We are exposed to volatility in the priceslong-lived assets, including goodwill and availabilityother intangible assets, any future impairment 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,assets could have a material adverse effect on our business, results of operations and financial condition.
Other Risks, including Litigation and Regulatory Risk
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 and financial institutions and other third parties. 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.
position.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 and in foreign countries, any violations of whichor failure to comply with securities laws, trade or tax rules or similar regulations 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.
16
Unanticipated changesChanges in our tax rateenvironmental laws or exposureregulations, the discovery of previously unknown or more extensive contamination, or the failure of a potentially responsible party to additional tax liabilities resulting from changes to tax laws among other factors could negativelyperform may adversely affect our profitability.
Results from our international operationsfinancial results.We could be adversely affected by changes in economic conditions, foreign currency fluctuationsenvironmental laws or regulations, including, for example, those imposed in response to vapor intrusion or climate change concerns.
Environmental laws and changes in local government regulations.
Our international operations, including salesregulations allow for the assessment of
U.S. exports, comprise a growing portion of our operationssubstantial fines 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 2010, approximately 34% 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 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,criminal sanctions as well as
facility shutdowns to address violations, and may require the installation of costly pollution control equipment or operational changes to limit emissions or discharges.Developments such as the adoption of new environmental laws and regulations, violations by us of such laws and regulations, discovery of previously unknown or more extensive contamination, litigation involving environmental impacts, our abilityinability 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 strengthrecover costs associated with any such developments, or financial insolvency of the European, Asian and developing economies and the impact of currency exchange rate fluctuations.other potentially
20
Implementation of the various provisions of the Dodd-Frank Act may increase our operating costs or otherwiseresponsible parties could have a material adverse effect on our business, financial condition orposition, results of operations.
On July 21, 2010, President Obama signedoperations, or cash flows.Failure to comply with the Dodd-Frank Wall Street Reform and Consumer ProtectionU.S. Foreign Corrupt Practices Act (Dodd-Frank Act). Thisor other applicable anti-corruption legislation affects comprehensive changes to the regulation of financial services in the United States and will subject us to additional federal regulation. The Dodd-Frank Act will require the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC) and other federal agencies to enact numerous new rules, many of which may not be implemented for several months or years. We cannot predict with any certainty the requirements of the regulations ultimately adopted or how the Dodd-Frank Act and such regulations will impact the cost of compliance for a public company. We are currently evaluating and monitoring developments with respect to the Dodd-Frank Act and the resulting rule proposals and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.
These laws, regulations and standards required by the Dodd-Frank Act are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in
continuing uncertainty regarding compliance mattersfines, criminal penalties and
higher costs necessitatedan adverse effect on our business.We operate in a number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws. We are subject, however, to the risk that we, our affiliated entities or our or their respective officers, directors, employees and agents may take action determined to be in violation of such anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 and the U.K. Bribery Act of 2010, as well as trade sanctions administered by ongoing revisions to disclosurethe Office of Foreign Assets Control, or OFAC, and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment maythe U.S. Department of Commerce. Any such violation could result in increased generalsubstantial fines, sanctions, civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and administrative expensesmight adversely affect our business, results of operations or financial positions. In addition, actual or alleged violations could damage our reputation and a diversion of management’sability to do business. Furthermore, detecting, investigating, and resolving actual or alleged
violations is expensive and can consume significant time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our boardsenior management.
Anti-takeover provisions in our organizational documents and Indiana law could delay or prevent a change in control.
Certain provisions of directors, particularlyour articles of incorporation and by-laws may delay or prevent a merger or acquisition that a shareholder may consider favorable. For example, the articles of incorporation and by-laws, among other things, provide for advance notice for shareholder proposals and nominations and do not permit action by written consent of the shareholders. In addition, the articles of incorporation authorize our Board of Directors to serve on our audit committee, and qualified executive officers.
The Dodd-Frank Actissue one or more series of preferred stock. These provisions may also requires companiesdiscourage acquisition proposals or delay or prevent a change in the mining industry to disclose in their periodic reports filed with the SEC substantial additional information about safety issues relating to their mining operations. The mining industry is already subject to stringent safety and health standards and recent mining accidents in West Virginia and abroad have received international attention and have led to responses at the state and national levels that have resulted in increased scrutiny of mining operations, particularly underground mining operations. This heightened scrutiny could generate negative publicity for the mining industry, increase the cost of compliance with mining regulations or result in the passage of new laws and regulations, any ofcontrol, which could negatively affectharm our stock price. Indiana law also imposes some restrictions on mergers and other business results.
combinations between any holder of 10% or more of our outstanding common stock and us as well as certain restrictions on the voting rights of “control shares” of an “issuing public corporation.” | | |
Item ITEM 1B. | | UNRESOLVED STAFF COMMENTS |
None.
17
We have 575132 locations, in 51 countries on 6 continents.31 countries. These properties total 226.5 million square feet, of which 499102 locations, or 123.0 million square feet are leased. We consider the many offices, plants, warehouses, and other properties that we own or lease to be in good condition and generally suitable for their intended purpose, are adequate for the purposesCompany’s needs and will allow for which they are used.expansion of capacity if needed. The following table shows thedetails our quantitatively or qualitatively significant locations by segment and division.
| | | | | | | |
| LOCATION | | SQ FT
(IN ‘000S) | | OWNED / LEASED |
Industrial Process | | | | | | | |
Seneca Falls, New York | | | | 828 | | | Owned |
Amory, Mississippi | | | | 110 | | | Leased |
Lancaster, Pennsylvania | | | | 89 | | | Owned |
City of Industry, California | | | | 74 | | | Owned |
Southaven, Mississippi | | | | 69 | | | Leased |
Salto, Brazil | | | | 68 | | | Owned |
Baroda, India | | | | 60 | | | Leased |
Tizayuca, Mexico | | | | 47 | | | Owned |
Axminster, United Kingdom | | | | 45 | | | Leased |
Cheongwon, South Korea | | | | 39 | | | Owned |
Shanghai, China | | | | 35 | | | Leased |
Perth, Australia | | | | 28 | | | Leased |
Dammam, Saudi Arabia | | | | 27 | | | Leased |
Motion Technologies | | | | | | | |
Oud Beijerland, Netherlands | | | | 379 | | | Owned |
Barge, Italy | | | | 279 | | | Owned |
Ostrava, Czech Republic | | | | 256 | | | Leased |
Vauda Canavese, Italy | | | | 97 | | | Owned |
Contrada Pantano, Italy | | | | 94 | | | Owned |
Hebron, Kentucky | | | | 42 | | | Leased |
Kelsterbach, Germany | | | | 28 | | | Leased |
Interconnect Solutions | | | | | | | |
Santa Ana, California | | | | 364 | | | Owned |
Nogales, Mexico | | | | 300 | | | Owned |
Weinstadt, Germany | | | | 231 | | | Owned |
Shenzhen, China | | | | 227 | | | Leased |
Basingstoke, England | | | | 179 | | | Leased |
Lainate, Italy | | | | 53 | | | Leased |
Control Technologies | | | | | | | |
Valencia, California | | | | 200 | | | Leased |
Wuxi, China | | | | 167 | | | Leased |
Orchard Park, New York | | | | 92 | | | Owned |
Westminster, South Carolina | | | | 66 | | | Owned |
Ladson, South Carolina | | | | 42 | | | Owned |
Billerica, Massachusetts | | | | 24 | | | Owned |
Corporate Headquarters | | | | | | | |
White Plains, New York | | | | 54 | | | Leased |
| | | | | | | | | | | | |
| | | | | | SQ FT
| | | | |
LOCATION | | | DIVISION | | | (IN ’000S) | | | | OWNED / LEASED |
Defense segment
| | | | | | | | | | | |
Clifton, New Jersey | | | Electronic Systems | | | | 921 | | | | Owned |
Rochester, New York | | | Geospatial Systems | | | | 440 | | | | Owned |
Fort Wayne, Indiana | | | Electronic Systems | | | | 302 | | | | Leased |
Roanoke, Virginia | | | Geospatial Systems | | | | 251 | | | | Owned |
Rochester, New York | | | Geospatial Systems | | | | 250 | | | | Leased |
Fort Wayne, Indiana | | | Electronic Systems | | | | 241 | | | | Owned |
Rochester, New York | | | Geospatial Systems | | | | 225 | | | | Owned |
Fluid segment
| | | | | | | | | | | |
Emmaboda, Sweden | | | Water and Wastewater | | | | 1,156 | | | | Owned |
Metz, France | | | Water and Wastewater | | | | 870 | | | | Leased |
Seneca Falls, New York | | | Industrial Process | | | | 828 | | | | Owned |
Morton Grove, Illinois | | | Residential and Commercial Water | | | | 530 | | | | Owned |
Veneto, Italy | | | Residential and Commercial Water | | | | 379 | | | | Owned |
Auburn, New York | | | Residential and Commercial Water | | | | 298 | | | | Owned |
Lubbock, Texas | | | Residential and Commercial Water | | | | 229 | | | | Owned |
Shenzhen, China | | | All divisions | | | | 227 | | | | Leased |
Cheektowaga, New York | | | Residential and Commercial Water | | | | 200 | | | | Owned |
Motion and Flow segment
| | | | | | | | | | | |
Oud Beijerland, Netherlands | | | Motion Technologies | | | | 379 | | | | Owned |
Sonora, Mexico | | | Interconnect Solutions | | | | 358 | | | | Owned |
Santa Ana, California | | | Interconnect Solutions | | | | 301 | | | | Owned |
Piemonte, Italy | | | Motion Technologies | | | | 279 | | | | Owned |
Ostrava, Czech Republic | | | Motion Technologies | | | | 256 | | | | Leased |
Weinstadt, Germany | | | Interconnect Solutions | | | | 231 | | | | Owned |
Valencia, California | | | Control Technologies | | | | 200 | | | | Leased |
Corporate Headquarters
| | | | | | | | | | | |
White Plains, New York | | | Corporate Headquarters | | | | 95 | | | | Leased |
|
18
| | |
Item ITEM 3. | | LEGAL PROCEEDINGS |
ITT Corporation and its subsidiaries fromFrom time to time, we are involved in legal proceedings the majority of whichthat are incidental to the operation of theirour businesses. Some of these proceedings allege damages relating to personal injury claims, environmental liabilities,exposures, intellectual property matters, copyright infringement, employment and pension matters, government contract issues and commercial or contractual disputes, sometimes related to acquisitions or divestitures.divestitures, and employment and pension matters. We will continue to defend vigorously against all claims. See information provided below and Note 19, “Commitments and Contingencies,” in20 to the Notes to Consolidated Financial Statements for further information.
ITT, including its subsidiary Goulds Pumps, Inc. (Goulds),Inc, 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 Pump 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.
We record a liability for pending asbestos claims and asbestos claims estimated to be filed over the next 10 years. While it is probable that we will incur additional costs for future claims to be filed against the Company, a liability for potential future claims beyond the next ten years is not reasonably
estimable due to a number of factors. As of December 31, 2010,2011, we have recorded an undiscounted asbestos-related liability for pending claims and unasserted claims estimated to be filed over the next 10 years of $1,676,$1,668, including expected legal fees, and an associated asset of $1,034,$954, which represents estimated recoveries from insurers and other responsible parties, resulting in a net asbestos exposure of $642.
$714.Other ProceedingsMatters
On April 17, 2007, ITT’s BoardDecember 20, 2011, the Ad Hoc Committee of Directors receivedITT Bondholders filed a letterComplaint in New York State court alleging that ITT breached the early redemption provisions of certain bonds issued in 2009. In 2009, ITT issued $500 in bonds maturing in 2019 at an interest rate of 6.125%. The documents governing the bonds contained certain provisions governing early redemptions. On September 20, 2011, ITT notified the holders of the debt that it intended to redeem the bonds on behalfOctober 20, 2011 in accordance with the terms of the governing documents. On October 18, 2011, the redemption price was disclosed. The Plaintiffs contend that ITT used an improper discount rate in calculating the redemption price and otherwise failed to comply with required redemption procedures. If the Plaintiffs’ claims are sustained, ITT could be required to pay up to $15 in additional redemption fees and interest to all holders of the bonds; however, the costs associated with this matter, if any, will be shared with Exelis and Xylem in accordance with the Distribution Agreement as described in Note 4, “Discontinued Operations” to the Consolidated Financial Statements. Management believes that these matters will not have a shareholder requesting that the Board take appropriate action against the employees responsible for the violations atmaterial adverse effect on our Night Vision facility described above. During 2007 and 2008, the Company also received noticeconsolidated financial position, results of four shareholder derivative actions each filed in the U.S. District Court for the Southern District of New York. On July 10, 2010, the Court granted the Defendants’ Motion to Terminate the proceedings. This matter is concluded.
| | |
Item ITEM 4. | | [REMOVED AND RESERVED]MINE SAFETY DISCLOSURES |
19
Not applicable.
23
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 by the Company’s Board of Directors.
| | | | | | | | | |
| NAME | | AGE AT
2/1/12 | | CURRENT TITLE | | OTHER BUSINESS EXPERIENCE DURING
PAST 5 YEARS |
Denise L. Ramos | | | | 55 | | | Chief Executive Officer and President (2011) | | Senior Vice President and Chief Financial Officer, (2007) |
| | | |
Aris C. Chicles | | | | 50 | | | Executive Vice President, Strategy (2011) | | Senior Vice President, Director of Strategy and Corporate Development (2008); Vice President, Director of Strategy and Corporate Development, ITT (2006) |
| | | |
Burt M. Fealing | | | | 42 | | | Senior Vice President, General Counsel and Secretary (2011) | | Vice President and Corporate Secretary (2010); Vice President, Corporate Secretary and Chief Securities Counsel, SUPERVALU INC. (2007) |
| | | |
Janice M. Klettner | | | | 51 | | | Vice President, Chief Accounting Officer and Assistant Secretary (2008) | | Chief Accounting Officer and Assistant Secretary, ITT (2006) |
| | | |
Thomas F. Korber | | | | 48 | | | Senior Vice President and Chief Human Resources Officer (2011) | | Towers Watson, Senior Consultant (2006) |
| | | |
Munish Nanda | | | | 47 | | | Senior Vice President and President, Control Technologies (2011) | | President, Control Technologies (2011); Vice President and Director, Integrated Supply Chain (2008); Vice President, General Manager Temperature Control Products, Thermo Fisher Scientific (2007) |
| | | |
Robert J. Pagano, Jr. | | | | 49 | | | Senior Vice President and President, Industrial Process (2011) | | President, Industrial Process (2009); Vice President Finance (2006) |
| | | |
Luca Savi | | | | 45 | | | Senior Vice President and President, Motion Technologies (2011) | | Chief Operating Officer, World, Comau Inc. (2009); President and Chief Executive Officer, Comau USA (2007) |
| | | |
Thomas M. Scalera | | | | 40 | | | Senior Vice President and Chief Financial Officer (2011) | | Vice President of Corporate Finance (2010); Director, Investor Relations (2008); Director Financial Planning and Analysis (2006) |
| | | |
William E. Taylor | | | | 59 | | | Senior Vice President and President, Interconnect Solutions (2011) | | President, Interconnect Solutions (2008); President ITT China & India (2006) |
| | | | | | | | | | | | |
| | | AGE AT
| | | | | | | OTHER BUSINESS EXPERIENCE DURING
|
NAME | | | 2/1/11 | | | | CURRENT TITLE | | | PAST 5 YEARS |
Angela A. Buonocore | | | | 52 | | | | 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 | | | | 49 | | | | Senior Vice President, Director of Strategy and Corporate Development (2008) | | | Vice President, Director of Strategy and Corporate Development, ITT (2006) |
Frank R. Jimenez | | | | 46 | | | | Vice President, General Counsel (2009) | | | General Counsel of the Navy (2006) |
Janice M. Klettner | | | | 50 | | | | Vice President, Chief Accounting Officer (2008) | | | Chief Accounting Officer and Assistant Secretary, ITT (2006) |
Steven R. Loranger | | | | 58 | | | | Chairman, President and Chief Executive Officer (2004) | | | |
David F. Melcher | | | | 56 | | | | Senior Vice President, ITT, President, ITT Defense & Information Solutions (2010) | | | Vice President, ITT, President, ITT Defense Electronics & Services (2008); Vice President, Strategy and Business Development (2008), ITT Defense Electronics & Services (2008); Lieutenant General, U.S. Army, Deputy Chief of Staff, Military Deputy for Budget (2006) |
Gretchen W. McClain | | | | 48 | | | | Senior Vice President, ITT, President, ITT Fluid and Motion Control (2008) | | | Vice President, ITT, President, ITT Fluid Technology (2007); President, ITT Residential & Commercial Water (2005) |
Denise L. Ramos | | | | 54 | | | | Senior Vice President and Chief Financial Officer (2007) | | | Chief Financial Officer, Furniture Brands International (2005) |
|
Note: Date in parentheses indicates the year in which the position was assumed.
20
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
| | | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| | | | HIGH | | | LOW | | | | HIGH | | | | LOW | |
| Three Months Ended: | | | | | | | | | | | | | | | | | | | |
| March 31 | | | $ | 55.61 | | | $ | 47.41 | | | | $ | 51.42 | | | | $ | 31.94 | |
| June 30 | | | | 57.99 | | | | 44.17 | | | | | 46.91 | | | | | 37.26 | |
| September 30 | | | | 50.79 | | | | 42.05 | | | | | 52.71 | | | | | 41.15 | |
| December 31 | | | | 53.24 | | | | 45.06 | | | | | 56.95 | | | | | 48.43 | |
| |
On October 31, 2011 (the Distribution Date), ITT completed the spin-offs of Exelis and Xylem and the common stock of each was distributed, on a pro rata basis, to the Company’s shareholders of record as of the close of business October 17, 2011 (the “Record Date”). On the Distribution Date, each ITT shareholder received one share of Exelis common stock and one share of Xylem common stock for every share of ITT common stock held on the Record Date. ITT completed a one-for-two reverse stock split of ITT common stock after the market close on October 31, 2011.
The above table below reflects the range of market prices of our common stock as reported in the consolidated transaction reporting system of the New York Stock Exchange (NYSE), the principal market in which this security is traded (under the trading symbol “ITT”). During and has been adjusted for the period from January 1, 2011 through January 31, 2011,reverse stock split; however the high and low reported markethistorical prices prior to the Distribution have not been adjusted for the impact of our common stock were $64.00 and $51.80, respectively.the Distribution. ITT common stock is also listed on the Euronext Exchange under the “ITT” trading symbol. In February 2012, a decision was made by the Board of Directors to delist from the Euronext Exchange following the payment of our first quarter 2012 dividend in April 2012.
| | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 |
| | | HIGH | | LOW | | HIGH | | LOW |
Three Months Ended: | | | | | | | | | | | | | | | | | | | | |
March 31 | | | $ | 128.00 | | | | $ | 103.60 | | | | $ | 111.22 | | | | $ | 94.82 | |
June 30 | | | | 122.08 | | | | | 108.80 | | | | | 115.98 | | | | | 88.34 | |
September 30 | | | | 120.26 | | | | | 80.50 | | | | | 101.58 | | | | | 84.10 | |
December 31(1) | | | | 94.98 | | | | | 16.67 | | | | | 106.48 | | | | | 90.12 | |
| | | | | | | | | | | | | | | | | | | | | |
| (1) | On October 31, 2011, we completed the Distribution of Exelis and Xylem. On October 31, 2011, the closing price of our common stock on the NYSE was $91.20. On November 1, 2011, the first day of “regular-way” trading following the Distribution, the opening price of our common stock on the NYSE was $17.02 and the opening prices for Exelis common stock and Xylem common stock were $10.33 and $25.60, respectively. The opening prices for Exelis and Xylem do not reflect an adjustment for the ITT common stock one-for-two reverse stock split. |
WeDuring the period from January 1, 2012 through January 31, 2012, the high and low reported market prices of our common stock were $22.39 and $19.52, respectively.
After giving effect to the 1:2 Reverse Stock Split, we declared dividends of $0.25 and $0.2125$0.50 per share of common stock in each of the four quarters of 2010 and 2009,the first three quarters of 2011, respectively. We declared a dividend of $0.091 per share of common stock in the fourth quarter of 2011. In the first quarter of 2011,2012, we declared a dividend of $0.25$0.091 per share for shareholders of record on March 2, 2011. Dividend decisions7, 2012. The amount and timing of dividends payable on our common stock are subject towithin the sole discretion of our Board of Directors and will be based on, and affected by, a number of factors, including operatingour financial position and results of operations, available cash, expected capital spending plans, prevailing business conditions, and financial requirements.other factors the Board deems relevant. Therefore, there can be no assurance as to what level of dividends, if any, will be paid in the future.
There were 19,269approximately 17,600 holders of record of our common stock on February 11, 2011.
10, 2012.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 onForm 10-K set forth under the caption “Equity Compensation Plan Information.”
25
ISSUER PURCHASES OF EQUITY SECURITIES
The following table summarizes our purchases of our common stock for the quarter ended December 31, 2010.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 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) | |
| 10/1/10 – 10/31/10 | | | | – | | | | | – | | | | | – | | | | $ | 569 | |
| 11/1/10 – 11/30/10 | | | | – | | | | | – | | | | | – | | | | $ | 569 | |
| 12/1/10 – 12/31/10 | | | | – | | | | | – | | | | | – | | | | $ | 569 | |
| |
| | | | | | | | | | | | | | | | | | | | |
| (IN MILLIONS) PERIOD | | TOTAL
NUMBER OF
SHARES
PURCHASED | | AVERAGE
PRICE
PAID PER
SHARE(1) | | TOTAL
NUMBER OF
SHARES
PURCHASED
AS PART OF
PUBLICLY
ANNOUNCED
PLANS OR
PROGRAMS(2) | | MAXIMUM
DOLLAR
VALUE OF
SHARES
THAT MAY
YET BE
PURCHASED
UNDER THE
PLANS OR
PROGRAMS(2) |
10/1/11 – 10/31/11 | | | | – | | | | | – | | | | | – | | | | $ | 569 | |
11/1/11 – 11/30/11 | | | | – | | | | | – | | | | | – | | | | $ | 569 | |
12/1/11 – 12/31/11 | | | | – | | | | | – | | | | | – | | | | $ | 569 | |
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| |
| (1) | Average price paid per share is calculated on a settlement basis and excludes commission. |
|
| (2) | On October 27, 2006, a three-year $1 billion share repurchase program was approved by our Board of Directors. On December 16, 2008, the provisions of the share repurchase program were modified by our Board of Directors to replace the original three-year term with an indefinite term. As of December 31, 2010,2011, we had repurchased 7.13.55 million shares for $431, including commission fees, under the $1 billion share repurchase program. The program is consistent with our capital allocation process, which has 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. |
21
PERFORMANCE GRAPH
CUMULATIVE TOTAL RETURN
Based upon an initial investment on December 31, 20052006 of $100 with dividends reinvested
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 12/31/05 | | | | 12/31/06 | | | | 12/31/07 | | | | 12/31/08 | | | | 12/31/09 | | | | 12/31/10 | |
| ITT Corporation | | | $ | 100.00 | | | | $ | 111.45 | | | | $ | 130.69 | | | | $ | 92.20 | | | | $ | 101.69 | | | | $ | 108.78 | |
| S&P 500 | | | $ | 100.00 | | | | $ | 115.79 | | | | $ | 122.16 | | | | $ | 76.96 | | | | $ | 97.33 | | | | $ | 111.99 | |
| S&P 500 Industrials Index | | | $ | 100.00 | | | | $ | 113.29 | | | | $ | 126.93 | | | | $ | 76.26 | | | | $ | 92.22 | | | | $ | 116.87 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Information provided in the Performance Graph shall
| | | | | | | | | | | | |
| | | 12/31/06 | | 12/31/07 | | 12/31/08 | | 12/31/09 | | 12/31/10 | | 12/31/11 |
ITT Corporation(a) | | $100.00 | | $117.26 | | $82.73 | | $91.24 | | $97.60 | | $111.28 |
S&P 500 | | $100.00 | | $105.49 | | $66.46 | | $84.05 | | $96.71 | | $98.76 |
S&P 500 Industrials | | $100.00 | | $112.04 | | $67.31 | | $81.40 | | $103.16 | | $102.55 |
S&P 400 MidCap | | $100.00 | | $107.98 | | $68.46 | | $98.37 | | $122.44 | | $119.89 |
S&P 400 MidCap Industrial Machinery | | $100.00 | | $135.93 | | $78.62 | | $109.77 | | $142.49 | | $141.86 |
| (a) | On November 1, 2011, following the Distribution, ITT was removed from the S&P 500 Index and S&P 500 Industrial Index and was added to the S&P 400 MidCap Index and S&P 400 MidCap Industrial Machinery Index. |
This graph is not, and is not intended to be, indicative of future performance of our common stock. This graph is not be deemed filed“filed” with the SEC.
22
SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933, as amended, or the Exchange Act.
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| ITEM 6. | | SELECTED FINANCIAL DATA |
The following table presents selected historical financial data derived from the audited Consolidated Financial Statements and other Company information for each of the five years presented. Dividends declared and per share amounts have been restated for the 1:2 Reverse Stock Split which was effective October 31, 2011. Prior year amounts have been reclassified to reflect the discontinued operations. This informationoperations of Exelis, Xylem and CAS, Inc (CAS) and gives effect to the immaterial corrections discussed in Note 23, “Immaterial Corrections,” to the Consolidated Financial Statements. The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited Consolidated Financial Statements and the Notes thereto.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) | | | 2010 | | | | 2009 | | | | 2008 | | | | 2007 | | | | 2006 | |
Results of Operations | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue(a) | | | $ | 10,995 | | | | $ | 10,674 | | | | $ | 11,476 | | | | $ | 9,000 | | | | $ | 7,808 | |
Operating income(b) | | | | 900 | | | | | 894 | | | | | 1,198 | | | | | 978 | | | | | 801 | |
Operating margin(b) | | | | 8.2 | % | | | | 8.4 | % | | | | 10.4 | % | | | | 10.9 | % | | | | 10.3 | % |
| Income from continuing operations | | | | 654 | | | | | 641 | | | | | 768 | | | | | 633 | | | | | 500 | |
| Income from continuing operations per diluted share | | | $ | 3.53 | | | | $ | 3.49 | | | | $ | 4.17 | | | | $ | 3.43 | | | | $ | 2.66 | |
| Dividends declared | | | $ | 1.00 | | | | $ | 0.85 | | | | $ | 0.70 | | | | $ | 0.56 | | | | $ | 0.44 | |
Financial Position | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets(a) | | | $ | 12,438 | | | | $ | 11,129 | | | | $ | 10,480 | | | | $ | 11,553 | | | | $ | 7,401 | |
Total debt(a) | | | | 1,365 | | | | | 1,506 | | | | | 2,147 | | | | | 3,566 | | | | | 1,097 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) | | 2011 | | 2010 | | 2009 | | 2008 | | 2007 |
Results of Operations | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue(a) | | | $ | 2,119 | | | | $ | 1,908 | | | | $ | 1,770 | | | | $ | 2,132 | | | | $ | 1,768 | |
Gross profit | | | | 655 | | | | | 607 | | | | | 563 | | | | | 704 | | | | | 571 | |
Gross margin | | | | 30.9 | % | | | | 31.8 | % | | | | 31.8 | % | | | | 33.0 | % | | | | 32.3 | % |
Restructuring and asset impairment costs, net | | | | 5 | | | | | 3 | | | | | 43 | | | | | 25 | | | | | 12 | |
Asbestos costs | | | | 100 | | | | | 385 | | | | | 238 | | | | | 14 | | | | | 14 | |
Transformation costs | | | | 396 | | | | | – | | | | | – | | | | | – | | | | | – | |
Other operating costs | | | | 401 | | | | | 403 | | | | | 403 | | | | | 454 | | | | | 342 | |
Operating (loss) income(b) | | | | (247 | ) | | | | (184 | ) | | | | (121 | ) | | | | 211 | | | | | 203 | |
Operating margin(b) | | | | (11.7 | )% | | | | (9.6 | )% | | | | (6.8 | )% | | | | 9.9 | % | | | | 11.5 | % |
(Loss) income from continuing operations | | | | (578 | ) | | | | (132 | ) | | | | (111 | ) | | | | 32 | | | | | 61 | |
Income from discontinued operations, net of tax | | | | 448 | | | | | 936 | | | | | 740 | | | | | 706 | | | | | 685 | |
Net (loss) income | | | $ | (130 | ) | | | $ | 804 | | | | $ | 629 | | | | $ | 738 | | | | $ | 746 | |
(Loss) income from continuing operations per basic share | | | $ | (6.23 | ) | | | $ | (1.44 | ) | | | $ | (1.21 | ) | | | $ | 0.35 | | | | $ | 0.67 | |
Income from discontinued operations per basic share | | | $ | 4.83 | | | | $ | 10.19 | | | | $ | 8.10 | | | | $ | 7.76 | | | | $ | 7.55 | |
Net income per basic share | | | $ | (1.40 | ) | | | $ | 8.75 | | | | $ | 6.89 | | | | $ | 8.11 | | | | $ | 8.22 | |
(Loss) income from continuing operations per diluted share | | | $ | (6.23 | ) | | | $ | (1.44 | ) | | | $ | (1.21 | ) | | | $ | 0.35 | | | | $ | 0.66 | |
Income from discontinued operations per diluted share | | | $ | 4.83 | | | | $ | 10.19 | | | | $ | 8.10 | | | | $ | 7.67 | | | | $ | 7.42 | |
Net income per diluted share | | | $ | (1.40 | ) | | | $ | 8.75 | | | | $ | 6.89 | | | | $ | 8.02 | | | | $ | 8.08 | |
Dividends declared | | | $ | 1.591 | | | | $ | 2.00 | | | | $ | 1.70 | | | | $ | 1.40 | | | | $ | 1.12 | |
Financial Position | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents(c) | | | $ | 690 | | | | $ | 206 | | | | $ | 187 | | | | $ | 203 | | | | $ | 342 | |
Total assets(d) | | | | 3,671 | | | | | 12,615 | | | | | 11,195 | | | | | 10,614 | | | | | 11,982 | |
Total debt(e) | | | | 6 | | | | | 1,360 | | | | | 1,506 | | | | | 2,147 | | | | | 3,566 | |
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| (a) | In September 2007 and December 2007, we acquired International Motion Control (IMC) and EDO Corporation (EDO), respectively. These businesses. This business contributed 2008consolidated revenue growth of approximately 19.0%, as compared to 2007. These businesses provided $2,758 of total assets and $2,154 of total debt on date of acquisition.$147 in 2008. |
| (b) | The decline in operating income from 2010 to 2011 is primarily attributable to $396 of Transformation costs incurred to complete the Distribution of Exelis and Xylem (Transformation costs), including debt extinguishment costs of $297, partially offset by a $285 decline in net asbestos costs. The Transformation costs decreased 2011 operating margins by 1,870 basis points. See Note 3, “Company Transformation,” to the Consolidated Financial Statements for further information on the Distribution. |
(b) | The decline in operating income and operating margin from 2008 to 2009 and 2009 to 2010 is primarily attributable to the recognition of a net asbestos liability related to pending claims and unasserted claims estimated to be filed over the next ten10 years. The 2011, 2010 and 2009 asbestos charges, net of estimated recoveries from insurers and other responsible parties, included in operating income were $100, $385 and $238, respectively. The asbestos charges decreased operating margins by 470 basis points, 2,020 basis points and 1,345 basis points in 2011, 2010 and 2009, respectively. Prior to 2009, we recorded an asbestos liability and related assets associated with pending claims only. It is probable that we will incur additional liabilities for asbestos claims filed beyond our current10-year horizon and such liabilities may be material. See Note 20, “Commitments and Contingencies,” to the Consolidated Financial Statements for further information on the Distribution. |
| (c) | The increase in cash and cash equivalents from 2010 to 2011 was primarily due to receipt of a net cash transfer (the Contribution) of $729 and $857 from Exelis and Xylem, respectively, in connection with the Distribution, offset in part by the extinguishment of $1,251 of long-term debt in October 2011. |
| (d) | The decline in total assets from 2010 to 2011 is primarily attributable to the Distribution of Exelis and Xylem on October 31, 2011, which had total combined assets of $9,322 as of December 31, 2010. The assets of Exelis and Xylem, although presented as discontinued operations, are included in the total asset amounts for 2007 through 2010. |
| (e) | The decline in total debt from 2010 to 2011 is primarily due to the extinguishment of $1,251 of long-term debt in October 2011. The year-over-year declines in total debt in 2008 and 2009 was due to repayments of outstanding commercial paper balances. |
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| | |
| ITEM 7. | | MANAGEMENT’S DISCUSSION & |
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
23
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share amounts, unless otherwise stated)OVERVIEW
ITT Corporation (references herein to “ITT,” “the Company,” and such words as “we,” “us,” and “our” include ITT Corporation and its subsidiaries) is a diversified manufacturer of highly engineered critical components and customized technology solutions for growing industrial end-markets. Building on its heritage of innovation, ITT partners with its customers to deliver enduring solutions to the key industries that underpin our modern way of life. We manufacture key components that are integral to the operation of systems and manufacturing processes in the electronics, energy & mining, transportation, aerospace, and related industrial markets. Our products provide enabling functionality for applications where reliability and performance are critically important for our customers and the end users of their products.
Our businesses share a common, repeatable operating model. Each business applies technology and engineering expertise to solve our customer’s most pressing challenges. Our applied engineering adeptness provides a superior business fit with our customers given the critical nature of their applications. This in turn provides us with a strong degree of knowledge of our customer’s requirements and how we can help them to achieve their business goals. Our technology and customer intimacy in tandem produce opportunities to capture recurring revenue streams aftermarket opportunities and long lived original equipment manufacturer (OEM) platforms.
Our product and service offerings are organized into four segments: Industrial Process, Motion Technologies, Interconnect Solutions (ICS), and Control Technologies. Our segments generally operate with strong niche positions in large, attractive markets where specialized engineered solutions are required to support large industrial and transportation customer needs.
| n | | Industrial Process manufactures engineered fluid process equipment serving a diversified mix of customers in global infrastructure industries such as oil & gas, mining, power generation, chemical and other process markets and is an aftermarket service provider. |
| n | | Motion Technologies manufactures brake pad, shock absorber and damping technologies for the global automotive, truck, trailer and public bus and rail transportation markets. |
| n | | Interconnect Solutions manufactures a wide range of highly specialized connector products that make it possible to transfer signal and power in various electronic devices that are utilized in aerospace, industrial, defense and oil & gas markets. |
| n | | Control Technologies manufactures specialized equipment, including actuation, valves, switches, vibration isolation, custom-energy absorption, and regulators for the aerospace, military and industrial markets. |
On October 31, 2011 (the Distribution Date), ITT completed the spin-off of Exelis Inc. (Exelis), formerly ITT’s Defense and Information Solutions segment, and Xylem Inc. (Xylem), formerly ITT’s water-related business, by way of a distribution (the Distribution) of all of the issued and outstanding shares of Exelis common stock and Xylem common stock, on a pro rata basis, to ITT shareholders of record on October 17, 2011 (the Record Date). On the Distribution Date, each ITT shareholder received one share of Exelis common stock and one share of Xylem common stock for every share of ITT common stock held on the Record Date. Exelis and Xylem are now independent companies trading on the New York Stock Exchange under the symbols “XLS” and “XYL”, respectively. The Distribution was made pursuant to a Distribution Agreement, dated October 25, 2011, among ITT, Exelis and Xylem (the Distribution Agreement). The net assets and results of Exelis and Xylem prior to the Distribution are classified as discontinued operations. See Note 3, “Company Transformation,” to the Consolidated Financial Statements for further information on the Distribution.
EXECUTIVE SUMMARY
ITT reported revenue of $11.0 billion$2,119 for the year ended December 31, 2010,2011, an increase of 3.0%11.1% from $10.7 billion$1,908 reported in 2009. Benefits from newly acquired businesses2010. Growth in emerging markets of 19.1% and a general recovery fromour core markets, including oil & gas, mining, transportation and aerospace drove the challenging 2009 market conditions drove revenue growthincrease in revenue. Operating loss increased $63, primarily due to $396 of costs incurred to complete the Distribution of Exelis and exceeded declines from certain programs that support the U.S. Government Armed Services. Investments in strategic operational and productivity initiatives taken over the past two years provided significantyear-over-year savings; however, these savings were largelyXylem, including debt extinguishment costs of $297, partially offset by additionala $285 reduction in asbestos-related costs and resulteda $39 increase in 2010segment operating income, reflecting 17.0% growth as compared to the prior year. Driven by Transformation costs and income tax expense, full year 2011 results ended with a loss from continuing operations of $654$578 or $3.53$6.23 per diluted share, reflecting growth of 2.0%.
share.Adjusted income from continuing operations was $818$117 for 2010,2011, reflecting an increase of $132,$43, or 19.2%58.1%, over the prior year adjusted amount.year. Our adjusted income from continuing operations translated into $4.41$1.24 per diluted share, which represents a record level for ITT and a $0.68$0.44 or 18.2%55.0% increase over the prior year. See the “Key Performance Indicators and Non-GAAP Measures,” section included within
29
Management’s Discussion and Analysis for a reconciliation of the adjusted non-GAAP measures.
Additional financial highlights for 20102011 include the following:
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| | n | Deployment | On October 31, 2011, ITT completed the Distribution of more than $1.0its Defense and Water businesses and with it created two new publicly traded companies, Exelis and Xylem. ITT is now an industrial company with $2.1 billion of revenue derived from four segments that deliver highly engineered and customized products and services focused on the industrial, aerospace, transportation, and oil & gas markets. |
| n | | We extinguished $1.25 billion of long-term debt and terminated a $61 capital intolease. We ended 2011 with a strong capital structure, including cash and cash equivalents of $690 and total debt of only $6. |
| n | | Segment operating income from continuing operations grew 17.0% during 2011, driven by double digit organic revenue growth at the consolidated level and within three of four segments. |
| n | | ITT secured a number of strategic acquisitions in growth markets, most notablywins during the acquisitionsfourth quarter of Nova and Godwin in our Fluid segment, which provided earnings accretion of $0.08 per share. |
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| n | Execution of a strategic transformation at our Defense segment that created greater efficiencies and better aligned our technical capabilities with our customers’ needs. Additionally, we completed the divestiture of CAS, our SETA business, which generated proceeds of $237 and an after-tax gain on sale of $130. |
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| n | Cash flow from operating activities of $1.2 billion, an 18% increase in our annual dividend to shareholders, and a cash position at the end of the year2011 across all businesses, including six significant Industrial Process emerging market wins each in excess of $1.0 billion.$2, our first major Korean medical connector order and positions on two Embraer Aerospace programs. |
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| | n | Net charge to operating income of $385 relating to asbestos exposures, reflecting an increase in our estimated liability net of insurance and other third-party recoveries, as a result of deteriorating conditions which affected several key factors used to estimate the net liability. |
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Emerging Markets provided a 19.1% increase to revenue during 2011, reflecting growth in each of our targeted economies, China, India, Brazil and the Middle East. |
| | n | Positions secured on a number of significant U.S. Government programs, including the FAA Systems Engineering 2020 (SE2020) support, the NASA Space Communications Network Services and the Kuwait and Afghanistan Base Operations & Security Support Services. |
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On October 27, 2011, ITT acquired Blakers Pump Engineers (Blakers), a long-time distributor of ITT’s Goulds Pumps brand in Australia. The acquisition will strengthen ITT’s presence and capabilities in Australia and Asia especially in the oil and gas and mining industries. |
| | n | In January | On October 31, 2011, Denise L. Ramos succeeded Steven R. Loranger as Chief Executive Officer and President of ITT Corporation. Frank T. MacInnis succeeded Mr. Loranger as Chairman of the announcementITT Board of Directors. |
| n | | On October 31, 2011, we completed a one-for-two reverse stock split (1:2 Reverse Stock Split) of ITT’s common stock. Par value of our plancommon stock remained $1 per share following the 1:2 Reverse Stock Split. All common stock shares authorized, issued and outstanding, as well as share prices and earnings per share give effect to transform ITT into three distinct, publicly traded companies by the end of 2011.1:2 Reverse Stock Split in all periods presented. |
Further details related to these results are contained in the following ConsolidatedDiscussion of Financial Results and Segment Review sections.section.
Key Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators 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 when evaluating our operating performance for the periods presented, andpresented. These measures provide a tool for evaluating our ongoing operations liquidity and management of assets.assets from period to period. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends, acquisitions, share repurchases and debt repayment. These metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America (GAAP) and should not be considered a substitute for revenue, operating income, income from continuing operations, income from continuing operations per diluted share or net cash from continuing operations asmeasures determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:
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| | n | | “organic revenue” and “organic orders,”orders” are defined as revenue and orders, respectively, excluding the impact of foreign currency fluctuations and contributions from acquisitions and divestitures.divestitures made during the current year. Divestitures include sales of insignificant portions of our business that did not meet the criteria for classificationpresentation as a discontinued operation. Theperiod-over-period change resulting from foreign currency fluctuations assumes no change in exchange rates from the prior period. |
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| | n | | “adjusted segment operating income” defined as operating income, adjusted to exclude costs incurred in connection with the Distribution and restructuring charges and “adjusted operating margin” defined as adjusted operating income divided by total revenue. |
| n | | “adjusted income from continuing operations” and “adjusted income from continuing operations per diluted share” are defined as income from continuing operations and income from continuing operations per diluted share, adjusted to exclude special items that include, but are not limited to, asbestos-related costs, Transformation costs, restructuring and asset impairment charges, income tax settlements or adjustments, and other unusual or infrequent non-operating items. Special items represent significant charges or credits that impact current results, but may not be related to the Company’s ongoing operations and performance. A reconciliation of adjusted income from continuing operations, including adjusted earnings per diluted share, is provided below. |
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| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
Loss from continuing operations(a) | | $ | (578 | ) | | $ | (132 | ) | | $ | (111 | ) |
Transformation costs, net of tax(b) | | | 257 | | | | – | | | | – | |
Net asbestos-related costs, net of tax(c) | | | 63 | | | | 241 | | | | 143 | |
Restructuring and asset impairment charges, net of tax | | | 3 | | | | 3 | | | | 30 | |
Legacy items and legal entity liquidation, net of tax | | | (9 | ) | | | – | | | | – | |
Interest income, net of tax | | | (1 | ) | | | (6 | ) | | | (9 | ) |
Tax-related special items(d) | | | 382 | | | | (32 | ) | | | 7 | |
| | | | | | | | | | | | | |
Adjusted income from continuing operations | | $ | 117 | | | $ | 74 | | | $ | 60 | |
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Loss from continuing operations per basic share(e) | | $ | (6.23 | ) | | $ | (1.44 | ) | | $ | (1.21 | ) |
Adjusted income from continuing operations per diluted share(e) | | $ | 1.24 | | | $ | 0.80 | | | $ | 0.63 | |
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| (a) | Loss from continuing operations includes interest expense associated with debt that was extinguished in October 2011 of $58, $75 and $50, for the years ended December 31, 2011, 2010 and 2009, respectively. |
24
income from continuing operations per diluted share, adjusted to exclude 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. A reconciliation of adjusted income from continuing operations, including adjusted earnings per diluted share, is provided below.
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| | | | 2010 | | | | 2009 | | | | 2008 | |
| Income from continuing operations | | | $ | 654 | | | | $ | 641 | | | | $ | 768 | |
Adjusted net asbestos-related costs, net of tax(a) | | | | 205 | | | | | 131 | | | | | — | |
Tax-related special items(b) | | | | (41 | ) | | | | (86 | ) | | | | (34 | ) |
| | | | | | | | | | | | | | | | |
| Adjusted income from continuing operations | | | | 818 | | | | | 686 | | | | | 734 | |
| | | | | | | | | | | | | | | | |
| Income from continuing operations per diluted share | | | $ | 3.53 | | | | $ | 3.49 | | | | $ | 4.17 | |
| Adjusted income from continuing operations per diluted share | | | $ | 4.41 | | | | $ | 3.73 | | | | $ | 3.99 | |
| | | | | | | | | | | | | | | | |
| (b) | |
(a) | The net asbestos-relatedfollowing table provides a reconciliation of Transformation costs to Transformation costs, net of tax, include costs related to an annual remeasurement of our asbestos assets and liabilities. Quarterly provisions for net asbestos-related costs, net of tax which relate to maintaining a rolling10-year projection period are not included as a special item. See Note 3, “Company Transformation” to the Consolidated Financial Statements for further information. |
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
Transformation costs before tax | | $ | 396 | | | $ | – | | | $ | – | |
Tax-related seperation costs | | | 4 | | | | – | | | | – | |
Tax benefit | | | (143 | ) | | | – | | | | – | |
| | | | | | | | | | | | | |
Transformation costs, net of tax | | $ | 257 | | | $ | – | | | $ | – | |
| | | | | | | | | | | | | |
| (c) | The following table provides a reconciliation of net asbestos-related costs to adjusted net asbestos-related costs, net of tax, included as a special item. |
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Net asbestos-related costs before taxes | | | $ | 385 | | | | $ | 238 | |
| Less: net asbestos-related costs incurred outside annual remeasurement | | | | (55 | ) | | | | (28 | ) |
| | | | | | | | | | | |
| Net asbestos-related costs related to annual remeasurement before taxes | | | | 330 | | | | | 210 | |
| Tax rate | | | | 38.0 | % | | | | 37.7 | % |
| | | | | | | | | | | |
| Adjusted net asbestos-related costs, net of tax | | | $ | 205 | | | | $ | 131 | |
| | | | | | | | | | | |
See Note 19, See Note 20, “Commitments and Contingencies,” in the Notes to our Consolidated Financial Statements for further information.
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(b) | The 2010 tax-related special items primarily include a reversal of certain valuation allowances, a reversal of uncertain tax positions and a reduction of deferred tax assets associated with the U.S. Patient Protection and Affordable Care Act (the Healthcare Reform Act). The 2009 tax-related special items primarily relate to interest received on a tax settlement and the reversal of deferred tax liabilities relating to a restructuring of certain international legal entities. The 2008 tax-related special items primarily relate to a tax account validation adjustment. See Note 6, “Income Taxes,” in the Notes to our Consolidated Financial Statements for further information. |
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| | | 2011 | | | 2010 | | | 2009 | |
Net asbestos-related costs before taxes | | $ | 100 | | | $ | 385 | | | $ | 238 | |
Tax benefit | | | (37 | ) | | | (144 | ) | | | (95 | ) |
| | | | | | | | | | | | | |
Net asbestos-related costs, net of tax | | $ | 63 | | | $ | 241 | | | $ | 143 | |
| | | | | | | | | | | | | |
| (d) | The following table details significant components of the tax-related special items. See Note 7, “Income Taxes,” to our Consolidated Financial Statements for further information. |
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
Change in tax valuation allowance | | $ | 340 | | | $ | (36 | ) | | $ | (19 | ) |
Charge on undistributed foreign earnings | | | 69 | | | | – | | | | – | |
Change in state tax rates | | | (31 | ) | | | – | | | | – | |
Write-off of deferred tax asset | | | – | | | | 12 | | | | – | |
Settlement of tax audit | | | – | | | | (5 | ) | | | – | |
Other | | | 4 | | | | (3 | ) | | | 26 | |
| | | | | | | | | | | | | |
Net tax-related special items | | $ | 382 | | | $ | (32 | ) | | $ | 7 | |
| | | | | | | | | | | | | |
| (e) | Loss from continuing operations per share has been calculated using weighted average basic shares outstanding. Adjusted income from continuing operations per share has been calculated using weighted average diluted shares outstanding. |
| | n | | “free cash flow” is defined as net cash provided by operating activities as reported in the Statement of Cash Flows, less capital expenditures, cash payments for Transformation costs and other significant items that impact current results which management believes are not related to our ongoing operations and performance. Our definition ofDue to other financial obligations and commitments, the entire free cash flow doesmay not consider certain non-discretionary cash payments, such as debt and interest payments.be available for discretionary purposes. A reconciliation of free cash flow is provided below. |
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | 2008 | |
| Net cash from continuing operations | | | $ | 1,234 | | | | $ | 1,258 | | | | $ | 1,107 | |
| Capital expenditures | | | | (328 | ) | | | | (271 | ) | | | | (248 | ) |
| Discretionary pension contributions, net of tax | | | | 31 | | | | | 62 | | | | | — | |
| | | | | | | | | | | | | | | | |
| Free cash flow | | | $ | 937 | | | | $ | 1,049 | | | | $ | 859 | |
| | | | | | | | | | | | | | | | |
2011 Outlook
Revenue for the full year 2011 is expected to grow to approximately $11.4 billion with adjusted earnings in the range of approximately $4.62 to $4.82 per diluted share. Organic revenue is expected to grow approximately 2%, with solid growth in the commercial businesses more than offsetting a slight decline in the Defense segment. Full-year revenue for the Defense segment is expected to decline approximately 2%, and operating margin is expected to decline to approximately 12.4%. Fluid segment revenue is expected to grow approximately 12%, and organic revenue growth is projected at approximately 5%. Fluid segment operating margin is expected to grow to approximately 14.0%. Motion & Flow segment revenue growth is expected to be approximately 7%, reflecting organic revenue growth of approximately 5%. Operating margin for Motion & Flow segment is estimated to grow to approximately 15.0%. This guidance excludes future impacts to earnings per share and operating margin that will result from the Company’s recently announced spinoff transaction.
On January 12, 2011, the Company announced a plan to spinoff its water-related and defense-related businesses by the end of 2011. The water-related businesses will include the Water & Wastewater division and the Residential & Commercial Water division, as well as the Flow Control division that is currently reported within the Motion & Flow Control segment. This new water business is estimated to generate pro forma 2011 revenue of approximately $3.6 billion. The new defense-related business, that will include the divisions that currently comprise our Defense segment, is estimated to generate pro forma 2011 revenue of approximately $5.8 billion. The new ITT will include the divisions that comprise our Motion & Flow segment, except for the Flow Control division, and will include
25
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
Net cash from continuing operations | | | (323 | ) | | | (77 | ) | | | 261 | |
Capital expenditures(f) | | | (85 | ) | | | (127 | ) | | | (92 | ) |
Transformation cash payments | | | 355 | | | | – | | | | – | |
| | | | | | | | | | | | | |
Free cash flow | | | (53 | ) | | | (204 | ) | | | 169 | |
| | | | | | | | | | | | | |
the Industrial Process division currently reported within the Fluid segment. The new ITT is estimated to generate pro forma 2011 revenue of approximately $2.1 billion. Pro forma revenue presented above is without other adjustment.
Known Trends and Uncertainties
The following list represents a summary of trends and uncertainties which could have a significant impact on our results of operations, financial positionand/or cash flows:
| (f) | | |
| n | The global economic environment remainsCapital expenditures in a relative state of uncertainty. Although financial markets have recovered from their lows in 2009, we consider the overall global economic recovery to be a gradual, long-term process. In the U.S., gradual improvements in credit availability, solid consumer spending, moderate job creation and less uncertainty about new regulations and taxes should work to reinforce the economic recovery. However, downside factors such2011 represents capital expenditures as the challenges facing local, state and federal government finance and possible spillover of Europe’s sovereign debt crisis could limit or delay U.S. growth. Within Europe, the sovereign debt crisis has weakened the recovery process and created the potential for significant volatility during 2011. 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 | The FY 2011 U.S. Department of Defense (DoD) budget was submitted to Congress by President Obama, but remains under deliberation. Agencies including the Department of Defense are operating under a continuing resolution. There is a chance this continuing resolution could be extended for the full fiscal year by the new Congress. Federal cabinet departments and agencies operating under a full-year continuing resolution, instead of enacted annual FY 2011 appropriations, are precluded from starting new programmatic initiatives or increasing production levels in ongoing procurement programs, unless they receive specific congressional authorization to reprogram funds. The administration’s spending and programmatic priorities, detailedreported in the DoD budget request and aligned with the 2010 Quadrennial Defense Review, include investmentsStatement of an enduring nature and focus on the future challenges of modernization and transformation of forces and capabilities. Examples include intelligence, surveillance and reconnaissance, network communications, cyber warfare and security, unmanned aircraft and integrated logistics support. Our portfolio of defense solutions, which covers a broad range of air, sea and ground platforms and applications, aligns with the priorities outlined by the DoD. However, uncertainty related to potential changes in appropriations and priorities could materially impact our business. |
|
|
| n | Programs related specifically to the support of ongoing operations in Iraq and Afghanistan face declining revenue streams going forward. This expectation is reflected in our business plans. The degree to which a reduction in these activities accelerates or not remains an area of uncertainty. There has been particular uncertainty around the U.S. administration’s earlier statements and intentions regarding reducing troop level presence in Afghanistan beginning in mid-2011. |
|
|
| n | Ongoing Department of Defense acquisition reform and Secretary Gates’ cost savings initiatives, combined with increased industry competitiveness to win long-term positions on key programs, could add pressure to industry profit margins going forward. |
|
|
| n | A portion of our Fluid segment’s revenue is derived from municipal projects and services. European austerity measures and budget pressures within the U.S. have forced governments to plan for reductions in spending, reevaluate their priorities and postpone wastewater infrastructure projects. These actions have led to a reduction in demand, increased competition and pricing pressures. Our ability or inability to secure project orders in this challenging environment could significantly affect our Fluid segment results. |
|
|
| n | A portion of the Fluid segment’s revenue is derived from U.S. commercial construction spending and residential real estate activity. Commercial construction build rates are expected to remain low during the majority of 2011 as the build versus buy indicator for real estate investors continues to favor investing in existing buildings due to depressed asset prices. Similarly, consensus expectations for residential homebuilding are mixed, reflecting uncertainty around the likelihood and magnitude of a recovery. The continued uncertainty and volatility within these markets could significantly affect the results of our Fluid segment. |
|
|
| n | A portion of our business provides pumps for the general industrial, mining, pulp and paper, chemical and petroleum processing industries. Emerging markets have led in the global industrial project recovery, most significantly within the mining industry as high metal prices have promoted robust demand for mining equipment. However, as long as global economic uncertainty remains it will be |
26
| | |
| | difficult to predict how the trends in industrial project orders may be impacted. |
| | |
| n | A portion of our Motion & Flow segment provides original equipment and after-market products to the automotive industry. Governmental automotive stimulus programs introduced during 2009 encouraged moderate recovery and induced increased levels of inventory restocking during 2010. However, as these programs have reached their conclusion, the potential for unfavorable trends within the automotive industry, particularly within Europe where we have a concentration of our business, continues to exist and could negatively impact our future results. |
|
|
| n | The connectors industry experienced significant declines in both orders and sales during 2009. Recent connectors industry data indicates that the recovering order trend experienced during 2010 has slowed over the past few months, but remains favorable compared to 2009. Due to the significant volatility experienced within this industry, it is difficult to predict how order trends will be impacted during 2011. |
|
|
| n | While projecting future asbestos costs is subject to numerous variables and uncertainties that are inherently difficult to predict, developments in several key factors since the third quarter of 2009 negatively impacted the assumptions used in our estimates. Further deterioration in these factors could have an unfavorable effect on our estimated asbestos costs and negatively affect our results of operations. In 2011, we expect higher net asbestos charges and greater net cash outflows as a result of the effects of inflation and a decline in the amount of available insurance or other recoveries. In addition, it is probable that we will incur additional liabilities for asbestos claims filed beyond our current10-year horizon and such liabilities may be material. See Note 19 “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements for further information. |
|
|
| n | The Company currently anticipates significantCash Flows, less capital expenditures associated with the planned spinoff transaction primarily consistingTransformation of employee-related costs, costs to start up certain stand-alone functions and information technology systems and other one-time transaction related costs, including investment banking, consulting fees.$18. |
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 onForm 10-K and our disclosure under the caption “Forward-Looking Statements” at the end of this section.
DISCUSSION OF FINANCIAL RESULTS
2010
2011 VERSUS 20092010
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | CHANGE | |
| Revenue | | | $ | 10,995 | | | | $ | 10,674 | | | | | 3.0 | % |
| Gross profit | | | | 3,175 | | | | | 3,024 | | | | | 5.0 | % |
Gross margin | | | | 28.9 | % | | | | 28.3 | % | | | | 60 | bp |
| Operating expenses | | | | 2,275 | | | | | 2,130 | | | | | 6.8 | % |
Expense to revenue ratio | | | | 20.7 | % | | | | 20.0 | % | | | | 70 | bp |
| Operating income | | | | 900 | | | | | 894 | | | | | 0.7 | % |
Operating margin | | | | 8.2 | % | | | | 8.4 | % | | | | (20 | )bp |
| Interest and non-operating expenses, net | | | | 82 | | | | | 84 | | | | | (2.4 | )% |
| Income tax expense | | | | 164 | | | | | 169 | | | | | (3.0 | )% |
Effective tax rate | | | | 20.0 | % | | | | 20.9 | % | | | | (90 | )bp |
| Income from continuing operations | | | | 654 | | | | | 641 | | | | | 2.0 | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | CHANGE |
Revenue | | | $ | 2,119 | | | | $ | 1,908 | | | | | 11.1 | % |
Gross profit | | | | 655 | | | | | 607 | | | | | 7.9 | % |
Gross margin | | | | 30.9 | % | | | | 31.8 | % | | | | (90 | )bp |
Operating expenses | | | | 902 | | | | | 791 | | | | | 14.0 | % |
Operating expense to revenue ratio | | | | 42.6 | % | | | | 41.5 | % | | | | 110 | bp |
Operating loss | | | | (247 | ) | | | | (184 | ) | | | | 34.2 | % |
Operating margin | | | | (11.7 | )% | | | | (9.6 | )% | | | | (210 | )bp |
Interest and non-operating expenses, net | | | | 71 | | | | | 92 | | | | | (22.8 | )% |
Income tax expense (benefit) | | | | 260 | | | | | (144 | ) | | | | (280.6 | )% |
Loss from continuing operations | | | | (578 | ) | | | | (132 | ) | | | | 337.9 | % |
Income from discontinued operations, net of tax | | | | 448 | | | | | 936 | | | | | (52.1 | )% |
Net (loss) income | | | $ | (130 | ) | | | $ | 804 | | | | | (116.2 | )% |
REVENUE
Our 2010 revenue was marked byresults for 2011 reflect growth in emerging markets of 19.1% and in our core markets, such as oil & gas, mining, transportation and aerospace. Our results also benefited from strategic acquisitions as well as a level ofthe continued economic recovery within the North American region, increasing production of commercial aircraft, and transportation share gains combined with a majorityrecovery in global automotive demand. During 2011, we secured positions on multiple key platforms and developed strategic account agreements with a number of significant customers, including six significant Industrial Process emerging
31
market wins each in excess of $2, our commercial businesses, most notably the businesses that comprise our Motion & Flow segment. Revenue within our commercial businesses benefited during 2010 fromfirst major Korean medical connector order and stocking delays caused by the uncertainty manifested throughout 2009. Although revenue has not yet reached the levels achieved during 2008, we believe that our competitive position and portfolio of highly engineered products will continue to be strengthened by a gradual economic improvement. positions on two Embraer Aerospace programs.
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | CHANGE |
Industrial Process | | | $ | 767 | | | | $ | 694 | | | | | 10.5 | % |
Motion Technologies | | | | 634 | | | | | 548 | | | | | 15.7 | % |
Interconnect Solutions | | | | 418 | | | | | 413 | | | | | 1.2 | % |
Control Technologies | | | | 318 | | | | | 275 | | | | | 15.6 | % |
Eliminations | | | | (18 | ) | | | | (22 | ) | | | | (18.2 | )% |
Total | | | $ | 2,119 | | | | $ | 1,908 | | | | | 11.1 | % |
The following table illustrates revenue generated with a specific country or region for the years ended December 31, 2011 and 2010, and 2009 revenue of our business segments. See below for further discussion ofyear-over-year revenue activity at the segment level.corresponding percentage change.
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | %
Change |
United States | | | $ | 792 | | | | $ | 742 | | | | | 6.7 | % |
Germany | | | | 233 | | | | | 205 | | | | | 13.7 | % |
France | | | | 127 | | | | | 117 | | | | | 8.5 | % |
Other developed markets | | | | 368 | | | | | 341 | | | | | 7.9 | % |
Total developed markets | | | | 1,520 | | | | | 1,405 | | | | | 8.2 | % |
South and Central America(a) | | | | 179 | | | | | 139 | | | | | 28.8 | % |
Eastern Europe and Russia | | | | 107 | | | | | 68 | | | | | 57.4 | % |
Middle East and Africa | | | | 100 | | | | | 101 | | | | | (1.0 | )% |
China and Hong Kong | | | | 119 | | | | | 115 | | | | | 3.5 | % |
Other emerging markets | | | | 94 | | | | | 80 | | | | | 17.5 | % |
Total emerging markets | | | | 599 | | | | | 503 | | | | | 19.1 | % |
Total Revenue | | | $ | 2,119 | | | | $ | 1,908 | | | | | 11.1 | % |
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | CHANGE | |
| Defense | | | $ | 5,897 | | | | $ | 6,067 | | | | | (2.8 | )% |
| Fluid | | | | 3,670 | | | | | 3,363 | | | | | 9.1 | % |
| Motion & Flow | | | | 1,441 | | | | | 1,253 | | | | | 15.0 | % |
| Eliminations | | | | (13 | ) | | | | (9 | ) | | | | — | |
| | | | | | | | | | | | | | | | |
| Total | | | $ | 10,995 | | | | $ | 10,674 | | | | | 3.0 | % |
| | | | | | | | | | | | | | | | |
27
The following table illustrates the impact from organic growth, recent acquisitions, and fluctuations in foreign currency, in relation to consolidated revenue during 2010.
2011. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Industrial Process | | Motion
Technologies | | Interconnect
Solutions | | Control
Technologies | | Eliminations | | Total ITT | | %
Change |
2010 Revenue | | | $ | 694 | | | | $ | 548 | | | | $ | 413 | | | | $ | 275 | | | | $ | (22 | ) | | | $ | 1,908 | | | | | | |
Organic growth | | | | 61 | | | | | 59 | | | | | (1 | ) | | | | 41 | | | | | 4 | | | | | 164 | | | | | 8.6 | % |
Acquisitions/(divestitures), net | | | | 7 | | | | | – | | | | | (2 | ) | | | | – | | | | | – | | | | | 5 | | | | | 0.3 | % |
Foreign currency translation | | | | 5 | | | | | 27 | | | | | 8 | | | | | 2 | | | | | – | | | | | 42 | | | | | 2.2 | % |
Total change in revenue | | | | 73 | | | | | 86 | | | | | 5 | | | | | 43 | | | | | 4 | | | | | 211 | | | | | 11.1 | % |
2011 Revenue | | | $ | 767 | | | | $ | 634 | | | | $ | 418 | | | | $ | 318 | | | | $ | (18 | ) | | | $ | 2,119 | | | | | | |
| | | | | | | | | | | |
| | | | $ CHANGE | | | | % CHANGE | |
| 2009 Revenue | | | $ | 10,674 | | | | | | |
| Organic growth | | | | 80 | | | | | 0.8 | % |
| Acquisitions/(divestitures), net | | | | 270 | | | | | 2.5 | % |
| Foreign currency translation | | | | (29 | ) | | | | (0.3 | )% |
| | | | | | | | | | | |
| Total change in revenue | | | | 321 | | | | | 3.0 | % |
| | | | | | | | | | | |
| 2010 Revenue | | | $ | 10,995 | | | | | | |
| | | | | | | | | | | |
Defense & Information SolutionsIndustrial Process
The 2010Industrial Process segment generated revenue generated bygrowth of 10.5% reflecting growth in aftermarket (pump parts and service) of approximately 17% and pump units of approximately 8%. This includes growth in our Defense segmentNorth American business of approximately 7% reflecting positive results across all industrial markets. The chemical market in the U.S. and Canada was $5,897, reflecting a decline of $170 or 2.8% from the segment’s 2009 revenue of $6,067. These results were driven by a decline in product revenue of 4.9%, or $186, which was mitigated by consistent results from service revenue programs. The following table provides total revenue andyear-over-year change by Defense segment division.
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | CHANGE | |
| Electronic Systems | | | $ | 2,425 | | | | $ | 2,629 | | | | | (7.8 | )% |
| Geospatial Systems | | | | 1,188 | | | | | 1,172 | | | | | 1.4 | % |
| Information Systems | | | | 2,304 | | | | | 2,292 | | | | | 0.5 | % |
| Eliminations | | | | (20 | ) | | | | (26 | ) | | | | — | |
| | | | | | | | | | | | | | | | |
| Defense segment revenue | | | $ | 5,897 | | | | $ | 6,067 | | | | | (2.8 | )% |
| | | | | | | | | | | | | | | | |
The 2010 product revenue results were impacted by volume declines in surge-related equipment, specifically CREW 2.1 (Counter RCIED Electronic Warfare) electronic jammers and U.S. Single Channel Ground and Airborne Radio Systems (SINCGARS) relatedmajor contributor to the urgent and compelling needs in past years. Declines in activity related to these two programs resulted in an approximate $608 decrease in revenue. However, significant strength in the majority of our other programs that support the U.S. Department of Defense and other government agencies, most notably special purpose electronic jammer equipment and composite structuresgrowth as well as an increase in the volume of night vision goggles sold to U.S. allies, partially mitigated the significant decline in the CREW 2.1 and SINCGARS programs. Order activity related to CREW 2.1 and U.S. SINCGARS programs began receding in 2009chemical companies increased output due to reduced U.S. troop deployment and programmatic timing. However, during 2010 we received key awards to develop the next generationlower cost North American natural gas feedstock. Growth in international pump units of battlefield improvised explosive device detection, such as CREW 3.2 and 3.3.
The 2010 service revenue was relatively flat as compared to the prior year. Logistical service, air-traffic management and international security program activities generated growth of approximately 8.4% during 2010. The strength14% reflects increased activity in the logistical service portion of our business were assisted by activity under several key facilities management awards received in the second half of 2009 and during 2010, including Kuwait, AfghanistanSouth America and the Logistics Civil Augmentation Program (LOGCAP), among others. However, growth from these programs wasMiddle East, primarily within the oil & gas market, partially offset by a decline in our involvement in the Data & Analysis Center for Software (DACS) program.
As noted in the “Executive Summary” section, during 2010 we secured positions on a number of significant U.S. Government service-related programs, including the FAA Systems Engineering 2020 (SE2020) support, the NASA Space Communications Network Services (SCNS) and the Kuwait and Afghanistan Base Operations & Security Support Services. These contracts have an estimated total potential value approximately $4.9 billion with all options exercised. See below for further information:
SE2020 – this contract has been awarded by the FAA to lead a team of aviation industry companies to support the development of advanced concepts involving the most challenging issues facing the FAA’s Next Generation Air Transportation System initiative to modernize the U.S. national airspace system. This contract has a ceiling value with all options exercised of $1.4 billion, with a five-year base period and five one-year options.
Kuwait Facilities Operations – this contract has been awarded by the U.S. Army Rock Island Contracting Center to provide comprehensive support services for all U.S. Army facilities in Kuwait. This contract has an estimated potential worth with all options exercised of $1.4 billion, with a one-year base period and four one-year options.
SCNS – this contract was originally awarded to ITT in October 2008 to support NASA space and near-Earth networks that provide most of the communications and tracking services for a wide range of Earth-orbiting spacecraft, but commencement of the contract work was delayed due to a number of protests filed by the incumbent contractor. These protests were cleared during the fourth quarter of 2010. The contract has a base performance period of five years and three months, with twoone-year option periods, and a maximum estimated potential value with all options exercised of $1.26 billion.
Afghanistan National Security Forces Facilities Support – this award actual pertains to two individual contracts from the U.S. Army Corps of Engineers Middle East District to provide facilities operations, maintenance and training services for the Afghanistan National Security Forces in Northern Afghanistan and Southern Afghanistan. Each award is for a one-year base period with options for four additional years. The contract has
28
an estimated potential value of $450 million for Northern Afghanistan and $350 million for Southern Afghanistan, with all options exercised.
Fluid Technology
The 2010 Fluid segment revenue of $3,670 grew 9.1%, including a $271 benefit from recent acquisitions, primarily Godwin Pumps and Nova Analytics. These acquisitions expanded our product offerings in the on-demand dewatering pump rental and analytical instrumentation markets. The revenue generated by these two businesses during 2010 exceeded our initial expectations. In 2011 we expect continued growth from these businesses due to increased leverage from our deep customer base and distribution channels.
The following table provides total organic revenue andyear-over-year organic revenue growth by division, reconciling to total segment revenue.
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | ORGANIC
| |
| | | | 2010 | | | | 2009 | | | | GROWTH | |
| Water & Wastewater | | | $ | 1,682 | | | | $ | 1,657 | | | | | 1.5 | % |
| Residential & Commercial Water | | | | 1,105 | | | | | 1,062 | | | | | 4.0 | % |
| Industrial Process | | | | 680 | | | | | 719 | | | | | (5.4 | )% |
| | | | | | | | | | | | | | | | |
| Fluid organic revenue | | | $ | 3,467 | | | | $ | 3,438 | | | | | 0.8 | % |
| | | | | | | | | | | | | | | | |
| Impact from acquisitions | | | | 271 | | | | | — | | | | | | |
| Impact from foreign currency | | | | 3 | | | | | — | | | | | | |
| Eliminations | | | | (71 | ) | | | | (75 | ) | | | | | |
| | | | | | | | | | | | | | | | |
| Fluid segment revenue | | | $ | 3,670 | | | | $ | 3,363 | | | | | | |
| | | | | | | | | | | | | | | | |
Organic revenue growth of 1.5% derived from our Water & Wastewater division reflects mixed regional results. Organic revenue derived within the U.S. and Canada increased approximately 9% compared to 2009, driven primarily by increased volume of transport equipment. Organic revenue within the Asia Pacific region increased approximately 19% due to positive results from transport and dewatering equipment. Growth in these regions was partially offset by the continued challenging economic and competitive pricing conditions within Europe that impacted the majority of our products lines, resulting in an approximate 6% revenue decline.
The organic revenue growth of 4.0% generated by our Residential & Commercial Water division was driven by growth in residential building services equipment and light industrial equipment. We attribute these positive results to the slow but continuing restocking of inventory and gradual recovery within the residential and commercial markets. Our significant installed base of equipment also provided demand stability.
Organic revenue from
oura large 2010 project in Africa. The Industrial Process
division declined 5.4% during 2010 reflecting declines in large industrial projects, partially offset byrevenue results include 21% growth
from after-market pumps and parts volume due to improved customer facility utilization. The decline in large industrial project revenue was consistent with the significant reduction in long-lead industrial project orders experienced during 2009. Delayed starts for received oil and gas orders also contributed to the overall decline. Orders have improved 11.8% or $76 from 2009, resulting primarily from after-market pumps and parts volume, as well as demand in emerging markets
relatedand also reflect the benefits from product development investments in more complex and specialized equipment.Orders increased during 2011 by 27.5% to $917 in both baseline and project business stemming from expanded capabilities focused on the oil and& gas and mining projects.markets as well
Motion & Flow Control
The Motion & Flow segment generated revenue of $1,441 during 2010, reflectingas expanded presence in growth of 15.0% overregions, including acquisitions. Fourth quarter 2011 orders were $235 or 30.5% higher than the prior year, primarily driven by improvedthe North American chemical market conditions withinand emerging market oil & gas projects and mining. Backlog as of December 31, 2011 was $489, representing a 54.1% increase over the majority of markets served, as well as market share growth from new product releasesprior year, and key platform wins. Unfavorable foreign currency fluctuations negatively impacted revenue growth by $31 or 2.5% in 2010. The following table provides total revenue andan all-time high for Industrial Process.
year-over-year change by Motion & Flow segment division.Technologies
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | CHANGE | |
| Motion Technologies | | | $ | 548 | | | | $ | 491 | | | | | 11.6 | % |
| Interconnect Solutions | | | | 413 | | | | | 341 | | | | | 21.1 | % |
| Control Technologies | | | | 275 | | | | | 243 | | | | | 13.2 | % |
| Flow Control | | | | 211 | | | | | 184 | | | | | 14.7 | % |
| Eliminations | | | | (6 | ) | | | | (6 | ) | | | | — | |
| | | | | | | | | | | | | | | | |
| Motion & Flow segment revenue | | | $ | 1,441 | | | | $ | 1,253 | | | | | 15.0 | % |
| | | | | | | | | | | | | | | | |
The Motion Technologies divisionsegment generated revenue growth of 11.6%15.7% during 2010, including negative impacts from unfavorable foreign currency fluctuations of 5.1%. The growth was2011, primarily driven by Europeana 12% or $54 increase in braking equipment volume, primarily to OEM. The increase in OEM pads stems from the significant automotive stimulus programs in place during the latter part of 2009 that bolstered demand in our primary geographic markets. In addition, key platform wins obtained duringover the past 18 months within Europeseveral years, which included new positions with European, North American and other regionsChinese producers. Sales of shock absorber equipment increased our share6%, or $6, however results were negatively impacted by the Chinese government’s decision to slow the development of the China rail infrastructure expansion program in the original equipment brake pad market.second half of 2011. Motion Technologies’ 2011 revenue results included 33% growth in emerging markets driven by automotive and rail
The
32
activity in China and a combined growth of 20% within the United States and Canada.
Interconnect Solutions division
The ICS segment generated revenue growth of 21.1%1.2% during 2010, driven2011, as strength in the aerospace, transportation, oil & gas, and defense markets were offset by an approximate 20% revenue decline in the overall strengthening and recovery within the majority of markets served. During 2010, we also received key platform wins on Smartphone devices that increased our sharecommunications market. The year-over-year decrease within the communications market.
market equipment reflects a decline in sales primarily due to lower production rates at a major smartphone customer and share declines in a specific communications application. Revenue growth within the aerospace market was approximately 7%, due to increased Boeing production and regional jet OEM demand. Revenue growth within the transportation market was approximately 10%, driven by our recently launched electronic vehicle-related connector products and construction and agriculture equipment platform wins in Europe and China. Revenue growth within the oil & gas market was approximately 9%, driven by increased demand in the Middle East and Latin America regions. Revenue growth in the defense market was approximately 5%, driven by radar and communication equipment platform wins.Control Technologies
The Control Technologies divisionsegment generated revenue growth of 13.2%15.6% during 2010, reflecting overall strengthening of2011, with growth in the general industrial, aerospace and industrial markets, partially offset by a 10% decline in defense markets servedrevenues. Revenue within the aerospace market grew approximately $19, or 12% driven by this division2011 Boeing and Airbus production increases. Industrial market revenues grew approximately $14 or 13%, primarily driven by increased demand for oil & gas and energy products, such as compared to prior year.
The Flow Control division generatedour Neo-Dyne switches and Conoflow regulators. Chinese rail infrastructure activities provided revenue growth of 14.7% during 2010, reflecting gains$10 related to a first-class seats program that is not expected to be meaningful in the food and beverage
29
2012.
market from new product releases. Our products in the marine markets benefited from a major re-stocking in distribution. Specialty industrial products growth reflected an increased presence in emerging markets.
GROSS PROFIT | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | CHANGE |
Industrial Process | | | $ | 244 | | | | $ | 216 | | | | | 13.0 | % |
Motion Technologies | | | | 157 | | | | | 153 | | | | | 2.6 | % |
Interconnect Solutions | | | | 134 | | | | | 142 | | | | | (5.6 | )% |
Control Technologies | | | | 119 | | | | | 95 | | | | | 25.3 | % |
Corporate and Other | | | | 1 | | | | | 1 | | | | | – | |
Total gross profit | | | $ | 655 | | | | $ | 607 | | | | | 7.9 | % |
Gross margin: | | | | | | | | | | | | | | | |
Industrial Process | | | | 31.8 | % | | | | 31.1 | % | | | | 70 | bp |
Motion Technologies | | | | 24.8 | % | | | | 27.9 | % | | | | (310 | )bp |
Interconnect Solutions | | | | 32.1 | % | | | | 34.4 | % | | | | (230 | )bp |
Control Technologies | | | | 37.4 | % | | | | 34.5 | % | | | | 290 | bp |
GrossIndustrial Process gross profit forincreased $28 or 13.0% during 2011 due to increased sales volume and net cost reductions from material sourcing initiatives. These items drove an increase to gross margin of 70 basis points over the prior year to 31.8%.
Motion Technologies gross profit increased $4 or 2.6% during 2011 from increased sales volume, however gross margin declined 310 basis points to 24.8%. The decline in gross margin was due to increasing material costs and an unfavorable mix shift attributable to recent OEM share gains between 2010 was $3,175,and 2011.
Interconnect Solutions gross profit decreased $8 or 5.6%, representing a $151 increase, or 5.0% from 2009, that includes contributions of approximately $102 from our 2010 acquisitions. Organic revenue growth of $80, driven by increased volume, was more than offset by230 basis point decline, during 2011 due to an unfavorable change in Defense segment product sales mix, and pricing that contributed to an overall decline inpartially offset by favorable product pricing.
Control Technologies gross profit of approximately $131. However, the overall impact from price reductions was mitigatedincreased $24 or 25.3% during 2011 due to increased sales volume, improved pricing, favorable mix, and operational performance improvements related to recent footprint consolidations and leadership changes. These favorable items were partially offset by significant net savings, which more than offset risingincreased labor, material and labor costs, generated by productivity and other cost-reduction initiatives. See further discussion on the 2010 net savings generated by our business segment within the “Operating Income” discussion below. The following table illustrates the 2010 and 2009 gross profit results of our business segments, includingoverhead costs. These items drove an increase to gross margin results.
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | CHANGE | |
| Defense | | | $ | 1,367 | | | | $ | 1,430 | | | | | (4.4 | )% |
| Fluid | | | | 1,345 | | | | | 1,196 | | | | | 12.5 | % |
| Motion & Flow | | | | 461 | | | | | 395 | | | | | 16.7 | % |
| Corporate and Other | | | | 2 | | | | | 3 | | | | | — | |
| | | | | | | | | | | | | | | | |
| Total gross profit | | | $ | 3,175 | | | | $ | 3,024 | | | | | 5.0 | % |
| Gross margin: | | | | 28.9 | % | | | | 28.3 | % | | | | 60 | bp |
Defense | | | | 23.2 | % | | | | 23.6 | % | | | | (40 | )bp |
Fluid | | | | 36.6 | % | | | | 35.6 | % | | | | 100 | bp |
Motion & Flow | | | | 32.0 | % | | | | 31.5 | % | | | | 50 | bp |
| | | | | | | | | | | | | | | | |
of 290 basis points over the prior year to 37.4%.OPERATING EXPENSES
Operating expenses increased 6.8%14.0% or $111 during 20102011 to $2,275,$902, primarily attributable to an increasea $396 of costs incurred to complete the Distribution of Exelis and Xylem, including debt extinguishment costs of $297, partially offset by a $285 reduction in net asbestos-related costs resulting from unfavorable trends in certain key assumptions that are reviewed during our annual assessment of the asbestos liability.costs. The following table provides further information by expense type, as well as a breakdown of operating expense by segment.
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | CHANGE |
Sales and marketing expenses | | | $ | 167 | | | | $ | 166 | | | | | 0.6 | % |
General and administrative expenses | | | | 168 | | | | | 176 | | | | | (4.5 | )% |
Research and development expenses | | | | 66 | | | | | 61 | | | | | 8.2 | % |
Restructuring and asset impairment charges, net | | | | 5 | | | | | 3 | | | | | 66.7 | % |
Asbestos-related costs, net | | | | 100 | | | | | 385 | | | | | (74.0 | )% |
Transformation costs | | | | 396 | | | | | – | | | | | – | |
Total operating expenses | | | $ | 902 | | | | $ | 791 | | | | | 14.0 | % |
By Segment: | | | | | | | | | | | | | | | |
Industrial Process | | | $ | 153 | | | | $ | 137 | | | | | 11.7 | % |
Motion Technologies | | | | 72 | | | | | 68 | | | | | 5.9 | % |
Interconnect Solutions | | | | 96 | | | | | 105 | | | | | (8.6 | )% |
Control Technologies | | | | 64 | | | | | 66 | | | | | (3.0 | )% |
Corporate & Other | | | | 517 | | | | | 415 | | | | | 24.6 | % |
Sales and marketing expenses were relatively flat year-over-year; however, due to our value-based commercial excellence (VBCE) initiative these costs as a percentage of
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | CHANGE | |
| Selling, general and administrative expenses | | | $ | 1,584 | | | | $ | 1,555 | | | | | 1.9 | % |
| Research and development expenses | | | | 253 | | | | | 258 | | | | | (1.9 | )% |
| Asbestos-related costs, net | | | | 385 | | | | | 238 | | | | | 61.8 | % |
| Restructuring and asset impairment charges, net | | | | 53 | | | | | 79 | | | | | (32.9 | )% |
| | | | | | | | | | | | | | | | |
| Total | | | $ | 2,275 | | | | $ | 2,130 | | | | | 6.8 | % |
| By Segment: | | | | | | | | | | | | | | | |
| Defense | | | $ | 615 | | | | $ | 669 | | | | | (8.1 | )% |
| Fluid | | | | 866 | | | | | 804 | | | | | 7.7 | % |
| Motion & Flow | | | | 282 | | | | | 277 | | | | | 1.8 | % |
| Corporate & Other | | | | 512 | | | | | 380 | | | | | 34.7 | % |
| | | | | | | | | | | | | | | | |
33
Selling, General & Administrative Expenses (SG&A)
SGrevenue declined 130 basis points at the consolidated level from 9.2% in 2010 to 7.9% in 2011, with similar basis point declines at each segment. VBCE is a continuous improvement process which our businesses use to strategically price our products and services, develop our value propositions, and assist our customers to solve their toughest business challenges.
G&A expenses incurred within our Fluid segment increased $75decreased $8 or 10.7%4.5% during 2010, primarily reflecting2011, as additional postretirement costs of $68 related to our newly acquired Godwin and Nova businesses.
SG&A expenses incurred within our Motion & Flow segment increased $29 or 15.3% during 2010, primarily reflecting the impact from an increase in sales volumes, as well as additional spending on various strategic investments.
The incremental SG&A expenses incurred within our commercial segments$8 were partially offset by a $59, or 11.4% decrease within our Defense segment. This decline includes$10 cancellation of a $24 decrease in sellingbond guarantee and other general expenses resulting primarily froma $4 gain on the headcount reductions and the decline in 2010 revenue, as well as a $22 benefit from reduced amortization expense related to intangible assets acquired in connection with our 2007 purchasesale of EDO Corporation.
Research and Development Expenses (R&D)
an ICS’ product line.R&D spending was relatively flatyear-over-year. R&D spending within our Defense segment decreased by $23 or 16.5% compared to 2009, related to the completion of certain R&D projects for integrated electronic warfare systems and other radio frequency technologies. R&D spendingcosts increased within our Fluid segment by $10 or 16.1%, primarily due to our newly acquired Nova business.
30
Asbestos-Related Costs, Net
During 2010, we recognized net asbestos related costs of $385, reflecting an increase of $1478.2% over the prior year primarily reflectingdue to slightly higher spending on new product developments in targeted growth markets at each segment. As a percentage of revenue, R&D costs declined to 3.1% in 2011 from 3.2% in 2010. We anticipate our investments in future R&D activities will moderately increase from current spending levels to ensure a continuing flow of innovative, high quality products and maintain our competitive position in the impactmarkets we serve.
Asbestos-Related Costs, Net
ITT, including its subsidiary Goulds Pumps, Inc., has been joined as a defendant with numerous other companies in product liability lawsuits alleging personal injury due to asbestos exposure. As of our annual updateDecember 31, 2011 and 2010, there were 105,486 and 103,575 open claims pending against ITT filed in various state and federal courts alleging injury as a result of exposure to the underlying assumptions used in our liability and asset estimates. As part of the annual update, the underlying assumptions used to estimate asbestos liabilities and potential recoveries are estimated based on our experience since our last detailed review, the appropriate reference period of years of experience used in determining each assumption is reassessed, and our expectations regarding future conditions are evaluated.
Based on the results of this annual update in 2010, we increased our estimatedasbestos. We record an undiscounted asbestos liability, including legal fees, by $691, reflectingfor 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. We also record a corresponding asbestos-related asset that represents our best estimate of probable recoveries from insurers and other responsible parties for the estimated asbestos liabilities.
The Company records a net asbestos charge each quarter to maintain a rolling 10 year forecast period (referred to as the Provision). In addition, in the third quarter of each year, we conduct an annual study to review and update the underlying assumptions used in our asbestos liability and related asset estimates (referred to as Remeasurement). During the annual study, the underlying assumptions are updated based on our actual experience since our last annual study, a reassessment of the appropriate reference period of years of experience used in determining each assumption and our expectations regarding future conditions, including inflation. For the years ended December 31, 2011 and 2010, the income statement effects to continuing operations from asbestos charges consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2011 | | December 31, 2010 |
| | | Liability | | Asset | | Net | | Liability | | Asset | | Net |
Provision | | | $ | 85 | | | | $ | 26 | | | | $ | 59 | | | | $ | 67 | | | | $ | 12 | | | | $ | 55 | |
Remeasurement | | | | 38 | | | | | (3 | ) | | | | 41 | | | | | 524 | | | | | 194 | | | | | 330 | |
Asbestos-related costs before tax | | | | 123 | | | | | 23 | | | | | 100 | | | | | 591 | | | | | 206 | | | | | 385 | |
Tax benefit | | | | | | | | | | | | | | (37 | ) | | | | | | | | | | | | | | (144 | ) |
Asbestos-related costs, net of tax | | | | | | | | | | | | | $ | 63 | | | | | | | | | | | | | | $ | 241 | |
Charges included in the table above reflect undiscounted 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, including legal fees. The decrease in our Remeasurement expense from 2010 to 2011 reflects the impact of our annual update to the underlying assumptions used to measure our asbestos liabilities and related assets and was a result of several developments including a reduction in the assumed rate of increase in future average settlement costs and an expectation of lower defense costs relative to
indemnities paid. These favorable factors were offset in part by increased activity in several higher-cost jurisdictions, increasing the number of cases expected to be adjudicated. The 2010 Remeasurement reflects an assumed increase in settlement costs and significantly increased activity in several higher-cost jurisdictions, increasing the number of cases to be adjudicated and the expected legal costs to defend the additional cases.
See Note 20, “Commitments & Contingencies,” to the Consolidated Financial Statements for further information on our asbestos-related liability and assets.
34
Transformation Costs
During 2011, we recognized expenses of $639 in connection with the Transformation. We have presented $396 of the Transformation costs within income from continuing operations and $240 within income from discontinued operations. The components of Transformation costs incurred during 2011 and included within income from continuing operations are presented below.
| | | | | |
Loss on extinguishment of debt(a) | | | $ | 297 | |
Non-cash asset impairment(b) | | | | 57 | |
Employee retention and other compensation costs(c) | | | | 37 | |
IT costs | | | | – | |
Lease termination and other real estate costs | | | | 4 | |
Other costs | | | | 1 | |
Transformation costs before income tax expense | | | | 396 | |
| (a) | The $297 loss on extinguishment of debt represents the costs to extinguish substantially all outstanding debt prior to the Distribution. The activities associated with the extinguishment of debt are described in Note 16. “Debt,” to the Consolidated Financial Statements. |
| (b) | Includes $55 non-cash impairment charge related to a decision to discontinue development of an information technology consolidation initiative. |
| (c) | Includes $17 of compensation costs recognized in connection with the retirement of Steven R. Loranger, our Former Chairman, President and Chief Executive Officer in October 2011. |
The Company expects to incur additional cash and non-cash Transformation costs during 2012 of approximately $15 to $20, net of tax, primarily consisting of additional advisory fees. The Company anticipates net after-tax cash outflows during 2012 of approximately $30 to $40, primarily related to advisory fees and employee-related costs.
OPERATING LOSS
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | CHANGE |
Industrial Process | | | $ | 91 | | | | $ | 79 | | | | | 15.2 | % |
Motion Technologies | | | | 85 | | | | | 85 | | | | | – | |
Interconnect Solutions | | | | 38 | | | | | 37 | | | | | 2.7 | % |
Control Technologies | | | | 55 | | | | | 29 | | | | | 89.7 | % |
Segment operating income | | | | 269 | | | | | 230 | | | | | 17.0 | % |
Asbestos-related costs, net | | | | (100 | ) | | | | (385 | ) | | | | (74.0 | )% |
Transformation costs | | | | (396 | ) | | | | – | | | | | – | |
Other corporate costs | | | | (20 | ) | | | | (29 | ) | | | | (31.0 | )% |
Total operating loss | | | $ | (247 | ) | | | $ | (184 | ) | | | | 34.2 | % |
Operating margin: | | | | | | | | | | | | | | | |
Consolidated operating margin | | | | (11.7 | )% | | | | (9.6 | )% | | | | (210 | )bp |
Segment operating margin | | | | 12.7 | % | | | | 12.1 | % | | | | 60 | bp |
Industrial Process | | | | 11.9 | % | | | | 11.4 | % | | | | 50 | bp |
Motion Technologies | | | | 13.4 | % | | | | 15.5 | % | | | | (210 | )bp |
Interconnect Solutions | | | | 9.1 | % | | | | 9.0 | % | | | | 10 | bp |
Control Technologies | | | | 17.3 | % | | | | 10.5 | % | | | | 680 | bp |
Industrial Process operating income increased $12 or 15.2% during 2011 due to increased sales volume and net cost reductions from productivity, sourcing and Value Based Lean Six Sigma initiatives. The favorability of these items was partially offset by competitive project pricing levels, increased bad debt expense of $5 and Transformation costs of $3. These items resulted in a net increase to operating margin of 50 basis points over the prior year.
Motion Technologies operating income was flat at $85 for 2011. Although Motion Technologies generated revenue growth of 15.7% during 2011, this growth was volume driven from the lower margin OEM equipment associated with key wins on numerous automotive platforms in the last two years. This dynamic contributed to an overall 210 basis point decline in operating margin, as did rising material costs and increased year-over-year severance costs. The overall impact of these items was offset partially by strategic sourcing initiatives.
Interconnect Solutions operating income increased $1 or 2.7% during 2011, as an unfavorable change in product sales mix and a $3 restructuring charge were offset by declines in warranty and compensation costs and a $4 gain from the sale of a product line.
Control Technologies operating income increased $26 or 89.7% during 2011 due to increased sales volume, improved pricing and favorable mix combined with operational improvements resulting from recent footprint actions. These results also include a favorable comparison to various 2010 inventory adjustments totaling $5. These favorable items were partially offset by increased labor, material and overhead costs. These items drove an increase to operating margin of 680 basis points over the prior year to 17.3%.
Corporate costs, excluding net asbestos-related costs and Transformation costs, decreased $9 during 2011, primarily due to a $10 gain from the cancellation of a bond guarantee, partially offset by a $3 unfavorable movement in the value of corporate owned life insurance policies.
INTEREST AND NON-OPERATING EXPENSES, NET
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | CHANGE |
Interest expense | | | $ | 76 | | | | $ | 97 | | | | | (21.6 | )% |
Interest income | | | | 4 | | | | | 11 | | | | | (63.6 | )% |
Miscellaneous (income) expense, net | | | | (1 | ) | | | | 6 | | | | | (116.7 | )% |
Total interest and non-operating expenses, net | | | | 71 | | | | | 92 | | | | | (22.8 | )% |
Total interest and non-operating expense, net decreased $21, or 22.8%, during 2011 due to the extinguishment of $1.25 billion of long-term debt in October 2011. We expect
35
that our future interest expense will be significantly lower than our historical interest costs due to the extinguishment of $1.25 billion of debt in October 2011. In the future, we expect our interest expenses will be aligned with borrowing levels commensurate with the size of the Company following the distribution of Exelis and Xylem. See Note 16, “Debt” to the Consolidated Financial Statements for further information regarding the debt extinguishment.
INCOME TAX EXPENSE (BENEFIT)
During the year ended December 31, 2011, we recognized income tax expense of $260 on a loss from continuing operations before income taxes of $318, an effective rate of (81.8)%, as compared to an income tax benefit of $144 on a loss from continuing operations before income taxes of $276, an effective rate of 52.2%, in the prior year.
The effective tax rate recorded in 2011 differs from US federal statutory rate of 35% due to several items. First, in 2011, we recorded a valuation allowance of $340 for US federal and state deferred tax assets as it became more likely than not that these deferred tax assets would not be realized as a result of the Distribution. The valuation allowance decreased the effective tax rate benefit by 106.7%. As of December 31, 2011, the Company was in a cumulative three-year loss position, which was considered a significant source of negative evidence indicating the need for a valuation allowance on our net deferred tax assets. Since the Company was in a three-year cumulative loss position at the end of 2011, management determined that the size and frequency of the losses from continuing operations in recent years and the uncertainty associated with projecting future taxable income supported the
conclusion that a valuation allowance was required to reduce its deferred tax assets.
Second, the Company recorded a $31 tax benefit in 2011 from an increase in state deferred tax assets which resulted in a 9.7% increase in the effective tax rate benefit. As a consequence of the Distribution, certain state deferred tax assets were re-valued based on enacted tax rates using different state apportionment factors, increasing the future state tax benefit. Third, in 2011 the Company also recorded $69 of tax expense for a portion of undistributed foreign earnings that were previously considered to be indefinitely re-invested which decreased the effective tax rate benefit by 21.8%. As a result of the Distribution and its impacts on the Company’s expected liquidity, investment opportunities and other factors, the Company determined that certain earnings generated in Luxemburg, Japan, and South Korea may be distributed in the future. As a result of the change in intent, the Company recorded an additional tax expense on these unremitted earnings. Such undistributed foreign earnings have not been remitted to the U.S. and the timing of such remittance if any is currently under evaluation. The Company recorded a tax benefit of $23 for various tax credits, resulting in a tax rate benefit of 7.2%.
The effective tax rate in 2010 differs from the US federal statutory tax rate due to the release of a $36 valuation allowance on a capital loss carry-forward that increased the 2010 effective tax rate by 12.9%, related to the sale of CAS and $35 of tax credits which increased the effective tax rate by 12.6%. These items were offset in part by the writeoff of a deferred tax asset as a result of the Parent Protection Act of 2010.
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
On October 31, 2011, the Company completed the Distribution of Exelis and Xylem. As a result, the operating results of Exelis and Xylem through the date of the Distribution have been classified in the consolidated financial statements as discontinued operations for all periods presented. The tables included below provide the operating results of discontinued operations through the date of disposal or distribution.
| | | | | | | | | | | | | | | | | | | | |
| Year Ended 2011 | | Exelis | | Xylem | | Other(b) | | Total |
Revenue | | | $ | 4,916 | | | | $ | 3,107 | | | | $ | – | | | | $ | 8,023 | |
Transformation costs | | | | 31 | | | | | 75 | | | | | 134 | | | | | 240 | |
Earnings (loss) before income taxes | | | | 473 | | | | | 321 | | | | | (108 | ) | | | | 686 | |
Income tax expense (benefit) | | | | 194 | | | | | 70 | | | | | (26 | ) | | | | 238 | |
Income (loss) from discontinued operations | | | | 279 | | | | | 251 | | | | | (82 | ) | | | | 448 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended 2010 | | Exelis(a) | | Xylem | | CAS | | Other(b) | | Total |
Revenue | | | $ | 5,893 | | | | $ | 3,192 | | | | $ | 160 | | | | $ | – | | | | $ | 9,245 | |
Earnings before income taxes | | | | 718 | | | | | 395 | | | | | 13 | | | | | 12 | | | | | 1,138 | |
Gain on sale of disposal before tax | | | | – | | | | | – | | | | | 125 | | | | | – | | | | | 125 | |
Income tax expense | | | | 251 | | | | | 51 | | | | | – | | | | | 25 | | | | | 327 | |
Income (loss) from discontinued operations | | | | 467 | | | | | 344 | | | | | 138 | | | | | (13 | ) | | | | 936 | |
| (a) | CAS was a component of our Defense and Information Solutions business, which was distributed as Exelis. The table above presents Exelis without CAS, which was disposed during 2010. |
| (b) | Amounts presented in the “Other” column within the tables above relate to various divested ITT businesses accounted for as discontinued operations in the year of divestiture for which legacy liabilities remain, as well as certain Transformation costs which were directly related to the Distribution and provide no future benefit to the Company. See Note 3, “Company Transformation” for further information. |
36
The components of Transformation costs incurred during 2011, and included within income from discontinued operations, are presented below.
| | | | | |
Advisory fees | | | $ | 139 | |
IT costs | | | | 46 | |
Employee retention and other compensation costs | | | | 20 | |
Lease termination and other real estate costs | | | | 10 | |
Non-cash asset impairment | | | | 8 | |
Other costs | | | | 17 | |
Transformation costs before income tax expense | | | | 240 | |
Tax-related separation costs | | | | 7 | |
Income tax benefit | | | | (74 | ) |
Total transformation costs, net of tax impact | | | | 173 | |
DISCUSSION OF FINANCIAL RESULTS
2010 VERSUS 2009
| | | | | | | | | | | | | | | |
| | | 2010 | | 2009 | | CHANGE |
Revenue | | | $ | 1,908 | | | | $ | 1,770 | | | | | 7.8 | % |
Gross profit | | | | 607 | | | | | 563 | | | | | 7.8 | % |
Gross margin | | | | 31.8 | % | | | | 31.8 | % | | | | – | |
Operating expenses | | | | 791 | | | | | 684 | | | | | 15.6 | % |
Expense to revenue ratio | | | | 41.5 | % | | | | 38.6 | % | | | | 290 | bp |
Operating loss | | | | (184 | ) | | | | (121 | ) | | | | 52.1 | % |
Operating margin | | | | (9.6 | )% | | | | (6.8 | )% | | | | (280 | )bp |
Interest and non-operating expenses, net | | | | 92 | | | | | 87 | | | | | 5.7 | % |
Income tax benefit | | | | (144 | ) | | | | (97 | ) | | | | 48.5 | % |
Loss from continuing operations | | | | (132 | ) | | | | (111 | ) | | | | 18.9 | % |
Income from discontinued operations | | | | 936 | | | | | 740 | | | | | 26.5 | % |
Net income | | | $ | 804 | | | | $ | 629 | | | | | 27.8 | % |
REVENUE
Our 2010 revenue growth reflected recoveries in three of our businesses from the economic lows experienced during 2009. Overall revenue increased 7.8% reflecting growth in both emerging and developed markets as strength in our short cycle
businesses was partially offset by a slower recovery in our late-cycle Industrial Process segment. In addition to the economic impact our business felt over the 2009-2010 period, our ICS segment gained market share with new products and platforms and our Motion Technologies segment continued to gain market share with key wins on various OEM platforms. The Control Technologies segment primarily benefited from a strengthening in the aerospace market. The following table illustrates the 2010 and 2009 revenue of our segments. See below for further discussion of year-over-year revenue activity at the segment level.
| | | | | | | | | | | | | | | |
| | | 2010 | | 2009 | | CHANGE |
Industrial Process | | | $ | 694 | | | | $ | 719 | | | | | (3.5 | )% |
Motion Technologies | | | | 548 | | | | | 491 | | | | | 11.6 | % |
Interconnect Solutions | | | | 413 | | | | | 341 | | | | | 21.1 | % |
Control Technologies | | | | 275 | | | | | 243 | | | | | 13.2 | % |
Eliminations | | | | (22 | ) | | | | (24 | ) | | | | (8.3 | )% |
Total | | | $ | 1,908 | | | | $ | 1,770 | | | | | 7.8 | % |
The following table illustrates revenue generated with a specific country or region for the years ended December 31, 2010 and 2009, and the corresponding percentage change.
| | | | | | | | | | | | | | | |
| | | 2010 | | 2009 | | % Change |
United States | | | $ | 742 | | | | $ | 710 | | | | | 4.5 | % |
Germany | | | | 205 | | | | | 188 | | | | | 9.0 | % |
France | | | | 117 | | | | | 101 | | | | | 15.8 | % |
Other developed markets | | | | 341 | | | | | 305 | | | | | 11.8 | % |
Total developed markets | | | | 1,405 | | | | | 1,304 | | | | | 7.7 | % |
South and Central America(a) | | | | 139 | | | | | 116 | | | | | 19.8 | % |
Eastern Europe and Russia | | | | 68 | | | | | 53 | | | | | 28.3 | % |
Middle East and Africa | | | | 101 | | | | | 101 | | | | | – | |
China and Hong Kong | | | | 115 | | | | | 98 | | | | | 17.3 | % |
Other emerging markets | | | | 80 | | | | | 98 | | | | | (18.4 | )% |
Total emerging markets | | | | 503 | | | | | 466 | | | | | 7.9 | % |
Total Revenue | | | $ | 1,908 | | | | $ | 1,770 | | | | | 7.8 | % |
The following table illustrates the impact from organic growth, recent acquisitions, and fluctuations in foreign currency, in relation to revenue during 2010.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Industrial Process | | Motion
Technologies | | Interconnect
Solutions | | Control
Technologies | | Eliminations | | Total ITT | | %
Change |
2009 Revenue | | | $ | 719 | | | | $ | 491 | | | | $ | 341 | | | | $ | 243 | | | | $ | (24 | ) | | | $ | 1,770 | | | | | | |
Organic growth | | | | (39 | ) | | | | 82 | | | | | 75 | | | | | 33 | | | | | 12 | | | | | 163 | | | | | 9.2 | % |
Acquisitions/(divestitures), net | | | | 5 | | | | | – | | | | | – | | | | | (1 | ) | | | | – | | | | | 4 | | | | | 0.2 | % |
Foreign currency translation | | | | 9 | | | | | (25 | ) | | | | (3 | ) | | | | – | | | | | (10 | ) | | | | (29 | ) | | | | (1.6 | )% |
Total change in revenue | | | | (25 | ) | | | | 57 | | | | | 72 | | | | | 32 | | | | | 2 | | | | | 138 | | | | | 7.8 | % |
2010 Revenue | | | $ | 694 | | | | $ | 548 | | | | $ | 413 | | | | $ | 275 | | | | $ | (22 | ) | | | $ | 1,908 | | | | | | |
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Industrial Process
The 2010 revenue generated by our Industrial Process segment was $694, reflecting a decline of $25 or 3.5% from the segment’s 2009 revenue of $719. Growth from aftermarket (pump parts and service) of 3.5% partially offset lower revenue from pump units. The Industrial Process segment experienced a sharp decline in pump unit order activity during 2009, as economic conditions caused our customers to delay or cancel a significant number of planned projects. The decline in 2009 project orders led to lower revenues in 2010.
Motion Technologies
The Motion Technologies segment generated revenue growth of 11.6% during 2010, despite negative impacts from unfavorable foreign currency fluctuations of 5.1%. The growth reflected benefits from European automotive stimulus programs in place during the latter part of 2009 that bolstered demand and led to distributor inventory restocking in the early portions of 2010. In addition, key platform wins obtained during the past 18 months within Europe, North America and China increased our share in the OEM braking equipment market.
Interconnect Solutions
The ICS segment generated revenue growth of 21.1% during 2010, primarily driven by the overall strengthening and recovery within the majority of markets served. In addition, our results also included benefits from key 2010 platform wins on Smartphone devices that increased our share within the communications market. The release of our DL connector used in medical imaging equipment drove revenue growth of approximately 37% within the medical market. These results also reflect expansion within emerging markets on oil and gas related projects.
Control Technologies
The Control Technologies segment generated revenue growth of 13.2% during 2010, primarily reflecting an overall strengthening of the general industrial, aerospace and defense markets served by this division as compared to prior year. In addition, our revenue results further benefited by the increasing production of high-speed rail seating equipment in China.
GROSS PROFIT
Gross profit for 2010 was $607, representing a $44 increase, or 7.8% from 2009. Increased volume and significant net savings generated by productivity and other cost-reduction initiatives, more than offset rising material and labor costs. See further discussion on the 2010 net savings generated by our segments within the “Operating Income” discussion below. The following table illustrates the 2010 and 2009 gross profit results of our segments, including gross margin results.
| | | | | | | | | | | | | | | |
| | | 2010 | | 2009 | | CHANGE |
Industrial Process | | | $ | 216 | | | | | 226 | | | | | (4.4 | )% |
Motion Technologies | | | | 153 | | | | | 133 | | | | | 15.0 | % |
Interconnect Solutions | | | | 142 | | | | | 108 | | | | | 31.5 | % |
Control Technologies | | | | 95 | | | | | 95 | | | | | – | |
Corporate and Other | | | | 1 | | | | | 1 | | | | | – | |
Total gross profit | | | $ | 607 | | | | $ | 563 | | | | | 7.8 | % |
Gross margin: | | | | | | | | | | | | | | | |
Industrial Process | | | | 31.1 | % | | | | 31.4 | % | | | | (30 | )bp |
Motion Technologies | | | | 27.9 | % | | | | 27.1 | % | | | | 80 | bp |
Interconnect Solutions | | | | 34.4 | % | | | | 31.7 | % | | | | 270 | bp |
Control Technologies | | | | 34.5 | % | | | | 39.1 | % | | | | (460 | )bp |
OPERATING EXPENSES
Operating expenses increased 15.6% or $107 during 2010 to $791, primarily attributable to a $147 increase in net asbestos-related costs resulting from unfavorable trends in certain key assumptions used in measuring our potential asbestos exposure to pending claims and those estimated to be filed over the next 10 years. The following table provides further information by expense type, as well as a breakdown of operating expense by segment.
| | | | | | | | | | | | | | | |
| | | 2010 | | 2009 | | CHANGE |
Sales and marketing expenses | | | $ | 166 | | | | $ | 149 | | | | | 11.4 | % |
General and administrative expenses | | | | 176 | | | | | 201 | | | | | (12.4 | )% |
Research and development expenses | | | | 61 | | | | | 53 | | | | | 15.1 | % |
Restructuring and asset impairment charges, net | | | | 3 | | | | | 43 | | | | | (93.0 | )% |
Asbestos-related costs, net | | | | 385 | | | | | 238 | | | | | 61.8 | % |
Total operating expenses | | | $ | 791 | | | | $ | 684 | | | | | 15.6 | % |
By Segment: | | | | | | | | | | | | | | | |
Industrial Process | | | $ | 137 | | | | | 154 | | | | | (11.0 | )% |
Motion Technologies | | | | 68 | | | | | 85 | | | | | (20.0 | )% |
Interconnect Solutions | | | | 105 | | | | | 89 | | | | | 18.0 | % |
Control Technologies | | | | 66 | | | | | 63 | | | | | 4.8 | % |
Corporate & Other | | | | 415 | | | | | 293 | | | | | 41.6 | % |
The increase in sales and marketing expenses was primarily due to additional variable selling costs corresponding to the rise in revenues. Additional factors contributing to the increased costs include added headcount in emerging market locations and higher employee related costs within the ICS segment primarily due to increased commissions and severance costs.
The decrease in G&A expenses was primarily due to lower costs for corporate compensation and benefit related matters. G&A expenses were relatively flat within our operating segments, as a $15 decline at Industrial Process was offset by a $12 increase at ICS. The decline at Industrial Process was primarily due to lower bad debt expense while the increase at
ICS was primarily due to increased compensation costs and bad debt expense.
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The increased R&D expense is primarily due to additional development projects within the ICS segment, such as our Universal Connector and Elec tric Vehicle Connector.
During 2010, we recognized net restructuring charges of $3, representing a $40 decrease as compared to the prior year. This decrease in expense was mainly attributable to a fewer
number of actions that were initiated during 2010 versus 2009. Restructuring charges incurred during 2009 related to the relocation of certain Motion Technologies and ICS production facilities to lower cost regions. See Note 6, “Restructuring and Asset Impairment Charges,” to the Consolidated Financial Statements for additional information.
Asbestos-Related Costs, Net
For the years ended December 31, 2010 and 2009, the income statement effects to continuing operations from asbestos charges consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2010 | | December 31, 2009 |
| | | Liability | | Asset | | Net | | Liability | | Asset | | Net |
Provision | | | $ | 67 | | | | $ | 12 | | | | $ | 55 | | | | $ | 56 | | | | $ | 28 | | | | $ | 28 | |
Remeasurement | | | | 524 | | | | | 194 | | | | | 330 | | | | | 644 | | | | | 434 | | | | | 210 | |
Asbestos-related costs before tax | | | | 591 | | | | | 206 | | | | | 385 | | | | $ | 700 | | | | $ | 462 | | | | | 238 | |
Tax benefit | | | | | | | | | | | | | | (144 | ) | | | | | | | | | | | | | | (95 | ) |
Asbestos-related costs, net of tax | | | | | | | | | | | | | $ | 241 | | | | | | | | | | | | | | $ | 143 | |
Charges included in the table above reflect undiscounted 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, including legal fees.
In the third quarter of 2009, we recorded a charge for claims estimated to be filed against the Company over the next 10 years for the first time. Beginning in the fourth quarter of 2009, we began recording a quarterly Provision to maintain a rolling 10 year projection period. The increase in the net Provision expense from 2009 to 2010 is a result of the Provision in 2009 including only the fourth quarter of 2009, while the Provision in 2010 includes a quarterly expense for all four quarters in 2010. The increase in our estimated liability isnet Remeasurement expense from 2009 to 2010 was a result of several developments, including higher settlement costs and significantly increased activity in several higher-cost jurisdictions, increasing the number of cases to be adjudicated and the expected legal costs. Our 2010 detailed review of the asbestos-related assets, including estimated recoveries from insurers and other responsible parties, resulted in a $372 increase in the recorded asset.
The net asbestos expense is primarily recorded within Corporate and Other; however, a portion of the expense is associated with businesses that were disposed of a number of years ago, and is reported within discontinued operations in our Consolidated Financial Statements. See Note 19,20, “Commitments & Contingencies,” in our Notes to the Consolidated Financial Statements for further information on our asbestos-related liability and assets.
RestructuringOPERATING LOSS
Our 2010 and Asset Impairment Charges, Net
During 2010, we recognized net restructuring charges2009 results include operating losses of $52, representing a $27 or 34.2% decrease as compared$184 and $121, respectively, due to the prior year. This decreaseasbestos-related costs of $385 and $238 discussed above and in expense was mainly attributable to a fewer number of actions that were initiated during 2010 versus 2009.
Our largest 2010 restructuring initiative related to a Defense segment realignment action that commenced during the first quarter, with the objective of enabling better product portfolio integration, encouraging a more coordinated market approachNote 20, “Commitments and reducing operational redundancies. This action resulted in the recognition of $28 of restructuring expense and the closure of three facilities. As of December 31, 2010, we consider this action to be substantially complete, except for remaining cash payments of $9 to settle remaining severance liabilities. We estimate our Defense realignment actions will yield approximately $61 in annual net savings, including estimated 2011 savings of $27 incremental to 2010.
In addition to the Defense realignment action, we incurred $24 related to other various restructuring initiatives that were not individually material. We consider the majority of these initiatives to be substantially complete as of December 31, 2010, except for remaining cash payments of $13. We estimate aggregate annual net savings of approximately $37 from our other 2010 actions, including estimated 2011 savings of $33 incremental to 2010.
See Note 5, “Restructuring and Asset Impairment Charges,” in the NotesContingencies”, to the Consolidated Financial Statements for additional information.
OPERATING INCOME
We generatedStatements. Asbestos-related costs reduced operating income of $900margins by 2,020 basis points and 1,340 basis points in 2010 and 2009, respectively. Operating margin during 2010 was favorably impacted by lower restructuring and asset impairment costs of $40 which provided a 0.7% increase230 basis point improvement and net
cost reductions of $42 which provided a 240 basis point improvement. Net cost reductions were the result of global sourcing initiatives, Value-Based Six Sigma and prior restructuring actions, which more than offset the impact from the prior year, primarily reflecting growth from our Fluidrising material, labor and Motion & Flow segment operations, offset by an unfavorable increase in net asbestos-relatedoverhead costs. Operating margin decreased to 8.2% for 2010, ayear-over-year decline of 20 basis points. The increase in net asbestos-related costs provided an unfavorable impact of 130 basis points to the 2010 operating margin. The following table illustrates the 2010 and 2009 operating income (loss) results of our business segments, including operating margin results.
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | CHANGE | |
| Defense | | | $ | 752 | | | | $ | 761 | | | | | (1.2 | )% |
| Fluid | | | | 479 | | | | | 393 | | | | | 21.9 | % |
| Motion & Flow | | | | 179 | | | | | 118 | | | | | 51.7 | % |
| | | | | | | | | | | | | | | | |
| Segment operating income | | | | 1,410 | | | | | 1,272 | | | | | 10.8 | % |
| Corporate and Other | | | | (510 | ) | | | | (378 | ) | | | | (34.9 | )% |
| | | | | | | | | | | | | | | | |
| Total operating income | | | $ | 900 | | | | $ | 894 | | | | | 0.7 | % |
| Operating margin: | | | | | | | | | | | | | | | |
| Consolidated | | | | 8.2 | % | | | | 8.4 | % | | | | (20 | )bp |
Defense | | | | 12.8 | % | | | | 12.5 | % | | | | 30 | bp |
Fluid | | | | 13.1 | % | | | | 11.7 | % | | | | 140 | bp |
Motion & Flow | | | | 12.4 | % | | | | 9.4 | % | | | | 300 | bp |
| | | | | | | | | | | | | | | | |
Defense & Information Solutions
Volume reductions combined with unfavorable sales mix, pricing pressures, | | | | | | | | | | | | | | | |
| | | 2010 | | 2009 | | CHANGE |
Industrial Process | | | $ | 79 | | | | $ | 72 | | | | | 9.7 | % |
Motion Technologies | | | | 85 | | | | | 48 | | | | | 77.1 | % |
Interconnect Solutions | | | | 37 | | | | | 19 | | | | | 94.7 | % |
Control Technologies | | | | 29 | | | | | 32 | | | | | (9.4 | )% |
Segment operating income | | | | 230 | | | | | 171 | | | | | 34.5 | % |
Asbestos-related costs, net | | | | (385 | ) | | | | (238 | ) | | | | 61.8 | % |
Other corporate costs | | | | (29 | ) | | | | (54 | ) | | | | (46.3 | )% |
Total operating loss | | | | (184 | ) | | | | (121 | ) | | | | 52.1 | % |
Operating margin: | | | | | | | | | | | | | | | |
Consolidated operating margin | | | | (9.6 | )% | | | | (6.8 | )% | | | | (280 | )bp |
Segment operating margin | | | | 12.1 | % | | | | 9.7 | % | | | | 240bp | |
Industrial Process | | | | 11.4 | % | | | | 10.0 | % | | | | 140bp | |
Motion Technologies | | | | 15.5 | % | | | | 9.8 | % | | | | 570bp | |
Interconnect Solutions | | | | 9.0 | % | | | | 5.6 | % | | | | 340bp | |
Control Technologies | | | | 10.5 | % | | | | 13.2 | % | | | | (270 | )bp |
Industrial Process’ operating income increased $7 or 9.7% during 2010, resulting in an operating margin of 11.4%, an improvement of 140 basis points versus 2009. The year-over-year growth was primarily attributable to lower bad debt and additional restructuring expenses of approximately $28 led to the decline in operating income.costs, as well as benefits from sourcing and productivity initiatives. These impactspositive factors were partially offset by reduced selling, administrativelower sales and general expensesincreased emerging market investments.
39
Motion Technologies’ operating income increased $37 or 77.1% during 2010, resulting in an operating margin of approximately $2415.5%, an improvement of 570 basis points versus 2009. The year-over-year growth was primarily attributable to lower restructuring costs, increased sales volumes and benefits from productivity initiatives. Global sourcing actions mitigated rising material costs.
Interconnect Solutions’ operating income increased $18 or 94.7% during 2010, resulting in an operating margin of 9.0%, an improvement of 340 basis points versus 2009. The year-over-year growth was primarily attributable to increased sales volumes and lower R&D expenses of approximately $24 as a result of Defense realignment activities. Additionally, lower amortization of approximately $22 also mitigated the negative impacts above. The year on year increase in margin of 30 bps was attributed to the
31
benefits outlined above offsetting the volume, sales mix and pricing challenges in 2010.
Fluid Technology
Operational productivity, including savings from restructuring actions and other cost savings initiatives, such as, Value-Based Six Sigma and global strategic sourcing,costs, as well asyear-over-year revenue growth, benefits from sourcing and productivity initiatives. These positive factors were partially offset by risingincreased R&D costs, of materialsbad debt expense and labor. These items combined to provide approximately $87 of benefit tocosts incurred in connection with a sales department reorganization initiative.Control Technologies’ operating income and a 240 basis point improvement to operating margin.
Operating income was also favorably impacted by a $23 reduction in 2010 restructuring costs, reflecting an 80 basis point improvement to operating margin. Increased investment spending of approximately $37decreased $3 or 9.4% during 2010, resulting in technology, R&D and the Value-Based Commercial Excellence initiative, among others, resulted in a 100 basis point decline to operating margin.
The 2010 acquisitions of Nova and Godwin provided benefits of approximately $26 to operating income, but unfavorably impactedan operating margin by 30of 10.5%, a decline of 270 basis points dueversus 2009. The year-over-year decline was primarily attributable to costs incurred associated with the purchase. In addition,a $5 unfavorable foreign currency fluctuations and additional postretirement benefit costs resulted in an approximate 50 basis point decline.
Motion & Flow Control
Operational productivity, includingyear-over-year revenue growth as well as savings from restructuring actions and other cost savings initiatives, such as, Value-Based Six Sigma and global strategic sourcing were2010 inventory adjustment, which was partially offset by risingincreased sales volumes and benefits from sourcing and productivity initiatives.Other corporate costs of materialsdeclined $25, or 46.3%, during 2010 primarily due to a $15 decline in employee compensation and labor, provided approximately $47 of benefit to operating incomecosts and a 180 basis point improvement to operating margin.
Operating income was also favorably impacted by a $32 reduction in 2010 restructuring costs, reflecting a 220 basis point improvement to operating margin. Increased investment spending of approximately $10 during 2010 in technology, R&D and the Value-Based Commercial Excellence initiative, among others, resulted in a 70 basis point$6 decline to operating margin. In addition, unfavorable foreign currency fluctuations andfrom additional postretirement benefit costs resulted in an approximate 50 basis point decline.
Corporate and Other
We incurred corporate and other expenses of $510 during 2010, reflecting an increase of $132 compared to 2009. The increase in expense primarily relates to the recognition of additional asbestos-related costs as mentioned above in the “Operating Expenses” discussion.
Impacts to Operating Income from Postretirement Expense
Postretirement costs (pension and other employee-related defined benefit plans) affect results in all segments. We recorded $126 of net periodic postretirement cost during 2010, compared with costs of $99 in 2009. As more fully described in Note 16, “Postretirement Benefit Plans,” in the Notes to Consolidated Financial Statements, the primary drivers behind the increase in the net periodic postretirement cost were the higher service costs due to the addition of approximately 3,000 employees following the EDO acquisition into the U.S. Salaried Retirement Plan (SRP), and increased amortization of net actuarial losses that resulted from the 2008 financial market decline, partially offset by an increase in expected returns on a higher base of plan assets.
In 2011, we expect to incur approximately $184 of net periodic postretirement cost, representing an increase of $58, or 46.0% as compared to 2010. This increase is primarily attributable to additional amortization of net actuarial losses.
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 expect to continue to seek reimbursement from the DoD for a portion of our postretirement costs and plan contributions.
2009 product liability related costs.INTEREST AND NON-OPERATING EXPENSES, NET
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Interest expense | | | $ | 100 | | | | $ | 99 | |
| Interest income | | | | 16 | | | | | 24 | |
| Miscellaneous (income) expense, net | | | | (2 | ) | | | | 9 | |
| | | | | | | | | | | |
| Total interest and non-operating expenses, net | | | $ | 82 | | | | $ | 84 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | 2010 | | 2009 | | CHANGE |
Interest expense | | | $ | 97 | | | | $ | 98 | | | | | (1.0 | )% |
Interest income | | | | 11 | | | | | 17 | | | | | (35.3 | )% |
Miscellaneous (income) expense, net | | | | 6 | | | | | 6 | | | | | – | |
Total interest and non-operating expenses, net | | | | 92 | | | | | 87 | | | | | 5.7 | % |
Interest expense for 2010 was relatively flat as compared to 2009, as a reduction in interest expense derived from commercial paper of $20 was offset by an increase in interest expense from long-term debt.debt related to the issuance of $1 billion of debt in May 2009. Our daily average outstanding commercial paper balance decreased from $704 in 2009 to $231 in 2010. The decline in 2010 interest income was primarily due to the recognition of ana $13 interest refund received in conjunction with an IRSU.S federal tax settlement during 2009. The fluctuation in net miscellaneous expense is due to the sale of certainavailable-for-sale investments during 2010 that resulted in a pre-tax gain of $7.
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INCOME TAX EXPENSEBENEFIT
IncomeDuring the year ended December 31, 2010, we recognized an income tax expense was $164 or 20.0%benefit of income$144 on a loss from continuing operations before income taxes for 2010,of $276, an effective rate of 52.2%, as compared to $169 or 20.9% duringan income tax benefit of $97 on a loss from continuing operations before income taxes of $208, an effective rate of 46.6%, in the prior year.
Theyear-over-year decrease in the incomeeffective tax expenserate was primarilypartially attributable to an additionalincome tax benefit of $41 related to an increase in asbestos-related costs coupled with an additional tax benefit of $262010 from the reversalrelease of a valuation allowances on certainallowance. The sale of CAS in 2010 enabled us to utilize a previously reserved capital loss carryforwards as it became more likely than not that thesecarryforward, which benefited the 2010 effective tax rate by $36, or 12.9%. The effective tax rate was also impacted by $35 of tax credits. These 2010 benefits to the effective tax rate were partially offset by the enactment of the Patient Protection Act of 2010 which resulted in the write-off of a deferred tax assets would be realized.asset of $12, and increased the effective tax rate by 4.2%. These 2010 income tax benefits largely replaced the prior year benefit of $58$14 from an international legal entity restructuring.
the release of a valuation allowance for state deferred tax assets which benefited the effective tax rate by 6.6%.INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
Income from discontinued operations, net of tax, was $144$936 for 2010, as compared to $3$740 for 2009. These results primarily reflect the operations of Exelis and Xylem, which were discontinued in connection with the Distribution. The increase of $141 primarily reflectsresults also reflect the recognition of an after-tax gain on sale of $130$129 related to our divesture of CAS, Inc. (CAS), a component of our former Defense segment, which was sold on September 8, 2010. CAS generated after-tax income from operations of $9 for both the 2009 twelve-month period and 2010 period prior to its sale. Also included within income from discontinued operations is an after-tax net asbestos-related benefit of $6 in 2010 as compared to expense of $6 during 2009, related to a business we disposed of a number of years ago.
DISCUSSION OF FINANCIAL RESULTS
2009 Versus 2008
| | | | | | | | | | | | | | | |
| | | | 2009 | | | | 2008 | | | | CHANGE |
| Revenue | | | $ | 10,674 | | | | $ | 11,476 | | | | | (7.0)% |
| Gross profit | | | | 3,024 | | | | | 3,214 | | | | | (5.9)% |
Gross margin | | | | 28.3 | % | | | | 28.0 | % | | | | 30bp |
| Operating expenses | | | | 2,130 | | | | | 2,016 | | | | | 5.7% |
Expense to revenue ratio | | | | 20.0 | % | | | | 17.6 | % | | | | 240bp |
| Operating income | | | | 894 | | | | | 1,198 | | | | | (25.4)% |
Operating margin | | | | 8.4 | % | | | | 10.4 | % | | | | (200)bp |
| Interest and non-operating expenses, net | | | | 84 | | | | | 122 | | | | | (31.1)% |
| Income tax expense | | | | 169 | | | | | 308 | | | | | (45.1)% |
Effective tax rate | | | | 20.9 | % | | | | 28.6 | % | | | | (770)bp |
| Income from continuing operations | | | | 641 | | | | | 768 | | | | | (16.5)% |
| | | | | | | | | | | | | | | |
REVENUE
The deteriorating global economic conditions experienced during 2009 created recessionary challenges within our Fluid and Motion & Flow segments. As a result, we experienced a significant decline in order activity that translated into a 14.9% decrease in revenue from these segments. However, the full extent of the unfavorable conditions experienced during 2009 was mitigated by the results of our defense businesses that are less prone to volatility in periods of economic uncertainty. The following table illustrates the 2009 and 2008 revenue results of our business segments. See below for further discussion ofyear-over-year revenue and order activity at the segment level.
| | | | | | | | | | | | | | | | |
| | | | 2009 | | | | 2008 | | | | CHANGE | |
| Defense | | | $ | 6,067 | | | | $ | 6,064 | | | | | — | |
| Fluid | | | | 3,363 | | | | | 3,841 | | | | | (12.4 | )% |
| Motion & Flow | | | | 1,253 | | | | | 1,583 | | | | | (20.8 | )% |
| Eliminations | | | | (9 | ) | | | | (12 | ) | | | | — | |
| | | | | | | | | | | | | | | | |
| Total | | | $ | 10,674 | | | | $ | 11,476 | | | | | (7.0 | )% |
| | | | | | | | | | | | | | | | |
The following table illustrates the impact from organic growth, acquisitions completed during the year, and fluctuations in foreign currency, in relation to consolidated revenue during 2009.
| | | | | | | | | | | |
| | | | $ CHANGE | | | | % CHANGE | |
| 2008 Revenue | | | $ | 11,476 | | | | | | |
| Organic decline | | | | (567 | ) | | | | (4.9 | )% |
| Acquisitions/(divestitures), net | | | | (12 | ) | | | | (0.1 | )% |
| Foreign currency translation | | | | (223 | ) | | | | (2.0 | )% |
| | | | | | | | | | | |
| Total change in revenue | | | | (802 | ) | | | | (7.0 | )% |
| | | | | | | | | | | |
| 2009 Revenue | | | $ | 10,674 | | | | | | |
| | | | | | | | | | | |
Defense & Information Solutions
The 2009 revenue generated by our Defense segment was $6,067, consistent with the segment’s 2008 revenue of $6,064. These results reflectyear-over-year growth in service revenue programs of $140 or 6.5% and a decline in product revenue of $137 or 3.5%.
The 2009 service revenue benefited from logistical service contract wins at Fort Benning and Maxwell Air Force Base, as well as increased activity under the Global Maintenance and Supply Services (GMASS) agreement with the U.S. Army. In addition, service revenue during 2009 benefited from an increase in engineering services related to the Tethered Aerostat Radar System (TARS) program and the Federal Aviation Administration’s (FAA) next generation air-traffic control program. These positive service revenue contributions were partially offset by a decline in Logistics Civil Augmentation Program (LOGCAP) revenues.
The 2009 product revenue results were impacted by volume declines in our C4 (command, control, communications and computers) business, U.S. SINCGARS and CREW 2.1. In addition, our 2009 program revenue was adversely affected by timing of deliveries for our electronic ground warfare systems.
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The decline in revenue from these programs was partially offset by revenue growth from increased volume of night vision goggles to international countries, Airborne Integrated Electronic warfare systems and radar systems, as well as the GPS Navigation project and other classified programs.
Fluid Technology
The 2009 revenue generated by our Fluid segment was $3,363, representing a decline of $478 or 12.4% from the segment’s 2008 revenue of $3,841. These results include a favorable impact from acquisitions of $24 and an unfavorable impact from foreign currency fluctuations of $153, resulting in an organic revenue decline of $349 or 9.1%. The decline in organic revenue was primarily the result of lower volumes and significant overall weakness in most markets served due to challenging global economic conditions. Organic revenue within the Residential & Commercial Water division decreased $170, the Water & Wastewater division decreased $90, and the Industrial Process division decreased $85. However, the overall impact from unfavorable conditions was partially mitigated by stable results from product sales to municipal markets, as well as from long-term construction type contracts within the oil & gas and power generating markets.
Motion & Flow Control
The 2009 revenue generated by our Motion & Flow segment was $1,253, representing a decline of $330 or 20.8% from the segment’s 2008 revenue of $1,583. These results include unfavorable impacts from divestitures of $36 and foreign currency fluctuations of $66, resulting in an organic revenue decline of $228 or 14.4%. The decline in organic revenue was primarily the result of lower volumes caused by challenging global economic conditions affecting the majority of markets served. The declines were mitigated during the latter half of 2009, through market share gains in the beverage and marine markets, benefits from European automotive stimulus programs, and solid results in rail-related products within emerging markets.
Organic revenue at our Motion Technologies division decreased $36 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.
Organic revenue at our Interconnect Solutions division declined $102 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.
Organic revenue at our Flow Control division decreased $30 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.
Organic revenue at our Control Technologies division declined $56 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.
GROSS PROFIT
Gross profit for 2009 was $3,024, representing a $190 or 5.9% 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 28.3% 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. The following table illustrates the 2009 and 2008 gross profit results of our business segments, including gross margin results.
| | | | | | | | | | | | | | | | |
| | | | 2009 | | | | 2008 | | | | CHANGE | |
| Defense | | | $ | 1,430 | | | | $ | 1,378 | | | | | 3.8 | % |
| Fluid | | | | 1,196 | | | | | 1,333 | | | | | (10.3) | % |
| Motion & Flow | | | | 395 | | | | | 500 | | | | | (21.0) | % |
| Corporate and Other | | | | 3 | | | | | 3 | | | | | — | |
| | | | | | | | | | | | | | | | |
| Total gross profit | | | $ | 3,024 | | | | $ | 3,214 | | | | | (5.9) | % |
| Gross margin: | | | | 28.3 | % | | | | 28.0 | % | | | | 30 | bp |
Defense | | | | 23.6 | % | | | | 22.7 | % | | | | 90 | bp |
Fluid | | | | 35.6 | % | | | | 34.7 | % | | | | 90 | bp |
Motion & Flow | | | | 31.5 | % | | | | 31.6 | % | | | | (10) | bp |
| | | | | | | | | | | | | | | | |
OPERATING EXPENSES
Operating expenses increased 5.7% during 2009 to $2,130, primarily attributable to a $224 increase in net asbestos-related costs resulting from our initial recognition of an estimated liability, net of expected recoveries from insurance and other responsible parties, for claims projected to be filed against the Company over the next 10 years. The increase in net asbestos-related costs was partially offset by a reduction in SG&A expenses of $134. The following table provides further information by expense type, as well as a breakdown of operating expense by segment.
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| | | | | | | | | | | | | | | | |
| | | | 2009 | | | | 2008 | | | | CHANGE | |
| Selling, general and administrative expenses | | | $ | 1,555 | | | | $ | 1,689 | | | | | (7.9 | )% |
| Research and development expenses | | | | 258 | | | | | 236 | | | | | 9.3 | % |
| Asbestos-related costs, net | | | | 238 | | | | | 14 | | | | | (a | ) |
| Restructuring and asset impairment charges, net | | | | 79 | | | | | 77 | | | | | 2.6 | % |
| | | | | | | | | | | | | | | | |
| Total | | | $ | 2,130 | | | | $ | 2,016 | | | | | 5.7 | % |
| By Segment: | | | | | | | | | | | | | | | |
| Defense | | | $ | 669 | | | | $ | 663 | | | | | 0.1 | % |
| Fluid | | | | 804 | | | | | 864 | | | | | (6.9 | )% |
| Motion & Flow | | | | 277 | | | | | 309 | | | | | (10.4 | )% |
| Corporate & Other | | | | 380 | | | | | 180 | | | | | 111.1 | % |
| | | | | | | | | | | | | | | | |
Selling, General & Administrative Expenses (SG&A)
SG&A decreased 7.9% to $1,555 in 2009. Theyear-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.
Research and Development Expenses (R&D)
R&D expenses increased $22 during 2009 over the prior year, primarily due to increased spending for development materials on key growth platforms across our Defense segment.
Asbestos-Related Costs, Net
During 2009, we recorded asbestos-related costs of $238, related to the estimated liability, net of expected recoveries from insurers and other responsible parties, for claims projected to be filed against the Company over the next 10 years. See Note 19, “Commitments & Contingencies,” in the Notes to Consolidated Financial Statements for additional information.
Restructuring and Asset Impairment Charges, Net
During 2009, we recognized net restructuring charges of $79, representing a $2 increase as compared to 2008. The charges associated with 2009 actions 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 totaled 1,092 employees, including 528 factory workers, 530 office workers and 34 management employees.
OPERATING INCOME
We generated operating income of $894 during 2009, a 25.4% decrease from 2008, 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 8.4% for 2009, ayear-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. The following table illustrates the 2009 and 2008 operating income results of our business segments, including operating margin results.
| | | | | | | | | | | | | | | | |
| | | | 2009 | | | | 2008 | | | | CHANGE | |
| Defense | | | $ | 761 | | | | $ | 715 | | | | | 6.4 | % |
| Fluid | | | | 393 | | | | | 469 | | | | | (16.2 | )% |
| Motion & Flow | | | | 118 | | | | | 192 | | | | | (38.5 | )% |
| | | | | | | | | | | | | | | | |
| Segment operating income | | | | 1,272 | | | | | 1,376 | | | | | (7.6 | )% |
| Corporate and Other | | | | (378 | ) | | | | (178 | ) | | | | (112.4 | )% |
| | | | | | | | | | | | | | | | |
| Total operating income | | | $ | 894 | | | | $ | 1,198 | | | | | (25.4 | )% |
| Operating margin: | | | | | | | | | | | | | | | |
| Consolidated | | | | 8.4 | % | | | | 10.4 | % | | | | (200 | )bp |
Defense | | | | 12.5 | % | | | | 11.8 | % | | | | 70 | bp |
Fluid | | | | 11.7 | % | | | | 12.2 | % | | | | (50 | )bp |
Motion & Flow | | | | 9.4 | % | | | | 12.1 | % | | | | (270 | )bp |
| | | | | | | | | | | | | | | | |
Defense & Information Solutions
Operating income increased $46 or 6.4% during 2009, resulting in an operating margin of 12.5%, an improvement of 70 basis points versus 2008. Theyear-over-year growth, reflecting reduced costs of revenue 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 postretirement benefit plan costs and increased investments in R&D.
Fluid Technology
Operating income for 2009 decreased $76 or 16.2% from 2008, with a decline in operating margin of 50 basis points to 11.7%. These declines were primarily attributable to reductions in sales volumes and higher postretirement benefit plan expenses,
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partially offset by strong productivity, which provided increasing benefits as the year progressed, and lower realignment costs.
Motion & Flow Control
Operating income decreased $74 or 38.5% during 2009, including impacts from unfavorable foreign currency fluctuations of $25. 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 during 2008 and 2009. As a result, this contributed toyear-over-year improvements in operating income of $17 in the fourth quarter. Operating margin decreased 270 basis points to 9.4% during 2009, primarily reflecting the factors described above.
Corporate and Other
We incurred corporate and other expenses of $378 during 2009, reflecting an increase of $200 or 112.4% as compared to 2008. The increase in expense primarily relates to the recognition of additional asbestos-related costs as mentioned above in the “Operating Expenses” discussion, partially offset by lower environmental-related and bonus costs, as well as investment gains on corporate-owned life insurance policies.
Impacts to Operating Income from Postretirement Expense
We recorded $99 of net periodic postretirement cost during 2009, compared with costs of $29 in 2008. The primary drivers behind the increase were the effect of an increase in the amortization of net actuarial losses, and expected returns on a lower base of plan assets, partially offset by an increase in the discount rate for our foreign plans.
INTEREST AND NON-OPERATING EXPENSES, NET
| | | | | | | | | | | | | | | | |
| | | | 2009 | | | | 2008 | | | | CHANGE | |
| Interest expense | | | $ | 99 | | | | $ | 140 | | | | | (29.3 | )% |
| Interest income | | | | 24 | | | | | 31 | | | | | (22.6 | )% |
| Miscellaneous expense, net | | | | 9 | | | | | 13 | | | | | (30.8 | )% |
| | | | | | | | | | | | | | | | |
| Total Interest and non-operating expenses, net | | | $ | 84 | | | | $ | 122 | | | | | (31.1 | )% |
| | | | | | | | | | | | | | | | |
Interest expense decreased 29.3% during 2009, due to interest rate declines on our commercial paper and variable rate debt, as well as loweryear-over-year levels of outstanding commercial paper and a decrease in interest related to taxes, partially offset by an increase in interest expense on fixed-rate debt related to the $1.0 billion debt issuance in May 2009. The2009 year-over-year decrease in interest income of 22.6% 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 received in conjunction with an IRS tax settlement.
INCOME TAX EXPENSE
Income tax expense was $169 or 20.9% of income from continuing operations before income taxes for 2009, compared to $308 or 28.6% during 2008. Theyear-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 $58. In addition, reversals of valuation allowances of $17, coupled with other tax credits and allowable deductions of $12, largely offset the prior year benefit from a tax account validation adjustment of $37. See Note 6, “Income Taxes,” in the Notes to Consolidated Financial Statements for additional information.
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
Income from discontinued operations, net of tax, was $3 for 2009, respectively, as compared to $27 for 2008. During the 2008, we completed the sale of the remaining component of the Switches businesses that generated total after-tax income of $6, including an after-tax gain on sale of $5. During 2010 we classified CAS, a component of our Defense segment, as a discontinued operation. CAS generated after-tax income from operations of $9 during 2009, as compared to $7 during 2008. Also included within income from discontinued operations during 2009 was additional after-tax net asbestos-related expense of $6, related to a business we disposed of a number of years ago.
LIQUIDITY AND CAPITAL RESOURCES
Funding and Liquidity Strategy
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. We believe thatHistorically, we have generated operating cash flow sufficient to fund our working capital, dividends, capital expenditures and financing requirements. Subsequent to the Distribution, while our ability to forecast future cash flows is more limited, we expect to fund our ongoing working capital, dividends, capital expenditures and financing requirements through cash flows from operations and our access tocash on hand, accessing the commercial paper market are sufficient to meetand utilizing our short-term funding requirements.borrowing capacity under the 2011 Revolving Credit Agreement, described below. If our access to the commercial paper market were adversely affected, we believe that alternative sources of liquidity, including our existing committed credit facility and access to the public debt market,2011 Revolving Credit Agreement would be sufficient to meet our short-term funding requirements.
Our
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In connection with the Distribution, ITT received a net cash transfer (the Contribution) of $729 and $857 from Exelis and Xylem, respectively. The proceeds from the Contribution were utilized during October 2011 to repay substantially all outstanding ITT long-term debt and commercial paper, with the remainder to be used for general corporate purposes, including Transformation costs.
Cash and cash equivalents at December 31, 2011 were 235.0% higher than the December 31, 2010 balance, and represented 18.8% of total assets. The increase in cash and cash equivalents is predominately held bydue largely to the Contribution. Cash and cash equivalents denominated in the Euro accounted for 67% of our foreign subsidiaries in currencies where we have operations. cash and cash equivalents at of December 31, 2011.
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 continue to look for opportunities to access cash balances in excess of local operating requirements to meet global liquidity needs in a cost-efficient manner. We have
36
and may continue to transfer cash from certain international subsidiaries to the
U.S.United States. and other international subsidiaries when it is cost effective to do so.
If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, ourOur intent is
generally to indefinitely reinvest these funds outside of the
U.S.United States; however, in connection with the Distribution we reviewed our domestic and
foreign cash profile, expected future cash generation and investment opportunities and determined that $515 of previously undistributed foreign earnings would no longer be considered indefinitely reinvested outside the United States. Such undistributed foreign earnings have not been remitted to the United States and the timing of such remittance if any is currently under evaluation. In connection with the review of our
currentdomestic and foreign cash profile, we recorded $69 of income tax expense and a corresponding deferred tax liability in the fourth quarter of 2011.In future periods, we expect to analyze any undistributed foreign earnings and profits for which an applicable outside basis difference exists to continue to support our assertion that such amounts will be indefinitely reinvested outside the United States. For the foreseeable future, ITT plans do not demonstrateto reinvest the excess undistributed foreign earnings in its international operations, consistent with its overall intentions to support growth and expand in markets outside the U.S., particularly in China, Latin and South America, Eastern Europe, India, Africa and the Middle East, as well as other developing and emerging markets, through development of business segment products, increasing non-US capital spending, and potentially acquiring foreign businesses.
The amount and timing of dividends payable on our common stock are within the sole discretion of our Board of
Directors and will be based on, and affected by, a neednumber of factors, including our financial position and results of operations, available cash, expected capital spending plans, prevailing business conditions, and other factors the Board deems relevant. Therefore, there can be no assurance as to repatriate themwhat level of dividends, if any, will be paid in the future. Aggregate dividends paid in 2011 were $193, compared to fund our U.S. operations.
$176 in 2010 and $148 in 2009. After giving effect to the 1:2 Reverse Stock Split, we declared dividends of $0.50 per share of common stock in each of the four quarters of 2010 and the first three quarters of 2011, respectively. In connection with the fourth quarter dividends expected to be declared by Exelis and Xylem of $0.2066 per share and $0.2024 per share, respectively, ITT decreased its quarterly dividend from $0.50 per share to $0.091 per share. Accordingly, dividends expected to be declared in the fourth-quarter for the three companies in the aggregate equaled ITT’s prior quarterly dividend of $0.50 per share. In the first quarter of 2012, we declared a dividend of $0.091 per share for shareholders of record on March 7, 2012. If dividends are declared each quarter of 2012 at a rate of $0.091 per share, aggregate dividends for 2012 would be approximately $35.Significant factors that affect our overall management of liquidity include our credit ratings, 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 it is advantageous to do so.
We access the commercial paper market to supplement the cash flows generated internally to provide additional short-term funding for strategic investments and other non-recurring funding requirements. We manage our short-term liquidity through the use of our commercial paper program by adjusting the level of commercial paper borrowings as opportunities to deploy additional capital arise, it is cost effective to do so, and a sufficient return on investment can be generated.
Our commercial paper program is supported byEffective October 31, 2011 we replaced a three-year revolving $1.5 billion credit agreement (August 2010 Credit Facility). In August 2010, we replaced with a five-yearnew four-year revolving $1.75 billion$500 credit agreement that was due to expire in November 2010 with the August 2010(the 2011 Revolving Credit Facility.Agreement). The revolving credit agreement2011 Revolving Credit Agreement is intended to provide access to additional liquidity asand be 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. The interest rate for borrowings under the August 20102011 Revolving Credit FacilityAgreement is generally based on the London Interbank Offered Rate (LIBOR), plus a spread, which reflects our debt rating. The provisions of the August 20102011
41
Revolving Credit FacilityAgreement require that we maintain an interest coverage ratio, as defined, of 3.5at least 3.0 times and a leverage ratio, as defined, of not more than 3.0 times. At December 31, 2010,2011, our interest coverage ratio wasand leverage ratio were well in excess of the minimum requirements.
See Note 16 to the Consolidated Financial Statements for further information on the credit facility.Our credit ratings as of December 31, 20102011 are as follows:
| | | | | | | | | | |
| Rating Agency | | Short-Term
Ratings | | Long-Term
Ratings |
Standard & Poor’s | | | | A-3 | | | | | BBB- | |
Moody’s Investors Service | | | | P-3 | | | | | |
| | | Short-Term
| | | | Long-Term
Baa3 | |
Rating Agency | | | Ratings | | | | Ratings | |
Standard & Poor’s | | | | A-2 | | | | | BBB+ | |
Moody’s Investors Service | | | | P-2 | | | | | Baa1 | |
Fitch Ratings | | | | F2 | | | | | A- | |
| | | | | | | | | A - | |
SubsequentPlease refer to the rating agency websites and press releases for more information.
Asbestos
Based on the estimated asbestos liability as of December 31, 2011 (for claims filed or estimated to be filed through 2021), we have estimated that we will be able to recover 57% of the asbestos indemnity and defense costs for pending claims as well as unasserted claims estimated to be filed over the next 10 years from our insurers or other responsible parties. However, there is uncertainty in estimating when cash payments related to the recorded asbestos liability will be fully expended and such cash payments will continue for a number of years past 2021 due to the significant proportion of future claims included in the estimated asbestos liability and the lag time between the date a claim is filed and when it is resolved. In addition, because there are gaps in our insurance coverage, reflecting uninsured periods, the insolvency of certain insurers and prior insurance settlements, and our expectation that certain policies from some of our primary insurers will exhaust within the next 10 years, actual insurance reimbursements vary from period to period and the anticipated recovery rate is expected to decline over time. Future recoverability rates may be impacted by other factors, such as future insurance settlements, unforeseen insolvencies and judicial determinations relevant to our January 2011 announced plancoverage program, which are difficult to separate ITT into three publicly traded entities, our short-and long-term credit ratings have been modified as follows:
| | |
| n | Standard & Poor’s — “CreditWatch Negative” |
|
| n | Moody’s Investor Service — “under review for possible downgrade” |
|
| n | Fitch Ratings — “Ratings Watch Evolving” |
We consider certain debt ratios, including the total debtpredict and subject to
total capitalization ratioa high degree of uncertainty.Subject to these inherent uncertainties, it is expected that future annual cash payments, net of recoveries related to pending asbestos claims and the net debt to net capitalization ratio,unasserted claims estimated to be key indicatorsfiled within the next 10 years, will extend through approximately 2026 due to the length of time between the filing of a claim and its resolution. Certain of our primary coverage in place agreements are expected to exhaust in the next twelve months, which will result in higher net cash outflows for managementthe short-term. These annual net cash outflows are projected to average $10 to $20, net of tax benefits over the
next five years, as compared to an average of approximately $6, net of tax benefits in the past three years, and investorsincrease to an average of approximately $35 to $45, net of tax benefits over the remainder of the projection period. Recovery rates for the tenth year of our model are currently projected to be approximately 27% of cash spent on settlements and defense costs.
In light of the uncertainties and variables inherent in evaluating our financial leverage, structurethe long-term projection of the Company’s asbestos exposures and strengthpotential recoveries, 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 the number of future claims, the nature of future claims, or the cost to resolve future claims for years beyond the next 10 years at this time. Accordingly, no liability or related asset has been recorded for any costs which may be incurred for claims asserted subsequent to 2021.
Due to these uncertainties, as well as our abilityinability to finance operations.reasonably estimate any additional asbestos liability for claims which may be filed beyond the next 10 years, it is not possible to predict the ultimate outcome of the cost of resolving the pending and estimated unasserted asbestos claims. We calculatebelieve it is possible that the total debt to total capitalization ratiofuture events affecting the key factors and other variables within the next 10 years, as total short-and long-term borrowings (total debt) divided by shareholders’ equity plus total debt (total capitalization). We calculatewell as the cost of asbestos claims filed beyond the next 10 years, net debt to net capitalization ratio as total debt less cashof expected recoveries, could have a material adverse effect on our financial position, results of operations and cash equivalents divided by total capitalization less cash and cash equivalents. Our 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 dividends and share repurchases.
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Debt to total capitalization | | | | 23.3 | % | | | | 28.0 | % |
| Net debt to net capitalization | | | | 6.9 | % | | | | 7.0 | % |
| | | | | | | | | | | |
flows.Sources and Uses of Liquidity
Our principal source of liquidity is our cash flow generated from operating activities, which provides us with the ability to meet the majority of our short-term funding requirements. The following table providessummarizes net cash provided byderived from operating, activities and used in investing, and financing activities, as well as net cash derived from discontinued operations, for each of the previous three years.
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | 2008 | |
| Operating Activities | | | $ | 1,234 | | | | $ | 1,258 | | | | $ | 1,107 | |
| Investing Activities | | | | (1,117 | ) | | | | (285 | ) | | | | (502 | ) |
| Financing Activities | | | | (290 | ) | | | | (772 | ) | | | | (1,407 | ) |
| Foreign Exchange | | | | (18 | ) | | | | 40 | | | | | (74 | ) |
| | | | | | | | | | | | | | | | |
| Total net cash flow from continuing operations | | | $ | (191 | ) | | | $ | 241 | | | | $ | (876 | ) |
| | | | | | | | | | | | | | | | |
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years ended December 31, 2011. | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
Operating Activities | | | $ | (323 | ) | | | $ | (77 | ) | | | $ | 261 | |
Investing Activities | | | | (107 | ) | | | | (136 | ) | | | | (86 | ) |
Financing Activities | | | | 1,202 | | | | | 450 | | | | | (497 | ) |
Foreign Exchange | | | | (9 | ) | | | | (22 | ) | | | | 34 | |
Total net cash flow from continuing operations | | | | 763 | | | | | 215 | | | | | (288 | ) |
Net cash from discontinued operations | | | | (279 | ) | | | | (196 | ) | | | | 272 | |
Net change in cash and cash equivalents | | | $ | 484 | | | | $ | 19 | | | | $ | (16 | ) |
Net cash providedused by operating activities was ($323) in 2011 representing a decrease of $246 from 2010. The decrease in operating cash flow was primarily attributable to several factors,
42
the most significant of which are to a) $355 of cash payments associated with the Distribution, b) lower income from continuing operations of $446 as a result of $396 of Transformation costs and a higher deferred income tax expense of $414, partially offset by lower net asbestos-related costs of $285, c) a cash use associated with changes in working capital of $151, primarily related to changes in the level of trade receivables and accounts payable, and d) a cash benefit from lower accrued income taxes of $160. Net cash payments for asbestos matters in 2011 increased by $21 and contributions to our global postretirement benefit plans increased by $16, while cash payments for restructuring actions decreased by $24 in 2010 as compared to 2009. Contributing factors included: $162 of higher 2010 net tax payments driven by a 2009 income tax refund of $26 and the timing of a $40 extension payment made during the beginning of 2010, an unfavorable 2010 impact from the timing of Defense segment collections received in December 2009 related to certain advance payments, an $85 reduction in contributions to pension plans, that included a $50 discretionary pension contribution in 2010, a $58 benefit from 2010 acquisitions and additional cash generation from sales growth.
Net cash provided by operating activities increased by $151 in 2009 as compared to 2008. Contributing factors included: $320 from improved accounts receivable conversion and benefits primarily from the timing of Defense segment collections received in December 2009 related to certain advanced customer payments, $99 reduction in net tax payments that included a $26 income tax refund received during 2009 and the timing of a $40 extension payment that was not processed until 2010, a decline in cash receipts due to decreased sales volume, $137 additional contributions to pension plans, including a $100 discretionary 2009 contribution and a $28 increase in restructuring-related payments.
$20.The annual net cash outflows associated with our asbestos-related liability are projected to average $25$10 to $20, net of tax, over the next five years, as compared to an average of approximately $10 to $15$6, net of tax, in the past three years, and increase to an average of approximately $50$35 to $60$45, net of tax, over the remainder of the projection period. We do not believe, subject to risks and uncertainties inherent in the estimation process, thatcash flows associated with the net asbestos-related liability for pending and unasserted claims estimated to be filed over the next 10 years will materially affect our short-termshort- or long-term liquidity positions or our operating cash flow.
Net cash used by operating activities was ($77) in 2010, a decrease of $338 as compared to 2009. Significant contributing factors included a) a decrease in operating income from continuing operations of $21 as improved operating performance by the segments was offset by higher net annualasbestos-related costs of $147, b) a cash flows.
benefit from changes in working capital of $63, primarily related to accounts payable which was supporting higher inventory levels, and c) a cash use associated with higher accrued income taxes of $354. Compared to 2009, net cash payments for asbestos matters in 2010 decreased by $7 and contributions to our global postretirement benefit plans increased by $7.Net cash used in investing activities increaseddecreased by $832$29 in 20102011 as compared to 2009. We invested an additional $1,007 during 2010 in various strategic acquisitions, including Nova and Godwin. We also increased our2010. Spending on capital expenditure spendingexpenditures decreased by $57, primarily related$24 as a result of a decision to terminate the planned implementation of an entity-wide enterprise resource planning (ERP) system in early 2011 for which we had capital expenditures of $35 in 2010. The ERP implementation was terminated in 2011 and additional investments into our Godwin business. The additional investment spending noted above was partially offset by an increase$55 of $237capitalized costs were written off as part of Transformation costs included in proceeds from the sale of CAS and other assets and businesses during 2010.
continuing operations.Net cash used in investing activities decreasedincreased by $217$50 in 20092010 as compared to 2008,2009 as we increased our capital expenditure spending by $29, primarily related to a $242 decline in acquisition spending. During 2008, we spent $227 related to EDO acquisition payments that carried over from 2007 to 2008 and $49 related to the acquisitions of several smaller companies. During 2009, we made $50 of additional investments related to the construction of radio towers in support of the ADS-B program with the FAA and the implementation of an entity-wide ERP system. These additional investments were partially offsetsystem and a net cash use in 2010 of $10, net of cash acquired, for the acquisition of Canberra.
Net cash provided by 2008 spendingfinancing activities increased by $752 in 2011 as compared to 2010, primarily related to ITT’s new corporate headquarters.
Duringthe $1,586 Contribution paid to ITT by Exelis and Xylem in connection with the Distribution, lower cash used by Xylem for acquisitions and the net effect of the global cash pooling in which Exelis and Xylem participated prior to the Distribution. The proceeds received by ITT from the Contribution were used during October 2011 to repay substantially all outstanding ITT long-term debt, commercial paper and capital leases, as well as debt extinguishment costs of $297 and other cash Transformation costs. Cash provided by financing activities in 2011 also included a cash inflow of $53 from the exercise of employee stock options, an increase of $25 compared to 2010 and cash outflow of $193 related to cash dividend payments, a 9.7% increase over 2010.Compared to 2009, our 2010 cash flow from financing activities increased $947. In 2010, we repaid $135 of short and 2008, we used approximately $1.8long-term debt compared to 2009 repayments of $644, net of $1 billion of cash generated from operationsdebt issued in May 2009, primarily related to repay our December 31, 2007 outstanding short-term debt balance of $2,907 that principally resulted from ourthe financing of theExelis’ EDO acquisition and our acquisition of IMC, acquisitionsboth in 2007. The remainderFinancing cash flows also benefitted from the net effect of this short-term debt was repaid using the proceeds from a $1.0 billion long-term debt issuanceglobal cash pooling in May 2009.which Exelis and Xylem participated prior to the Distributions, offset in part by increased cash used by Xylem for acquisitions. Our cash usage related to financing activities during 2010 was primarily for thealso included $176 payment of dividendsdividend payments that represented an 18.9% increase as compared to 2009. Also during 2010, we used $79 to retire two long-term outstanding debentures.
Consistent with our 2009 and 2010 objectives surrounding the preservation of liquidity, we did not participate in the share repurchase program during either of these years. In 2008, we spent $75, including commission fees, on the repurchase of common stock.
Our average daily outstanding commercial paper balance for the year ended 2011 and 2010 was $231.$128 and $231, respectively. The maximum outstanding commercial paper during 2011 and 2010 was $408 and $620, corresponding to ourwith Xylem’s acquisition of Nova Analytics.YSI in 2011 and Godwin in 2010. As of December 31, 2010,2011, we did not have any commercial paper outstanding.
During the first half of 2012, we expect to receive a $105 refund from the U.S. Internal Revenue Service (IRS) for income taxes previously paid. In addition, we expect to receive an additional $35 income tax refund near the end of 2012 for net operating losses and R&D tax credits generated during 2011 and $25 for carryback of foreign credits to prior years. Under the Tax Matters Agreement, $27 of the $35 refund is owed to Exelis.
Funding of Postretirement Plans
Effective as of the Distribution Date, ITT transferred to Exelis and Xylem certain defined benefit pension and other postretirement benefit plans, most significantly the U.S. Salaried Retirement Plan to Exelis. Following the distribution, Exelis and Xylem assumed all liabilities and assets associated with such plans and became the plans’ sponsors.
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The net liabilities associated with such plans assumed by Exelis and Xylem were approximately $2,150 and $170, respectively, excluding net deferred tax assets of approximately $800 and $55, respectively.
At December 31, 2010,2011, our global postretirement benefit plans were underfunded by $1.7 billion. The $1.7 billion underfunded obligation includes $773 related$330, of which $146 relates to the U.S. SRP. A substantial portion of the underfunded position arose during the fourth quarter of 2008, when we recognized a significant decline in the fair market value of ourpension plans, including $50 for non-U.S. plans which are typically not funded due to local regulations, and $184 relates to other postretirement benefit plan assets. Favorable market conditions during the latter half of 2009 and throughout 2010 resulted in an increase in the fair market value of our postretirement benefit plan assets. As of December 31, 2010, the U.S. SRP was 83% funded.
plans. 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 2010,During 2011, we contributed $76$27 to our U.S. postretirement benefit plans, including a voluntary contribution$18 of $50which was to the U.S. SRP during the fourth quarter.
pension plans and $9 to our other employee-related benefit plans.While the Company has significant discretion in making voluntary contributions, the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006 and further amended by the Worker, Retiree, and
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Employer Recovery Act of 2008 and applicable Internal Revenue Code regulations mandate minimum funding thresholds. Failure to satisfy the minimum funding thresholds could result in restrictions on our ability to amend the plan or make benefit payments. Given our 2010 voluntary contributionIn general, certain benefit restrictions apply when the Adjusted Funding Target Attainment Percentage (AFTAP) of $50, we currently do not believea plan is less than 80%. When the AFTAP is between 80% and 60%, there is a restriction on plan amendments and a partial restriction on accelerated benefit payments (i.e., lump sums cannot exceed 50% of the value of the participants total benefit). Full benefit restrictions apply if the plan’s AFTAP falls below 60%. Although mandatory contributions will be required to our U.S. SRPpostretirement plans were not required during 2011. However,2011, we do anticipate making contributionswill continue to our other postretirement benefit plans inmonitor the range of $90 to $110 during 2011.
funded status and minimum funding requirements.The funded status at the end of 2011January 1, 2012 and future requiredstatutory minimum contributions will depend primarily on the actual return on assets during the year and the discount rate, used to measure the benefit obligation at the end of the year.both determined using AFTAP guidelines. Depending on these factors, and the resulting
funded status of our U.S. pension plans, the level of future statutory minimum contributions could be material.
We currently anticipate making contributions of $20 to $25 to our global pension plans during 2012.Capital Resources
Long-term debt is raised through the offering of debt securities primarily within the United States capital markets. Long-term debt is generally defined as any debt with an original maturity greater than 12 months. We hadOn September 20, 2011, Exelis and Xylem issued an aggregate principal of $1,850 of long-term debt. The Exelis and Xylem Notes were initially guaranteed on a senior unsecured basis by ITT. The guarantee terminated and was automatically and unconditionally released on the followingdistribution of the common stock of Exelis and Xylem to the holders of the Company’s common stock.
In October 2011, we paid $1,340 and deposited U.S. Treasury securities with an aggregate purchase price of $263 to retire $1,251 of long-term debt that was outstanding at December 31:
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Current portion of long-term debt | | | $ | 10 | | | | $ | 10 | |
| Non-current portion of long-term debt | | | | 1,354 | | | | | 1,431 | |
| | | | | | | | | | | |
| Total long-term debt | | | $ | 1,364 | | | | $ | 1,441 | |
| | | | | | | | | | | |
See further details on total year-end stated rates on debt and maturitiesas of September 30, 2011. Additionally during 2011, we terminated a sale leaseback agreement by repurchasing the leased property for $66. These transactions resulted in Note 15, “Debt,” in the Notes toa net $297 charge presented within our Consolidated Financial Statements.
AtIncome Statement as Transformation costs.As of December 31, 2010, our availability to additional2011, we have sources of long- and short-term funding includesincluding access to the capital markets through an unlimited 2009 Shelf Registration Statement, a $1.5 billionan available $500 commercial paper program and approximately $132 in unused credit lines. Our commercial paper program is supported by a three-year revolving $1.5 billion credit agreement.the 2011 Revolving Credit Agreement.
We had the following long-term debt outstanding at December 31:
| | | | | | | | | | |
| | | 2011 | | 2010 |
Current portion of long-term debt | | | $ | 2 | | | | $ | 10 | |
Non-current portion of long-term debt | | | | 4 | | | | | 1,350 | |
Total long-term debt | | | $ | 6 | | | | $ | 1,360 | |
See further details on debt transactions in 2011 in Note 16, “Debt,” to the Consolidated Financial Statements.
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Contractual Obligations
ITT’s commitment to make future payments under long-term contractual obligations was as follows, as of December 31, 2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | PAYMENTS DUE BY PERIOD | |
| | | | | | | | LESS THAN
| | | | | | | | | | | | MORE THAN
| |
| CONTRACTUAL OBLIGATIONS | | | TOTAL | | | | 1 YEAR | | | | 1-3 YEARS | | | | 3-5 YEARS | | | | 5 YEARS | |
Debt(1) | | | $ | 1,328 | | | | $ | 11 | | | | $ | 24 | | | | $ | 539 | | | | $ | 754 | |
Interest payments(2) | | | | 636 | | | | | 77 | | | | | 153 | | | | | 113 | | | | | 293 | |
Operating leases(3) | | | | 654 | | | | | 143 | | | | | 205 | | | | | 123 | | | | | 183 | |
Purchase obligations(4) | | | | 682 | | | | | 415 | | | | | 256 | | | | | 11 | | | | | — | |
Other long-term obligations reflected on balance sheet(5) | | | | 169 | | | | | 17 | | | | | 27 | | | | | 26 | | | | | 99 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | $ | 3,469 | | | | $ | 663 | | | | $ | 665 | | | | $ | 812 | | | | $ | 1,329 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2011: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | PAYMENTS DUE BY PERIOD |
| CONTRACTUAL OBLIGATIONS | | TOTAL | | LESS THAN
1 YEAR | | 1-3 YEARS | | 3-5 YEARS | | MORE THAN
5 YEARS |
Debt | | | $ | 6 | | | | $ | 2 | | | | $ | 1 | | | | $ | 1 | | | | $ | 2 | |
Operating leases | | | | 134 | | | | | 17 | | | | | 22 | | | | | 18 | | | | | 77 | |
Purchase obligations(1) | | | | 113 | | | | | 86 | | | | | 26 | | | | | – | | | | | – | |
Other long-term obligations(2) | | | | 141 | | | | | 23 | | | | | 39 | | | | | 36 | | | | | 43 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | $ | 394 | | | | $ | 128 | | | | $ | 88 | | | | $ | 55 | | | | $ | 122 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
In addition to the amounts presented in the table above, we have recorded liabilities for pending asbestos claims and unasserted asbestos claims estimated to be filed over the next ten years and uncertain tax positions of $1,676$1,668 and $192,$100, respectively, in our Consolidated Balance Sheet as ofat December 31, 2010.2011. These amounts have been excluded from the contractual obligations table due to an inability to reasonably estimate the timing of payments in individual years.
| |
| (1) | See Note 15, “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. |
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(2) | Amounts represent estimate of future interest payments on long-term debt outstanding as of December 31, 2010. For variable rate debt, the interest rate in effect at year end was utilized. |
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(3) | Refer to Note 14, “Leases and Rentals,” in the Notes to Consolidated Financial Statements, for further discussion of lease and rental agreements. |
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(4) | Represents unconditional purchase agreements that are enforceable and legally binding and that specify all significant terms to purchase goods or services, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase agreements that are cancellable without penalty have been excluded. |
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(5) (2) | Other long-term obligations include amounts recorded on our December 31, 2011 Consolidated Balance Sheet, including estimated environmental payments.payments and employee compensation agreements. We estimate, based on historical experience that we will spend between $12 and $15 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, 2010,2011, our best estimate forrecorded environmental liabilities is $139. In addition, other long-term obligations include letters of credit, and payments in connection with our settlement of compliance issues in the Defense segment.liability was $102. |
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Off-Balance Sheet Arrangements
Off-balance sheet arrangements represent transactions, agreements or other contractual arrangements with unconsolidated entities, where an obligation or contingent interest exists. Our off-balance sheet arrangements, as of December 31, 2010,2011, consist of indemnities related to acquisition and disposition agreements and certain third-party guarantees.
As part of the Distribution, ITT provided certain indemnifications and cross-indemnifications among ITT, Exelis and Xylem, subject to limited exceptions with respect to employee claims. The indemnifications address a variety of subjects, including asserted and unasserted product liability matters (e.g., asbestos claims, product warranties) which relate to products manufactured, repaired and/or sold prior to the Distribution Date. The indemnifications are indefinite. The indemnification associated with pending and future asbestos claims does not expire. In addition, ITT, Exelis and Xylem agreed to certain cross-indemnifications with respect to other liabilities and obligations. ITT expects Exelis and Xylem to fully perform under the terms of the Distribution Agreement and therefore has not recorded a liability for matters for which we have been indemnified. In addition, we are not aware of any claims or other circumstances that would give rise to material payments to Xylem or Exelis under the indemnity provided by ITT.
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 historicthese indemnifications and are not aware of any claims or other information that would give rise to material payments under such indemnities.
Guarantees
We have a number of guarantees, letters of credit and similar arrangements outstanding at December 31, 2011 primarily pertaining to commercial or performance guarantees and insurance matters. We have not recorded any loss contingencies under these guarantees, letters of credit and similar arrangements as of December 31, 2011 as the likelihood of nonperformance by the underlying obligors is considered remote. From time to time, we may provide certain third-party guarantees that may be affected by various conditions and external factors, some of which could require that payments be made under such guarantees. We do not consider the maximum exposure or current recorded liabilities under our third-party guarantees to be material either individually or in the aggregate. We do not believe such payments would have a material adverse impact on our financial position, results of operations or cash flows on a consolidated basis.
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Guarantees
As part ofIn December 2007, we entered into a sale leaseback agreement for our corporate aircraft, we havewith the aircraft leased to ITT under a five-year operating lease and ITT provided a residual value guarantee to the lessor for the future value of the aircraft. During the second quarter of 2011, we purchased the aircraft with maximum exposure of $42. During 2010, we increased our loss contingency to $17 due to a declinefrom the lessor for $50, the price stated in the projectedsale leaseback agreement, and as such the sale leaseback agreement and the associated residual value guarantee were terminated. In connection with this transaction, we settled a previously recorded $22 residual value guarantee and recognized an additional charge of $3, presented within G&A expenses, as the purchase price exceeded the fair value of the aircraft at the date of termination of the sale leaseback agreement. One of the corporate aircraft was sold for a gain of $3 and the other aircraft was distributed to Exelis, and accordingly, at December 31, 2011, ITT no longer owned any corporate aircraft.
In December 2011, the Flagler County Board of Commissioners approved the termination of certain construction obligations associated with a 1984 Development Order for Development of Regional Impact (“DRI”) known as Hammock Dunes, Florida. On February 1, 2012, lease expiration date.
the Flagler County Board of Commissioners released ITT from further material obligations related to the DRI and cancelled the $10 bond issued in its favor by ITT to secure the construction obligations under the DRI. As a result of the approval to terminate the construction obligation in December 2011, the Company released its $10 previously recorded contingent liability for these construction obligations.Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformityaccordance with GAAP requires managementus to make judgments, estimates and assumptions that affect the amounts reported amountsin the financial statements and accompanying notes. Significant accounting policies used in the preparation of assets, liabilities, revenuesthe financial statements are discussed in Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements. An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes to the estimate that are reasonably possible could materially affect the financial statements. Senior management has discussed the development, selection and expenses,disclosure of these estimates with the Audit Committee of ITT’s Board of Directors.
The accounting estimates and assumptions discussed below are those that we consider most critical to fully understanding our financial statements and evaluating our results as they are inherently uncertain, involve the most
subjective or complex judgments, include areas where different estimates reasonably could have been used, and the disclosureuse of contingent liabilities. Management bases itsan alternative estimate that is reasonably possible could materially effect the financial statements. We base our estimates on historical experience and on various other data and assumptions that it believesbelieved to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of ITT’s Board of Directors.
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 are inherently uncertain, involve significant judgments, include areas where different estimates reasonably could have been used, and changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes that the accounting estimates employed and the resulting balances reported in the Consolidated Financial Statements are reasonable; however, actual results in these areas could differ materially from management’sour estimates under different assumptions or conditions.
and assumptions.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 ofproducts sold by us or our products soldsubsidiaries 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 pending asbestos claims and those that may be filed in the future is subject to significant management judgment, as there is significant uncertainty and risk associated with theas there are multiple variables that can affect the timing, severity, quality, 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, and is supplemented by management’s expectations of the future. 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 information for the industry and occupation categories relevant to the Company, an estimate is developed of the number of claims estimated to be filed against the Company over the next ten years, as well as the aggregate settlement costs that would be incurred to resolve both pending and estimated future claims based on 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 external defense counsel. In addition,The asbestos liability has not been discounted to present value due to the inability to
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reliably forecast the timing of future cash flows. The Company retains a consulting firm to assist management in estimating our potential exposure to pending asbestos claims and for claims estimated to be filed over the next 10 years. The methodology to project future
40
asbestos costs is one in which the underlying assumptions are separately assessed for their reasonableness and then each is used as an input to the liability estimate. Our assessment of the underlying assumptions is based upon recent experience and future expectations, yieldingyields only one value for each assumption.
The liability estimate is most sensitive to those factorsassumptions surrounding mesothelioma and lung cancer claims, as together, thesethe estimated costs to resolve pending and estimated future mesothelioma and lung cancer claims represent nearly 90 percentmore than 90% of the estimated asbestos liability. These factorsexposure, but only 10% of pending claims. The assumptions related to mesothelioma and lung cancer that are most significant include the number of new claims forecast to be filed against the Company in the future, the projected average settlement costs (including the rate of inflation assumed), and the percentage of claims dismissed against the Company. Company that are dismissed without a settlement payment, and the cost to defend against filed claims.
These factorsassumptions are interdependent, and no one factor predominates in estimating the asbestos liability. While there are other potential inputs to the estimation model used to estimate our asbestos exposures for pending and estimated future claims, our methodology relies on the best input available in the circumstances for each individual assumption and does not create a range of reasonably possible outcomes. 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 includeassumptions, additional uncertainty related to asbestos claims arises from the long latency period prior to the manifestation of thean asbestos-related disease, changes in available medical treatments and changes in medical costs, of medical treatment, the impact ofchanges in plaintiff behavior resulting from bankruptcies of other companies that are potential or 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,The forecast period used to estimate our potential exposure to pending and projected asbestos claims is a judgment based on a number of factors, including the number and type of claims filed, recent experience with pending claims activity and whether that experience will continue into the future, the jurisdictions where claims are filed, the effect of any predictions with respect tolegislative or judicial developments, and the variables impactinglikelihood of any comprehensive asbestos legislation at the federal level. These factors have both positive and negative effects on the dynamics of asbestos litigation in the tort system and, accordingly, our estimate of the asbestos liability are subjectexposure. Developments related to even greater uncertainty as the projection
asbestos tend to be long-cycle, changing over multi-year periods. Accordingly, we monitor these and other factors and periodically assess whether an alternative forecast 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 assess the most recent data available for the key inputs and assumptions, comparing the data to our expectations on which the most recent annual liability estimate was based.
appropriate.We record a corresponding asbestos-related asset that represents our best estimate of probable recoveries related to the recorded asbestos liability. In developing this estimate, the Company considerscoverage-in-place and other settlement agreements with its insurers and other contractual agreements with responsible parties, as well as a number of additional factors. These additional factors include currentexpected levels of future cost recovery, experience, the financial viability of the insurance companies or other responsible parties, the method by which losses will be allocated to the various insurance policies and the years covered by those policies, the extent to which settlement and defense costs will be reimbursed by the insurance policies, and interpretation of the various policy and contract terms and limits and their interrelationships. The asbestos-related asset has not been discounted to present value.
The Company has negotiated with certain of its excess insurers to reimburse the Company for a portion of its settlement and/or defense costs as incurred, frequently referred to as “coverage-in-place” agreements. Under coverage-in-place agreements, an insurer’s policies remain in force and the insurer undertakes to provide coverage for the Company’s present and future asbestos claims on specified terms and conditions that address, among other things, the share of asbestos claims costs to be paid by the insurer, payment terms, claims handling procedures and the expiration of the insurer’s obligations. As of December 31, 2011, the Company has entered into five coverage-in-place agreements representing approximately 40% of our recorded asset. Certain of our primary coverage-in-place agreements are expected to exhaust in the next twelve months, which will result in higher net cash outflows for the short-term. The Company has entered into policy buyout and settlement agreements with certain insurers confirming the aggregate amount of available coverage under the subject policies and setting forth a schedule for future reimbursement payments to the Company based on aggregate indemnity and defense payments made by the Company. As of December 31, 2011, the Company has entered into two policy buyout and settlement agreements representing approximately 10% of our recorded asset, including an agreement in principal entered into in the fourth quarter of 2011 that will result in $68 million being paid to the Company between 2012 and 2026. In addition, the Company is party to a cost sharing agreement that represents 10% of our recorded asset. The cost sharing agreement provides that responsibility for costs associated with claims resolved gradually transitions away from ITT, such that ITT will have no responsibility for claims resolved beginning no later than July 1, 2022. While there are overall limits on the
47
aggregate amount of insurance available to the Company with respect to asbestos claims, those overall limits were not reached by the estimated liability recorded by the Company at December 31, 2011. In the aggregate, approximately 60% of our asbestos-related asset represents coverage-in-place agreements, policy buyout settlements and other agreements with our insurers and other responsible parties.
The timing and amount of reimbursements from our insurers and other responsible parties will vary due to the lag between when ITT pays an amount to defend or settle a claim and when a reimbursement is received, differing policy terms, and certain gaps in our insurance coverage as a result of someuninsured periods, insurer insolvencies. In addition, theinsolvencies, and prior insurance settlements.
The Company retains an insurance consulting firm to assist management in estimating probable recoveries for pending asbestos claims and for claims estimated to be filed over the next 10 years based on the analysis of policy terms, the likelihood of recovery provided by ourexternal legal counsel assuming the continued viability of those insurance carriers and other responsible parties that are currently solvent, and incorporating risk mitigation judgments where policy terms or other factors wereare not certain.
We havecertain, and allocating asbestos settlement and defense costs between our insurers and other responsible parties.Using the estimated liability as of December 31, 2011 (for claims filed or estimated to be filed through 2021), we estimate that we will be able to recover 62 percentapproximately 57% of the settlementindemnity and defense costs for pending claims as well asand unasserted claims estimated to be filed over the next 10 years from our insurers and other responsible parties. However, there is uncertainty in estimating when cash payments related to the recorded asbestos liability will be fully expended and such cash payments will continue for a number of years past 2021 due to the significant proportion of future claims included in the estimated asbestos liability and the lag time between the date a claim is filed and when it is resolved. In addition, because there are gaps in our insurance coverage reflecting certain uninsured periods and prior insurance settlements, and we expectour expectation that certain policies from some of our primary insurers will exhaust within the next 10 years, actual insurance reimbursements vary from period to period and the anticipated recovery rate is expected to decline over time. Recovery rates for potential additional asbestos liabilities. Insurance coverage in the tenth year of our estimate of the asbestos liability ismodel are currently projected to be approximately 25 percent.27% of cash spent on settlements and defense costs. Future recoverabilityrecovery 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.
TheOur estimated asbestos liability and related receivables are based upon current, known information. However,on management’s best estimate of future events largely
based on past experience; however, past experience may not prove a reliable predictor of the future. Future events affecting the key factorsassumptions and other variables for either the asbestos liability or the related receivables could cause the actual costs and recoveries to be materially higher or lower than currently estimated. For example, a significant upward or downward trend in the number of claims filed, depending on the nature of the alleged injury, the jurisdiction where filed and the quality of the product identification, or a significant upward or downward trend in the costs of defending claims, could change the estimated liability, as would substantial adverse verdicts at trial that withstand appeal. A legislative solution, structured settlement transaction, or significant change in relevant case law could also change the estimated liability. Further, the bankruptcy of an insurer or other responsible party or settlements with our insurers, whether through coverage-in-place agreements or policy buyouts, could change the estimated receivable.
Furthermore, any predictions with respect to the variables impacting the estimate of the asbestos liability and related asset 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 asbestos exposures and potential recoveries, 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 the number of future claims, the nature of future claims, or the cost to resolve future claims for years beyond the next 10 years at this time. Accordingly, no accrual or receivable has been recorded for any costs which may be incurred for claims asserted subsequent to 2021.
Due to these uncertainties, as well as our inability to reasonably estimate any additional asbestos liability for claims which may be filed beyond the next 10 years, it is not possible to predict the ultimate outcome of the cost of resolving the pending and allestimated unasserted asbestos claims. We believe it is possible that the future events affecting the key factors and other variables within the next 10 years, as well as the cost of asbestos claims filed beyond the next 10 years, net of expected recoveries, could have a material adverse effect on our financial position, results of operations orand cash flows.
As part of our ongoing review of our netestimated asbestos exposure and related receivables, each quarter we assess the most recent data available forunderlying the key inputsassumptions related to mesothelioma and assumptions,lung cancer (e.g., claims filed, settled and dismissed, acceptance rates, average settlement values), comparing the data to the
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expectations on which the most recent annual liability and asset estimates were based. In addition to evaluating ITT’s claims experience, the Company also considers additional quantitative and qualitative factors
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such as significant appellate rulings and legislative developments, and their respective effects on estimated future filings and settlement values, and trends in the tort system. Our quarterly procedures also involve a review of our assumed recovery rates, considering changes in the financial wherewithal of the insurers and settlements or other agreements with insurers. Provided the quarterly review does not indicate a more detailed evaluation of our asbestos exposure is required, each quarter, we record a net asbestos expense to maintain a rolling 10-year time horizon. In the third quarter each year we conduct a detailed study with the assistance of outside consultants to review and update, as appropriate, the underlying assumptions used to estimate our asbestos liability and related assets. Additionally, we periodically reassessassets, including a reassessment of the time horizon over which a reasonable estimate of unasserted claims can be projected.
Revenue Recognition
Revenue is derived from the sale of products and services to customers. We recognize revenue when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, collectability is reasonably assured and delivery has occurred. For product sales, other than long-term construction and production-type contracts (referred to as design and build arrangements), we recognize revenue at the time title and risks and rewards of ownership pass to the customer, which is generally when products are shipped, and the contractual terms have been fulfilled. Certain contracts with customers require delivery, installation, testing, certification or other acceptance provisions to be satisfied before revenue is recognized. In instances where contractual terms include a provision for customer acceptance, revenue is recognized when either (i) we have previously demonstrated that the product meets the specified criteria based on either seller or customer-specified objective criteria or (ii) on formal acceptance received from the customer where the product has not been previously demonstrated to meet customer-specified objective criteria.
We recognize revenue on product sales to channel partners, including resellers, distributors or value-added solution providers at the time of sale when the channel partners have economic substance apart from ITT and ITT has completed its obligations related to the sale. Revenue on service and repair contracts is recognized after services have been agreed to by the customer and rendered or over the service period.
We enter into contracts to sell our products and services, and while the majority of our sales agreements contain standard terms and conditions, certain agreements contain multiple elements or non-standard terms and conditions. Where sales agreements contain multiple elements or non-standard terms and conditions, judgment is required to determine the appropriate accounting, including whether the
See Note 19, “Commitmentsdeliverables specified in these agreements should be treated as separate units of accounting for revenue recognition purposes, and, Contingencies”if so, how the transaction price should be allocated among the elements and when to recognize revenue for each element.
When a sale involves multiple deliverables, the entire fee from the arrangement is allocated to each unit of accounting based on the relative selling price of the deliverable to all other deliverables in the Notescontract. Revenue for multiple element arrangements is recognized when the appropriate revenue recognition criteria for the individual deliverable have been satisfied. The allocation of sales price between elements may impact the timing of revenue recognition, but will not change the total revenue recognized on the arrangement. For agreements that contain multiple deliverables, we recognize revenue based on the relative selling price if the deliverable has stand-alone value to Consolidated Financial Statements for further information.
Postretirement Plans
ITT sponsors numerous defined benefit pension plans for employees around the
world. The determination of projected benefit obligationscustomer 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 ratesin arrangements that include a general right of return
on plan assets, raterelative to the delivered element, performance of
future compensation increases, mortalitythe undelivered element is considered probable and
termination (some of which are disclosed in Note 16, “Postretirement Benefit Plans,”substantially in the
Notes to Consolidated Financial Statements)Company’s control. The selling price for a deliverable is based on vendor-specific objective evidence of selling price (VSOE), if available, third-party evidence of selling price (TPE), if VSOE is not available, or best estimated selling price (BESP), if neither VSOE nor TPE is available.The deliverables in our arrangements with multiple elements include various products and other factors. Actual results that differ from our assumptions are accumulatedmay include related services, such as installation and are amortized generally overstart-up services. We allocate arrangement consideration based on the estimated future working liferelative selling prices of the plan participants.
Significant Assumptions
Management develops each assumptionseparate units of accounting determined in accordance with the hierarchy described above. For deliverables that are sold separately, we establish VSOE based on the price when the deliverable is sold separately. We establish TPE, generally for services, based on prices similarly situated customers pay for similar services from third party vendors. For those deliverables for which we are unable to establish VSOE or TPE, we estimate the selling price considering various factors including market and pricing trends, geography, product customization, and profit objectives.We recognize revenue on certain design and build projects using relevant Company experience,the completed contract method. Provisions for estimated losses, if any, on uncompleted design and build arrangements, are recognized in conjunction with market-related data for each individual countrythe period in which such plans exist. All assumptionslosses are reviewed periodically with third party actuarial consultants and adjusted as necessary. The table included below provides the weighted average assumptions used to estimate our defined benefit pension obligations and costs as of and for the years ended 2010 and 2009.
| | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | |
| | | | U.S. | | | | Int’l | | | U.S. | | | Int’l | |
| Obligation Assumptions: | | | | | | | | | | | | | | | | | | |
| Discount rate | | | | 5.73 | % | | | | 5.47 | % | | | 6.00 | % | | | 5.79 | % |
| Rate of future compensation increase | | | | 4.00 | % | | | | 3.26 | % | | | 4.00 | % | | | 3.87 | % |
| Cost Assumptions: | | | | | | | | | | | | | | | | | | |
| Discount rate | | | | 6.00 | % | | | | 5.79 | % | | | 6.25 | % | | | 6.14 | % |
| Expected return on plan assets | | | | 9.00 | % | | | | 7.33 | % | | | 9.00 | % | | | 7.29 | % |
| Rate of future compensation increase | | | | 4.00 | % | | | | 3.84 | % | | | 4.00 | % | | | 3.64 | % |
| | | | | | | | | | | | | | | | | | | |
We determine our expected return on plan assets 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 15, 20 and 25 years; estimate future returns based on independent estimates of asset class returns; and evaluate historical broad market returns over long-term timeframes based on our strategic asset allocation, which is detailed in Note 16, “Postretirement 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 was 8.8%, 10.1% and 10.3%, for the past 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, “Postretirement Benefit Plans,” in the Notes to Consolidated Financial Statements for more information.
| | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | | | 2008 | |
| Expected long-term rate of return on plan assets | | | | 9.0 | % | | | 9.0 | % | | | 9.0 | % |
| Actual rate of return on plan assets | | | | 14.1 | % | | | 24.1 | % | | | (31.2 | )% |
| |
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 affect net periodic pension cost. Our weighted average expected return on plan assets for all pension plans, including foreign affiliate plans, at December 31, 2010 is 8.87%.
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, 2010 is 5.71%.
The rate of future compensation increase assumption reflects our long-term actual experience and future and near-
42
term outlook. At December 31, 2010, 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 2011 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 | ) | | | $ | 10 | |
| Discount rate used to determine net periodic benefit cost | | | | (13 | ) | | | | 13 | |
| Rate of future compensation increases used to determine net periodic pension cost | | | | 4 | | | | | (3 | ) |
| |
The amounts included in the table above are on a pre-tax basis, without consideration to potential reimbursement from the DoD.
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 76% 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 $118. Similarly, every five percentage point change in the actual 2011 rate of return on assets impacts the same plan by approximately $187.
Fair Value of Plan Assets
The plan assets of our postretirement plans comprise 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 comprises 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 where 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, “Postretirement Benefit Plans” in the Notes to Consolidated Financial Statements for further information.
Revenue Recognition
The Defense segment and certain businesses within the Fluid segment enter into long-term construction-type sales contracts for which revenue is recognized under thepercentage-of-completion method, based upon units of delivery, percentage of costs incurred to total costs, or the completion of scheduled performance milestones. Revenues and profits recognized under thepercentage-of-completion methods are based on management’s estimates such as total contract revenues, contract costs and the extent of progress toward completion.determined. Due to the long-term nature of the contracts, these estimates are subject to uncertainties and require significant judgment. Negotiated fees under certain contractsjudgment and 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 revenue when there is sufficient information to reasonably assess anticipated contract performance. Our claims on contracts are recorded only if it is probable the claim will result in additional contract revenue and the amounts can be reliably estimated. Estimates of contract costs include labor hours and rates, subcontractor costs and material costs. These estimates consider historical performance, the complexity of the work to be performed, the estimated time to complete the project, and other economic factors such as inflation and market rates.
We update our estimates on a periodic basis and any revisions to such estimates are recorded in earnings in the period in which they are determined. Provisionsinflation.Additionally, accruals for estimated losses, if any, on uncompleted long-term contracts,expenses related to sales returns and warranties are made in the period in which such losses are determined.
We record a reduction in revenue at the time of saleproducts are
49
sold. Reserves for estimated productsales returns, rebates and other allowances basedare established using historical information on historical experiencethe frequency of returns for a particular product and known trends.period over which products can be returned. Future market conditions and product transitions may require us to take actions to increase customer incentive offerings, possibly resulting in an incrementala reduction ofin revenue at the time the incentive is offered.
43
Additionally, accruals for estimated expenses related to warranties are made at the time products are sold or services are renderedFor distributors and are recorded as a component of costs of revenue. Theseresellers, our typical return period is less than 180 days. Warranty accruals are established using historical information on the nature, frequency and average cost of warranty claims and estimates of future costs. Our standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. While we engage in extensive product quality programs and processes, we base our estimated warranty obligation on product warranty terms offered to customers, ongoing product failure rates, materialmaterials usage, and service delivery costs incurred in correcting a product failure, as well as specific product class failures outside of our baseline experience.experience and associated overhead costs. If actual product failure rates, repair rates or any other post-sales support costs differ from these estimates, revisions to the estimated warranty liability would be required.
Deferred income tax assets and liabilities are determined based on temporarythe estimated future tax effects of differences between the financial reporting and tax bases of assets and liabilities, applying currently enacted tax rates 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 assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes to our estimate of the amount we are more likely than not to realize in the valuation allowance, with a corresponding adjustment to earnings or other comprehensive income (loss), as appropriate.
Significant judgment is required in assessing the need for any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we look toconsider all available evidence, including the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility ofperiods, prudent and feasible tax planning strategies, and estimated future taxable income. The valuation allowance can be affected by changes to tax laws,regulations, interpretations and rulings, changes to enacted statutory tax rates, and changes to future taxable income estimates.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including the reversals of deferred tax liabilities) during the periods in which
those deferred tax assets will become deductible. The Company’s management assesses available positive and negative evidence regarding the realizability of its deferred tax assets, and records a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. To form a conclusion, management considers positive evidence in the form of reversing temporary differences, projections of future taxable income and tax planning strategies, and negative evidence such as recent history of losses. Beginning in 2011, the Company is in a cumulative three-year loss position, which we weighted as a significant source of negative evidence indicating the need for a valuation allowance on our net deferred tax assets. Since the Company was in a three-year cumulative loss position at the end of 2011, management determined that the size and frequency of the losses from continuing operations in recent years and the uncertainty associated with projecting future taxable income supported the conclusion that a valuation allowance was required to reduce its deferred tax assets. If ITT achieves profitability in future periods, then management will evaluate whether its recent history of profitability constitutes sufficient positive evidence to support a reversal of a portion, or all, of the remaining valuation allowance.
Our effective tax rate reflects the impact of certain undistributed foreign earnings for which we have not provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the United States. We plan foreign earnings remittance amounts based on projected cash flow needs, as well as the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Based on these assumptions, we estimate the amount we will distribute to the United States and provide theaccrue U.S. federal taxes due on these planned foreign remittance amounts. Material changes in our estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could impact our effective tax rate.
Our provision for income taxes could be adversely impacted by changes in our geographic mix of earnings or changes in the enacted tax rates in the jurisdictions in which we conduct our business.The calculation of our deferred and other tax liabilitiesbalances involves significant management judgment when dealing with uncertainties in the application of complex tax regulations and rulings in a multitude of taxing jurisdictions across our global operations. The Company is routinely audited by U.S federal, state and foreign tax authorities, the results of which could result in proposed assessments against the Company. 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
50
will be sustained on examination by the taxing authorities, based on the technical merits of the position. Theposition in consideration of applicable tax statutes and related interpretations and precedents and the expected outcome of the proceedings (or negotiations) with the taxing authorities. 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 uponon 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 of a tax examination may resultdiffer from the amounts recorded in the financial statements for a payment that is materially different from our current estimatenumber of reasons, including the Company’s decision to settle rather than litigate a matter, relevant legal precedent related to similar matters, and the Company’s success in supporting its filing positions with the tax liabilities.authorities. If our estimate of tax liabilities proves to be lessdifferent than the ultimate assessment, an additional tax expense would result. If a payment of these amounts ultimately proves to be less thanoutcome, such differences will effect the recorded amounts, the reversal of the liabilities would result in tax benefits being recognizedprovision for income taxes in the period whenin which such determination is made.
Postretirement Plans
ITT sponsors numerous defined benefit pension and other postretirement benefit plans for certain employees around the world (collectively, postretirement benefit plans). Postretirement benefit obligations for domestic plans are generally determined on a flat dollar benefit formula and years of service. Foreign plan benefit obligations are primarily determined based on participant years of service, future compensation, and age at retirement or termination. The determination of projected benefit obligations and the recognition of expenses related to postretirement benefit plans are dependent on various assumptions that are judgmental and developed in consultation with our actuaries and other advisors. The major assumptions involved in the measurement of our postretirement benefit plan obligations and net periodic postretirement costs primarily relate to discount rates, long-term expected rates of return on plan assets, and mortality and termination rates. 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 with external advisors and adjusted as necessary. The table included below provides the weighted average assumptions used to estimate our defined benefit pension obligations and costs as of and for the years ended 2011 and 2010.
| | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 |
| | | U.S. | | Int’l | | U.S. | | Int’l |
Obligation Assumptions: | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | | 4.79 | % | | | | 4.85 | % | | | | 5.69 | % | | | | 5.03 | % |
Cost Assumptions: | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | | 5.69 | % | | | | 5.03 | % | | | | 6.00 | % | | | | 5.09 | % |
Expected return on plan assets | | | | 9.00 | % | | | | 4.75 | % | | | | 9.00 | % | | | | 4.75 | % |
The assumed discount rates reflect 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 net periodic postretirement cost. We base the discount rate assumption on current investment yields of high-quality fixed income securities during the retirement benefits maturity period. The discount rates were determined by considering an interest rate yield curve comprising high quality corporate bonds, with maturities between zero and thirty years. 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 postretirement benefit plan obligations, including foreign affiliate plans, at December 31, 2011 is 4.80%.
We determine our expected return on plan assets by evaluating both historical returns and estimates of future returns. Specifically, we determineestimate future returns based on independent estimates of asset class returns weighted by the liabilities are no longer necessary.targeted investment allocation and evaluate historical broad market returns over long-term timeframes based on our targeted asset allocation, which is detailed in Note 17, “Postretirement Benefit Plans,” to the Consolidated Financial Statements. Based on this approach, our weighted average expected return on plan assets for all postretirement benefit plans, including foreign affiliate plans, at December 31, 2011 is 8.96%.
Prior to the Distribution of Exelis and Xylem, the Company’s U.S. postretirement plans participated in a master trust that invested in asset classes that historically generated asset returns in excess of the expected long-term rate of return on plan assets. With the distribution of certain postretirement benefit plans and their respective plan assets to Exelis and
51
Xylem, we developed a new targeted asset allocation that is expected to generate a lower level of returns on plan assets than were realized in the past. Accordingly, we have reduced our long-term expected rate of return on plan assets beginning in 2012. For postretirement plans that participated in the master trust distributed to Exelis, the chart below shows actual returns compared to the expected long-term returns for our U.S. postretirement plans that were utilized in the calculation of the net periodic postretirement cost for each respective year.
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
Expected long-term rate of return on plan assets | | | | 9.0 | % | | | | 9.0 | % | | | | 9.0 | % |
Actual rate of return on plan assets | | | | (3.2 | )% | | | | 14.1 | % | | | | 24.1 | % |
For the recognition of net periodic postretirement 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 market-related value, of plan assets could materially affect net periodic postretirement cost.
Assumption Sensitivity
A 25 basis point increase or decrease in the expected rate of return on plan assets, discount rate, or rate of future compensation increases, would not have a material effect on 2012 postretirement expense. We estimate that every 25 basis point change in the discount rate impacts the funded status of our postretirement benefit plans by approximately $14. Similarly, every five percentage point change in the fair value of plan assets impacts the funded status by approximately $10.
Goodwill and Other Intangible Assets
We review goodwill and 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 also review the carrying value of our finite-lived intangible assets for potential impairment when impairment indicators arise. 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 estimated fair value of each reporting unit to its carrying value. If the estimated 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 exceeds 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. In our annual impairment test for indefinite-lived intangible assets, we
compare the fair value of those assets to their carrying value. We recognize an impairment loss when the estimated fair value
44
of the indefinite-lived intangible asset is less than its carrying value. We estimate the fair value of our reporting units and intangible assets with indefinite lives using an income approach.approach, corroborated by market multiples when appropriate. 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 intangible asset is judgmental in nature and involves the use of significant estimates and assumptions, particularly related to future operating results and cash flows. 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 the reporting units when determining the carrying value of each reporting unit also requires judgment. Goodwill is tested for impairment at the reporting unit level, which, based on the applicable accounting guidance, is either the reportable segment (e.g., for the Fluid segment) identified in Note 21, “Business Segment22, “Segment Information,” to our Notes to the Consolidated Financial Statements, or one level below (e.g., the divisions of our Defense and Motion and Flow segments)Control Technology segment). The fair value of our reporting units and indefinite-lived 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 2010 Further, had different reporting units been identified or had different valuation methodologies or assumptions been utilized, the results of our impairment tests could have resulted in an impairment loss, which could have been material.The 2011 annual goodwill impairment test indicated that the fair value of each reporting unit was significantly in excess of its respective carrying value. In connection with the Distribution of Exelis and Xylem, we conducted an interim goodwill impairment test as of October 31, 2011. The 2011 interim goodwill impairment analysis indicated the estimated fair value of our reporting units significantly exceeded their carrying value,value. The reporting unit with the lowest passing margin as of the 2011 interim goodwill impairment test had $56 million of goodwill and accordingly,passed the test by 39%. Accordingly, no reporting unit with significant goodwill was at risk of failing step one of the goodwill impairment charges were recorded.test at October 31, 2011. In order to evaluate the sensitivity of the fair value estimates on the goodwill impairment test, we applied a hypothetical 100 basis point increase to the discount rates utilized, a ten percent reduction in expected future cash flows,
52
and reduced the assumed future growth rates of each reporting unit to zero. These hypothetical changes did not result in any reporting unit failing step one of the impairment test. Further, our 20102011 annual indefinite-lived intangible asset impairment test did not result in an impairment charge as the estimated fair value of the assets significantly exceeded their carrying value.values.
Environmental Liabilities
We are subject to various federal, state, local and foreign environmental laws and regulations that require environmental assessment or remediation efforts. Accruals for environmental exposures 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. Significant judgment is required to determine both the likelihood of a loss and the estimated amount of loss. Engineering studies, probability techniques, historical experience and other factors are used to identify and evaluate remediation alternatives and their related costs in estimating our reserve for environmental liabilities. Our environmental reserve of $102 related to environmental matters at December 31, 2011, represents management’s estimate of undiscounted costs expected to be incurred related to environmental assessment or remediation efforts, as well as related legal fees, without regard to potential recoveries from insurance companies or other third parties. Our estimated liability is reduced to reflect the 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 share of the relevant costs. Our environmental accruals are reviewed and adjusted for progress of investigation and remediation efforts and as additional technical or legal information become available, such as the impact of negotiations with regulators and other potentially responsible parties, settlements, rulings, advice of legal counsel, and other current information.
We closely monitor our environmental responsibilities, together with trends in the environmental laws. Environmental remediation reserves are subject to numerous inherent uncertainties that affect our ability to estimate our share of the costs. Such uncertainties involve incomplete information regarding particular sites and other potentially responsible parties, uncertainty regarding the nature and extent of contamination at each site, the extent of remediation required under existing regulations, our share of any remediation liability, if any, widely varying cost estimates associated with potential alternative remedial approaches, the length of time required to remediate a particular site, the potential effects of continuing improvements in remediation technology, and changes in environmental standards and regulatory requirements. While environmental laws and regulations are
subject to change, the nature of such change is inherently unpredictable and the timing of potential changes is uncertain. The effect of legislative or regulatory changes on environmental standards could be material to the Company’s financial position or results of operations. Additionally, violations by us of such laws and regulations, discovery of previously unknown or more extensive contamination, litigation involving environmental impacts, our inability to recover costs associated with any such developments, or financial insolvency of other potentially responsible parties could have a material adverse effect on our financial position, results of operations, or cash flows.
Although it is not possible to predict with certainty the ultimate costs of environmental remediation, the reasonably possible low- and high end range of our estimated environmental liability, for these environmental matters at December 31, 2011 was $81 and $175.
NewRecent Accounting Pronouncements
See Note 2, “New“Recent 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 and Cautionary Statements
Some of the information included herein includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995 (the Act). These forward-looking statements include statements that describe our business strategy, outlook, objectives, plans, intentions or goals, and any discussion of future operating or financial performance. Whenever used, words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target” and other terms of similar meaning are intended to identify such forward-looking statements. Forward-looking statements are uncertain and to some extent unpredictable, and involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed in, or implied from, such forward-looking statements. Factors that could cause results to differ materially from those anticipated include:
| | |
| | n | The effects of the proposed spinoffs of our water and defense business; |
| | Uncertainties with respect to our estimation of asbestos liability exposures, third party recoveries and net cash flows; |
| | n | The tax liability associated with the proposed spinoff transactions; |
|
| | n | The size of ITT’s operational and financial profile after the spinoffs; |
|
| n | Economic, political and social conditions in the countries in which we conduct our businesses; |
|
| | n | | Changes in U.S. or International government defense budgets;sales and operations; |
|
| | n | | Contingencies related to actual or alleged environmental contamination, claims and concerns; |
53
| n | | Decline in consumer spending; |
|
| | n | Sales and revenues | Revenue mix and pricing levels; |
|
| | n | | Availability of adequate labor, commodities, supplies and raw materials; |
|
| | n | Interest and foreign | Foreign currency exchange rate fluctuations and changes in local government regulations;fluctuations; |
|
| | n | | Changes in government regulations and compliance therewith; |
| n | | Competition, industry capacity and production rates; |
|
| | n | | Declines in orders or sales as a result of industry or geographic downturns; |
| 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 | | Changes in the valuerecoverability of goodwill or intangible assets; |
|
| | n | Acquisitions | Our ability to achieve stated synergies or cost savings from acquisitions or divestitures; |
|
| | n | Personal injury claims; |
| | The number of personal injury claims filed against the companies or the degree of liability; |
| | n | Uncertainties with respect to our estimation of asbestos liability exposures, third party recoveries and net cash flows; |
|
| | n | Our ability to affect restructuring and cost reduction programs and realize savings from such actions; |
|
| | n | Government regulations and compliance therewith, including compliance with and costs associated with new Dodd-Frank legislation; |
| | Changes in our effective tax rate as a result in changes in the geographic earnings mix, tax examinations or disputes, tax authority rulings or changes in applicable tax laws; |
| | n | | Intellectual property matters; |
|
| | n | Governmental investigations; |
|
| | n | Potential future postretirement benefit plan contributions and other employment and pension matters; |
45
| | |
| | n | Contingencies related to actual or alleged environmental contamination, claims and concerns; and |
| | Susceptibility to market fluctuations and costs as a result of becoming a smaller, more focused company after the Distribution; and |
| | n | | Changes in generally accepted accounting principles. |
We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, there are risksSee Item 1A. “Risk Factors,” for further discussion pertaining to known and uncertainties relating tounknown risk affecting the planned tax-free spinoffs of our water and defense businesses, including the timing and certainty of the completion of those transactions and the ability of each business to operate as an independent entity. The guidance for full-year 2011 is based on the Company’s current structure and does not give effect to the separation of our water and defense businesses into newly independent public companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Company. | | |
| ITEM 7A. | | QUANTITATIVE AND QUALITATIVE |
| DISCLOSURES ABOUT MARKET RISK |
As a result of our global operating and financing activities, we are exposed to market risks from changes in foreign currency exchange rates interest rates and commodity prices, which may adversely affect our operating results and financial position. The impact
from changes in market conditions is generally minimized through our normal operating and financing activities. However, we may use derivative instruments, primarily forward contracts, to manage some of these exposures. We do not use derivative financial instruments for trading or other speculative purposes. To minimize the risk of counterparty non-performance, derivative instrument agreements are made only through major financial institutions and there is no significant concentration of exposure with any one party.counterparty. A summary of our accounting policies for derivative financial instruments is included in Note 1, “Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements.
Foreign Currency Exchange Rate Exposures
Our foreign currency exchange rate risk relates to receipts from customers, payments to suppliers and intercompany transactions denominated in foreign currencies. We primarily utilize forward contracts to mitigate exposures related to intercompany transactions. As of December 31, 2010,2011, we had a total of 133 forward contracts in place to mitigate exposures related to intercompany transactions with an aggregate notional amount of $197$64 and related net fair value of $2.less than $1. These forward contracts are all short-term in duration, generally maturing within three months from contract date. We may also use derivative financial instruments to offset risk related to receipts from customers and payments to suppliers, when it is believed that the exposure will not be limited by our normal operating and financing activities. Our principal currency exposures relate to the U.S. dollar, Euro, Swedish krona,Czech Kurona, Chinese Renminbi, South Korean Won, Mexican Peso, British pound,Pound, Brazilian Real, Australian Dollar and Canadian dollar, Chinese renminbi and Australian dollar.Dollar. We currently do not believe the net exposure related to receipts from customers and payments to suppliers to be significant, as such we have not entered into any derivative financial instruments to offset this potential exposure.
We estimate that a hypothetical 10% adverse movement in foreign currency rates to which we are exposed would not be material to our financial position, results of operations or cash flows.Effective January 1, 2010, Venezuela was determined to be a highly inflationary economy.economy and we changed the functional currency of our operations in Venezuela to the U.S dollar. In addition, on January 8, 2010, Venezuela announced the devaluation of the Bolivar and provided further currency adjustments on January 1, 2011. Given our limited presence in Venezuela, the devaluation, as well as the highly inflationary accounting treatment has not resulted in, nor is notit expected to have, a material impact on our results of operations, financial position or cash flows.
As of December 31, 2010,2011, we do not have a material exposure to interest rate risk as our debt portfolio entirely comprises long-term, fixed-rate instruments.we have minimal debt. We issue
54
commercial paper, which exposes us to changes in interest rates; however, we do not have an outstanding commercial paper balance as of December 31, 2010. We do not account for our long-term debt using the fair value option.
2011.Commodity Price Exposures:Exposures
Portions of our business are exposed to volatility in the prices of certain commodities, such as copper,steel, iron, aluminum, nickel, tin, and aluminum,copper, among others. Our primary exposure to thiscommodity price volatility resides with the use of these materials in purchased component parts. We generally maintain long-term fixed price contracts on raw materials and component parts; however, we are prone to exposure as these contracts expire. We estimate that a hypothetical 10% adverse movement in prices for raw metal commodities would not be material to the financial position, results of operations or cash flows; however, it is difficult to estimate the extent and timing of how such a rise in raw metal commodities would impact our total cost of purchased component parts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
| | |
| ITEM 9. | | CHANGES IN AND DISAGREEMENTS |
WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
| | |
| ITEM 9A. | | CONTROLS AND PROCEDURES |
Attached as exhibits to theForm 10-K are certifications of the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in accordance with
46
Rule 13a-14 of the Securities Exchange Act of 1934 (Act), as amended.(a) Evaluation of Disclosure Controls and Procedures
| |
(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 theRules 13a-15(e) and15d-15(e) of the Act) as of December 31, 2010.2011. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.
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 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 |
(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 inRules 13a-15(f) and15d-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, 2010.2011. 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, 2010,2011, 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 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,
55
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(c)9B in this Annual Report onForm 10-K.
(c) Changes in Internal Control over Financial Reporting
| |
(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.
ITEM 9B. OTHER INFORMATION
Mine Safety Disclosure
Pursuant to the reporting requirements under Section 1503(a) of the Dodd-Frank Act, the Company is providing the following information: one facility owned and operated by ITT Water and Wastewater Leopold, Inc. is regulated by the Federal Mine Health and Safety Act (MSHA). This facility is a coal processing facility located in Watsontown, Pennsylvania. During 2010, MSHA inspected the Watsontown facility four times. MSHA identified one machine guarding violation during the inspection that commenced on July 7, 2010. This violation was corrected and the Company paid a fine of $127 dollars. As of the date of filing of this Annual Report onForm 10-K, MSHA has identified one violation but has not assessed penalties related to the inspection that commenced on December 6, 2010.
47
| | |
| ITEM 9B. | | OTHER INFORMATION |
None.
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
We have audited the internal control over financial reporting of ITT Corporation and subsidiaries (the “Company”) as of December 31, 2010,2011, based on criteria established inInternal Control — Integrated Frameworkissued 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 accompanyingManagement’s Report on InternalControl 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, 2010,2011, based on the criteria established inInternal Control — Integrated Frameworkissued 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, 20102011 of the Company and our report dated February 24, 201129, 2012 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
|
| /S/ DELOITTE & TOUCHE |
| Stamford, Connecticut |
February 24, 2011
48
29, 2012
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
| | |
| 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 20102011 annual meeting of shareholders to be filed pursuant to Regulation 14A of the Exchange Act set forth under the captions “Election“1. Election of Directors,” “Information About the Board of Directors”Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” 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 http://www.itt.com/responsibility/investors/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”)Selected Officers). The 2011 Code of Conduct is available on the company’s website at http://www.itt.com/news/publications/. In accordance with the SEC’s rules and regulations, a copy of the code was filed as an exhibit to the 2002Form 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 2010.2011. The Company also filed with the SEC, as exhibits to the Company’s current Annual Report onForm 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
| | |
| 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 captioncaptions “Executive Compensation” and “2011 Non-Management Director Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
| | |
| 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 “Stock Ownership of Directors and Executive Officers,” “Beneficial Ownership of ITT Corporation Common Stock” and “Equity Compensation Plan Information.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
| | |
| 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
| | |
| 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.“2. Ratification of Appointment of the Independent Registered Accounting Firm.”
49
PART IV
58
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULEPART IV
(a) Documents filed as a part of this report:
| | |
| ITEM 15. | | EXHIBITS AND FINANCIAL |
| STATEMENT SCHEDULES |
| (a) | Documents filed as a part of this report: |
| | 1. | See Index to Consolidated Financial Statements appearing on page 51XXX 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. |
50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
We have audited the accompanying consolidated balance sheets of ITT Corporation and subsidiaries (the “Company”) as of December 31, 20102011 and 2009,2010, 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, 2010.2011. 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, 20102011 and 2009,2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010,2011, 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, 2010,2011, based on the criteria established inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 201129, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
|
| /S/ DELOITTE & TOUCHE |
| Stamford, Connecticut |
February 24, 2011
52
29, 2012
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
| | | | | | | | | | | | | | | | |
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
| | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31 | | | 2010 | | | | 2009 | | | | 2008 | |
| Product revenue | | | $ | 8,494 | | | | $ | 8,244 | | | | $ | 9,181 | |
| Service revenue | | | | 2,501 | | | | | 2,430 | | | | | 2,295 | |
| | | | | | | | | | | | | | | | |
| Total revenue | | | | 10,995 | | | | | 10,674 | | | | | 11,476 | |
| | | | | | | | | | | | | | | | |
| Costs of product revenue | | | | 5,624 | | | | | 5,528 | | | | | 6,255 | |
| Costs of service revenue | | | | 2,196 | | | | | 2,122 | | | | | 2,007 | |
| | | | | | | | | | | | | | | | |
| Total costs of revenue | | | | 7,820 | | | | | 7,650 | | | | | 8,262 | |
| | | | | | | | | | | | | | | | |
| Gross profit | | | | 3,175 | | | | | 3,024 | | | | | 3,214 | |
| Selling, general and administrative expenses | | | | 1,584 | | | | | 1,555 | | | | | 1,689 | |
| Research and development expenses | | | | 253 | | | | | 258 | | | | | 236 | |
| Asbestos-related costs, net | | | | 385 | | | | | 238 | | | | | 14 | |
| Restructuring and asset impairment charges, net | | | | 53 | | | | | 79 | | | | | 77 | |
| | | | | | | | | | | | | | | | |
| Operating income | | | | 900 | | | | | 894 | | | | | 1,198 | |
| Interest expense | | | | 100 | | | | | 99 | | | | | 140 | |
| Interest income | | | | 16 | | | | | 24 | | | | | 31 | |
| Miscellaneous (income) expense, net | | | | (2 | ) | | | | 9 | | | | | 13 | |
| | | | | | | | | | | | | | | | |
| Income from continuing operations before income tax expense | | | | 818 | | | | | 810 | | | | | 1,076 | |
| Income tax expense | | | | 164 | | | | | 169 | | | | | 308 | |
| | | | | | | | | | | | | | | | |
| Income from continuing operations | | | | 654 | | | | | 641 | | | | | 768 | |
| Income from discontinued operations, including tax (expense) benefit of $(8), $(1) and $2, respectively | | | | 144 | | | | | 3 | | | | | 27 | |
| | | | | | | | | | | | | | | | |
| Net income | | | $ | 798 | | | | $ | 644 | | | | $ | 795 | |
| | | | | | | | | | | | | | | | |
| Earnings Per Share: | | | | | | | | | | | | | | | |
| Basic: | | | | | | | | | | | | | | | |
| Continuing operations | | | $ | 3.55 | | | | $ | 3.51 | | | | $ | 4.22 | |
| Discontinued operations | | | | 0.79 | | | | | 0.02 | | | | | 0.15 | |
| Net income | | | $ | 4.34 | | | | $ | 3.53 | | | | $ | 4.37 | |
| Diluted: | | | | | | | | | | | | | | | |
| Continuing operations | | | $ | 3.53 | | | | $ | 3.49 | | | | $ | 4.17 | |
| Discontinued operations | | | | 0.77 | | | | | 0.01 | | | | | 0.15 | |
| Net income | | | $ | 4.30 | | | | $ | 3.50 | | | | $ | 4.32 | |
| Weighted average common shares – basic | | | | 183.9 | | | | | 182.5 | | | | | 181.9 | |
| Weighted average common shares – diluted | | | | 185.3 | | | | | 183.9 | | | | | 184.0 | |
| Cash dividends declared per common share | | | $ | 1.00 | | | | $ | 0.85 | | | | $ | 0.70 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31 | | 2011 | | 2010 | | 2009 |
Revenue | | | $ | 2,119 | | | | $ | 1,908 | | | | $ | 1,770 | |
Costs of revenue | | | | 1,464 | | | | | 1,301 | | | | | 1,207 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | | 655 | | | | | 607 | | | | | 563 | |
| | | | | | | | | | | | | | | | |
Sales and marketing expenses | | | | 167 | | | | | 166 | | | | | 149 | |
General and administrative expenses | | | | 168 | | | | | 176 | | | | | 201 | |
Research and development expenses | | | | 66 | | | | | 61 | | | | | 53 | |
Restructuring and asset impairment charges, net | | | | 5 | | | | | 3 | | | | | 43 | |
Asbestos-related costs, net | | | | 100 | | | | | 385 | | | | | 238 | |
Transformation costs | | | | 396 | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | |
Operating loss | | | | (247 | ) | | | | (184 | ) | | | | (121 | ) |
| | | | | | | | | | | | | | | | |
Interest expense | | | | 76 | | | | | 97 | | | | | 98 | |
Interest income | | | | 4 | | | | | 11 | | | | | 17 | |
Miscellaneous (income) expense, net | | | | (1 | ) | | | | 6 | | | | | 6 | |
| | | | | | | | | | | | | | | | |
Loss from continuing operations before income tax expense (benefit) | | | | (318 | ) | | | | (276 | ) | | | | (208 | ) |
| | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | | | 260 | | | | | (144 | ) | | | | (97 | ) |
| | | | | | | | | | | | | | | | |
Loss from continuing operations | | | | (578 | ) | | | | (132 | ) | | | | (111 | ) |
| | | | | | | | | | | | | | | | |
Income from discontinued operations, including tax expense of $237, $330 and $275, respectively | | | | 448 | | | | | 807 | | | | | 740 | |
Gain on sale of discontinued operation, including tax benefit of $4 | | | | – | | | | | 129 | | | | | – | |
| | | | | | | | | | | | | | | | |
Net (loss) income | | | $ | (130 | ) | | | $ | 804 | | | | $ | 629 | |
| | | | | | | | | | | | | | | | |
Basic and Diluted Earnings Per Share: | | | | | | | | | | | | | | | |
Continuing operations | | | $ | (6.23 | ) | | | $ | (1.44 | ) | | | $ | (1.21 | ) |
Discontinued operations | | | | 4.83 | | | | | 10.19 | | | | | 8.10 | |
| | | | | | | | | | | | | | | | |
Net (loss) income | | | $ | (1.40 | ) | | | $ | 8.75 | | | | $ | 6.89 | |
| | | | | | | | | | | | | | | | |
Weighted average common shares – basic and diluted | | | | 92.8 | | | | | 92.0 | | | | | 91.3 | |
Cash dividends declared per common share | | | $ | 1.591 | | | | $ | 2.00 | | | | $ | 1.70 | |
| | | | | | | | | | | | | | | | |
The accompanying Notes to Consolidated Financial Statements are an integral part of the above income statements.
53
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | |
(IN MILLIONS)
| | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31 | | | 2010 | | | | 2009 | | | | 2008 | |
| Net income | | | $ | 798 | | | | $ | 644 | | | | $ | 795 | |
| Other comprehensive income: | | | | | | | | | | | | | | | |
| Net foreign currency translation adjustment | | | | (74 | ) | | | | 126 | | | | | (221 | ) |
| Net change in postretirement benefit plans, net of tax (expense) benefit of $(19), $(89) and $781, respectively | | | | 27 | | | | | 146 | | | | | (1,338 | ) |
| Net change in unrealized gains on investment securities, net of tax (expense) of $0, $(7) and $0, respectively | | | | — | | | | | 11 | | | | | — | |
| | | | | | | | | | | | | | | | |
| Other comprehensive (loss) income | | | | (47 | ) | | | | 283 | | | | | (1,559 | ) |
| | | | | | | | | | | | | | | | |
| Comprehensive income (loss) | | | $ | 751 | | | | $ | 927 | | | | $ | (764 | ) |
| | | | | | | | | | | | | | | | |
Disclosure of reclassification adjustment: | | | | | | | | | | | | | | | |
| Net foreign currency translation adjustment: | | | | | | | | | | | | | | | |
| Foreign currency translation (loss) gain | | | $ | (74 | ) | | | $ | 126 | | | | $ | (215 | ) |
| Foreign currency translation gains included in net income | | | | — | | | | | — | | | | | (6 | ) |
| | | | | | | | | | | | | | | | |
| Net foreign currency translation adjustment | | | $ | (74 | ) | | | $ | 126 | | | | $ | (221 | ) |
| | | | | | | | | | | | | | | | |
| Net change in postretirement benefit plans, net of tax: | | | | | | | | | | | | | | | |
| Prior service (cost) benefit from plan amendment, net of tax benefit (expense) of $1, $(1) and $(1), respectively | | | $ | (3 | ) | | | $ | 2 | | | | $ | 2 | |
| Net actuarial (loss) gain arising during the period, net of tax benefit(expense) of $14, $(61) and $792, respectively | | | | (24 | ) | | | | 100 | | | | | (1,357 | ) |
| | | | | | | | | | | | | | | | |
| Unrealized changes in postretirement benefit plans, net of tax | | | | (27 | ) | | | | 102 | | | | | (1,355 | ) |
| Amortization of prior service costs, net of tax benefit of $1, $3 and $2, respectively | | | | 1 | | | | | 5 | | | | | 4 | |
| Amortization of net actuarial loss, net of tax benefit of $33, $24 and $8, respectively | | | | 53 | | | | | 39 | | | | | 13 | |
| | | | | | | | | | | | | | | | |
| Total amortization from accumulated other comprehensive income into net period benefit cost, net of tax | | | | 54 | | | | | 44 | | | | | 17 | |
| | | | | | | | | | | | | | | | |
| Net change in postretirement benefit plans, net of tax | | | $ | 27 | | | | $ | 146 | | | | $ | (1,338 | ) |
| | | | | | | | | | | | | | | | |
| Net change in unrealized gains on investment securities, net of tax: | | | | | | | | | | | | | | | |
| Unrealized holding gains arising during period, net of tax expense of $3, $7 and $0, respectively | | | $ | 4 | | | | $ | 11 | | | | $ | — | |
| Realized gains arising during the period, net of tax expense of $3, $0 and $0, respectively | | | | (4 | ) | | | | — | | | | | — | |
| | | | | | | | | | | | | | | | |
| Net change in unrealized gains on investment securities, net of tax | | | $ | — | | | | $ | 11 | | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(IN MILLIONS) YEARS ENDED DECEMBER 31 | | 2011 | | 2010 | | 2009 |
Net (loss) income | | | $ | (130 | ) | | | $ | 804 | | | | $ | 629 | |
Other comprehensive (loss) income: | | | | | | | | | | | | | | | |
Net foreign currency translation adjustment | | | | (40 | ) | | | | (74 | ) | | | | 126 | |
Net change in postretirement benefit plans, net of tax (expense) benefit of $399, $(19) and $(88), respectively | | | | (508 | ) | | | | 29 | | | | | 141 | |
Net change in unrealized gains on investment securities, net of tax (expense) benefit of $8, $0 and $(7), respectively | | | | (12 | ) | | | | (1 | ) | | | | 12 | |
| | | | | | | | | | | | | | | | |
Other comprehensive (loss) income | | | | (560 | ) | | | | (46 | ) | | | | 279 | |
| | | | | | | | | | | | | | | | |
Comprehensive (loss) income | | | $ | (690 | ) | | | $ | 758 | | | | $ | 908 | |
| | | | | | | | | | | | | | | | |
Disclosure of reclassification adjustments: | | | | | | | | | | | | | | | |
Net change in postretirement benefit plans, net of tax: | | | | | | | | | | | | | | | |
Prior service benefit (cost) from plan amendment, net of tax (expense) benefit of $(1), $1 and $(1), respectively | | | $ | 2 | | | | $ | (2 | ) | | | $ | 2 | |
Net actuarial (loss) gain arising during the period, net of tax benefit (expense) of $443, $14 and $(61), respectively | | | | (580 | ) | | | | (23 | ) | | | | 95 | |
| | | | | | | | | | | | | | | | |
Unrealized changes in postretirement benefit plans, net of tax | | | | (578 | ) | | | | (25 | ) | | | | 97 | |
Amortization of prior service costs, net of tax benefit of $(1), $(1) and $(2), respectively | | | | 2 | | | | | 1 | | | | | 5 | |
Amortization of net actuarial loss, net of tax benefit of $(42), $(33) and $(24), respectively | | | | 68 | | | | | 53 | | | | | 39 | |
| | | | | | | | | | | | | | | | |
Total amortization from accumulated other comprehensive loss into net periodic benefit cost, net of tax | | | | 70 | | | | | 54 | | | | | 44 | |
| | | | | | | | | | | | | | | | |
Net change in postretirement benefit plans, net of tax | | | $ | (508 | ) | | | $ | 29 | | | | $ | 141 | |
| | | | | | | | | | | | | | | | |
Net change in unrealized gains on investment securities, net of tax: | | | | | | | | | | | | | | | |
Unrealized holding (losses) gains arising during period, net of tax benefit (expense) of $2, $(3) and $(7), respectively | | | $ | (2 | ) | | | $ | 4 | | | | $ | 12 | |
Realized gains arising during the period, net of tax expense of $6, $3 and $0, respectively | | | | (10 | ) | | | | (5 | ) | | | | – | |
| | | | | | | | | | | | | | | | |
Net change in unrealized gains on investment securities, net of tax | | | $ | (12 | ) | | | $ | (1 | ) | | | $ | 12 | |
| | | | | | | | | | | | | | | | |
The accompanying Notes to Consolidated Financial Statements are an integral part of the above statements of comprehensive income (loss).
54
income.
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
| | | | | | | | |
| DECEMBER 31 | | | 2010 | | | | 2009 | |
Assets | | | | | | | | | | |
| Current assets: | | | | | | | | | | |
| Cash and cash equivalents | | | $ | 1,032 | | | | $ | 1,216 | |
| Receivables, net | | | | 1,944 | | | | | 1,754 | |
| Inventories, net | | | | 856 | | | | | 802 | |
| Other current assets | | | | 562 | | | | | 579 | |
| | | | | | | | | | | |
| Total current assets | | | | 4,394 | | | | | 4,351 | |
| | | | | | | | | | | |
| Plant, property and equipment, net | | | | 1,205 | | | | | 1,050 | |
| Deferred income taxes | | | | 554 | | | | | 583 | |
| Goodwill | | | | 4,277 | | | | | 3,788 | |
| Other intangible assets, net | | | | 766 | | | | | 501 | |
| Asbestos-related assets | | | | 930 | | | | | 604 | |
| Other non-current assets | | | | 312 | | | | | 252 | |
| | | | | | | | | | | |
| Total non-current assets | | | | 8,044 | | | | | 6,778 | |
| | | | | | | | | | | |
Total assets | | | $ | 12,438 | | | | $ | 11,129 | |
| | | | | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | |
| Accounts payable | | | $ | 1,472 | | | | $ | 1,273 | |
| Accrued liabilities | | | | 1,262 | | | | | 1,276 | |
| Short-term borrowings and current maturities of long-term debt | | | | 11 | | | | | 75 | |
| | | | | | | | | | | |
| Total current liabilities | | | | 2,745 | | | | | 2,624 | |
| | | | | | | | | | | |
| Postretirement benefits | | | | 1,733 | | | | | 1,788 | |
| Long-term debt | | | | 1,354 | | | | | 1,431 | |
| Asbestos-related liabilities | | | | 1,559 | | | | | 867 | |
| Other non-current liabilities | | | | 542 | | | | | 541 | |
| | | | | | | | | | | |
| Total non-current liabilities | | | | 5,188 | | | | | 4,627 | |
| | | | | | | | | | | |
Total liabilities | | | | 7,933 | | | | | 7,251 | |
| | | | | | | | | | | |
| Shareholders’ Equity: | | | | | | | | | | |
Common stock: Authorized – 500.0 shares, $1 par value per share (206.9 shares issued) Outstanding – 184.0 shares and 182.9 shares, respectively(a) | | | | 183 | | | | | 181 | |
| Retained earnings | | | | 5,409 | | | | | 4,737 | |
| Total accumulated other comprehensive loss | | | | (1,087 | ) | | | | (1,040 | ) |
| | | | | | | | | | | |
Total shareholders’ equity | | | | 4,505 | | | | | 3,878 | |
| | | | | | | | | | | |
Total liabilities and shareholders’ equity | | | $ | 12,438 | | | | $ | 11,129 | |
| | | | | | | | | | | |
| | | | | | | | | | |
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31 | | 2011 | | 2010 |
Assets | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | | $ | 690 | | | | $ | 206 | |
Receivables, net | | | | 396 | | | | | 315 | |
Inventories, net | | | | 254 | | | | | 218 | |
Other current assets | | | | 422 | | | | | 228 | |
Current assets of discontinued operations | | | | – | | | | | 3,457 | |
| | | | | | | | | | | |
Total current assets | | | | 1,762 | | | | | 4,424 | |
| | | | | | | | | | | |
Plant, property and equipment, net | | | | 324 | | | | | 299 | |
Deferred income taxes | | | | 45 | | | | | 320 | |
Goodwill | | | | 510 | | | | | 504 | |
Other intangible assets, net | | | | 88 | | | | | 92 | |
Asbestos-related assets | | | | 821 | | | | | 930 | |
Other non-current assets | | | | 121 | | | | | 181 | |
Non-current assets of discontinued operations | | | | – | | | | | 5,865 | |
| | | | | | | | | | | |
Total non-current assets | | | | 1,909 | | | | | 8,191 | |
| | | | | | | | | | | |
Total assets | | | $ | 3,671 | | | | $ | 12,615 | |
| | | | | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable | | | $ | 364 | | | | $ | 397 | |
Accrued liabilities | | | | 468 | | | | | 442 | |
Short-term borrowings and current maturities of long-term debt | | | | 2 | | | | | 10 | |
Current liabilities of discontinued operations | | | | – | | | | | 1,892 | |
| | | | | | | | | | | |
Total current liabilities | | | | 834 | | | | | 2,741 | |
| | | | | | | | | | | |
Postretirement benefits | | | | 315 | | | | | 262 | |
Long-term debt | | | | 4 | | | | | 1,350 | |
Asbestos-related liabilities | | | | 1,529 | | | | | 1,559 | |
Other non-current liabilities | | | | 295 | | | | | 325 | |
Non-current liabilities of discontinued operations | | | | – | | | | | 1,917 | |
| | | | | | | | | | | |
Total non-current liabilities | | | | 2,143 | | | | | 5,413 | |
| | | | | | | | | | | |
Total liabilities | | | | 2,977 | | | | | 8,154 | |
| | | | | | | | | | | |
Shareholders’ Equity: | | | | | | | | | | |
Common stock: Authorized – 250 shares, $1 par value per share (104.1 shares issued(a))
Outstanding – 93.5 shares and 92.6, respectively(a) | | | | 93 | | | | | 92 | |
Retained earnings | | | | 852 | | | | | 5,441 | |
Accumulated other comprehensive loss: | | | | | | | | | | |
Postretirement benefit plans | | | | (153 | ) | | | | (1,359 | ) |
Cumulative translation adjustments | | | | (97 | ) | | | | 276 | |
Unrealized (loss) gain on investment securities | | | | (1 | ) | | | | 11 | |
| | | | | | | | | | | |
Total shareholders’ equity | | | | 694 | | | | | 4,461 | |
| | | | | | | | | | | |
Total liabilities and shareholders’ equity | | | $ | 3,671 | | | | $ | 12,615 | |
| | | | | | | | | | | |
| |
| (a) | Shares issued and outstanding include unvested restricted common stock of 1.00.5 and 1.30.6 at December 31, 20102011 and 2009,2010, respectively. |
The accompanying Notes to Consolidated Financial Statements are an integral part of the above balance sheets.
55
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | |
(IN MILLIONS)
| | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31 | | | 2010 | | | | 2009 | | | | 2008 | |
Operating Activities | | | | | | | | | | | | | | | |
| Net income | | | $ | 798 | | | | $ | 644 | | | | $ | 795 | |
| Less: Income from discontinued operations | | | | 144 | | | | | 3 | | | | | 27 | |
| | | | | | | | | | | | | | | | |
| Income from continuing operations | | | | 654 | | | | | 641 | | | | | 768 | |
| Adjustments to income from continuing operations: | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | | 297 | | | | | 289 | | | | | 274 | |
| Deferred income taxes | | | | (115 | ) | | | | (77 | ) | | | | 12 | |
| Stock-based compensation | | | | 30 | | | | | 31 | | | | | 30 | |
| Asbestos-related costs, net | | | | 385 | | | | | 238 | | | | | 14 | |
| Restructuring and asset impairment charges, net | | | | 53 | | | | | 79 | | | | | 77 | |
| Payments for restructuring | | | | (70 | ) | | | | (82 | ) | | | | (54 | ) |
| Contributions to pension plans | | | | (76 | ) | | | | (161 | ) | | | | (24 | ) |
| Change in receivables | | | | (150 | ) | | | | 187 | | | | | (108 | ) |
| Change in inventories | | | | 50 | | | | | 21 | | | | | 70 | |
| Change in accounts payable | | | | 174 | | | | | 33 | | | | | (50 | ) |
| Change in accrued liabilities | | | | 47 | | | | | 6 | | | | | 109 | |
| Change in accrued taxes | | | | (73 | ) | | | | 63 | | | | | 5 | |
| Change in other assets | | | | (24 | ) | | | | (21 | ) | | | | (5 | ) |
| Change in other liabilities | | | | 35 | | | | | (13 | ) | | | | (7 | ) |
| Other, net | | | | 17 | | | | | 24 | | | | | (4 | ) |
| | | | | | | | | | | | | | | | |
Net Cash – Operating activities | | | | 1,234 | | | | | 1,258 | | | | | 1,107 | |
| | | | | | | | | | | | | | | | |
Investing Activities | | | | | | | | | | | | | | | |
| Capital expenditures | | | | (328 | ) | | | | (271 | ) | | | | (248 | ) |
| Acquisitions, net of cash acquired | | | | (1,041 | ) | | | | (34 | ) | | | | (276 | ) |
| Proceeds from sale of discontinued operations and other assets | | | | 257 | | | | | 20 | | | | | 22 | |
| Other, net | | | | (5 | ) | | | | — | | | | | — | |
| | | | | | | | | | | | | | | | |
Net Cash – Investing activities | | | | (1,117 | ) | | | | (285 | ) | | | | (502 | ) |
| | | | | | | | | | | | | | | | |
Financing Activities | | | | | | | | | | | | | | | |
| Short-term debt, net | | | | (63 | ) | | | | (1,603 | ) | | | | (1,229 | ) |
| Long-term debt repaid | | | | (79 | ) | | | | (29 | ) | | | | (23 | ) |
| Long-term debt issued | | | | 1 | | | | | 992 | | | | | 1 | |
| Repurchase of common stock | | | | — | | | | | — | | | | | (75 | ) |
| Proceeds from issuance of common stock | | | | 28 | | | | | 15 | | | | | 34 | |
| Dividends paid | | | | (176 | ) | | | | (148 | ) | | | | (121 | ) |
| Other, net | | | | (1 | ) | | | | 1 | | | | | 6 | |
| | | | | | | | | | | | | | | | |
Net Cash – Financing activities | | | | (290 | ) | | | | (772 | ) | | | | (1,407 | ) |
| | | | | | | | | | | | | | | | |
| Exchange rate effects on cash and cash equivalents | | | | (18 | ) | | | | 40 | | | | | (74 | ) |
| Net cash from discontinued operations | | | | 7 | | | | | 10 | | | | | 1 | |
| | | | | | | | | | | | | | | | |
| Net change in cash and cash equivalents | | | | (184 | ) | | | | 251 | | | | | (875 | ) |
| Cash and cash equivalents – beginning of year | | | | 1,216 | | | | | 965 | | | | | 1,840 | |
| | | | | | | | | | | | | | | | |
Cash and Cash Equivalents – End of Year | | | $ | 1,032 | | | | $ | 1,216 | | | | $ | 965 | |
| | | | | | | | | | | | | | | | |
Supplemental Disclosures of Cash Flow Information | | | | | | | | | | | | | | | |
| Cash paid during the year for: | | | | | | | | | | | | | | | |
| Interest | | | $ | 92 | | | | $ | 90 | | | | $ | 136 | |
| Income taxes (net of refunds received) | | | $ | 343 | | | | $ | 181 | | | | $ | 280 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(IN MILLIONS) YEARS ENDED DECEMBER 31 | | 2011 | | 2010 | | 2009 |
Operating Activities | | | | | | | | | | | | | | | |
Net (loss) income | | | | (130 | ) | | | | 804 | | | | | 629 | |
Less: Income from discontinued operations | | | | 448 | | | | | 936 | | | | | 740 | |
| | | | | | | | | | | | | | | | |
Loss from continuing operations | | | | (578 | ) | | | | (132 | ) | | | | (111 | ) |
Adjustments to loss from continuing operations | | | | | | | | | | | | | | | |
Depreciation and amortization | | | | 74 | | | | | 66 | | | | | 65 | |
Stock-based compensation | | | | 12 | | | | | 10 | | | | | 18 | |
Restructuring and asset impairment charges, net | | | | 5 | | | | | 3 | | | | | 43 | |
Asbestos-related costs, net | | | | 100 | | | | | 385 | | | | | 238 | |
Transformation costs | | | | 396 | | | | | – | | | | | – | |
Deferred income taxes | | | | 303 | | | | | (111 | ) | | | | (122 | ) |
Restructuring payments | | | | (7 | ) | | | | (27 | ) | | | | (30 | ) |
Asbestos-related payments | | | | (21 | ) | | | | – | | | | | (7 | ) |
Transformation-related payments | | | | (355 | ) | | | | – | | | | | – | |
Contributions to pension plans | | | | (30 | ) | | | | (14 | ) | | | | (7 | ) |
Changes in assets and liabilities (net of acquisitions): | | | | | | | | | | | | | | | |
Change in receivables | | | | (74 | ) | | | | 1 | | | | | 5 | |
Change in inventories | | | | (38 | ) | | | | (41 | ) | | | | (7 | ) |
Change in accounts payable | | | | 4 | | | | | 83 | | | | | (18 | ) |
Change in accrued expenses | | | | 38 | | | | | (29 | ) | | | | 30 | |
Change in accrued income taxes | | | | (99 | ) | | | | (259 | ) | | | | 95 | |
Other, net | | | | (53 | ) | | | | (12 | ) | | | | 69 | |
| | | | | | | | | | | | | | | | |
Net Cash – Operating activities | | | | (323 | ) | | | | (77 | ) | | | | 261 | |
| | | | | | | | | | | | | | | | |
Investing Activities | | | | | | | | | | | | | | | |
Capital expenditures | | | | (103 | ) | | | | (127 | ) | | | | (92 | ) |
Acquisitions, net of cash acquired | | | | (16 | ) | | | | (10 | ) | | | | – | |
Proceeds from sale of discontinued operations and other assets | | | | 11 | | | | | 1 | | | | | 6 | |
Other, net | | | | 1 | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | |
Net Cash – Investing activities | | | | (107 | ) | | | | (136 | ) | | | | (86 | ) |
| | | | | | | | | | | | | | | | |
Financing Activities | | | | | | | | | | | | | | | |
Short-term debt, net | | | | 3 | | | | | (56 | ) | | | | (1,607 | ) |
Long-term debt repaid | | | | (1,319 | ) | | | | (79 | ) | | | | (29 | ) |
Long-term debt issued | | | | – | | | | | – | | | | | 992 | |
Proceeds from issuance of common stock | | | | 53 | | | | | 28 | | | | | 15 | |
Tax benefit from share-based compensation | | | | 7 | | | | | 6 | | | | | 3 | |
Dividends paid | | | | (193 | ) | | | | (176 | ) | | | | (148 | ) |
Contributions from Exelis and Xylem, net | | | | 1,671 | | | | | – | | | | | – | |
Distributions of Exelis and Xylem, net | | | | 980 | | | | | 727 | | | | | 277 | |
| | | | | | | | | | | | | | | | |
Net Cash – Financing activities | | | | 1,202 | | | | | 450 | | | | | (497 | ) |
| | | | | | | | | | | | | | | | |
Exchange rate effects on cash and cash equivalents | | | | (9 | ) | | | | (22 | ) | | | | 34 | |
Discontinued operations: | | | | | | | | | | | | | | | |
Operating activities | | | | 500 | | | | | 1,053 | | | | | 1,011 | |
Investing activities | | | | (467 | ) | | | | (984 | ) | | | | (202 | ) |
Financing activities | | | | (319 | ) | | | | (269 | ) | | | | (543 | ) |
Exchange rate effects on cash and cash equivalents | | | | 7 | | | | | 4 | | | | | 6 | |
| | | | | | | | | | | | | | | | |
NetCash – Discontinued operations | | | | (279 | ) | | | | (196 | ) | | | | 272 | |
| | | | | | | | | | | | | | | | |
Net change in cash and cash equivalents | | | | 484 | | | | | 19 | | | | | (16 | ) |
Cash and cash equivalents – beginning of year | | | | 206 | | | | | 187 | | | | | 203 | |
| | | | | | | | | | | | | | | | |
Cash and Cash Equivalents – End of Year | | | | 690 | | | | | 206 | | | | | 187 | |
| | | | | | | | | | | | | | | | |
Supplemental Disclosures of Cash Flow Information | | | | | | | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | | | | | | |
Interest | | | | 80 | | | | | 92 | | | | | 90 | |
Income taxes (net of refunds received) | | | | 140 | | | | | 343 | | | | | 172 | |
| | | | | | | | | | | | | | | | |
The accompanying Notes to Consolidated Financial Statements are an integral part of the above statements of cash flows.
56
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(IN MILLIONS)
| | | SHARES | | | DOLLARS | |
| YEAR ENDED DECEMBER 31 | | | 2010 | | | | 2009 | | | 2008 | | | 2010 | | | | 2009 | | | | 2008 | |
Common Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock, beginning balance | | | | 181 | | | | | 180 | | | | 180 | | | $ | 181 | | | | $ | 180 | | | | $ | 180 | |
| Activity from stock incentive plans | | | | 2 | | | | | 1 | | | | 1 | | | | 2 | | | | | 1 | | | | | 1 | |
| Repurchase of common stock | | | | – | | | | | – | | | | (1 | ) | | | – | | | | | – | | | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock, ending balance | | | | 183 | | | | | 181 | | | | 180 | | | $ | 183 | | | | $ | 181 | | | | $ | 180 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retained Earnings | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retained earnings, beginning balance | | | | | | | | | | | | | | | | $ | 4,737 | | | | $ | 4,203 | | | | $ | 3,529 | |
| Net income | | | | | | | | | | | | | | | | | 798 | | | | | 644 | | | | | 795 | |
| Cash dividends declared on common stock | | | | | | | | | | | | | | | | | (184 | ) | | | | (155 | ) | | | | (127 | ) |
Repurchase of common stock, additionalpaid-in-capital | | | | | | | | | | | | | | | | | – | | | | | – | | | | | (75 | ) |
Activity from stock incentive plans, additionalpaid-in-capital | | | | | | | | | | | | | | | | | 58 | | | | | 45 | | | | | 81 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retained earnings, ending balance | | | | | | | | | | | | | | | | $ | 5,409 | | | | $ | 4,737 | | | | $ | 4,203 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated Other Comprehensive Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Postretirement benefit plans, beginning balance | | | | | | | | | | | | | | | | $ | (1,388 | ) | | | $ | (1,534 | ) | | | $ | (196 | ) |
| Net change in postretirement benefit plans | | | | | | | | | | | | | | | | | 27 | | | | | 146 | | | | | (1,338 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Postretirement benefit plans, ending balance | | | | | | | | | | | | | | | | | (1,361 | ) | | | | (1,388 | ) | | | | (1,534 | ) |
| Cumulative translation adjustments, beginning balance | | | | | | | | | | | | | | | | | 336 | | | | | 210 | | | | | 431 | |
| Net foreign currency translation adjustment | | | | | | | | | | | | | | | | | (74 | ) | | | | 126 | | | | | (221 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative translation adjustments, ending balance | | | | | | | | | | | | | | | | | 262 | | | | | 336 | | | | | 210 | |
| Unrealized gain on investment securities, beginning balance | | | | | | | | | | | | | | | | | 12 | | | | | 1 | | | | | 1 | |
| Net change in unrealized gains on investment securities | | | | | | | | | | | | | | | | | – | | | | | 11 | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gain on investment securities, ending balance | | | | | | | | | | | | | | | | | 12 | | | | | 12 | | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total accumulated other comprehensive loss | | | | | | | | | | | | | | | | $ | (1,087 | ) | | | $ | (1,040 | ) | | | $ | (1,323 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total shareholders’ equity, beginning balance | | | | | | | | | | | | | | | | $ | 3,878 | | | | $ | 3,060 | | | | $ | 3,945 | |
| Net change in common stock | | | | | | | | | | | | | | | | | 2 | | | | | 1 | | | | | – | |
| Net change in retained earnings | | | | | | | | | | | | | | | | | 672 | | | | | 534 | | | | | 674 | |
| Net change in accumulated other comprehensive income | | | | | | | | | | | | | | | | | (47 | ) | | | | 283 | | | | | (1,559 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total shareholders’ equity, ending balance | | | | | | | | | | | | | | | | $ | 4,505 | | | | $ | 3,878 | | | | $ | 3,060 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(IN MILLIONS) YEARS ENDED DECEMBER 31 | | SHARES | | DOLLARS |
| | 2011 | | 2010 | | 2009 | | 2011 | | 2010 | | 2009 |
Common Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock, beginning balance | | | | 91.5 | | | | | 90.8 | | | | | 90.3 | | | | $ | 92 | | | | $ | 91 | | | | $ | 90 | |
Activity from stock incentive plans | | | | 1.6 | | | | | 0.7 | | | | | 0.5 | | | | | 1 | | | | | 1 | | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock, ending balance | | | | 93.1 | | | | | 91.5 | | | | | 90.8 | | | | $ | 93 | | | | $ | 92 | | | | $ | 91 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retained Earnings | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retained earnings, beginning balance | | | | | | | | | | | | | | | | | | $ | 5,441 | | | | $ | 4,762 | | | | $ | 4,242 | |
Net (loss) income | | | | | | | | | | | | | | | | | | | (130 | ) | | | | 804 | | | | | 629 | |
Cash dividends declared on common stock | | | | | | | | | | | | | | | | | | | (147 | ) | | | | (184 | ) | | | | (154 | ) |
Activity from stock incentive plans | | | | | | | | | | | | | | | | | | | 97 | | | | | 59 | | | | | 45 | |
Distribution of Exelis and Xylem | | | | | | | | | | | | | | | | | | | (4,409 | ) | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retained earnings, ending balance | | | | | | | | | | | | | | | | | | $ | 852 | | | | $ | 5,441 | | | | $ | 4,762 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated Other Comprehensive Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Postretirement benefit plans, beginning balance | | | | | | | | | | | | | | | | | | $ | (1,359 | ) | | | $ | (1,388 | ) | | | $ | (1,529 | ) |
Net change in postretirement benefit plans | | | | | | | | | | | | | | | | | | | (508 | ) | | | | 29 | | | | | 141 | |
Distribution of Exelis and Xylem | | | | | | | | | | | | | | | | | | | 1,714 | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Postretirement benefit plans, ending balance | | | | | | | | | | | | | | | | | | $ | (153 | ) | | | $ | (1,359 | ) | | | $ | (1,388 | ) |
| | | | | | |
Cumulative translation adjustments, beginning balance | | | | | | | | | | | | | | | | | | $ | 276 | | | | $ | 350 | | | | $ | 224 | |
Net foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | (40 | ) | | | | (74 | ) | | | | 126 | |
Distribution of Exelis and Xylem | | | | | | | | | | | | | | | | | | | (333 | ) | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative translation adjustments, ending balance | | | | | | | | | | | | | | | | | | $ | (97 | ) | | | $ | 276 | | | | $ | 350 | |
| | | | | | |
Unrealized gain on investment securities, beginning balance | | | | | | | | | | | | | | | | | | $ | 11 | | | | $ | 12 | | | | $ | 1 | |
Net change in unrealized gains on investment securities | | | | | | | | | | | | | | | | | | | (12 | ) | | | | (1 | ) | | | | 11 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gain on investment securities, ending balance | | | | | | | | | | | | | | | | | | $ | (1 | ) | | | $ | 11 | | | | $ | 12 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total accumulated other comprehensive loss | | | | | | | | | | | | | | | | | | $ | (251 | ) | | | $ | (1,072 | ) | | | $ | (1,026 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total shareholders’ equity, beginning balance | | | | | | | | | | | | | | | | | | $ | 4,461 | | | | $ | 3,827 | | | | $ | 3,028 | |
Net change in common stock | | | | | | | | | | | | | | | | | | | 1 | | | | | 1 | | | | | – | |
Net change in retained earnings | | | | | | | | | | | | | | | | | | | (4,589 | ) | | | | 679 | | | | | 520 | |
Net change in accumulated other comprehensive income | | | | | | | | | | | | | | | | | | | 821 | | | | | (46 | ) | | | | 279 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total shareholders’ equity, ending balance | | | | | | | | | | | | | | | | | | $ | 694 | | | | $ | 4,461 | | | | $ | 3,827 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying Notes to Consolidated Financial Statements are an integral part of the above statements of changes in shareholders’ equity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS AND SHARE AMOUNTS IN MILLIONS, UNLESS OTHERWISE STATED)
Description of Business, Basis of Presentation and Summary of Significant Accounting PoliciesNOTE 1
Description of Business, Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
ITT Corporation is a global multi-industry leaderindustrial company specializing in high-technologythe engineering and manufacturing, operating through three principal business segments; Defense & Information Solutions (Defense segment), Fluid Technology (Fluid segment) and Motion & Flow Control (Motion & Flow segment). The Consolidated Financial Statements are prepared in conformity with accounting principles generally acceptedmanufacture of critical components in the United States of America (GAAP).aerospace, transportation, energy and industrial markets. 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. CertainITT operates through four segments: Industrial Process consisting of industrial pumping and complementary equipment; Motion Technologies consisting of friction and shock & vibration equipment; Interconnect Solutions (ICS) consisting of electronic connectors; and Control Technologies consisting of fluid handling, motion control and vibration and shock isolation products. Financial information for our segments is presented in Note 22, “Segment Information.”
Basis of Presentation
On October 31, 2011, ITT Corporation made a pro rata distribution to its shareholders consisting of all the shares of common stock of Xylem Inc. (Xylem, previously referred to as the water-related businesses), which held ITT’s interests in the water businesses, and all the shares of common stock of Exelis Inc. (Exelis, previously referred to as ITT’s Defense & Information Solutions segment), which held ITT’s interests in the defense businesses (the Distribution). These financial statements have been reclassified to present the financial position, results of operations and cash flows of Exelis and Xylem as discontinued operations in all periods presented. For further information on the discontinued operations of Exelis and Xylem, see Note 4, “Discontinued Operations.” In addition, in conjunction with the Distribution, we implemented changes to our management structure and changed our segment reporting structure.
On October 31, 2011, we completed a one-for-two reverse stock split (1:2 Reverse Stock Split) of ITT’s issued and outstanding common stock, as approved by our Board of Directors. The par value of our common stock remained $1 per share following the 1:2 Reverse Stock Split. All common stock shares authorized, issued and outstanding, as well as share prices and earnings per share give effect to the 1:2 Reverse Stock Split in all periods presented.
In addition to the reclassification effects from the Distribution, certain other prior year amounts have been reclassified to conform to the current year presentation. Reclassifications principally relate to the designation of CAS, Inc. (CAS)presentation as a discontinued operation and accordingly,described within these reclassifications have affected the results of continuing operations for historical periods. See Note 4, “Discontinued Operations,” in our Notes to the Consolidated Financial Statements for further information on the CAS divestiture.Statements.
Significant Accounting Policies
Use of Estimates
The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). 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. Estimates and assumptions are used for, but not limited to, asbestos-related liabilities and recoveries from insurers and other responsible parties, postretirement obligations and assets, revenue recognition, income tax contingency accruals and valuation allowances, postretirement obligations and assets, goodwill and other intangible asset impairment testing, environmental liabilities, allowance for doubtful accounts and contingent liabilities.inventory valuation. Actual results could differ from these estimates.
Principles of Consolidation Principles
Our consolidated financial statements include the accounts of all majority-owned subsidiaries. ITT consolidates companies in which it has a controlling financial interest or when ITT is considered the primary beneficiary of a variable interest entity. We account for investments in companies over which we have the ability to exercise significant influence, but do not hold a controlling interest under the equity method, and we record our proportionate share of income or losses in the Consolidated Income Statements. 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.disposal or distribution. All intercompany transactions have been eliminated.
Business CombinationsRevenue Recognition
ITT allocates the purchase price of its acquisitions to the tangible and intangible assets acquired, liabilities assumed, and non-controlling interests acquired based on their estimated fair value at the acquisition date. Changes to acquisition date fair values prior to the expiration of the measurement period, a period not to exceed 12 months from date of acquisition, are recorded as an adjustment to the associated goodwill. Changes to acquisition date fair values after expiration of the measurement period are recorded in earnings. The excess of the acquisition price over those estimated fair valuesRevenue is recorded as goodwill. Acquisition-related expenses and restructuring costs are recognized separatelyderived from the business combinationsale of products and are expensed as incurred.
Revenue Recognition
services to customers. The following revenue recognition policies describe the manner in which we account for different classes of revenue transactions.Revenue is recognized when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, collectability is reasonably assured and delivery has occurred or services have been rendered. For product sales, other than long-term construction-typeconstruction and production-type contracts (referred to as design and build arrangements), we recognize revenue at the time title and risks and rewards of ownership pass to the customer, which is generally when products are shipped.shipped, and
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the contractual terms have been fulfilled. Certain contracts with customers require delivery, installation, testing, certification or other acceptance provisions to be satisfied before revenue is recognized. In instances where contractual terms include a provision for customer acceptance, revenue is recognized when either (i) we have previously demonstrated that the product meets the specified criteria based on either seller or customer-specified objective criteria or (ii) on formal acceptance received from the customer where the product has not been previously demonstrated to meet customer-specified objective criteria.
We recognize revenue on product sales to channel partners, including resellers, distributors or value-added solution providers at the time of sale when the channel partners have economic substance apart from ITT and ITT has completed its obligations related to the sale. Service revenueRevenue on service and repair contracts is recognized asafter services are performed. For agreementshave been agreed to by the customer and rendered or over the service period.
Effective January 1, 2011, we adopted amended guidance on the accounting for revenue arrangements that contain multiple deliverables,elements. The amended guidance was applied to new arrangements or arrangements materially modified on or after January 1, 2011 on a prospective basis.
For multiple deliverable arrangements entered into or materially modified on or after January 1, 2011, we recognize revenue for a delivered element when itbased on the relative selling price if the deliverable has stand-alone value to the customer there is objective and reliable evidence of fair value of the undelivered elements, and, in arrangements that include a general right of return relative to the delivered element, performance of the undelivered element is considered probable and substantially in the Company’s control.
The Defense segmentselling price for a deliverable is based on vendor-specific objective evidence of selling price (VSOE), if available, third-party evidence of selling price (TPE), if VSOE is not available, or best estimated selling price (BESP), if neither VSOE nor TPE is available.The deliverables in our arrangements with multiple elements include various products and certain businesses withinmay include related services, such as installation and start-up services. We allocate arrangement consideration based on the Fluid segment enter into long-term construction-type sales contractsrelative selling prices of the separate units of accounting determined in accordance with the hierarchy described above. For deliverables that are sold separately, we establish VSOE based on the price when the deliverable is sold separately. We establish TPE, generally for services, based on prices similarly situated customers pay for similar services from third party vendors. For those deliverables for which revenuewe are unable to establish VSOE or TPE, we estimate the selling price considering various factors including market and pricing trends, geography, product customization, and profit objectives. Revenue for multiple element arrangements is recognized underwhen thepercentage-of-completion method based upon appropriate revenue recognition criteria for the individual deliverable have been satisfied.
For arrangements entered into prior to January 1, 2011 and not subsequently materially modified, if objective and reliable evidence of fair value existed for all of the units of delivery, percentageaccounting identified, the transaction consideration was allocated based on the relative fair values of costs incurred to total costs, or the completion of scheduled performance milestones. For units of delivery, revenuesaccounting. Alternatively, when the evidence of fair value existed for the delivered items, but not the undelivered items, the arrangement consideration was allocated using the residual method.
We recognize revenue on certain design and profits are recognized based uponbuild projects using the ratio of actual
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units delivered to estimated total units to be delivered under the contract. Under thecost-to-total cost method, revenue is recognized based upon the ratio of costs incurred to estimated total costs at completion. Revenue is recognized under the milestone method, based upon accomplishing a clear deliverable output of contract performance with value to the customer. Revenue under cost-reimbursement contracts is recorded as costs are incurred and includes estimated earned fees or profits calculated on the basis of the relationship between costs incurred and total estimated costs. Revenue and profits ontime-and-material type contracts are recognized based on billable rates times direct labor hours incurred plus material and other reimbursable costs incurred. The completed contract method is utilized when reasonable and reliable cost estimates for a project cannot be made.method. Amounts invoiced to customers in excess of revenue recognized are recorded as deferred revenue, until the revenue recognition criteria are satisfied, and isare recorded as a component of accounts payable. Revenue that is earned and recognized in excess of amounts invoiced is recorded as a component of trade receivables.
accrued liabilities.During the performance of long-term sale contracts,design and build arrangements, estimated final contract prices and costs are periodically reviewed and revisions are made as required and recorded in earnings in the period in which they are determined. Additionally, 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 revenue when there is sufficient information to reasonably assess anticipated contract performance. Our claims on contracts are recorded only if it is probable the claim will result in additional contract revenue and the amounts can be reliably estimated.quarterly. Provisions for estimated losses if any, on uncompleted long-term contracts,design and build arrangements are maderecognized in the period in which such losses are determined anddetermined. Provisions for estimated losses are recorded as a component of costs of revenue.
We record a reduction in revenue at the time of sale for estimated product returns, rebates and other allowances, based on historical experience and known trends. Additionally, 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 costs of revenue. These accruals are established using historical information on the nature, frequency and average cost of warranty claims and estimates of future costs.
Revenue is reported net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Shipping and Handling Costs
Shipping and handling costs are recorded as a component of costs of revenue.
Product Warranties
Our standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. Accruals for estimated expenses related to product warranties are made at the time revenue is recognized and are recorded as a component of costs of revenue. We estimate the liability for warranty claims based on our standard warranties, the historical frequency of claims and the cost to replace or repair our products under warranty. Factors that influence our warranty liability include the number of units sold, the length of warranty term, historical and anticipated rates of warranty claims and the cost per claim.
Asbestos-Related Liabilities and Assets
ITT has been named as a defendant in numerous product liability lawsuits alleging personal injury due to asbestos exposure. We accrue the estimated value of pending claims and
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unasserted claims estimated to be filed over the next 10 years, including legal fees, on an undiscounted basis. Assumptions utilized in estimating the liability for both pending and unasserted claims include: disease type, average settlement costs, percentage of claims settled or dismissed, the number of claims estimated to be filed against the Company in the future and the costs to defend such claims. In light of the uncertainties and variables inherent in the long-term projection of the Company’s 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.
The Company has also recorded an asbestos-related asset, comprised predominantly of insurance receivables and expected recoveries from other responsible parties. The asbestos-related asset represents our best estimate of probable recoveries from third parties for pending claims, as well as unasserted claims estimated to be filed over the next 10 years. In developing this estimate, the Company considers coverage-in-place and other settlement agreements with its insurers and other contractual agreements with responsible parties, as well as a review of expected levels of future cost recovery, the financial viability of the insurance companies or other responsible parties, 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 and contract terms and limits and their interrelationships.
As part of our ongoing review of our net asbestos exposure, each quarter we assess the most recent data available for the key inputs and assumptions, comparing the data to the expectations on which the most recent annual liability and asset estimates were based. Provided the quarterly review does not indicate a more detailed evaluation of our asbestos exposure is required, each quarter, we record a net asbestos expense to maintain a rolling 10-year time horizon. In the third quarter each year we conduct a detailed study with the assistance of outside consultants to review and update, as appropriate, the underlying assumptions used to estimate our asbestos liability and related assets, including a reassessment of the time horizon over which a reasonable estimate of unasserted claims can be projected.
Postretirement Benefit Plans
ITT sponsors numerous pension and other employee-related defined benefit plans (collectively, postretirement benefit plans) for certain employees around the world. Postretirement benefit obligations are generally determined, where applicable, based on participant years of service, future compensation, age at retirement or termination, and medical cost trends. The determination of projected benefit obligations and the recognition of expenses related to postretirement benefit plans are dependent on various assumptions.assumptions that are judgmental and
developed in consultation with our actuaries and other advisors. The major assumptions involved in the measurement of our postretirement benefit plan obligations and net periodic postretirement costs primarily relate to discount rates, long-term expected rates of return on plan assets, rate of future compensation increases, mortality and termination rates, 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 actuarialActual results that differ from our assumptions are reviewed periodically with third-party consultantsaccumulated and adjusted as necessary.amortized over the estimated future working life of the plan participants. For the recognition of net periodic postretirement 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 fair value of plan assets is determinedestimated based on market prices or estimated fair value at the measurement date. See Note 16,17, “Postretirement Benefit Plans,” for further information on the measurement of fair value.
plan assets.The funded or unfunded positionstatus 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 (loss) income are recorded in accumulated other comprehensive income (loss) within shareholders’ equity, net of taxes, until they are amortized as a component of net periodic postretirement cost.
Research and development (R&D) programs include Company-sponsored activities as well as activities performed pursuant to customer contracts. R&D costs incurred as part of a Company-sponsored activity are charged to expense as incurred and are reported as a component of operating income within the R&D expense line. R&D costs incurred under customer contracts reported as a component of costs of revenue when the expense is incurred.
Stock-Based Compensation
Stock-based awards issued to employees and non-employee directors include non-qualified stock options, restricted stock
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awards, restricted stock units, and certain liability-based awards. Compensation costs resulting from share-based payment transactions are recognized primarily within SG&A,general and administrative expenses, at fair value over the requisite service period (typically three years) on a straight-line basis. The calculatedamount of compensation cost is adjustedrecognized includes an adjustment 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 is 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, including an adjustment for awards that are not ultimately expected to vest.
period.Asbestos-Related Contingencies and ReceivablesRestructuring
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 pending claims and unasserted claims estimated 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. In addition, the Company retains a consulting firm to assist management in estimating our potential exposure to pending asbestos claims and for claims estimated to be filed over the next 10 years.
The Company has also recorded an asbestos asset, comprised predominantly of an insurance asset and expected recoveries from other responsible parties. The asbestos asset represents our best estimate of probable recoveries from third parties for pending claims, as well as unasserted claims estimated to be filed over the next 10 years. The timing and amount of reimbursements will vary due to differing policy terms and certain gaps in coverage as a result of possible insurer insolvencies.
As part of our ongoing review of our net asbestos exposure, each quarter we assess the most recent data available for the key inputs and assumptions, comparing the data to the expectations on which the most recent annual liability and asset estimates were based. In the third quarter each year, we conduct a detailed study with the assistance of outside consultants to review and update, as appropriate, the underlying assumptions to estimate our asbestos liability and related assets. Additionally, we periodically reassess the time horizon over which a reasonable estimate of unasserted claims can be projected.
Restructuring
We periodically initiate management approved restructuring activities to achieve cost savings through reduced operational
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redundancies and to strategically position ourselves in the market in response to prevailing economic conditions and associated customer demand. Costs associated with restructuring actions can include severance, infrastructure charges to vacate facilities or consolidate operations, contract termination costs and other related charges. For involuntary separation plans, a liability is recognized when it is probable and reasonably estimable. For voluntary separation plans, a liability is recognized when the employee irrevocably accepts the voluntary termination. For one-time termination benefits, such as additional severance pay or benefit payouts, and other exit costs, such as lease termination costs, the liability is measured and recognized initially at fair value in the period in which the liability is incurred, with subsequent changes to the liability recognized as adjustments in the period of change.
We determine the provision for income taxes using the asset and liability approach. Under this approach, deferred income taxes representtax assets and liabilities are determined based on the expectedestimated future tax consequenceseffects of temporary differences between the carrying amountsfinancial reporting and tax basisbases of assets and liabilities.liabilities, applying currently enacted tax rates in effect for the year in which we expect the differences will reverse. We record a valuation allowance to reduceagainst our deferred tax assets when uncertainty regarding their realizability exists.
In assessing the need for a valuation allowance, we look toconsider all available evidence, including the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility ofperiods, prudent and feasible tax planning strategies, and estimated future taxable income. The valuation allowance can be affected by changes to tax laws,regulations, interpretations and rulings, changes to enacted statutory tax rates, and changes to future taxable income estimates.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including the reversals of deferred tax liabilities) during the periods in which those deferred tax assets will become deductible. The Company’s management assesses available positive and negative evidence regarding the realizability of its deferred tax assets, and records a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. To form a conclusion, management considers positive evidence in the form of reversing temporary differences, projections of future taxable income and tax planning strategies, and negative evidence such as recent history of losses. Beginning in 2011, the Company is in a cumulative three-year loss position, which we weighted as a significant source of negative evidence indicating the need for a valuation allowance on our net deferred tax assets. Since the Company was in a three-year cumulative loss position at the
end of 2011, management determined that the size and frequency of the losses from continuing operations in recent years and the uncertainty associated with projecting future taxable income supported the conclusion that a valuation allowance was required to reduce its deferred tax assets. If ITT achieves profitability in future periods, then management will evaluate whether its recent history of profitability constitutes sufficient positive evidence to support a reversal of a portion, or all, of the remaining valuation allowance.
We have not provided deferred tax liabilities for the impact of U.S income taxes on undistributed foreign earnings which we plan to reinvest indefinitely outside the United States. We have recorded deferred tax liabilities for the impact of U.S income taxes on undistributed foreign earnings which are not indefinitely reinvested outside the United States. We plan foreign earnings remittance amounts based on projected cash flow needs, as well as the working capital and long-term investment requirements of foreign subsidiaries and our domestic operations.
Furthermore, we recognize the tax benefitsbenefit from an uncertain tax positionsposition 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. Theposition in consideration of applicable tax statutes and related interpretations and precedents and the expected outcome of the proceedings (or negotiations) with the taxing authorities. Tax benefits recognized in the Consolidated Financial Statementsfinancial statements from such positionsa position are measured based on the largest benefit that has a greater than 50% likelihood of being realized uponon ultimate settlement.
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Foreign Currency Translation
The national currencies of our foreign companies are generally the functional currencies. 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. Net gains or losses from foreign currency transactions are reported currently in selling, general and administrative expenses.
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.
Diluted shares outstanding include the dilutive effect of in-the-money options, unvested restricted stock and unvested restricted stock units. The dilutive effect of such equity awards is calculated based on the average share price for each reporting period using the treasury stock method. Common stock equivalents are excluded from the computation of earnings per share if they have an anti-dilutive effect.Cash and Cash Equivalents
ITT considers all highly liquid investments purchased with an original maturity or remaining maturity at time of purchase of three months or less to be cash equivalents. We did not have any investments in marketable securities reported within cash and cash equivalents as of December 31, 2010. As of December 31, 2009, marketable securities included in cash and cash equivalents totaled $72.
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Concentrations of Credit Risk
Financial instruments that potentially subject ITT to significant concentrations of credit risk consist principally of cash and cash equivalents and, accounts receivable from trade customers, and derivative contracts.customers. We maintain cash and cash equivalents and derivative contracts with various financial institutions. These financial institutions are located in many different geographical regions, and our policy is designed to limit exposure with any one institution. As part of our cash and risk management processes, we perform periodic evaluations of the relative credit standing of the financial institutions. We have not sustained any material credit losses during the previous three years from instruments held at financial institutions. We may utilize forward contracts to protect against the effects of foreign currency fluctuations. Such contracts involve the risk of non-performance by the counterparty.
The U.S. government accounted for 25% and 18% of gross accounts receivable at December 31, 2010 and 2009, respectively. Credit risk with respect to other accounts receivable is generally diversified due to the large number of entities comprising ITT’s customer base and their dispersion across many different industries and geographic regions. ITT performs ongoing credit evaluations of the financial condition of its third-party distributors, resellers and other customers and requires collateral, such as letters of credit and bank guarantees, in certain circumstances.
Allowance for Doubtful Accounts
We determine our allowance for doubtful accounts using a combination of factors to reduce our trade receivables balances to their estimated net realizable amount. We maintain an allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, macroeconomic trends and conditions, significant one-time events, historical experience and the financial condition of customers. We record a specific reserve for individual accounts when we become aware of specific customer circumstances, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. The past due or delinquency status of a receivable is based on the contractual payment terms of the receivable. If circumstances related to the specific customer change, we adjust estimates of the recoverability of receivables as appropriate.
Inventories, which include the costs of material, labor and overhead, are recordedstated at the lower of cost or market, with cost generally computed on afirst-in, first-out (FIFO) basis. A full absorption policy is employed using standard cost techniques that are periodically reviewed and adjusted. Estimated losses from obsolete and slow-moving inventories are recorded to reduce inventory values to their estimated net realizable value. Inventory write-downs are measured as the difference between the cost of the inventory and market based assumptions about future demand and is charged to cost of sales. At the point of loss recognition, a new cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in a recovery in carrying value. Inventories valued under thelast-in, first-out (LIFO) method represent 7.1%17.6% and 6.4%12.8% of total 20102011 and 2009 2010
inventories, respectively. There would notWe have been a material difference in the valueLIFO reserve of inventories if the FIFO method had been used to value all inventories.
Inventoried costs related to long-term contracts are stated at the$8 and $7 recorded as of December 31, 2011 and 2010, respectively.Cost of sales is reported using standard cost techniques with full overhead absorption, which generally approximates 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 costs of revenue.
cost.Plant, Property and Equipment
Plant, property and equipment, including capitalized interest applicable to major project expenditures, are recorded at cost. Depreciation is computed on a straight-line basis over the economicestimated useful lives of the assets involved as follows: buildings
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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. Leasehold improvements are depreciated over the life of the lease or the asset, whichever is shorter. Fully depreciated assets are retained in property and accumulated depreciation accounts until disposal.
Repairs and maintenance costs are expensed as incurred.The Company enters into operating and capital leases for the use of premises and equipment. Rent expense related to operating lease agreements are recorded on a straight line basis, considering lease incentives and escalating rental payments.
Capitalized Internal Use Software
Costs incurred in the preliminary project stage of developing or acquiring internal use software are expensed as incurred. After the preliminary project stage is completed, management has approved the project and it is probable that the project will be completed and the software will be used for its intended purpose, ITT capitalizes certain internal and external costs incurred to acquire or create internal use software, principally related to software coding, designing system interfaces and installation and testing of the software. ITT amortizes capitalized internal use software costs using the straight-line method over the estimated useful life of the software, generally from three to seven years.
Investments in Corporate-Owned Life Insurance
Investments in corporate-owned life insurance (COLI) policies are recorded at their cash surrender values as of each balance sheet date. The total amounts related to the Company’s investments in COLI policies are included in other non-current assets in the consolidated balance sheets and were $79 and $76 at December 31, 2011 and 2010, respectively. Changes in the cash surrender value during the period are recorded as a gain or loss within operating expenses and were not material in the years ended December 31, 2011, 2010 and 2009. These investments were made with the intention of utilizing them as a long-term funding source for deferred compensation obligations, which as of December 31, 2011 and 2010 were
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approximately $20 and $16, respectively, however, the COLI policies do not represent a committed funding source for these obligations and as such they are subject to claims from creditors, and we can designate them for another purpose at any time.
Long-Lived Asset Impairment
Long-lived assets, including intangible assets with finite lives and capitalized internal use software, are tested for impairment whenever events or changes in circumstances indicate their carrying value 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. Intangible assets with a finite life are generally amortized on a straight-line basis over an estimated economic useful life, which generally range from15-20 years, and are tested for impairment if indicators of impairment are identified. Certain of our intangible assets have an indefinite life, namely certain brands and trademarks.
Goodwill and indefinite-lived intangible assets are not amortized, but insteadrather are tested 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 fiscal quarter. For goodwill, the impairment test is a two-step test. In the first step, the estimated fair value of each reporting unit is compared to the carrying value of the net assets assigned to that reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and the second step of the impairment test is not performed. If the carrying value of the reporting unit exceeds its estimated fair value, then the second step of the impairment test is performed in order to measure the impairment loss to be recorded.recorded, if any. 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
indefinite-lived intangible assets using an income approach. Under the income approach, we estimate fair value based on the present value of estimated future cash flows.
Business Combinations
ITT allocates the purchase price of its acquisitions to the tangible and intangible assets acquired, liabilities assumed, and non-controlling interests acquired based on their estimated fair value at the acquisition date. Changes to acquisition date fair values prior to the expiration of the measurement period, a period not to exceed 12 months from date of acquisition, are recorded as an adjustment to the associated goodwill. Changes to acquisition date fair values after expiration of the measurement period are recorded in earnings. The excess of the acquisition price over those estimated fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are recognized separately from the business combination and are expensed as incurred.
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. Significant judgment is required to determine both probability and the estimated amount of loss. We review these accruals quarterly and adjust the accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other updatedcurrent information.
Environmental Liabilities
Accruals for environmental matters are recorded on a site by sitesite-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 become 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 non-current liabilities at undiscounted amounts and exclude claims for recoveries from insurance companies or other third parties. Recoveries
Foreign Currency Translation
The national currencies of our foreign subsidiaries are generally the functional currencies. Balance sheet accounts are translated at the exchange rate in effect at the end of each period, except for equity which is translated at historical rates; income statement accounts are translated at the average rates of exchange prevailing during the period. Gains and losses resulting from insurance companies or other third partiesforeign currency translation are primarily includedreflected in the
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cumulative translation adjustments component of shareholders’ equity.
For foreign subsidiaries that do not use the local currency as their functional currency, foreign currency assets and liabilities are remeasured to the foreign subsidiary’s functional currency using end of period exchange rates, except for nonmonetary balance sheet accounts, which are remeasured at historical exchange rates.
For transactions denominated in other non-currentthan the functional currency, revenue and expenses are remeasured at average exchange rates in effect during the reporting period in which the transactions occurred, except for expenses related to nonmonetary assets when the recovery is probable.
and liabilities. Transaction gains or losses from foreign currency remeasurement are reported in general and administrative expenses.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 between market participants at the measurement date. We use a hierarchical structure to prioritize the inputs to valuation
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techniques used to measure fair value into three broad levels.levels based on the observability of the input. 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
ITT uses derivative financial instruments, primarily foreign currency forward contracts, to mitigate exposure from foreign currency exchange rate fluctuations as it pertains to intercompany transactions. We do not use derivative instruments for speculative purposes. We record derivatives at their fair value as either a currentan asset or current liability. We include adjustments to reflect changes in fair values of derivatives in earnings as these contracts are not designated as hedges. The amount of gains and losses recorded related to our foreign currency exchange contracts and the net fair value of our outstanding contracts was not material as of and for the years ended December 31, 2011, 2010 2009 and 2008.2009. Such contracts involve the risk of non-performance by the counterparty. 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.
ITT may use 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 interest rate swaps designated as hedges 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, 2010 and 2009 we did not have any material open interest rate swaps.
New Recent Accounting PronouncementsNOTE 2
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements Not Yet Adopted
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)No. 2010-28, which provides additional guidance whenapplicable to the testing of
goodwill for potential impairment. Specifically, for reporting units with zero or negative carrying amounts, an entity is required to perform the second step of the goodwill impairment test (a comparison between the carrying amount of a reporting unit’s goodwill to its implied fair value) if it is more likely than not that a goodwill impairment exists, considering any adverse qualitative factors. As of the date of our 2010 annual goodwill impairment test, the net carrying amounts for each of our reporting units exceeded zero. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. We currently do not expectAs of the date of our annual and interim goodwill impairment tests, none of our reporting units were affected by the application of this guidance as each reporting unit had a carrying amount that exceeded zero.
In April 2010, the FASB issued authoritative guidance permitting use of the milestone method of revenue recognition for research or development arrangements that contain payment provisions or consideration contingent on the achievement of specified events. On January 1, 2011, we adopted the new guidance on a prospective basis. The adoption of this ASU on January 1, 2011 toguidance did not have a significant effectmaterial impact on our Consolidated Financial Statements.
financial position, results of operations or cash flows.In October 2009, the FASB issued ASUNo. 2009-13, which amended guidance on the accounting for revenue arrangements that contain multiple elements. Theelements by eliminating the criteria that objective and reliable evidence of this amendment is to address the accountingfair value for multiple-deliverable arrangements to enable vendors to account forundelivered products or services (deliverables)needs to exist in order to be able to account separately rather than as a combined unit.for deliverables and eliminating the use of the residual method of allocating arrangement consideration. 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
We adopted the new multiple element guidance provided within ASU2009-13 is effective January 1, 2011 for new arrangements entered into or arrangements materially modified arrangements in fiscal years beginning on or after June 15, 2010 and allows for eitherthat date on a prospective or retrospective application, with early adoption permitted. We will adopt the provisions of this ASU on January 1, 2011. Although we continue to evaluate the effectsbasis. The adoption of this ASU willthe new multiple element guidance did not result in a material change in either the units of accounting or the pattern or timing of revenue recognition. Additionally, the adoption of the revised multiple element arrangement guidance did not have we currently do not believea material impact on our financial position, results of operations financial position or liquidity will be adversely affected.
cash flows.In October 2009, the FASB issued ASUNo. 2009-14, which amended the accounting requirements for software revenue recognition. 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 the software revenue recognition literature. The amendments align the accounting for these revenue transaction types with the amendments described under ASU2009-13for multiple element arrangements above. TheWe adopted the provisions of this guidance provided within ASU2009-14 is effective for new or materially modified arrangements in fiscal years beginning
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entered into on or after June 15, 2010 and allows for eitherJanuary 1, 2011 on a prospective or retrospective application, with early adoption permitted. We do not believebasis. The adoption of this ASU on January 1, 2011 will have a significant impact on our Consolidated Financial Statements.
In April 2010, the FASB issued ASUNo. 2010-17, which establishes authoritative guidance permitting use of the milestone method of revenue recognition for research or development arrangements that contain payment provisions or consideration contingent on the achievement of specified events. This guidance is effective for milestones achieved in fiscal years beginning on or after June 15, 2010 and allows for either prospective or retrospective application, with early adoption permitted. We do not believe adoption of this ASU on January 1, 2011 will have a significant impact on our Consolidated Financial Statements.
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Recently Adopted Accounting Pronouncements
In June 2009, the FASB amended the accounting and disclosure requirements related 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 VIE(s) with an approach focused on identifying which enterprise has the power to direct the activities of 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 amendments require an ongoing assessment of whether an enterprise is the primary beneficiary of the VIE(s) and requires additional disclosures about an enterprise’s involvement in VIE(s). The adoption of these amendments on January 1, 2010 did not have a material impact on our Consolidated Financial Statements.
In September 2009, the FASB issued ASU2009-12 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 ASU2009-05 which provides additional guidance on the application of fair value techniques for liabilities under the Fair Value Measurements and Disclosures Topic (ASC 820). 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.
In January 2009, the FASB amended the requirements pertaining to the method of applying the acquisition method of accounting for business combinations. 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. These amendments have been applied prospectively to business combinations with an acquisition date subsequent to January 1, 2009. While the new business combination accounting guidance did not have a material impact on our Consolidated Financial Statements on adoption, the effects on future periods will depend upon the nature and significance of future business combinations.
NOTE 3
Acquisitions
During 2010, we spent an aggregate of $1,041, net of cash acquired, primarily on the acquisitions of Nova Analytics Corporation (Nova) and Godwin Pumps of America, Inc. and Godwin Holdings Limited (collectively referred to as Godwin). Thefinancial position, results of operations
andor cash
flows from our 2010 acquisitions have been included in our Consolidated Financial Statements prospectively from their date of acquisition. Pro forma results of operations for acquisitions completed in 2010, 2009 and 2008 have not been presented because they are not materialflows.Accounting Pronouncements Not Yet Adopted
In September 2011, the FASB provided companies with the option to our Consolidated Financial Statements, either individually or in the aggregate. Provided below is additional information related to the Nova and Godwin acquisitions.
Nova Analytics
On March 23, 2010, we acquired 100% of the outstanding stock of Nova, a manufacturer of premium quality laboratory, field, portable and on-line analytical instruments used in water and wastewater, environmental, medical, and food and beverage applications, for a purchase price of $385, net of cash acquired. Nova provides us with brands, technologies, distribution and after-market content in the analytical instrumentation market. The addition of Nova broadens the solutions our Fluid segment offers customers in key markets such as municipal water and wastewater, industrial processing, and food and beverage.
The purchase price for Nova was allocated to the net tangible and intangible assets acquired and liabilities assumedmake an initial qualitative evaluation, based on their estimated fair values asthe entity’s events and circumstances, to determine the likelihood of March 23, 2010.goodwill impairment. The aggregate estimated fair valueresult of distributor relationships, trademarks and proprietary technology was $112, $42 and $10, respectively. Other assets acquired and liabilities assumed as part ofthis qualitative assessment determines whether it is necessary to perform the acquisition were $70 primarily related to working capital balances and $81 primarily related to deferred tax liabilities, respectively. The excess of the purchase price over the estimated fair value of net assets acquired equal to $232 was recorded as goodwill (whichcurrently required two-step impairment test. If it is more likely than not expected to be deductible for income tax purposes). The goodwill arising from the acquisition consists largely of the planned expansion of the Nova footprint to new geographic markets, synergies and economies of scale. All of the goodwill has been assigned to the Fluid segment.
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Godwin Pumps
On August 3, 2010, we acquired 100% of the privately held stock of Godwin for a purchase price of $580, net of cash acquired. Godwin is a supplier and servicer of automatic self-priming and on-demand pumping solutions serving the global industrial, construction, mining, municipal, oil and gas dewatering markets. The addition of Godwin’s specialized products and skills to our Fluid segment’s broad submersible pump portfolio and global sales and distribution network provides significant geographic expansion opportunities.
The purchase price for Godwin was allocated to the net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of August 3, 2010. The aggregate estimated fair value of customer relationships, trademarks and proprietary technology was $107, $46 and $14, respectively. Other assets acquired as part of the acquisition were $191, primarily including rental equipment, inventory, and trade receivables. Liabilities assumed as part of the acquisition were $30. The excess of the purchase price overthat the fair value of
net assets acquired equala reporting unit is less than its carrying amount, a company would be required to
$252 was recorded asperform the two-step impairment test. This guidance is effective for annual and interim goodwill
a significant portion of which isimpairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company could elect to apply the option in future goodwill impairment tests; however, the amendments are not expected to
be deductiblehave a material effect on the Company’s Consolidated Financial Statements.In May 2011, the FASB issued guidance intended to achieve common fair value measurements and related disclosures between U.S. GAAP and international accounting standards. The amendments primarily clarify existing fair value guidance and are not intended to change the application of existing fair value measurement guidance. However, the amendments include certain instances where a particular principle or requirement for income tax purposes. The goodwill arisingmeasuring fair value or disclosing information about fair value measurements has changed. This guidance is effective for the periods beginning after December 15, 2011 and early application is prohibited. We will
adopt these amendments on January 1, 2012; however, the requirements are not expected to have a material effect on the Company’s Consolidated Financial Statements.
NOTE 3 Company TransformationNOTE 3
Company Transformation
As mentioned in Note 1, on October 31, 2011, the Company completed the legal and structural separation of Exelis and Xylem from the acquisitionCompany into two independent, publicly traded companies via a tax-free Distribution to shareholders. The Distribution was made pursuant to a Distribution Agreement, dated October 25, 2011, among ITT, Exelis and Xylem (the Distribution Agreement). With the completion of these separations, the Company disposed of its water-related businesses and Defense segment in their entirety and ceased to consolidate their financial position and results of operations in its consolidated financial statements. Accordingly, the Company has presented the financial position and results of operations of its former water-related businesses and Defense segment as discontinued operations in the consolidated financial statements for all periods presented. See Note 4, “Discontinued Operations,” for additional information. The water-related businesses include the Water & Wastewater division, including its analytical instrumentation component, and the Residential & Commercial Water division previously reported within the Fluid Technology segment, as well as the Flow Control division that was previously reported within the Motion & Flow segment. The Industrial Process division, which was previously reported within the Fluid Technology segment, was not included in the Distribution and is primarilynow reported as a segment of ITT.
During 2011, we recognized pre-tax expenses of $636 in connection with activities taken to complete the Distribution and to create the revised organizational structure (referred to herein as Transformation costs). We have presented $396 of the pre-tax transformation costs within income from continuing operations and $240 within income from discontinued operations. Amounts presented within discontinued operations are costs directly related to the planned geographic expansionDistribution and provide no future benefit to the Company. The components of Godwin’s operations. Alltransformation costs incurred during 2011 are presented below.
| | | | | | | | | | | | | | | |
| | | Continuing Operations | | Discontinued Operations | | Total |
Loss on extinguishment of debt (see Note 16) | | | $ | 297 | | | | $ | – | | | | $ | 297 | |
Advisory fees | | | | – | | | | | 139 | | | | | 139 | |
Non-cash asset impairment(a) | | | | 57 | | | | | 8 | | | | | 65 | |
IT costs | | | | – | | | | | 46 | | | | | 46 | |
Employee retention and other compensation costs(b) | | | | 37 | | | | | 20 | | | | | 57 | |
Lease termination and other real estate costs | | | | 4 | | | | | 10 | | | | | 14 | |
Other costs | | | | 1 | | | | | 17 | | | | | 18 | |
| | | | | | | | | | | | | | | | |
Transformation costs before income tax expense | | | | 396 | | | | | 240 | | | | | 636 | |
Tax-related separation costs | | | | 4 | | | | | 7 | | | | | 11 | |
Tax benefit | | | | (143 | ) | | | | (74 | ) | | | | (217 | ) |
| | | | | | | | | | | | | | | | |
Total transformation costs, net of tax benefit | | | $ | 257 | | | | $ | 173 | | | | $ | 430 | |
| | | | | | | | | | | | | | | | |
| (a) | Includes a $55 million non-cash impairment charge related to a decision to discontinue development of an information technology consolidation initiative. |
| (b) | Includes $17 of compensation costs recognized within continuing operations in connection with the retirement of Steven R. Loranger, our former Chairman, President and Chief Executive Officer in October 2011. |
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The table included below provides a rollforward of the goodwill has been assignedaccrual for Transformation costs for the year ended 2011.
| | | | | |
Transformation accrual – January 1 | | | $ | 2 | |
Charges for actions during the period: | | | | | |
Continuing operations | | | | 396 | |
Discontinued operations | | | | 240 | |
Cash payments | | | | (559 | ) |
Asset impairment and other non-cash charges, net | | | | (45 | ) |
| | | | | | |
Transformation accrual – December 31 | | | $ | 34 | |
| | | | | | |
NOTE 4 Discontinued OperationsNOTE 4
Discontinued Operations
On October 31, 2011, the Company completed the Distribution of Exelis and Xylem (see Note 1). ITT was designated as the accounting and legal spinnor with respect to the Fluid segment.Distribution. In connection with the Distribution, ITT received a net cash transfer (the Contribution) of $683 and $988 from Exelis and Xylem, respectively. No gain or loss was recognized in connection with the Distribution. While we are a party to a Distribution Agreement and several other agreements, including a Tax Matters Agreement, Benefits and Compensation Matters Agreement and Master Transition Services Agreement, we have determined we do not have significant continuing involvement in
2009the operations of Xylem or Exelis, nor do we expect significant continuing cash flows from Exelis or Xylem. As a result, the operating results of Exelis and 2008 Acquisitions
During 2009, we spent $34, netXylem through the date of cash acquired, on acquisitions that were not material individually orthe Distribution have been classified in the aggregate to our results ofconsolidated financial statements as discontinued 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.
During 2008, we spent $276, net of cash acquired, on acquisitions that were not material individually or in the aggregate to our results of operations or financial position. The cash spent on acquisitions during 2008 included $226 related to our 2007 acquisition of EDO Corporation (EDO), a global aerospace and defense company.
NOTE 4
Discontinued Operations
for all periods presented.During 2010 we sold CAS, Inc. (CAS), a component of our prior Defense & Information Solutions business segment, (Defense segment) engaging in systems engineering and technical assistance (SETA) for the U.S. Government. The sale of CAS was completed on September 8, 2010, resulting in the recognition of a $130 after-tax gain, reported as a component of income from discontinued operations within our Consolidated Income Statements. This transaction resulted in a tax benefit of $4, primarily due to the difference in the book and tax bases of CAS. Proceedsproceeds from the sale of CAS were $237.
Subsequent to this divestiture, we do not have any significant continuing involvement in the operations of CAS, nor do we expect significant continuing cash flows from CAS. Accordingly, the financial position and results of operations from CAS are reported as a discontinued operation for the
2010 and 2009 periods.Interest expense was not allocated to the divested businesses for any of the periods presented.The following tablepresented.
Amounts presented for 2010 and 2009 have been adjusted to reflect certain immaterial corrections, primarily relating to income taxes, to the amounts previously reported in the consolidated financial statements. See Note 23, “Immaterial Corrections,” for further information.
The tables below provides third-party revenuethe operating results of discontinued operations through the date of disposal or distribution and operating income providedcertain Transformation costs that were incurred by CAS includedITT but qualified for classification within discontinued operations.
| | | | | | | | | | | | | | | | | | | | |
| Year Ended 2011 | | Exelis | | Xylem | | Other(b) | | Total |
Revenue | | | $ | 4,916 | | | | $ | 3,107 | | | | $ | – | | | | $ | 8,023 | |
Transformation costs | | | | 31 | | | | | 75 | | | | | 134 | | | | | 240 | |
Earnings (loss) before income taxes | | | | 473 | | | | | 321 | | | | | (108 | ) | | | | 686 | |
Income tax expense (benefit) | | | | 194 | | | | | 70 | | | | | (26 | ) | | | | 238 | |
Income (loss) from discontinued operations | | | $ | 279 | | | | $ | 251 | | | | $ | (82 | ) | | | $ | 448 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended 2010 | | Exelis(a) | | Xylem | | CAS | | Other(b) | | Total |
Revenue | | | $ | 5,893 | | | | $ | 3,192 | | | | $ | 160 | | | | $ | – | | | | $ | 9,245 | |
Earnings before income taxes | | | | 718 | | | | | 395 | | | | | 13 | | | | | 12 | | | | | 1,138 | |
Gain on sale of disposal before tax | | | | – | | | | | – | | | | | 125 | | | | | – | | | | | 125 | |
Income tax expense | | | | 251 | | | | | 51 | | | | | – | | | | | 25 | | | | | 327 | |
Income (loss) from discontinued operations | | | $ | 467 | | | | $ | 344 | | | | $ | 138 | | | | $ | (13 | ) | | | $ | 936 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended 2009 | | Exelis(a) | | Xylem | | CAS | | Other(b) | | Total |
Revenue | | | $ | 6,059 | | | | $ | 2,839 | | | | $ | 231 | | | | $ | – | | | | $ | 9,129 | |
Earnings (loss) before income taxes | | | | 727 | | | | | 285 | | | | | 15 | | | | | (12 | ) | | | | 1,015 | |
Income tax expense | | | | 253 | | | | | 14 | | | | | 6 | | | | | 2 | | | | | 275 | |
Income (loss) from discontinued operations | | | $ | 474 | | | | $ | 271 | | | | $ | 9 | | | | $ | (14 | ) | | | $ | 740 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (a) | CAS was a component of our Defense and Information Solutions business, which was distributed as Exelis. The table above presents Exelis without CAS, which was disposed during 2010. |
| (b) | Amounts presented in the “Other” column within the tables above relate to various divested ITT businesses accounted for as discontinued operations in the year of divestiture for which legacy liabilities remain, as well as certain Transformation costs which were directly related to the Distribution and provide no future benefit to the Company. See Note 3, “Company Transformation” for further information. |
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ITT CORPORATION AND SUBSIDIARIES
The table below provides the major components of assets and liabilities at December 31, 2010 that were included in the Distribution and includes those assets and liabilities that were distributed to Exelis and Xylem which were not part of their historical operations.
| | | | | | | | | | | | | | | |
| | | Exelis | | Xylem | | Total |
Cash and cash equivalents | | | $ | 18 | | | | $ | 808 | | | | $ | 826 | |
Receivables, net | | | | 958 | | | | | 690 | | | | | 1,648 | |
Inventories, net | | | | 239 | | | | | 389 | | | | | 628 | |
Other current assets | | | | 188 | | | | | 167 | | | | | 355 | |
| | | | | | | | | | | | | | | | |
Total current assets | | | | 1,403 | | | | | 2,054 | | | | | 3,457 | |
| | | | | | | | | | | | | | | | |
Plant, Property and Equipment, net | | | | 462 | | | | | 465 | | | | | 927 | |
Goodwill | | | | 2,156 | | | | | 1,617 | | | | | 3,773 | |
Other intangible assets | | | | 258 | | | | | 416 | | | | | 674 | |
Other non-current assets | | | | 243 | | | | | 248 | | | | | 491 | |
| | | | | | | | | | | | | | | | |
Total assets | | | | 4,522 | | | | | 4,800 | | | | | 9,322 | |
| | | | | | | | | | | | | | | | |
Accounts payable | | | | 326 | | | | | 321 | | | | | 647 | |
Accrued liabilities and other current liabilities | | | | 884 | | | | | 361 | | | | | 1,245 | |
| | | | | | | | | | | | | | | | |
Total current liabilities | | | | 1,210 | | | | | 682 | | | | | 1,892 | |
| | | | | | | | | | | | | | | | |
Postretirement benefits | | | | 1,223 | | | | | 257 | | | | | 1,480 | |
Other non-current liabilities | | | | 113 | | | | | 324 | | | | | 437 | |
| | | | | | | | | | | | | | | | |
Total liabilities | | | $ | 2,546 | | | | $ | 1,263 | | | | $ | 3,809 | |
| | | | | | | | | | | | | | | | |
In order to effect the Distribution and govern ITT’s relationship with Exelis and Xylem after the Distribution, ITT entered into a distribution agreement and several other agreements, including a tax matters agreement, employee benefits and compensation agreement and master transition services agreement. Information on the agreements utilized to effectuate the Distribution are provided below.
Distribution Agreement
The Distribution Agreement between ITT and Exelis and Xylem contains the key provisions relating to the separation of the businesses of Exelis and Xylem from ITT and the distribution of the shares of Exelis and Xylem common stock to our shareholders. The Distribution Agreement provides the framework for the allocation, transfer and assumption of assets and liabilities among ITT, Exelis and Xylem as well as the settlement or extinguishment of certain liabilities and other obligations between and among ITT, Exelis and Xylem. Under the Distribution Agreement, we agreed to indemnify Exelis and Xylem and their respective subsidiaries and affiliates, subject to limited exceptions with respect to certain employee claims, against claims and liabilities related to the past operation of ITT’s business (other than the liabilities of the divested businesses) and Exelis and Xylem agreed to indemnify us against claims and liabilities related to their respective businesses. The Distribution Agreement establishes that certain liabilities, e.g., the bond litigation, referenced in Note 20,
“Commitments and Contingencies,” will be shared 21% to ITT, 40% to Exelis, and 39% to Xylem.
In connection with the Distribution, ITT retained certain material contingent legacy liabilities involving asbestos and environmental matters. See Note 20, “Commitments and Contingencies,” for information regarding asbestos and environmental related contingencies.
Tax Matters Agreement
On October 25, 2011, we entered into a Tax Matters Agreement with Exelis and Xylem that governs the respective rights, responsibilities and obligations of the companies after the Distribution with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. Federal, state, local and foreign income taxes, other tax matters and related tax returns. Exelis and Xylem have liability with ITT to the U.S. Internal Revenue Service (IRS) for the consolidated U.S. Federal income taxes of the ITT consolidated group relating to the taxable periods in which Exelis and Xylem were part of that group. However, the Tax Matters Agreement specifies the portion, if any, of this tax liability for which ITT, Exelis and Xylem will bear responsibility, and ITT, Exelis and Xylem agreed to indemnify each other against any amounts for which they are not responsible. The Tax Matters Agreement also provides special rules for allocating tax liabilities in the event that the Distribution is determined to not be tax-free. The Tax Matters Agreement provides for certain covenants that may
| | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | | | 2008 | |
| Revenue | | | $ | 160 | | | $ | 231 | | | $ | 218 | |
| Pre-tax operating income | | | | 13 | | | | 15 | | | | 12 | |
| | | | | | | | | | | | | | |
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ITT CORPORATION AND SUBSIDIARIES
Assetsrestrict our ability to pursue strategic or other transactions that otherwise could maximize the value of our business and may discourage or delay a change of control that may be considered favorable. Though valid as between the parties, the Tax Matters Agreement will not be binding on the IRS.
Pursuant to the Tax Matters Agreement, as the shared income tax liabilities are settled, ITT will make payments up to certain specified thresholds, with payments in excess of those specified thresholds shared among ITT, Exelis, and Xylem. If payments to the taxing authorities are less than certain specified thresholds, ITT will make payments up to the remaining specified thresholds to Exelis and Xylem. Settlement is expected to occur as the audit process by applicable taxing authorities is completed for the impacted years and cash payments are made. Given the nature of the shared tax liabilities, the maximum amount of potential future payments is not determinable. Any such cash payments, when they occur, will reduce the liability for uncertain tax positions as such payments represent an equivalent reduction of risk. At December 31, 2011, ITT’s accrual for uncertain tax positions includes amounts related to certain shared tax liabilities; however, no receivables from Exelis or Xylem have been recorded as our estimate of their portion of the shared tax liabilities is not more than the amounts currently accrued for the uncertain tax position. If our estimate of exposures to the shared tax liabilities increases above the specified threshold, a receivable would be recorded. At December 31, 2011, there is a tax indemnification liability recorded of $4 due to Xylem.
Adjustments in the future for the impact of filing final income tax returns in certain jurisdictions where those returns include a combination of ITT, Exelis and Xylem legal entities and for certain amended income tax returns for the periods prior to the Distribution may be recorded to either shareholders’ equity or the statement of income depending on the specific item giving rise to the adjustment.
Benefits and Compensation Matters Agreement
On October 25, 2011, we entered into a Benefits and Compensation Matters Agreement with Exelis and Xylem that governs the respective rights, responsibilities and obligations of Exelis, Xylem and ITT after the Distribution with respect to transferred employees, defined benefit pension plans, defined contribution pension plans, nonqualified pension plans, employee health and welfare benefit plans, incentive plans, corporate-owned life insurance, stock equity awards, foreign benefit plans, director plans and collective bargaining agreements. The Benefits and Compensation Matters Agreement provides for the allocation and treatment of assets and liabilities arising out of CAS reportedincentive plans, pension plans and employee welfare benefit programs in which Exelis and Xylem employees participated prior to the Distribution. Generally,
Exelis and Xylem assumed or retained sponsorship of, and liabilities relating to, employee compensation and benefit programs relating to Exelis and Xylem current employees.
The Benefits and Compensation Matters Agreement also provided that outstanding ITT equity awards would be equitably adjusted in connection with the Distribution. All outstanding ITT equity awards held by employees of Exelis as discontinued operations withinof the Distribution Date were substituted for Exelis equity awards and all outstanding ITT equity awards held by employees of Xylem as of the Distribution Date were substituted for Xylem equity awards. As described in Note 18, “Long-Term Incentive Employee Compensation,” the substitution preserved the economic value of the cancelled ITT equity awards for employees of Exelis and Xylem as of the Distribution Date. Subject to the applicable transition period with respect to certain benefit plans or programs, after the Distribution, employees of Exelis and Xylem no longer participate in ITT’s plans or programs, and Exelis and Xylem have established or maintained plans or programs for their employees.
Master Transition Services Agreement
On October 25, 2011, we entered into a Master Transition Services Agreement with Exelis and Xylem, under which each of Exelis and Xylem or their respective affiliates provide us with certain services (including information technology, financial, procurement and human resource services, benefits support services and other specified services), and we or certain of our Consolidated Balance Sheetaffiliates provide each of Exelis and Xylem certain services (including information technology, human resources services and other specified services). These services will initially be provided at cost with scheduled, escalating increases to up to cost plus 10% and generally extend for a period of 3 to 24 months and are presentedintended to help ensure an orderly transition for each of Exelis, Xylem and ITT following the Distribution.
During November and December of 2011, we billed Exelis and Xylem approximately $22, primarily relating to active employee health benefits which continued to be administered by ITT. On January 1, 2012, the administration of the employee health benefit plans was transferred to Exelis and Xylem. Total billings by Exelis and Xylem to ITT, following the Distribution, amount to less than $1. As of December 31, 2011, we have an aggregate receivable and payable, associated with transactions related to the Master Transition Services Agreement, of less than $1 each.
Subcontract Pending Novation
On October 31, 2011, we entered into a Subcontract Agreement Pending Novation with Exelis through which ITT engaged Exelis as a subcontractor for approximately 425 U.S. government contracts. Exelis will be obligated to directly perform to the contract specifications to the satisfaction of the U.S. Government as if the contracts had been novated. The
77
ITT CORPORATION AND SUBSIDIARIES
Subcontract Agreement Pending Novation will remain in effect until the earlier of the U.S. Government’s agreement to novate is completed or performance under the contract is completed. ITT and Exelis are working with the U.S. Government to finalize the novation of the underlying contracts and do not expect any disruptions as a result of this process.
All rights and benefits conferred or accruing under the contracts pending novation inure to Exelis. Pursuant to the terms of the Subcontract Agreement Pending Novation, ITT is obligated to immediately deposit all proceeds it receives under such government contracts into a bank account controlled by Exelis. Exelis has indemnified ITT against claims and liabilities related to the U.S. Government contracts pending novation arising in connection with performance under the contracts.
While the novation is pending, ITT does not have the ability to significantly influence Exelis’ performance under the contracts as Exelis acts as the contracted party and has assumed control of all legal matters, including with respect to audits performed by the U.S. Government. Further, ITT has granted Exelis the right to, among other things, (i) prepare, execute and submit invoices in the table below.
| | | | | | |
| | | | 2009 | |
| Receivables, net | | | $ | 43 | |
| Plant, property and equipment, net | | | | 1 | |
| Goodwill | | | | 76 | |
| Other intangible assets, net | | | | 18 | |
| Deferred income taxes | | | | 2 | |
| Other assets | | | | 1 | |
| | | | | | |
| Total assets of discontinued operations | | | $ | 141 | |
| | | | | | |
| Accounts payable | | | $ | 19 | |
| Accrued expenses | | | | 17 | |
| Deferred income taxes | | | | 8 | |
| | | | | | |
| Total liabilities of discontinued operations | | | $ | 44 | |
| | | | | | |
We did not engagename of ITT, (ii) send correspondence relating to matters under such contract in
the name of ITT and (iii) otherwise exercise all rights in respect of such contract in the name of ITT. The U.S. government was billed approximately $250 from the Distribution Date through December 31, 2011 for contracts awaiting novation. Revenues and costs resulting from activities performed by Exelis on these contracts after the Distribution Date have been recorded on a net basis in ITT’s financial statements, resulting in no effect on any
divestiture actionsamounts reported in ITT’s financial statements.NOTE 5 AcquisitionsNOTE 5
Acquisitions
During 2011, we spent $16, net of cash acquired, on acquisitions that were not material individually or in the aggregate to our results of operations or financial position,position. The most significant of these acquisitions was Blakers Pump Engineers Unit Trust (Blakers) on October 27, 2011 for $15, net of cash acquired. Blakers, reported within the Industrial Process segment, is a supplier of process and industrial pumping equipment serving customers in either 2009the oil & gas, mining, power, and general markets.
During 2010, we spent $10, net of cash acquired, on the acquisition of Canberra Pumps do Brasil (Canberra). Canberra, a manufacturer of pump equipment serving customers in the chemical, pulp and paper, and general industry pump markets. Canberra is reported within the Industrial Process segment.
Our financial statements include the results of operations and cash flows from each of our acquisitions prospectively from their respective acquisition date; however, these results were
not material during the years ended December 31, 2011, 2010 or 2008. We received proceeds from the sale of assets and businesses of $20 and $22 during 2009 and 2008, respectively. Amounts reported as discontinuedaccordingly, pro forma results of 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.
65
have not been presented.
ITT CORPORATION AND SUBSIDIARIES
NOTE 56 Restructuring and Asset Impairment Charges, netNOTE 6
Restructuring and Asset Impairment Charges, net
We have initiated various restructuring activities throughout the business during the past three years, of which only the realignment of our Defense segment in 2010 and an entity-wide reduction in force in the fourth quarter of 2008 are considered individually significant. See further discussion on these two plans below.
The components of all restructuring costsand asset impairment charges incurred during each of the previous three years ended December 31, 2011, excluding impairment charges of $55 incurred during 2011 in connection with the Distribution, are presented below.
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | 2008 | |
| By component: | | | | | | | | | | | | | | | |
| Severance charges | | | $ | 47 | | | | $ | 71 | | | | $ | 66 | |
| Other restructuring charges | | | | 10 | | | | | 11 | | | | | 10 | |
| Reversal of restructuring accruals | | | | (5 | ) | | | | (3 | ) | | | | (2 | ) |
| | | | | | | | | | | | | | | | |
| Total net restructuring charge | | | | 52 | | | | | 79 | | | | | 74 | |
| Asset impairment charge | | | | 1 | | | | | – | | | | | 3 | |
| | | | | | | | | | | | | | | | |
| Total net restructuring and impairment charge | | | $ | 53 | | | | $ | 79 | | | | $ | 77 | |
| | | | | | | | | | | | | | | | |
| By segment: | | | | | | | | | | | | | | | |
| Defense | | | $ | 33 | | | | $ | 5 | | | | $ | 11 | |
| Fluid | | | | 14 | | | | | 37 | | | | | 34 | |
| Motion & Flow | | | | 5 | | | | | 37 | | | | | 30 | |
| Corporate and Other | | | | 1 | | | | | – | | | | | 2 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
By component: | | | | | | | | | | | | | | | |
Severance charges | | | $ | 4 | | | | $ | 2 | | | | $ | 40 | |
Other restructuring charges | | | | 1 | | | | | 2 | | | | | 5 | |
Reversal of restructuring accruals | | | | – | | | | | (1 | ) | | | | (2 | ) |
| | | | | | | | | | | | | | | | |
Restructuring and asset impairment charge, net | | | $ | 5 | | | | $ | 3 | | | | $ | 43 | |
| | | | | | | | | | | | | | | | |
By segment: | | | | | | | | | | | | | | | |
Industrial Process | | | $ | – | | | | $ | 1 | | | | $ | 11 | |
Motion Technologies | | | | – | | | | | – | | | | | 21 | |
Interconnect Solutions | | | | 3 | | | | | – | | | | | 7 | |
Control Technologies | | | | 2 | | | | | 2 | | | | | 3 | |
Corporate and Other | | | | – | | | | | – | | | | | 1 | |
| | | | | | | | | | | | | | | | |
The following table displays a rollforward of the restructuring accruals, presented on our Consolidated Balance Sheet within accrued liabilities, for the each of the previous three years ended.ended December 31, 2011 and 2010.
| | | | | | | | | | |
| | | 2011 | | 2010 |
Restructuring accruals – January 1 | | | $ | 6 | | | | $ | 33 | |
Charges for plans initiated during the year | | | | 3 | | | | | 2 | |
Charges for plans initiated in prior years | | | | 2 | | | | | 2 | |
Cash payments | | | | (7 | ) | | | | (27 | ) |
Asset write-offs | | | | – | | | | | (1 | ) |
Reversal of accruals | | | | – | | | | | (1 | ) |
Foreign exchange translation and other | | | | – | | | | | (2 | ) |
| | | | | | | | | | | |
Restructuring accruals – December 31 | | | $ | 4 | | | | $ | 6 | |
| | | | | | | | | | | |
By accrual type: | | | | | | | | | | |
Severance accrual | | | $ | 4 | | | | $ | 5 | |
Facility carrying and other costs accrual | | | | – | | | | | 1 | |
| | | | | | | | | | | |
By segment: | | | | | | | | | | |
Industrial Process | | | $ | – | | | | $ | – | |
Motion Technologies | | | | 1 | | | | | 4 | |
Interconnect Solutions | | | | 3 | | | | | – | |
Control Technologies | | | | – | | | | | 1 | |
Corporate and Other | | | | – | | | | | 1 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Restructuring accruals – 1/1 | | | $ | 53 | | | | $ | 58 | |
| Charges for plans initiated during the year | | | | 50 | | | | | 71 | |
| Charges for plans initiated in prior years | | | | 7 | | | | | 11 | |
| Cash payments | | | | (70 | ) | | | | (82 | ) |
| Asset write-offs | | | | (1 | ) | | | | (2 | ) |
| Reversal of accruals | | | | (5 | ) | | | | (3 | ) |
| Foreign exchange translation and other | | | | (2 | ) | | | | – | |
| | | | | | | | | | | |
| Restructuring accruals – 12/31 | | | $ | 32 | | | | $ | 53 | |
| | | | | | | | | | | |
| By accrual type: | | | | | | | | | | |
| Severance accrual | | | $ | 26 | | | | $ | 46 | |
| Facility carrying and other costs accrual | | | | 6 | | | | | 7 | |
| | | | | | | | | | | |
| By segment: | | | | | | | | | | |
| Defense | | | $ | 17 | | | | $ | 4 | |
| Fluid | | | | 7 | | | | | 18 | |
| Motion & Flow | | | | 8 | | | | | 31 | |
| Corporate and Other | | | | – | | | | | – | |
| | | | | | | | | | | |
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ITT CORPORATION AND SUBSIDIARIES
The following is a rollforward of employee position eliminations associated with restructuring activities throughfor the years ended December 31, 2011 and 2010:
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Planned reductions – 1/1 | | | | 407 | | | | | 510 | |
| Additional planned reductions | | | | 1,265 | | | | | 1,125 | |
| Actual reductions | | | | (1,488 | ) | | | | (1,228 | ) |
| | | | | | | | | | | |
| Planned reductions – 12/31 | | | | 184 | | | | | 407 | |
| | | | | | | | | | | |
| | | | | | | | | | |
| | | 2011 | | 2010 |
Planned reductions – January 1 | | | | 113 | | | | | 257 | |
Additional planned reductions | | | | 52 | | | | | 75 | |
Actual reductions | | | | (136 | ) | | | | (219 | ) |
| | | | | | | | | | | |
Planned reductions – December 31 | | | | 29 | | | | | 113 | |
| | | | | | | | | | | |
2010 Defense Segment Realignment ActivitiesStrategic Relocation of Manufacturing Operations
During the firstfourth quarter of 2010,2009, we initiated an action within Motion Technologies to realignrelocate certain of our Defense segmentproduction operations to enable better product portfolio integration, encouraging a more coordinated market approach and reduced operational redundancies. As partlower cost regions. This action resulted in $21 of the strategic realignment of the Defense segment, the previous organizational structure, consisting of seven divisions, was consolidated into three larger divisions. Thetotal restructuring charges, incurred during 2010 under this action primarily related to employee severance and to a lesser extent, lease cancellation and other costs associated with three facilities that were substantially closed during 2010. Headcount reductions totaling 642 were originally planned under this action, including 162 factory workers, 457 office workers and 23 management employees. As of December 31, 2010, substantially all of this headcount initiative has been completed. We do not expect to incur significant restructuring charges under this action going forward. We estimate our
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ITT CORPORATION AND SUBSIDIARIES
Defense realignment actions will yield approximately $61 in annual net savings.The following table provides a rollforward of the restructuring accrual associated with this action, including the related charges and payments.
| | | | | | |
| | | | 2010 | |
| Restructuring accruals – 1/1 | | | $ | – | |
| Restructuring charges | | | | 28 | |
| Cash payments | | | | (18 | ) |
| Reversal of accruals | | | | (1 | ) |
| Foreign exchange translation and other | | | | – | |
| | | | | | |
| Restructuring accruals – 12/31 | | | $ | 9 | |
| | | | | | |
Fourth Quarter 2008 Reduction in Force Activities
During the fourth quarter of 2008, we initiated an action to reduce headcount across our businesses in response to declining economic conditions. The fourth quarter 2008 reduction in force activities resulted in $64 of total restructuring charges. The charges by segment were: Fluid $29, Motion & Flow $23, Defense $11 and Corporate & Other $1. This action has resulted in a total headcount reduction of 1,257,175, including 601153 factory workers, 62818 office workers and 284 management employees.The following table provides a rollforwardemployees. This action was completed during 2010.
NOTE 7 Income TaxesNOTE 7
Income Taxes
For each of the restructuring accrual associated with this action, includingthree years ended December 31, 2011, the related charges and payments.
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Restructuring accruals – 1/1 | | | $ | 8 | | | | $ | 46 | |
| Restructuring charges | | | | – | | | | | 8 | |
| Cash payments | | | | (4 | ) | | | | (45 | ) |
| Reversal of accruals | | | | (1 | ) | | | | (1 | ) |
| Foreign exchange translation and other | | | | – | | | | | – | |
| | | | | | | | | | | |
| Restructuring accruals – 12/31 | | | $ | 3 | | | | $ | 8 | |
| | | | | | | | | | | |
NOTE 6
Income Taxes
Income tax data
related to the loss from continuing operations is as follows:
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
Income components: | | | | | | | | | | | | | | | |
United States | | | $ | (466 | ) | | | $ | (395 | ) | | | $ | (306 | ) |
International | | | | 148 | | | | | 119 | | | | | 98 | |
| | | | | | | | | | | | | | | | |
Total pre-tax loss from continuing operations | | | $ | (318 | ) | | | $ | (276 | ) | | | $ | (208 | ) |
| | | | | | | | | | | | | | | | |
Income tax expense (benefit) components: | | | | | | | | | | | | | | | |
Current income tax expense (benefit): | | | | | | | | | | | | | | | |
United States – federal | | | $ | (80 | ) | | | $ | (61 | ) | | | $ | 9 | |
United States – state and local | | | | (12 | ) | | | | – | | | | | (2 | ) |
International | | | | 49 | | | | | 28 | | | | | 18 | |
| | | | | | | | | | | | | | | | |
Total current income tax (benefit) expense | | | | (43 | ) | | | | (33 | ) | | | | 25 | |
| | | | | | | | | | | | | | | | |
Deferred income tax expense (benefit): | | | | | | | | | | | | | | | |
United States – federal | | | | 319 | | | | | (100 | ) | | | | (115 | ) |
United States – state and local | | | | (15 | ) | | | | (15 | ) | | | | (9 | ) |
International | | | | (1 | ) | | | | 4 | | | | | 2 | |
| | | | | | | | | | | | | | | | |
Total deferred income tax expense (benefit) | | | | 303 | | | | | (111 | ) | | | | (122 | ) |
| | | | | | | | | | | | | | | | |
Total income tax expense (benefit) | | | $ | 260 | | | | $ | (144 | ) | | | $ | (97 | ) |
Effective income tax rate | | | | (81.8 | )% | | | | 52.2 | % | | | | 46.6 | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | 2008 | |
| Income components: | | | | | | | | | | | | | | | |
| United States | | | $ | 352 | | | | $ | 432 | | | | $ | 651 | |
| International | | | | 466 | | | | | 378 | | | | | 425 | |
| | | | | | | | | | | | | | | | |
| Total pre-tax income | | | $ | 818 | | | | $ | 810 | | | | $ | 1,076 | |
| | | | | | | | | | | | | | | | |
| Income tax expense components: | | | | | | | | | | | | | | | |
| Current income tax provision: | | | | | | | | | | | | | | | |
| United States – federal | | | $ | 152 | | | | $ | 129 | | | | $ | 160 | |
| United States – state and local | | | | 18 | | | | | 8 | | | | | 5 | |
| International | | | | 109 | | | | | 109 | | | | | 131 | |
| | | | | | | | | | | | | | | | |
| Total current income tax provision | | | | 279 | | | | | 246 | | | | | 296 | |
| | | | | | | | | | | | | | | | |
| Deferred income tax provision: | | | | | | | | | | | | | | | |
| United States – federal | | | | (112 | ) | | | | (45 | ) | | | | 19 | |
| United States – state and local | | | | (9 | ) | | | | (14 | ) | | | | (1 | ) |
| International | | | | 6 | | | | | (18 | ) | | | | (6 | ) |
| | | | | | | | | | | | | | | | |
| Total deferred income tax provision | | | | (115 | ) | | | | (77 | ) | | | | 12 | |
| | | | | | | | | | | | | | | | |
| Total income tax expense | | | $ | 164 | | | | $ | 169 | | | | $ | 308 | |
| Effective income tax rate | | | | 20.0 | % | | | | 20.9 | % | | | | 28.6 | % |
| | | | | | | | | | | | | | | | |
79
ITT CORPORATION AND SUBSIDIARIES
A reconciliation of the tax provisionexpense (benefit) for continuing operations atfrom the U.S. statutory income tax rate to the effective income tax expense rate as reported is as follows:
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | 2008 | |
| Tax provision at U.S. statutory rate | | | | 35.0 | % | | | | 35.0 | % | | | | 35.0 | % |
| International restructurings | | | | – | | | | | (7.1 | ) | | | | – | |
| Foreign tax rate differential | | | | (5.9 | ) | | | | (4.4 | ) | | | | (2.2 | ) |
| Effect of repatriation of foreign earnings | | | | (3.1 | ) | | | | (0.4 | ) | | | | (0.4 | ) |
| State and local income tax | | | | 1.1 | | | | | (1.5 | ) | | | | 0.4 | |
| Research credit | | | | (1.1 | ) | | | | (0.9 | ) | | | | (0.3 | ) |
| Tax examinations | | | | (1.4 | ) | | | | – | | | | | – | |
| Domestic manufacturing deduction | | | | (2.6 | ) | | | | (1.3 | ) | | | | (0.3 | ) |
| Tax account validation adjustment | | | | – | | | | | – | | | | | (3.9 | ) |
| Other | | | | (2.0 | ) | | | | 1.5 | | | | | 0.3 | |
| | | | | | | | | | | | | | | | |
| Effective income tax expense rate | | | | 20.0 | % | | | | 20.9 | % | | | | 28.6 | % |
| | | | | | | | | | | | | | | | |
67
follows for each of the three years ended December 31, 2011: | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
Tax provision at U.S. statutory rate | | | | 35.0 | % | | | | 35.0 | % | | | | 35.0 | % |
Foreign tax rate differential | | | | 4.2 | | | | | 2.2 | | | | | 1.9 | |
State and local income tax | | | | 0.5 | | | | | 5.6 | | | | | 5.8 | |
Tax on undistributed foreign earnings | | | | (21.8 | ) | | | | – | | | | | – | |
Change in state tax rate | | | | 9.7 | | | | | – | | | | | – | |
Valuation allowance on realizability of deferred tax assets | | | | (106.7 | ) | | | | 14.6 | | | | | 6.6 | |
U.S. permanent items | | | | – | | | | | – | | | | | (6.5 | ) |
Audit settlements | | | | – | | | | | – | | | | | (1.0 | ) |
Medicare | | | | 0.4 | | | | | (4.2 | ) | | | | – | |
U.S. tax on foreign earnings | | | | (6.8 | ) | | | | (16.0 | ) | | | | – | |
Tax credits | | | | 7.2 | | | | | 12.6 | | | | | 5.3 | |
Other adjustments | | | | (3.5 | ) | | | | 2.4 | | | | | (0.5 | ) |
| | | | | | | | | | | | | | | | |
Effective income tax rate | | | | (81.8 | )% | | | | 52.2 | % | | | | 46.6 | % |
| | | | | | | | | | | | | | | | |
ITT CORPORATION AND SUBSIDIARIES
Deferred tax assetsWe recorded the valuation allowance in 2011 primarily because 2011 operating results produced a cumulative three-year loss, which is considered a significant factor that is difficult to overcome when determining whether a valuation allowance is required.Since the Company was in a three-year cumulative loss position at the end of 2011, management determined that the size and liabilities are determined based on temporary differences betweenfrequency of the financial reportinglosses from continuing operations in recent years and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expectuncertainty associated with projecting future taxable income supported the differences will reverse.
Deferred tax assets and liabilities include the following:
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Deferred Tax Assets: | | | | | | | | | | |
| Employee benefits | | | $ | 650 | | | | $ | 736 | |
| Accruals | | | | 391 | | | | | 281 | |
| Loss carryforwards | | | | 148 | | | | | 200 | |
| Other | | | | 110 | | | | | 39 | |
| | | | | | | | | | | |
| Subtotal | | | | 1,299 | | | | | 1,256 | |
| Valuation allowance | | | | (116 | ) | | | | (150 | ) |
| | | | | | | | | | | |
| Net deferred tax assets | | | $ | 1,183 | | | | $ | 1,106 | |
| | | | | | | | | | | |
| Deferred Tax Liabilities: | | | | | | | | | | |
| Intangibles | | | $ | 355 | | | | $ | 324 | |
| Accelerated depreciation | | | | 50 | | | | | 47 | |
| Investment | | | | 8 | | | | | 16 | |
| | | | | | | | | | | |
| Total deferred tax liabilities | | | $ | 413 | | | | $ | 387 | |
| | | | | | | | | | | |
Included within theconclusion that a valuation allowance was required to reduce its deferred tax
table provided above is $6assets.As a result of net deferredthe Distribution and its impacts on the Company’s expected liquidity, investment opportunities and other factors, the Company determined that certain earnings generated in Luxemburg, Japan, and South Koreawere no longer considered to be indefinitely reinvested. As a result of the change in intent, the Company recorded $69 of income tax liabilityexpense on these undistributed foreign earnings. However, as of December 31, 2009 related to discontinued operations.
Deferred taxes in the Consolidated Balance Sheets consist of the following:
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Current assets | | | $ | 280 | | | | $ | 232 | |
| Non-current assets | | | | 554 | | | | | 583 | |
| Current liabilities | | | | (12 | ) | | | | (36 | ) |
| Other non-current liabilities | | | | (52 | ) | | | | (54 | ) |
| | | | | | | | | | | |
| | | | $ | 770 | | | | $ | 725 | |
| | | | | | | | | | | |
As of December 31, 2010,2011, we have not provided for deferred taxes on the
remaining excess of financial reporting over
the tax basis of investments in
certain foreign subsidiaries in the amount of
$1,865$370 because we plan to reinvest such earnings indefinitely outside the United States. 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.
As a consequence of the Distribution, certain state deferred tax assets were revalued based on enacted tax rates
using different state apportionment factors, effectively increasing the future state tax rates at which these deferred tax assets will be benefitted resulting in a $31 income tax benefit.
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 in effect for the year in which we expect the differences will reverse.
Deferred tax assets and liabilities include the following:
| | | | | | | | | | |
| | | 2011 | | 2010 |
Deferred Tax Assets: | | | | | | | | | | |
Accruals | | | $ | 355 | | | | $ | 303 | |
Employee benefits | | | | 135 | | | | | 69 | |
Credit carryforwards | | | | 35 | | | | | 7 | |
Loss carryforwards | | | | 65 | | | | | 57 | |
Other | | | | 40 | | | | | 60 | |
| | | | | | | | | | | |
Subtotal | | | | 630 | | | | | 496 | |
Valuation allowance | | | | (438 | ) | | | | (28 | ) |
| | | | | | | | | | | |
Net deferred tax assets | | | $ | 192 | | | | $ | 468 | |
| | | | | | | | | | | |
Deferred Tax Liabilities: | | | | | | | | | | |
Undistributed earnings | | | $ | (69 | ) | | | $ | – | |
Intangibles | | | | (51 | ) | | | | (50 | ) |
Accelerated depreciation | | | | (21 | ) | | | | (23 | ) |
Investment | | | | (1 | ) | | | | (1 | ) |
| | | | | | | | | | | |
Total deferred tax liabilities | | | $ | (142 | ) | | | $ | (74 | ) |
| | | | | | | | | | | |
Deferred taxes in the Consolidated Balance Sheets consist of the following:
| | | | | | | | | | |
| | | 2011 | | 2010 |
Current assets | | | $ | 25 | | | | $ | 85 | |
Non-current assets | | | | 45 | | | | | 320 | |
Current liabilities | | | | (2 | ) | | | | – | |
Other non-current liabilities | | | | (18 | ) | | | | (11 | ) |
| | | | | | | | | | | |
Net deferred taxes | | | $ | 50 | | | | $ | 394 | |
| | | | | | | | | | | |
We have the following attributes available for utilization:
| | | | | | | | | | | |
| ATTRIBUTE | | | AMOUNT | | | | FIRST YEAR OF EXPIRATION | |
| U.S. net operating losses | | | $ | 24 | | | | | December 31, 2020 | |
| State net operating losses | | | | 2,486 | | | | | December 31, 2011 | |
| Federal and state capital losses | | | | 29 | | | | | December 31, 2012 | |
| U.S. tax credits | | | | 22 | | | | | December 31, 2012 | |
| Foreign net operating losses | | | | 343 | | | | | December 31, 2011 | |
| | | | | | | | | | | |
| | | | | | | | | | |
| ATTRIBUTE | | AMOUNT | | FIRST YEAR OF EXPIRATION |
U.S. federal net operating losses | | | $ | 85 | | | | | 2031 | |
U.S. state net operating losses | | | | 2,519 | | | | | 2012 | |
Federal and state capital losses | | | | 13 | | | | | 2013 | |
U.S. federal tax credits | | | | 33 | | | |
| 2012
|
|
U.S. state tax credits | | | | 12 | | | | | 2012 | |
Foreign net operating losses | | | | 87 | | | | | 2012 | |
| | | | | | | | | | | |
As of December 31, 2010,2011, a valuation allowance of approximately $116$438 had been established to reduce the deferred income tax asset related to certain U.S. state and foreign net operating losses
80
ITT CORPORATION AND SUBSIDIARIES
and U.S. capital loss carryforwards. During 2010,2011, the valuation allowance decreasedincreased by $34$410 resulting from the following: a decreasean increase of $34$340 attributable to U.S. federal capital loss carryforwards that were utilized in 2010, a decreaseand state net noncurrent temporary differences, an increase of $12$57 attributable to U.S. state net operating loss and credit carryforwards, and an increase of $12 attributable to foreign net operating loss carryforwards and foreign investments.
investments, and an increase of $1 attributable to U.S. federal capital loss carryforwards.Shareholders’ equity at December 31, 20102011 and 20092010 reflects excess income tax benefits related to stock-based compensation in 20102011 and 20092010 of approximately $9$7 and $3,$6, respectively.
We recognize income 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 asfor each of the three years ended December 31, 2010 and 20092011 is as follows:
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | 2008 | |
| Unrecognized tax benefits – 1/1 | | | $ | 171 | | | | $ | 145 | | | | $ | 103 | |
| Additions for: | | | | | | | | | | | | | | | |
| Current year tax positions | | | | 48 | | | | | 5 | | | | | 7 | |
| Prior year tax positions | | | | 17 | | | | | 28 | | | | | 66 | |
| Purchase accounting | | | | 5 | | | | | – | | | | | 2 | |
| Reductions for: | | | | | | | | | | | | | | | |
| Prior year tax positions | | | | (37 | ) | | | | (6 | ) | | | | (13 | ) |
| Purchase accounting | | | | – | | | | | – | | | | | (2 | ) |
| Settlements | | | | (12 | ) | | | | (1 | ) | | | | (15 | ) |
| Lapse of statute of limitations | | | | – | | | | | – | | | | | (3 | ) |
| | | | | | | | | | | | | | | | |
| Unrecognized tax benefits – 12/31 | | | $ | 192 | | | | $ | 171 | | | | $ | 145 | |
| | | | | | | | | | | | | | | | |
68
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
Unrecognized tax benefits – January 1 | | | $ | 169 | | | | $ | 149 | | | | $ | 126 | |
Additions for: | | | | | | | | | | | | | | | |
Prior year tax positions | | | | 1 | | | | | 17 | | | | | 28 | |
Current year tax positions | | | | 15 | | | | | 48 | | | | | 2 | |
Purchase accounting | | | | – | | | | | 5 | | | | | – | |
Reductions for: | | | | | | | | | | | | | | | |
Prior year tax positions | | | | (21 | ) | | | | (38 | ) | | | | (6 | ) |
Settlements | | | | – | | | | | (12 | ) | | | | (1 | ) |
| | | | | | | | | | | | | | | | |
Unrecognized tax benefits – December 31 | | | $ | 164 | | | | $ | 169 | | | | $ | 149 | |
| | | | | | | | | | | | | | | | |
ITT CORPORATION AND SUBSIDIARIES
As of December 31, 2010, $902011, $92 of the unrecognized tax benefits would affect the effective tax rate if realized. Included in the balance at December 31, 20102011 are tax positions of $96,$72, 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 addition, tax positionsSee Note 4, “Discontinued Operations” for discussion of $6 attributable to discontinued operations would not impact the annual effective tax rate.
Tax Matters Agreement.We do not believe that the uncertain tax positions 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.Theauthorities. The following table summarizes the earliest open tax years by major jurisdiction:
| | | | | |
| JURISDICTION | | | EARLIEST OPEN YEAR | |
Austria | | | | 2004 | |
CanadaGermany | | | | 2006 | |
Germany | | | | 2000 | |
Italy | | | | 2005 | |
Netherlands | | | | 2006 | |
Sweden | | | | 2005 | |
United Kingdom | | | | 2008 | |
United Kingdom | | | | 2008 | |
United States | | | | 2007 | |
| | | | | | |
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 2011 and 2010, we recognized less than $1 in net interest expense related to tax matters. During 2009, we recognized net interest income of $3 primarily due to an interest settlement claim with the IRS. We had $23$18 and $14 of interest accrued as of December 31, 2011 and 2010, and 2009.
respectively.NOTE 78 Earnings Per ShareNOTE 8
AThe following table provides a reconciliation of the data used in the calculation of basic and diluted earningsloss per share computations for incomeloss from continuing operations is as follows:
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | 2008 | |
| Income from continuing operations | | | $ | 654 | | | | $ | 641 | | | | $ | 768 | |
| Weighted average common shares outstanding | | | | 182.3 | | | | | 181.0 | | | | | 180.7 | |
Add: Weighted average restricted stock awards outstanding(a) | | | | 1.6 | | | | | 1.5 | | | | | 1.2 | |
| | | | | | | | | | | | | | | | |
| Basic weighted average common shares outstanding | | | | 183.9 | | | | | 182.5 | | | | | 181.9 | |
| Add: Dilutive impact of stock options | | | | 1.4 | | | | | 1.4 | | | | | 2.1 | |
| | | | | | | | | | | | | | | | |
| Diluted weighted average common shares outstanding | | | | 185.3 | | | | | 183.9 | | | | | 184.0 | |
| Basic earnings per share | | | $ | 3.55 | | | | $ | 3.51 | | | | $ | 4.22 | |
| Diluted earnings per share | | | $ | 3.53 | | | | $ | 3.49 | | | | $ | 4.17 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
Loss from continuing operations | | | $ | (578 | ) | | | $ | (132 | ) | | | $ | (111 | ) |
Weighted average common shares outstanding | | | | 92.2 | | | | | 91.2 | | | | | 90.5 | |
Add: Weighted average restricted stock awards outstanding(a) | | | | 0.6 | | | | | 0.8 | | | | | 0.8 | |
| | | | | | | | | | | | | | | | |
Basic weighted average common shares outstanding | | | | 92.8 | | | | | 92.0 | | | | | 91.3 | |
Add: Dilutive impact of stock options | | | | N/A | | | | | N/A | | | | | N/A | |
| | | | | | | | | | | | | | | | |
Diluted weighted average common shares outstanding | | | | 92.8 | | | | | 92.0 | | | | | 91.3 | |
Basic and diluted loss per share | | | $ | (6.23 | ) | | | $ | (1.44 | ) | | | $ | (1.21 | ) |
| | | | | | | | | | | | | | | | |
| |
| (a) | Restricted stock awards containing rights to non-forfeitable dividends which participate in undistributed earnings with common shareholders are considered participating securities for purposes of computing earnings per share. |
81
ITT CORPORATION AND SUBSIDIARIES
Shares underlying stock options excluded from the computation of diluted earningsloss per share because they were anti-dilutive were as follows:
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | 2008 | |
| Anti-dilutive stock options | | | | 2.1 | | | | | 1.7 | | | | | 4.1 | |
| Average exercise price | | | $ | 54.37 | | | | $ | 54.49 | | | | $ | 49.29 | |
| | | | | | | | | | | | | | | | |
| Years of expiration | | | | 2012- | | | | | 2012- | | | | | 2012- | |
| | | | | 2020 | | | | | 2016 | | | | | 2015 | |
| | | | | | | | | | | | | | | | |
69
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
Anti-dilutive stock options | | | | 2.1 | | | | | 1.7 | | | | | 1.5 | |
Average exercise price(b) | | | $ | 16.70 | | | | $ | 85.08 | | | | $ | 80.58 | |
| | | | | | | | | | | | | | | | |
Years of expiration | | |
| 2012-
2021 |
| | |
| 2012-
2020 |
| | |
| 2012-
2016 |
|
| | | | | | | | | | | | | | | | |
| (b) | The decrease in average exercise price of anti-dilutive stock options from 2010 to 2011 resulted from the change in stock price of ITT common stock following the Distribution. |
ITT CORPORATION AND SUBSIDIARIES
NOTE 89 Receivables, NetNOTE 9
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Trade accounts receivable | | | $ | 1,579 | | | | $ | 1,379 | |
| Unbilled contract receivable | | | | 367 | | | | | 373 | |
| Other | | | | 47 | | | | | 56 | |
| | | | | | | | | | | |
| Receivables, gross | | | | 1,993 | | | | | 1,808 | |
| Allowance for doubtful accounts | | | | (42 | ) | | | | (48 | ) |
| Allowance for cash discounts | | | | (7 | ) | | | | (6 | ) |
| | | | | | | | | | | |
| Receivables, net | | | $ | 1,944 | | | | $ | 1,754 | |
| | | | | | | | | | | |
Unbilled contract receivables represent revenue recognized on long-term contracts that arise based on performance attainment which, though appropriately recognized, cannot be billed as of the balance sheet date. We expect to bill and collect substantially all of the December 31, 2010 unbilled contract receivables during 2011 as scheduled performance milestones are completed or units are delivered.
Our outstanding trade accounts receivable balance from the U.S. Government was $491 and $327 as of December 31, 2010 and 2009, respectively.
| | | | | | | | | | |
| | | 2011 | | 2010 |
Trade accounts receivable | | | $ | 361 | | | | $ | 305 | |
Notes receivable | | | | 7 | | | | | 5 | |
Other receivables | | | | 41 | | | | | 18 | |
| | | | | | | | | | | |
Receivables, gross | | | | 409 | | | | | 328 | |
Allowance for doubtful accounts | | | | (13 | ) | | | | (13 | ) |
| | | | | | | | | | | |
Receivables, net | | | $ | 396 | | | | $ | 315 | |
| | | | | | | | | | | |
The following table displays an aggregate rollforward of the allowance for doubtful accounts, for the years ended December 31, 20102011 and 2009.
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Allowance for doubtful accounts – 1/1 | | | $ | 48 | | | | $ | 33 | |
| Additions charged to expense | | | | 5 | | | | | 24 | |
| Write-offs | | | | (9 | ) | | | | (8 | ) |
| Foreign currency and other | | | | (2 | ) | | | | (1 | ) |
| | | | | | | | | | | |
| Allowance for doubtful accounts – 12/31 | | | $ | 42 | | | | $ | 48 | |
| | | | | | | | | | | |
2010. | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
Allowance for doubtful accounts – January 1 | | | $ | 13 | | | | $ | 21 | | | | $ | 12 | |
Charges (benefits) to income | | | | 2 | | | | | (3 | ) | | | | 13 | |
Write-offs | | | | (1 | ) | | | | (3 | ) | | | | (3 | ) |
Foreign currency and other | | | | (1 | ) | | | | (2 | ) | | | | (1 | ) |
| | | | | | | | | | | | | | | | |
Allowance for doubtful accounts – December 31 | | | $ | 13 | | | | $ | 13 | | | | $ | 21 | |
| | | | | | | | | | | | | | | | |
NOTE 910 Inventories, NetNOTE 10
Inventories, Net
| | | | | | | | | | |
| | | 2011 | | 2010 |
Finished goods | | | $ | 62 | | | | $ | 62 | |
Work in process | | | | 49 | | | | | 38 | |
Raw materials | | | | 125 | | | | | 107 | |
| | | | | | | | | | | |
Total product inventory | | | | 236 | | | | | 207 | |
Inventoried costs related to long-term contracts | | | | 65 | | | | | 44 | |
Less – progress payments | | | | (47 | ) | | | | (33 | ) |
| | | | | | | | | | | |
Inventoried costs related to long-term contracts, net | | | | 18 | | | | | 11 | |
| | | | | | | | | | | |
Inventories, net | | | $ | 254 | | | | $ | 218 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Finished goods | | | $ | 231 | | | | $ | 176 | |
| Work in process | | | | 88 | | | | | 57 | |
| Raw materials | | | | 317 | | | | | 253 | |
| | | | | | | | | | | |
| | | | | 636 | | | | | 486 | |
| Inventoried costs related to long-term contracts | | | | 296 | | | | | 391 | |
| Less — progress payments | | | | (76 | ) | | | | (75 | ) |
| | | | | | | | | | | |
| Inventoried costs related to long-term contracts, net | | | | 220 | | | | | 316 | |
| | | | | | | | | | | |
| Inventories, net | | | $ | 856 | | | | $ | 802 | |
| | | | | | | | | | | |
NOTE 1011 Other Current and Non-Current AssetsNOTE 11
Other Current and Non-Current Assets
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Current deferred income taxes | | | $ | 280 | | | | $ | 232 | |
| Asbestos-related current assets | | | | 105 | | | | | 62 | |
| Assets of discontinued operations | | | | – | | | | | 141 | |
| Other | | | | 177 | | | | | 144 | |
| | | | | | | | | | | |
| Other current assets | | | $ | 562 | | | | $ | 579 | |
| | | | | | | | | | | |
| Other employee benefit-related assets | | | $ | 106 | | | | $ | 87 | |
| Capitalized software costs | | | | 118 | | | | | 65 | |
| Other | | | | 88 | | | | | 100 | |
| | | | | | | | | | | |
| Other non-current assets | | | $ | 312 | | | | $ | 252 | |
| | | | | | | | | | | |
ITT | | | | | | | | | | |
| | | 2011 | | 2010 |
Current deferred income taxes | | | $ | 25 | | | | $ | 85 | |
Asbestos-related current assets | | | | 133 | | | | | 105 | |
Income tax receivable | | | | 164 | | | | | – | |
Other | | | | 100 | | | | | 38 | |
| | | | | | | | | | | |
Other current assets | | | $ | 422 | | | | $ | 228 | |
| | | | | | | | | | | |
| | |
Other employee benefit-related assets | | | $ | 79 | | | | $ | 76 | |
Capitalized software costs | | | | 13 | | | | | 67 | |
Other | | | | 29 | | | | | 38 | |
| | | | | | | | | | | |
Other non-current assets | | | $ | 121 | | | | $ | 181 | |
| | | | | | | | | | | |
As described in Note 3, “Company Transformation,” during the first quarter of 2011 we discontinued the development of an information technology consolidation initiative and recorded sales to unconsolidated affiliates during 2010, 2009a capitalized software impairment charge of $55.
NOTE 12 Plant, Property and 2008 totaling $51, $44 and $20, respectively. Additionally, ITT purchased $22 and $15 of products from unconsolidated affiliates during 2010 and 2009, respectively.NOTE 1112
Plant, Property and Equipment, Net
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Land and improvements | | | $ | 59 | | | | $ | 57 | |
| Buildings and improvements | | | | 642 | | | | | 609 | |
| Machinery and equipment | | | | 1,809 | | | | | 1,688 | |
| Equipment held for lease or rental | | | | 132 | | | | | 72 | |
| Furniture, fixtures and office equipment | | | | 231 | | | | | 220 | |
| Construction work in progress | | | | 160 | | | | | 157 | |
| Other | | | | 29 | | | | | 22 | |
| | | | | | | | | | | |
| Plant, property and equipment, gross | | | | 3,062 | | | | | 2,825 | |
| Less — accumulated depreciation | | | | (1,857 | ) | | | | (1,775 | ) |
| | | | | | | | | | | |
| Plant, property and equipment, net | | | $ | 1,205 | | | | $ | 1,050 | |
| | | | | | | | | | | |
| | | | | | | | | | |
| | | 2011 | | 2010 |
Land and improvements | | | $ | 17 | | | | $ | 17 | |
Buildings and improvements | | | | 163 | | | | | 164 | |
Machinery and equipment | | | | 738 | | | | | 710 | |
Furniture, fixtures and office equipment | | | | 62 | | | | | 59 | |
Construction work in progress | | | | 46 | | | | | 38 | |
Other | | | | 8 | | | | | 11 | |
| | | | | | | | | | | |
Plant, property and equipment, gross | | | | 1,034 | | | | | 999 | |
Less – accumulated depreciation | | | | (710 | ) | | | | (700 | ) |
| | | | | | | | | | | |
Plant, property and equipment, net | | | $ | 324 | | | | $ | 299 | |
| | | | | | | | | | | |
Depreciation expense of $190, $173$57, $52 and $179$54 was recognized in 2011, 2010 and 2009, and 2008, respectively.
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ITT CORPORATION AND SUBSIDIARIES
NOTE 1213 Goodwill and Other Intangible Assets, NetNOTE 13
Goodwill and Other Intangible Assets, Net
Changes in the carrying amount of goodwill for the years ended December 31, 2011 and 2010 and 2009 by business segment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Industrial
Process | | Motion
Technologies | | Interconnect
Solutions | | Control
Technologies | | Total |
Goodwill – January 1, 2010 | | | $ | 184 | | | | $ | 52 | | | | $ | 72 | | | | $ | 198 | | | | $ | 506 | |
Goodwill acquired | | | | 3 | | | | | – | | | | | – | | | | | – | | | | | 3 | |
Foreign currency | | | | 1 | | | | | (4 | ) | | | | (2 | ) | | | | – | | | | | (5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill – December 31, 2010 | | | | 188 | | | | | 48 | | | | | 70 | | | | | 198 | | | | | 504 | |
Goodwill acquired | | | | 8 | | | | | – | | | | | 3 | | | | | – | | | | | 11 | |
Adjustments to purchase price allocations | | | | (3 | ) | | | | – | | | | | – | | | | | – | | | | | (3 | ) |
Foreign currency | | | | – | | | | | (1 | ) | | | | (1 | ) | | | | – | | | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill – December 31, 2011 | | | $ | 193 | | | | $ | 47 | | | | $ | 72 | | | | $ | 198 | | | | $ | 510 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | MOTION &
| | | | | |
| | | | DEFENSE | | | | FLUID | | | FLOW | | | | TOTAL | |
| Goodwill — 1/1/2009 | | | $ | 2,134 | | | | $ | 1,122 | | | $ | 499 | | | | $ | 3,755 | |
| Goodwill acquired | | | | – | | | | | 17 | | | | – | | | | | 17 | |
| Foreign currency | | | | – | | | | | 26 | | | | 2 | | | | | 28 | |
| Other | | | | (2 | ) | | | | – | | | | (10 | ) | | | | (12 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Goodwill — 12/31/2009 | | | $ | 2,132 | | | | $ | 1,165 | | | $ | 491 | | | | $ | 3,788 | |
Goodwill acquired | | | | 24 | | | | | 495 | | | | – | | | | | 519 | |
Foreign currency | | | | – | | | | | (25 | ) | | | (6 | ) | | | | (31 | ) |
Other | | | | – | | | | | 1 | | | | – | | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | |
Goodwill — 12/31/2010 | | | $ | 2,156 | | | | $ | 1,636 | | | $ | 485 | | | | $ | 4,277 | |
| | | | | | | | | | | | | | | | | | | | |
Goodwill of $2,156 and $1,617 was disposed of during 2011 related to the Distribution of Exelis and Xylem, respectively. Goodwill of $76 was disposed of during 2010 related to the sale of CAS on September 8, 2010.CAS. See Note 4, “Discontinued Operations” for further information.
Goodwill acquired during 2010 primarily relates to the Nova and Godwin acquisitions. Goodwill acquired during 2009 primarily 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.
Based on the results of itsour annual impairment tests, performed as of October 1, 2011, and subsequent tests
performed as of the Distribution Date for Exelis and Xylem, we determined that no impairment of goodwill existed as of theeither measurement date in 2010 or 2009.2011. However, future goodwill impairment tests could result in a charge to earnings. We will continue to evaluate goodwill on an annual basis as of the beginning of our fourth fiscal quarter and whenever events and changes in circumstances indicate there may be a potential impairment.
Information regarding our other intangible assets is as follows:
| | | | | | | | | | | | | | | |
| | | GROSS
CARRYING
AMOUNT | | ACCUMULATED
AMORTIZATION | | NET
INTANGIBLES |
Customer relationships | | | $ | 77 | | | | $ | (24 | ) | | | $ | 53 | |
Proprietary technology | | | | 20 | | | | | (7 | ) | | | | 13 | |
Trademarks | | | | 3 | | | | | (1 | ) | | | | 2 | |
Patents and other | | | | 5 | | | | | (2 | ) | | | | 3 | |
Indefinite-lived intangibles | | | | 17 | | | | | – | | | | | 17 | |
| | | | | | | | | | | | | | | | |
Intangibles – December 31, 2011 | | | $ | 122 | | | | $ | (34 | ) | | | $ | 88 | |
| | | | | | | | | | | | | | | | |
Customer and distributor relationships | | | $ | 74 | | | | $ | (18 | ) | | | $ | 56 | |
Proprietary technology | | | | 20 | | | | | (5 | ) | | | | 15 | |
Trademarks | | | | 3 | | | | | (1 | ) | | | | 2 | |
Patents and other | | | | 4 | | | | | (2 | ) | | | | 2 | |
Indefinite-lived intangibles | | | | 17 | | | | | – | | | | | 17 | |
| | | | | | | | | | | | | | | | |
Intangibles – December 31, 2010 | | | $ | 118 | | | | $ | (26 | ) | | | $ | 92 | |
| | | | | | | | | | | | | | | | |
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ITT CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | | |
| | | | GROSS
| | | | | | | | | |
| | | | CARRYING
| | | | ACCUMULATED
| | | | NET
| |
| | | | AMOUNT | | | | AMORTIZATION | | | | INTANGIBLES | |
Customer and distributor relationships | | | $ | 855 | | | | $ | (312 | ) | | | $ | 543 | |
Proprietary technology | | | | 109 | | | | | (35 | ) | | | | 74 | |
Trademarks | | | | 35 | | | | | (10 | ) | | | | 25 | |
Patents and other | | | | 32 | | | | | (18 | ) | | | | 14 | |
Indefinite-lived intangibles | | | | 110 | | | | | — | | | | | 110 | |
| | | | | | | | | | | | | | | | |
Intangibles – 12/31/2010 | | | $ | 1,141 | | | | $ | (375 | ) | | | $ | 766 | |
| | | | | | | | | | | | | | | | |
| Customer and distributor relationships | | | $ | 625 | | | | $ | (236 | ) | | | $ | 389 | |
| Proprietary technology | | | | 84 | | | | | (29 | ) | | | | 55 | |
| Trademarks | | | | 35 | | | | | (8 | ) | | | | 27 | |
| Patents and other | | | | 27 | | | | | (15 | ) | | | | 12 | |
| Indefinite-lived intangibles | | | | 18 | | | | | – | | | | | 18 | |
| | | | | | | | | | | | | | | | |
| Intangibles – 12/31/2009 | | | $ | 789 | | | | $ | (288 | ) | | | $ | 501 | |
| | | | | | | | | | | | | | | | |
Indefinite-lived intangibles consist of brands and trademarks. Based on the results of its annual impairment tests, we determined that no impairment of the indefinite-lived intangibles existed as of the measurement date in 20102011 or 2009.2010. However, future impairment tests could result in a charge to earnings. We will continue to evaluate the indefinite-lived intangible assets on an annual basis as of the beginning of our fourth fiscal quarter and whenever events and changes in circumstances indicate there may be an indicator of potential impairment.
Customer and distributor relationships, proprietary
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ITT CORPORATION AND SUBSIDIARIES
technology, trademarks, and patents and other are amortized over weighted average lives of approximately nine14.3 years, 1714.1 years, 157.4 years and 1111.7 years, respectively.
Amortization expense related to intangible assets for 2011, 2010 and 2009 was $10, $8 and 2008 was $90, $101 and $96, respectively.Estimated$8, respectively. Estimated amortization expense for each of the five succeeding years is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| 2011 | | | 2012 | | | | 2013 | | | | 2014 | | | | 2015 | |
| $87 | | | $ | 77 | | | | $ | 60 | | | | $ | 55 | | | | $ | 52 | |
| | | | | |
Year | | Estimated
Amortization
Expense |
2012 | | | $ | 10 | |
2013 | | | | 9 | |
2014 | | | | 8 | |
2015 | | | | 7 | |
2016 | | | | 7 | |
| | | | | | |
NOTE 1314 Accrued Liabilities and Other Non-Current LiabilitiesNOTE 14
Accrued Liabilities and Other Non-Current Liabilities
| | | | | | | | | | |
| | | 2011 | | 2010 |
Compensation and other employee-benefits | | | $ | 172 | | | | $ | 167 | |
Asbestos-related liability | | | | 139 | | | | | 117 | |
Customer-related liabilities | | | | 32 | | | | | 21 | |
Accrued warranty costs | | | | 26 | | | | | 27 | |
Accrued income taxes | | | | 23 | | | | | 24 | |
Environmental and other legal matters | | | | 19 | | | | | 21 | |
Other accrued liabilities | | | | 57 | | | | | 65 | |
| | | | | | | | | | | |
Accrued liabilities | | | $ | 468 | | | | $ | 442 | |
| | | | | | | | | | | |
Deferred income taxes and other tax-related accruals | | | $ | 136 | | | | $ | 129 | |
Environmental | | | | 91 | | | | | 93 | |
Compensation and other employee-related benefits | | | | 46 | | | | | 44 | |
Product liability, guarantees and other legal matters | | | | 2 | | | | | 39 | |
Other | | | | 20 | | | | | 20 | |
| | | | | | | | | | | |
Other non-current liabilities | | | $ | 295 | | | | $ | 325 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Compensation and other employee-benefits | | | $ | 604 | | | | $ | 578 | |
| Asbestos-related liability | | | | 117 | | | | | 66 | |
| Customer-related liabilities | | | | 91 | | | | | 55 | |
| Accrued warranty costs | | | | 72 | | | | | 67 | |
| Accrued income taxes | | | | 63 | | | | | 103 | |
| Environmental and other legal matters | | | | 33 | | | | | 44 | |
| Accrued restructuring costs | | | | 32 | | | | | 53 | |
| Deferred income tax liability | | | | 12 | | | | | 36 | |
| Liabilities of discontinued operations | | | | – | | | | | 44 | |
| Other accrued liabilities | | | | 238 | | | | | 230 | |
| | | | | | | | | | | |
| Accrued liabilities | | | $ | 1,262 | | | | $ | 1,276 | |
| | | | | | | | | | | |
| Deferred income taxes and other tax-related accruals | | | $ | 179 | | | | $ | 174 | |
| Environmental | | | | 128 | | | | | 128 | |
| Compensation and other employee-related benefits | | | | 117 | | | | | 123 | |
| Product liability, guarantees and other legal matters | | | | 52 | | | | | 63 | |
| Other | | | | 66 | | | | | 53 | |
| | | | | | | | | | | |
| Other non-current liabilities | | | $ | 542 | | | | $ | 541 | |
| | | | | | | | | | | |
NOTE 1415 Leases and RentalsNOTE 15
ITT leases certain offices, manufacturing buildings, land, machinery, automobiles, aircraft, computers and other equipment. SuchThe majority of leases expire at various dates through 20232027 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 $132, $139$16, $19 and $131$25 for 2011, 2010 2009 and 2008,2009, respectively. Future minimum operating lease payments under non-cancellable operating leases with an initial term in excess of one year as of December 31, 20102011 are shown below.
| | | | | | |
| 2011 | | | $ | 143 | |
| 2012 | | | | 115 | |
| 2013 | | | | 90 | |
| 2014 | | | | 70 | |
| 2015 | | | | 53 | |
| 2016 and thereafter | | | | 183 | |
| | | | | | |
| Total minimum lease payments | | | $ | 654 | |
| | | | | | |
| | | | | |
2012 | | | $ | 17 | |
2013 | | | | 12 | |
2014 | | | | 10 | |
2015 | | | | 9 | |
2016 | | | | 8 | |
2017 and thereafter | | | | 78 | |
| | | | | | |
Total minimum lease payments | | | $ | 134 | |
| | | | | | |
NOTE 1516 DebtNOTE 16
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Commercial paper | | | $ | – | | | | $ | 55 | |
| Short-term loans | | | | 1 | | | | | 10 | |
| Current maturities of long-term debt and other | | | | 10 | | | | | 10 | |
| | | | | | | | | | | |
| Short-term debt and current maturities of long-term debt | | | | 11 | | | | | 75 | |
| | | | | | | | | | | |
| Non-current maturities of long-term debt | | | | 1,314 | | | | | 1,392 | |
| Non-current capital leases | | | | 3 | | | | | 4 | |
| Deferred gain on interest rate swaps | | | | 45 | | | | | 50 | |
| Unamortized discounts and debt issuance costs | | | | (8 | ) | | | | (15 | ) |
| | | | | | | | | | | |
| Long-term debt | | | | 1,354 | | | | | 1,431 | |
| | | | | | | | | | | |
| Total debt | | | $ | 1,365 | | | | $ | 1,506 | |
| | | | | | | | | | | |
Principal payments required per year on our outstanding | | | | | | | | | | |
| | | 2011 | | 2010 |
Short-term loans | | | $ | 2 | | | | $ | – | |
Current maturities of long-term debt and other | | | | – | | | | | 10 | |
Short-term debt and current maturities of long-term debt | | | | 2 | | | | | 10 | |
Non-current maturities of long-term debt | | | | 4 | | | | | 1,256 | |
Non-current capital leases | | | | – | | | | | 57 | |
Deferred gain on interest rate swaps | | | | – | | | | | 45 | |
Unamortized discounts and debt issuance costs | | | | – | | | | | (8 | ) |
Long-term debt | | | | 4 | | | | | 1,350 | |
Total debt | | | $ | 6 | | | | $ | 1,360 | |
| | | | | | | | | | | |
During 2011, we reclassified the presentation of amounts reported within the long-term notes and debentures for the next five years and thereafter are $11, $11, $13, $538, $1 and $754, respectively. The book value of assets pledged as collateral amounted to $63debt balance sheet account as of December 31, 2010.2010, related to non-current capital leases by reclassifying $57 from non-current maturities of long-term debt to non-current capital leases. This reclassification had no impact on amounts reported within the 2010 Consolidated Income Statements or net cash from financing activities within the Consolidated Statements of Cash Flows.
Revolving Credit Facility
On October 25, 2011, we entered into a competitive advance and revolving credit facility agreement (2011 Revolving Credit Agreement) with a consortium of third party lenders including JP Morgan Chase Bank, N.A., as administrative agent, and Citibank, N.A. as syndication agent. Upon its effectiveness at
Commercial Paper
The weighted average interest rate for outstanding commercial paper was 0.21% at December 31, 2009. Our commercial paper program is supported by a revolving credit agreement with the intended purposes of providing additional liquidity, if needed. In August 2010, we replaced a $1.75 billion revolving credit agreement with a new three-year $1.5 billion revolving credit agreement (August 2010 Credit Facility). The interest rate for borrowings under these agreements is generally based on the London Interbank Offered Rate (LIBOR), plus a spread, which reflects ITT’s debt rating. The commitment fee on the August 2010 Credit Facility is 0.225% of the total commitment.
72
ITT CORPORATION AND SUBSIDIARIES
The provisions ofthe Distribution, this agreement requirereplaced our existing $1,500 three-year revolving credit facility due August 2013. The 2011 Revolving Credit Agreement provides for a four-year maturity with a one-year extension option upon satisfaction of certain conditions, and comprises an aggregate principal amount of up to $500 of (i) revolving extensions of credit (the revolving loans) outstanding at any time, (ii) competitive advance borrowing option which will be provided on an uncommitted competitive advance basis through an auction mechanism (the competitive advances), and (iii) letters of credit in a face amount up to $100 at any time outstanding. Subject to certain conditions, we are permitted to terminate permanently the total commitments and reduce commitments in minimum amounts of $10. We are also permitted, subject to certain conditions, to request that we maintainlenders increase the commitments under the facility by up to $200 for a maximum aggregate principal amount of $700. Voluntary prepayments are permitted in minimum amounts of $50.
At our election, the interest rate per annum applicable to the competitive advances will be based on either (i) a Eurodollar rate determined by reference to LIBOR, plus an applicable margin offered by the lender making such loans and accepted by us or (ii) a fixed percentage rate per annum specified by the lender making such loans. At our election, interest rate per annum applicable to the revolving loans will be based on either (i) a Eurodollar rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin or (ii) a fluctuating rate of interest determined by reference to the greatest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate plus one-half of 1% or (c) the 1-month LIBO rate, adjusted for statutory reserve requirements, plus 1%, in each case, plus an applicable margin.
Our obligations under the credit facility are unconditionally guaranteed by each of our direct or indirect domestic subsidiaries.
The credit facility contains customary affirmative and negative covenants that, among other things, will limit or restrict our ability to: incur additional debt or issue guarantees; create liens; enter into certain sale and lease-back transactions; merge or consolidate with another person; sell, transfer, lease or otherwise dispose of assets; liquidate or dissolve; and enter into restrictive covenants. Additionally, the 2011 Revolving Credit Agreement requires us not to permit the ratio of consolidated total indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (leverage ratio) to exceed 3.00 to 1.00 at any time, or the ratio of consolidated EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) to consolidated interest expense ratio greater(interest coverage ratio) to be less than 3.5:1.3.00 to 1.00. At December 31, 20102011, our interest coverage ratio and 2009, weleverage ratio were well in compliance with our debt covenants.excess of the minimum requirements.
The following table summarizes the carrying and fair value of our long-term outstanding notes and debentures by maturity date for bothat December 31, 2010 and 2009.2010. The fair value of our outstanding commercial paper and short-term loans approximates carrying value.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 2010 | | | 2009 | |
| | | | | | | | | |
| | | | Interest
| | | | Carrying
| | | Fair
| | | Carrying
| | | Fair
| |
| | | | Rate | | | | Value | | | Value | | | Value | | | Value | |
| MATURITY DATE: | | | | | | | | | | | | | | | | | | | | | | |
| May 2011 | | | | 6.50 | % | | | $ | – | | | $ | – | | | $ | 32 | | | $ | 32 | |
| July 2011 | | | | 7.50 | % | | | | – | | | | – | | | | 37 | | | | 40 | |
| May 2014 | | | | 4.90 | % | | | | 500 | | | | 538 | | | | 500 | | | | 515 | |
| May 2019 | | | | 6.125 | % | | | | 500 | | | | 553 | | | | 500 | | | | 521 | |
| November 2025 | | | | 7.40 | % | | | | 250 | | | | 311 | | | | 250 | | | | 285 | |
| August 2048 | | | | (a | ) | | | | 1 | | | | 1 | | | | 1 | | | | 1 | |
| December 2010 – 2014 | | | | 4.70 | % | | | | 66 | | | | 69 | | | | 74 | | | | 76 | |
| Various 2010 – 2022 | | | | (b | ) | | | | 11 | | | | 11 | | | | 12 | | | | 12 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | $ | 1,328 | | | $ | 1,483 | | | $ | 1,406 | | | $ | 1,482 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | 2010 |
| | | Interest
Rate | | Carrying
Value | | Fair
Value |
MATURITY DATE: | | | | | | | | | | | | | | | |
May 2014 | | | | 4.90 | % | | | $ | 500 | | | | $ | 538 | |
May 2019 | | | | 6.125 | % | | | | 500 | | | | | 553 | |
November 2025 | | | | 7.40 | % | | | | 250 | | | | | 311 | |
August 2048 | | | | (a | ) | | | | 1 | | | | | 1 | |
December 2011 – 2014 | | | | 4.70 | % | | | | 66 | | | | | 69 | |
Various 2011 – 2022 | | | | (b | ) | | | | 6 | | | | | 6 | |
| | | | | | | | | $ | 1,323 | | | | $ | 1,478 | |
| |
| (a) | Variable rate debt with an interest rate of 0.19% as of December 31, 2010 and 0.16% as of December 31, 2009.2010. |
| |
| (b) | Includes individually immaterial notes, bonds and capital leases. The weighted average interest rate was 4.86% and 5.24% at December 31, 2010 and 2009, respectively.2010. |
MayRedemption of 4.90% Senior Notes due 2014 and May 20196.125% Senior Notes due 2019
In May 2009, the Company issued $500On September 20, 2011, ITT called all of 4.9%its 4.90% Senior Notes due May 1, 2014 (the 2014 Notes) and $500all of its 6.125% Senior Notes due May 1, 2019 (collectively referred to as the(the 2019 Notes). The issuance2014 and 2019 Notes were redeemed on October 20, 2011. The redemption price for the 2014 Notes was $1,098 per $1,000 par value, plus accrued interest, and the redemption price for the 2019 Notes was $1,235 per $1,000 par value, plus accrued interest. The redemption resulted in gross proceedsa loss on extinguishment of $998, offset by $6$167, plus incidental fees, which was recorded as a Transformation cost.
Tender Offer for 7.40% Debentures due 2025
On September 20, 2011, we commenced a cash tender offer to purchase up to $100 in debt issuance costs. We may redeemprincipal of our 7.40% Debentures due November 2025 (the 2025 Notes). On October 19, 2011, the tender period expired and, $88 of principal was tendered. The tender offer resulted in a loss on extinguishment of $51 which was recorded as a Transformation cost.
Following the completion of the tender offer, on October 21, 2011, we extinguished the remaining $162 of principal on the 2025 Notes in whole or in part at any time at a redemption price equalpursuant to the greatersatisfaction and discharge provisions in the indenture relating to the 2025 Notes. In order to discharge the 2025 Notes, on October 20, 2011, we deposited $6 of (i) 100%cash and U.S. treasury securities with an aggregate purchase price of $263 in a trust account. As a result of the principal amount satisfaction and discharge, the 2025 Notes have been extinguished for accounting purposes and are no longer presented in ITT’s consolidated financial statements. The satisfaction and discharge resulted in a loss on extinguishment
85
ITT CORPORATION AND SUBSIDIARIES
of such Notesapproximately $107 which was recorded as a Transformation Cost.
Termination of Capital Lease
During the second quarter of 2011, we notified the lessor of our intent to terminate a sale leaseback agreement entered into in 2004 by repurchasing the leased property. The leased property includes five manufacturing and (ii)office facilities. The repurchase occurred on September 28, 2011 when ITT paid the sumlessor $66 million related to the capital lease obligation. The termination of the present valuecapital lease resulted in a charge of $5 which was recorded as a Transformation Cost. Four of the remaining scheduled paymentsfive properties were distributed to either Exelis or Xylem on the Distribution Date.
Other Actions Associated with Extinguishment of principal and interest thereon (exclusiveDebt
In connection with the debt extinguishment of interest accrued to the date$1,251, we recognized a previously deferred gain 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. The Notes are senior unsecured obligations and rank equally with all existing and future senior unsecured indebtedness.
November 2025 Senior Notes
In November 1995, the Company issued $250 of 7.4% Senior Notes due November 15, 2025 (1995 Senior Notes). We may redeem the 1995 Senior 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 1995 Senior Notes and (ii) the sum of the present value of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semiannual basis at the Treasury Rate plus 20 basis points, plus in each case accrued interest to the date of redemption. The 1995 Senior Notes are senior unsecured obligations and rank equally with all existing and future senior unsecured indebtedness.
Other
As of December 31, 2010, ITT had a $66 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.
Long-term debt includes the unamortized portion of a deferred gain$43 on a terminated interest rate swap that will be amortizedand expensed previously deferred debt issuance costs and an unamortized debt discounts of $6. In addition, in September 2011 we entered into earnings through 2025.
three forward-starting interest rate swaps and treasury lock to hedge certain exposure associated with the plan to extinguish the 2019 Notes and 2025 Notes. In October 2011, all four of the contracts matured and were settled in cash, resulting in a loss of $3.NOTE 1617 Postretirement Benefit PlansNOTE 17
Postretirement Benefit Plans
In connection with the Distribution, certain pension and other employee-related benefit plans (collectively, postretirement benefit plans) were contributed by ITT to Exelis and Xylem. Exelis and Xylem assumed all assets and liabilities of the contributed plans and became the plans’ sponsor on the date of the Distribution. Most significantly, Exelis became the plan sponsor of the former U.S. ITT Salaried Retirement Plan (SRP). ITT’s U.S salaried employees no longer accrue retirement benefits under SRP and all benefits accrued as of the Distribution date were frozen. Benefit payments to participants in the SRP that remained ITT employees following the Distribution will be made by Exelis. During 2011, 2010, and 2009, ITT recorded expenses of approximately $15, $9 and $4, respectively, related to the participation of ITT employees in the SRP. Included in the 2011 cost of ITT participation in the SRP is a curtailment charge of approximately $1 related to the reduction in benefits, including the effect of immediate recognition of prior service costs and the impact of special termination benefits. All assets and liabilities related to postretirement benefit plans that were contributed to Exelis and Xylem, including the SRP, are reflected in discontinued operations in the consolidated financial statements.
Effective at the date of Distribution, the ITT Corporation Retirement Savings Plan for Salaried Employees was created,
which increased company contributions from a maximum of 3.5% of base pay to 6% or 7%, depending on age and years of service, of total eligible pay which includes base pay, overtime and bonuses. Additionally, for five years subsequent to the distribution, the Company will provide transition credits to certain employees up to 5% of eligible pay.
Defined Contribution Plans
Substantially all of ITT’s U.S. and certain international employees are eligible to participate in a defined contribution plan. ITT sponsors numerous defined contribution savings plans, which allow employees to contribute a portion of their pre-taxand/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. MatchingCompany contributions charged to income amounted to $64, $44$8, $7 and $47$5 for 2011, 2010 and 2009, and 2008, respectively.
The ITT Stock Fund, an investment option under the ITT Corporation Retirement Savings Plan for Salaried InvestmentEmployees and the ITT Hourly Savings Plan, is considered an Employee Stock Ownership Planemployee 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 8.30.5 shares of ITT common stock at December 31, 2010.
2011. At the date of distribution, for each share of ITT common stock in the ITT Stock Fund, a share of common stock of each Exelis and Xylem was received. As of December 31, 2011, there were 0.4 and 1.1 shares of Exelis and Xylem, respectively, held in the ITT Corporation Retirement Savings Plan for Salaried Employees and ITT Hourly Savings Plan.Defined Benefit Plans
ITT sponsors numerous defined benefit pension plans.plans which have approximately 2,200 active participants, however, most of these plans have been closed to new participants for several years. As of December 31, 2010,2011, of our total projected benefit obligation, the U.S. Salaried RetirementITT Pension Plan (U.S. SRP)for Bargaining Unit Employees Seneca Falls represented 76%28%, the ITT Consolidated Hourly Pension Plan represented 26%, other U.S. plans represented 14%30% and international pension plans represented 10%16%. We fund the U.S. SRP as required by statutory regulationsThe domestic plans are generally for hourly employees with a flat dollar benefit formula based on years of service. Foreign plan benefits are primarily determined based on participant years of service, future compensation, and age at retirement or through discretionary contributions. In addition, we fund certain of our international pension plans in countries where funding is allowable and tax-effective.
73
termination.
ITT CORPORATION AND SUBSIDIARIES
ITT also provides health care and life insurance benefits for certain eligible U.S. employees upon retirement. We have funded a portionIn some cases, the plan is still open to new employees, but for the majority of our businesses these plans are closed to new participants. The majority of the health care and life insurance obligations, where such funding can be accomplished on a tax-effective basis.liability pertains to retirees with postretirement medical insurance.
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ITT CORPORATION AND SUBSIDIARIES
Balance Sheet Information
Amounts recognized as liabilities in the Consolidated Balance Sheets for pension and other employee-relatedpostretirement benefit plans (collectively, postretirement benefit plans) reflect the funded status of the postretirement benefit plans.status. The following table provides a summary of the funded status of our postretirement benefit plans and the presentation of such balancesthe funded status within our Consolidated Balance Sheet as of December 31, 20102011 and 2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | |
| | | | | |
| | | | | | | | Other
| | | | | | | | | | Other
| | | | | |
| | | | Pension | | | | Benefits | | | Total | | | Pension | | | | Benefits | | | | Total | |
| Fair value of plan assets | | | $ | 4,622 | | | | $ | 275 | | | $ | 4,897 | | | $ | 4,308 | | | | $ | 247 | | | | $ | 4,555 | |
| Projected benefit obligation | | | | (5,960 | ) | | | | (722 | ) | | | (6,682 | ) | | | (5,700 | ) | | | | (701 | ) | | | | (6,401 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Funded status | | | $ | (1,338 | ) | | | $ | (447 | ) | | $ | (1,785 | ) | | $ | (1,392 | ) | | | $ | (454 | ) | | | $ | (1,846 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amounts reported within: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other non-current assets | | | $ | 20 | | | | $ | – | | | $ | 20 | | | $ | 16 | | | | $ | – | | | | $ | 16 | |
| Accrued liabilities | | | | (24 | ) | | | | (48 | ) | | | (72 | ) | | | (25 | ) | | | | (49 | ) | | | | (74 | ) |
| Non-current liabilities | | | | (1,334 | ) | | | | (399 | ) | | | (1,733 | ) | | | (1,383 | ) | | | | (405 | ) | | | | (1,788 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2010. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 |
| | | Pension | | Other
Benefits | | Total | | Pension | | Other
Benefits | | Total |
Fair value of plan assets | | | $ | 184 | | | | $ | 8 | | | | $ | 192 | | | | $ | 187 | | | | $ | 8 | | | | $ | 195 | |
Projected benefit obligation | | | | 330 | | | | | 192 | | | | | 522 | | | | | 299 | | | | | 175 | | | | | 474 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Funded status | | | $ | (146 | ) | | | $ | (184 | ) | | | $ | (330 | ) | | | $ | (112 | ) | | | $ | (167 | ) | | | $ | (279 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts reported within: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accrued liabilities | | | $ | (4 | ) | | | $ | (10 | ) | | | $ | (14 | ) | | | $ | (3 | ) | | | $ | (10 | ) | | | $ | (13 | ) |
Non-current liabilities | | | | (142 | ) | | | | (174 | ) | | | | (316 | ) | | | | (109 | ) | | | | (158 | ) | | | | (267 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
A portion of our projected benefit obligation includes amounts that have not yet been recognized as expense in our results of operations. Such amounts are recorded within accumulated other comprehensive loss until they are amortized as a component of net periodic postretirement cost. The following table provides a summary of amounts recorded within accumulated other comprehensive loss at December 31, 20102011 and 2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | |
| | | | | |
| | | | | | | | Other
| | | | | | | | | | Other
| | | | | |
| | | | Pension | | | | Benefits | | | Total | | | Pension | | | | Benefits | | | | Total | |
| Net actuarial loss | | | $ | 1,986 | | | | $ | 162 | | | $ | 2,148 | | | $ | 2,034 | | | | $ | 162 | | | | $ | 2,196 | |
| Prior service cost (benefit) | | | | 29 | | | | | (6 | ) | | | 23 | | | | 29 | | | | | (8 | ) | | | | 21 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | 2,015 | | | | | 156 | | | | 2,171 | | | $ | 2,063 | | | | $ | 154 | | | | $ | 2,217 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2010. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 |
| | | Pension | | Other
Benefits | | Total | | Pension | | Other
Benefits | | Total |
Net actuarial loss | | | $ | 147 | | | | $ | 58 | | | | $ | 205 | | | | $ | 100 | | | | $ | 45 | | | | $ | 145 | |
Prior service cost (benefit) | | | | 6 | | | | | (1 | ) | | | | 5 | | | | | 9 | | | | | (1 | ) | | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | $ | 153 | | | | $ | 57 | | | | $ | 210 | | | | $ | 109 | | | | $ | 44 | | | | $ | 153 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table provides a rollforward of the projected benefit obligations for our U.S. and international pension plans for the years ended 2010December 31, 2011 and 2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | |
| | | | | |
| | | | U.S. | | | | Int’l | | | Total | | | U.S. | | | | Int’l | | | | Total | |
Change in benefit obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Benefit obligation – 1/1 | | | $ | 5,173 | | | | $ | 527 | | | $ | 5,700 | | | $ | 4,886 | | | | $ | 437 | | | | $ | 5,323 | |
| Service cost | | | | 108 | | | | | 15 | | | | 123 | | | | 88 | | | | | 11 | | | | | 99 | |
| Interest cost | | | | 299 | | | | | 29 | | | | 328 | | | | 302 | | | | | 27 | | | | | 329 | |
| Amendments / other | | | | 4 | | | | | – | | | | 4 | | | | 2 | | | | | 1 | | | | | 3 | |
| Actuarial loss | | | | 133 | | | | | 31 | | | | 164 | | | | 247 | | | | | 40 | | | | | 287 | |
| Benefits paid | | | | (353 | ) | | | | (27 | ) | | | (380 | ) | | | (352 | ) | | | | (31 | ) | | | | (383 | ) |
| Liabilities assumed through acquisition | | | | – | | | | | 29 | | | | 29 | | | | – | | | | | – | | | | | – | |
| Foreign currency translation | | | | – | | | | | (8 | ) | | | (8 | ) | | | – | | | | | 42 | | | | | 42 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Benefit obligation – 12/31 | | | $ | 5,364 | | | | $ | 596 | | | $ | 5,960 | | | $ | 5,173 | | | | $ | 527 | | | | $ | 5,700 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
74
2010. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 |
| | | U.S. | | Int’l | | Total | | U.S. | | Int’l | | Total |
Change in benefit obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Benefit obligation – January 1 | | | $ | 246 | | | | $ | 53 | | | | $ | 299 | | | | $ | 229 | | | | $ | 51 | | | | $ | 280 | |
Service cost | | | | 6 | | | | | 1 | | | | | 7 | | | | | 6 | | | | | 1 | | | | | 7 | |
Interest cost | | | | 13 | | | | | 2 | | | | | 15 | | | | | 14 | | | | | 2 | | | | | 16 | |
Amendments /other | | | | (2 | ) | | | | – | | | | | (2 | ) | | | | (1 | ) | | | | 2 | | | | | 1 | |
Actuarial loss (gain) | | | | 27 | | | | | (1 | ) | | | | 26 | | | | | 10 | | | | | (1 | ) | | | | 9 | |
Benefits paid | | | | (13 | ) | | | | (3 | ) | | | | (16 | ) | | | | (12 | ) | | | | (2 | ) | | | | (14 | ) |
Curtailment / Special termination benefit | | | | 1 | | | | | – | | | | | 1 | | | | | – | | | | | 1 | | | | | 1 | |
Liabilities assumed through acquisition | | | | – | | | | | 1 | | | | | 1 | | | | | – | | | | | – | | | | | – | |
Foreign currency translation | | | | – | | | | | (1 | ) | | | | (1 | ) | | | | – | | | | | (1 | ) | | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Benefit obligation – December 31 | | | $ | 278 | | | | $ | 52 | | | | $ | 330 | | | | $ | 246 | | | | $ | 53 | | | | $ | 299 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
87
ITT CORPORATION AND SUBSIDIARIES
The following table provides a rollforward of the projected benefit obligations for our other employee-related defined benefit plans for the years ended 2010December 31, 2011 and 2009.2010.
| | | | | | | | | | |
| | | 2011 | | 2010 |
Change in benefit obligation | | | | | | | | | | |
Benefit obligation – January 1 | | | $ | 175 | | | | $ | 171 | |
Service cost | | | | 2 | | | | | 2 | |
Interest cost | | | | 9 | | | | | 9 | |
Actuarial loss | | | | 15 | | | | | 2 | |
Benefits paid | | | | (9 | ) | | | | (9 | ) |
| | | | | | | | | | | |
Benefit obligation – December 31 | | | $ | 192 | | | | $ | 175 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
Change in benefit obligation | | | | | | | | | | |
| Benefit obligation – 1/1 | | | $ | 701 | | | | $ | 703 | |
| Service cost | | | | 6 | | | | | 7 | |
| Interest cost | | | | 40 | | | | | 42 | |
| Amendments / other | | | | – | | | | | (12 | ) |
| Actuarial loss | | | | 22 | | | | | 7 | |
| Benefits paid | | | | (47 | ) | | | | (46 | ) |
| | | | | | | | | | | |
| Benefit obligation – 12/31 | | | $ | 722 | | | | $ | 701 | |
| | | | | | | | | | | |
The following table provides a rollforward of the pension plan assets and the ending funded status for our U.S. and international pension plans for the years ended 2010December 31, 2011 and 2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 |
| | | U.S. | | Int’l | | Total | | U.S. | | Int’l | | Total |
Change in plan assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Plan assets – January 1 | | | $ | 185 | | | | $ | 2 | | | | $ | 187 | | | | $ | 174 | | | | $ | 2 | | | | $ | 176 | |
Actual return on plan assets | | | | (6 | ) | | | | | | | | | (6 | ) | | | | 23 | | | | | – | | | | | 23 | |
Employer contributions | | | | 18 | | | | | 3 | | | | | 21 | | | | | 2 | | | | | 3 | | | | | 5 | |
Benefits paid | | | | (13 | ) | | | | (3 | ) | | | | (16 | ) | | | | (12 | ) | | | | (3 | ) | | | | (15 | ) |
Expenses | | | | (2 | ) | | | | – | | | | | (2 | ) | | | | (2 | ) | | | | – | | | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Plan assets – December 31 | | | $ | 182 | | | | $ | 2 | | | | $ | 184 | | | | $ | 185 | | | | $ | 2 | | | | $ | 187 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Funded status at end of year | | | $ | (96 | ) | | | $ | (50 | ) | | | $ | (146 | ) | | | $ | (61 | ) | | | $ | (51 | ) | | | $ | (112 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | |
| | | | | |
| | | | U.S. | | | | Int’l | | | Total | | | U.S. | | | | Int’l | | | | Total | |
Change in plan assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Plan assets – 1/1 | | | $ | 4,011 | | | | $ | 297 | | | $ | 4,308 | | | $ | 3,392 | | | | $ | 219 | | | | $ | 3,611 | |
| Actual return on plan assets | | | | 525 | | | | | 25 | | | | 550 | | | | 772 | | | | | 52 | | | | | 824 | |
| Employer contributions | | | | 58 | | | | | 18 | | | | 76 | | | | 150 | | | | | 11 | | | | | 161 | |
| Employee contributions | | | | – | | | | | 1 | | | | 1 | | | | – | | | | | 2 | | | | | 2 | |
| Benefits paid | | | | (322 | ) | | | | (5 | ) | | | (327 | ) | | | (303 | ) | | | | (16 | ) | | | | (319 | ) |
| Assets acquired through acquisition | | | | – | | | | | 21 | | | | 21 | | | | – | | | | | – | | | | | – | |
| Foreign currency translation | | | | – | | | | | (7 | ) | | | (7 | ) | | | – | | | | | 29 | | | | | 29 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Plan assets – 12/31 | | | $ | 4,272 | | | | $ | 350 | | | $ | 4,622 | | | $ | 4,011 | | | | $ | 297 | | | | $ | 4,308 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Funded status at end of year | | | $ | (1,092 | ) | | | $ | (246 | ) | | $ | (1,338 | ) | | $ | (1,162 | ) | | | $ | (230 | ) | | | $ | (1,392 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table provides a rollforward of the other employee-related defined benefit plan assets and the ending funded status for the years ended 2010December 31, 2011 and 2009.2010.
| | | | | | | | | | |
| | | 2011 | | 2010 |
Change in plan assets | | | | | | | | | | |
Plan assets – January 1 | | | $ | 8 | | | | $ | 8 | |
Employer contributions | | | | 9 | | | | | 9 | |
Benefits paid | | | | (9 | ) | | | | (9 | ) |
| | | | | | | | | | | |
Plan assets – December 31 | | | $ | 8 | | | | $ | 8 | |
| | | | | | | | | | | |
Funded status at end of year | | | $ | (184 | ) | | | $ | (167 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | | |
Change in plan assets | | | | | | | | | | | | | | | |
| Plan assets – 1/1 | | | $ | 247 | | | | $ | 205 | | | | | | |
| Actual return on plan assets | | | | 33 | | | | | 47 | | | | | | |
| Benefits paid | | | | (5 | ) | | | | (5 | ) | | | | | |
| | | | | | | | | | | | | | | | |
| Plan assets – 12/31 | | | $ | 275 | | | | $ | 247 | | | | | | |
| | | | | | | | | | | | | | | | |
| Funded status at end of year | | | $ | (447 | ) | | | $ | (454 | ) | | | | | |
| | | | | | | | | | | | | | | | |
The accumulated benefit obligation for all defined benefit pension plans was $5,644$328 and $5,378$297 at December 31, 20102011 and 2009,2010, respectively. The following table provides information for pension plans with an accumulated benefit obligation in excess of plan assets.
| | | | | | | | | | |
| | | 2011 | | 2010 |
Projected benefit obligation | | | $ | 328 | | | | $ | 299 | |
Accumulated benefit obligation | | | | 327 | | | | | 297 | |
Fair value of plan assets | | | | 182 | | | | | 187 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | | |
| Projected benefit obligation | | | $ | 5,683 | | | | $ | 5,465 | | | | | | |
| Accumulated benefit obligation | | | | 5,381 | | | | | 5,171 | | | | | | |
| Fair value of plan assets | | | | 4,325 | | | | | 4,058 | | | | | | |
| | | | | | | | | | | | | | | | |
75
ITT CORPORATION AND SUBSIDIARIES
Income Statement Information
The following table provides the components of net periodic benefit cost and other amounts recognized in other comprehensive income for each of the three years 2010, 2009 and 2008,ended December 31, 2011, as they pertain to our defined benefit pension plans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | | | | 2008 | | | | | |
| | | | U.S. | | | | Int’l | | | Total | | | U.S. | | | | Int’l | | | | Total | | | | U.S. | | | | Int’l | | | | Total | |
Net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service cost | | | $ | 108 | | | | $ | 15 | | | $ | 123 | | | $ | 88 | | | | $ | 11 | | | | $ | 99 | | | | $ | 85 | | | | $ | 14 | | | | $ | 99 | |
| Interest cost | | | | 299 | | | | | 29 | | | | 328 | | | | 302 | | | | | 27 | | | | | 329 | | | | | 294 | | | | | 31 | | | | | 325 | |
| Expected return on plan assets | | | | (414 | ) | | | | (24 | ) | | | (438 | ) | | | (412 | ) | | | | (21 | ) | | | | (433 | ) | | | | (421 | ) | | | | (24 | ) | | | | (445 | ) |
| Amortization of net actuarial loss | | | | 72 | | | | | 3 | | | | 75 | | | | 46 | | | | | 2 | | | | | 48 | | | | | 14 | | | | | 3 | | | | | 17 | |
| Amortization of prior service cost | | | | 4 | | | | | – | | | | 4 | | | | 4 | | | | | – | | | | | 4 | | | | | 4 | | | | | – | | | | | 4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net periodic benefit cost (income) | | | | 69 | | | | | 23 | | | | 92 | | | | 28 | | | | | 19 | | | | | 47 | | | | | (24 | ) | | | | 24 | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Effect of curtailment | | | | 1 | | | | | – | | | | 1 | | | | 3 | | | | | – | | | | | 3 | | | | | – | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total net periodic benefit cost (income) | | | | 70 | | | | | 23 | | | | 93 | | | | 31 | | | | | 19 | | | | | 50 | | | | | (24 | ) | | | | 24 | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other changes in plan assets and benefit obligations recognized in other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss (gain) | | | | 8 | | | | | 19 | | | | 27 | | | | (151 | ) | | | | 13 | | | | | (138 | ) | | | | 2,018 | | | | | 41 | | | | | 2,059 | |
| Prior service cost | | | | 4 | | | | | – | | | | 4 | | | | 6 | | | | | 1 | | | | | 7 | | | | | – | | | | | – | | | | | – | |
| Amortization of net actuarial loss | | | | (72 | ) | | | | (3 | ) | | | (75 | ) | | | (46 | ) | | | | (2 | ) | | | | (48 | ) | | | | (14 | ) | | | | (3 | ) | | | | (17 | ) |
| Amortization of prior service cost | | | | (4 | ) | | | | – | | | | (4 | ) | | | (4 | ) | | | | – | | | | | (4 | ) | | | | (4 | ) | | | | – | | | | | (4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total change recognized in other comprehensive income | | | | (64 | ) | | | | 16 | | | | (48 | ) | | | (195 | ) | | | | 12 | | | | | (183 | ) | | | | 2,000 | | | | | 38 | | | | | 2,038 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total impact from net periodic benefit cost and changes in other comprehensive income | | | $ | 6 | | | | $ | 39 | | | $ | 45 | | | $ | (164 | ) | | | $ | 31 | | | | $ | (133 | ) | | | $ | 1,976 | | | | $ | 62 | | | | $ | 2,038 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
76
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
| | | U.S. | | Int’l | | Total | | U.S. | | Int’l | | Total | | U.S. | | Int’l | | Total |
Net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | | $ | 6 | | | | $ | 1 | | | | $ | 7 | | | | $ | 6 | | | | $ | 1 | | | | $ | 7 | | | | $ | 4 | | | | $ | 1 | | | | $ | 5 | |
Interest cost | | | | 13 | | | | | 2 | | | | | 15 | | | | | 14 | | | | | 2 | | | | | 16 | | | | | 13 | | | | | 3 | | | | | 16 | |
Expected return on plan assets | | | | (19 | ) | | | | – | | | | | (19 | ) | | | | (18 | ) | | | | – | | | | | (18 | ) | | | | (18 | ) | | | | – | | | | | (18 | ) |
Amortization of net actuarial loss | | | | 4 | | | | | – | | | | | 4 | | | | | 2 | | | | | – | | | | | 2 | | | | | 2 | | | | | – | | | | | 2 | |
Amortization of prior service cost | | | | 1 | | | | | – | | | | | 1 | | | | | 1 | | | | | – | | | | | 1 | | | | | 1 | | | | | – | | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost (income) | | | | 5 | | | | | 3 | | | | | 8 | | | | | 5 | | | | | 3 | | | | | 8 | | | | | 2 | | | | | 4 | | | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Effect of curtailment / Special termination benefit | | | | 3 | | | | | – | | | | | 3 | | | | | – | | | | | 2 | | | | | 2 | | | | | – | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total net periodic benefit cost (income) | | | | 8 | | | | | 3 | | | | | 11 | | | | | 5 | | | | | 5 | | | | | 10 | | | | | 2 | | | | | 4 | | | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other changes in plan assets and benefit obligations recognized in other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss (gain) | | | | 52 | | | | | (1 | ) | | | | 51 | | | | | 5 | | | | | – | | | | | 5 | | | | | (10 | ) | | | | – | | | | | (10 | ) |
Prior service cost | | | | – | | | | | – | | | | | – | | | | | 1 | | | | | – | | | | | 1 | | | | | – | | | | | – | | | | | – | |
Amortization of net actuarial loss | | | | (4 | ) | | | | – | | | | | (4 | ) | | | | (2 | ) | | | | – | | | | | (2 | ) | | | | (2 | ) | | | | – | | | | | (2 | ) |
Amortization of prior service cost | | | | (3 | ) | | | | – | | | | | (3 | ) | | | | (1 | ) | | | | – | | | | | (1 | ) | | | | (1 | ) | | | | – | | | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total change recognized in other comprehensive (loss) income | | | | 45 | | | | | (1 | ) | | | | 44 | | | | | 3 | | | | | – | | | | | 3 | | | | | (13 | ) | | | | – | | | | | (13 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total impact from net periodic benefit cost and changes in other comprehensive (loss) income | | | $ | 53 | | | | $ | 2 | | | | $ | 55 | | | | $ | 8 | | | | $ | 5 | | | | $ | 13 | | | | $ | (11 | ) | | | $ | 4 | | | | $ | (7 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ITT CORPORATION AND SUBSIDIARIES
The following table provides the components of net periodic benefit cost and other amounts recognized in other comprehensive loss(loss) income for each of the three years 2010, 2009 and 2008,ended December 31, 2011, as they pertain to other employee-related defined benefit plans.
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
Net periodic benefit cost | | | | | | | | | | | | | | | |
Service cost | | | $ | 2 | | | | $ | 2 | | | | $ | 2 | |
Interest cost | | | | 9 | | | | | 9 | | | | | 10 | |
Expected return on plan assets | | | | (1 | ) | | | | (1 | ) | | | | (1 | ) |
Amortization of net actuarial loss | | | | 3 | | | | | 1 | | | | | 2 | |
| | | | | | | | | | | | | | | | |
Total net periodic benefit cost | | | | 13 | | | | | 11 | | | | | 13 | |
| | | | | | | | | | | | | | | | |
Other changes in plan assets and benefit obligations recognized in other comprehensive (loss) income | | | | | | | | | | | | | | | |
Net loss | | | | 15 | | | | | 2 | | | | | 7 | |
Amortization of net actuarial loss | | | | (3 | ) | | | | (1 | ) | | | | (2 | ) |
| | | | | | | | | | | | | | | | |
Total changes recognized in other comprehensive (loss) income | | | | 12 | | | | | 1 | | | | | 5 | |
| | | | | | | | | | | | | | | | |
Total impact from net periodic benefit cost and changes in other comprehensive (loss) income | | �� | $ | 25 | | | | $ | 12 | | | | $ | 18 | |
| | | | | | | | | | | | | | | | |
89
ITT CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | 2008 | | | | |
Net periodic benefit cost | | | | | | | | | | | | | | | | | | |
| Service cost | | | $ | 6 | | | | $ | 7 | | | $ | 8 | | | | | |
| Interest cost | | | | 40 | | | | | 42 | | | | 42 | | | | | |
| Expected return on plan assets | | | | (22 | ) | | | | (18 | ) | | | (28 | ) | | | | |
| Amortization of net actuarial loss | | | | 11 | | | | | 15 | | | | 4 | | | | | |
| Amortization of prior service (credit) cost | | | | (2 | ) | | | | 4 | | | | 3 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net periodic benefit cost | | | | 33 | | | | | 50 | | | | 29 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Effect of curtailment | | | | — | | | | | (1 | ) | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total net periodic benefit cost | | | | 33 | | | | | 49 | | | | 29 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other changes in plan assets and benefit obligations recognized in other comprehensive income | | | | | | | | | | | | | | | | | | |
| Net loss (gain) | | | | 11 | | | | | (23 | ) | | | 90 | | | | | |
| Prior service credit | | | | — | | | | | (10 | ) | | | (3 | ) | | | | |
| Amortization of net actuarial loss | | | | (11 | ) | | | | (15 | ) | | | (4 | ) | | | | |
| Amortization of prior service credit (cost) | | | | 2 | | | | | (4 | ) | | | (3 | ) | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total changes recognized in other comprehensive income | | | | 2 | | | | | (52 | ) | | | 80 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total impact from net periodic benefit cost and changes in other comprehensive income | | | $ | 35 | | | | $ | (3 | ) | | $ | 109 | | | | | |
The following table provides the estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive lossincome into net periodic benefit cost during 2011.
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | Other
| | | | | | | |
| | | | Pension | | | | Benefits | | | Total | | | | |
| Net actuarial loss | | | $ | 118 | | | | $ | 12 | | | $ | 130 | | | | | |
| Prior service cost (credit) | | | | 4 | | | | | (2 | ) | | | 2 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total | | | | 122 | | | | | 10 | | | | 132 | | | | | |
| | | | | | | | | | | | | | | | | | | |
2012. | | | | | | | | | | | | | | | |
| | | Pension | | Other
Benefits | | Total |
Net actuarial loss | | | $ | 6 | | | | $ | 4 | | | | $ | 10 | |
Prior service cost | | | | 1 | | | | | – | | | | | 1 | |
| | | | | | | | | | | | | | | | |
Total | | | $ | 7 | | | | $ | 4 | | | | $ | 11 | |
| | | | | | | | | | | | | | | | |
Postretirement Plan Assumptions
The following table provides the weighted-average assumptions used to determinedetermination of projected benefit obligations and net periodicthe recognition of expenses related to postretirement benefit cost, as they pertain to our defined benefit pension plans.
| | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | |
| | | | U.S. | | | | Int’l | | | U.S. | | | Int’l | |
| Obligation Assumptions: | | | | | | | | | | | | | | | | | | |
| Discount rate | | | | 5.73 | % | | | | 5.47 | % | | | 6.00 | % | | | 5.79 | % |
| Rate of future compensation increase | | | | 4.00 | % | | | | 3.26 | % | | | 4.00 | % | | | 3.87 | % |
| Cost Assumptions: | | | | | | | | | | | | | | | | | | |
| Discount rate | | | | 6.00 | % | | | | 5.79 | % | | | 6.25 | % | | | 6.14 | % |
| Expected return on plan assets | | | | 9.00 | % | | | | 7.33 | % | | | 9.00 | % | | | 7.29 | % |
| Rate of future compensation increase | | | | 4.00 | % | | | | 3.84 | % | | | 4.00 | % | | | 3.64 | % |
| | | | | | | | | | | | | | | | | | | |
77
ITT CORPORATION AND SUBSIDIARIES
The following table provides the weighted-averageplans are dependent on various assumptions used to determine projected benefit obligationsthat are judgmental and net periodic benefit cost, as they pertain to other employee-related benefit plans.
| | | | | | | | | | |
| | | | 2010 | | | 2009 | |
| Obligation Assumptions: | | | | | | | | | |
| Discount rate | | | | 5.50 | % | | | 6.00 | % |
| Rate of future compensation increase | | | | 4.00 | % | | | 4.00 | % |
| Cost Assumptions: | | | | | | | | | |
| Discount rate | | | | 6.00 | % | | | 6.25 | % |
| Expected return on plan assets | | | | 9.00 | % | | | 9.00 | % |
| Rate of future compensation increase | | | | 4.00 | % | | | 4.00 | % |
developed in consultation with external advisors. 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 actuarial assumptions are based on the provisions of the applicable accounting pronouncements, review of various market data and discussion with our external advisors. Changes in these assumptions could materially affect our financial position and results of operations.The following table provides the weighted-average assumptions used to determine projected benefit obligations and net periodic postretirement cost, as they pertain to our defined benefit pension plans.
| | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 |
| | | U.S. | | Int’l | | U.S. | | Int’l |
Obligation Assumptions: | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | | 4.79 | % | | | | 4.85 | % | | | | 5.69 | % | | | | 5.03 | % |
Rate of future compensation increase | | | | N/A | | | | | 2.46 | % | | | | N/A | | | | | 2.42 | % |
Cost Assumptions: | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | | 5.69 | % | | | | 5.03 | % | | | | 6.00 | % | | | | 5.09 | % |
Expected return on plan assets | | |
| 9.00
| %
| | | | 4.75 | % | | | | 9.00 | % | | | | 4.75 | % |
| | | | | | | | | | | | | | | | | | | | | |
The following table provides the weighted-average assumptions used to determine projected benefit obligations and net periodic postretirement cost, as they pertain to other employee-related defined benefit plans.
| | | | | | | | | | |
| | | 2011 | | 2010 |
Obligation Assumptions: | | | | | | | | | | |
Discount rate | | | | 4.80 | % | | | | 5.50 | % |
Cost Assumptions: | | | | | | | | | | |
Discount rate | | | | 5.50 | % | | | | 6.00 | % |
Expected return on plan assets | | | | 9.00 | % | | | | 9.00 | % |
| | | | | | | | | | | |
The assumed discount rates reflect our expectation of the present value of expected future cash payments for benefits at
the measurement date. We base the discount rate assumption on current investment yields of high-quality fixed income securities during the retirement benefits maturity period. The discount rates were determined by considering an interest rate yield curve comprising high quality corporate bonds, with maturities between zero and thirty years. 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.
The rate of future compensation increase assumption for foreign plans reflects our long-term actual experience and future and near-term outlook.
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.returns based on our targeted asset allocation. Specifically, we analyze the plan’s actual historical annual return on assets, net of fees, over the past 15, 20 and 25 years; estimate future returns based on independent estimates of asset class returns;returns weighted by the targeted investment allocation.
Prior to the Distribution of Exelis and evaluate historical broad marketXylem, the Company’s U.S. postretirement plans participated in a master trust that invested in asset classes that historically generated asset returns overin excess of the expected long-term timeframes basedrate of return on ourplan assets. With the distribution of certain postretirement benefit plans and their respective plan assets to Exelis and Xylem, we developed a new targeted asset allocation range.that is expected to generate a lower level of returns on plan assets than were realized in the past. Based on this approach, our weighted average estimate of the long-term annual rate of return on assets for domestic pension plans is 9.0%beginning in 2012 will be reduced to 8%. For reference,postretirement plans that participated in the master trust distributed to Exelis, the chart below shows actual returns compared to the expected long-term returns for our actual geometric average annualpostretirement plans that were utilized in the calculation of the net periodic postretirement cost for each respective year.
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
Expected rate of return on plan assets | | | | 9.00 | % | | | | 9.00 | % | | | | 9.00 | % |
Actual rate of return on plan assets | | | | (3.2 | )% | | | | 14.1 | % | | | | 24.1 | % |
| | | | | | | | | | | | | | | | |
For the recognition of net periodic postretirement cost, the calculation of the expected return on plan assets for domestic pension plans asis generally derived using a market-related value of December 31, 2010 was 8.8%, 10.1% and 10.3%, forplan assets based on average asset values at the past 15, 20, and 25 year periods, respectively.measurement date over the last five years. The use of fair value, rather than a market-related value, of plan assets could materially affect net periodic postretirement cost.
90
ITT CORPORATION AND SUBSIDIARIES
The table below provides the actual rate of return generated on plan assets during each of the years presented, as they compare to the expected long-term return utilized in calculating the net periodic benefit costs, as they pertain to our U.S. pension plans.
| | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | 2008 | | | | |
| Expected rate of return on plan assets | | | | 9.0 | % | | | | 9.0 | % | | | 9.0 | % | | | | |
| Actual rate of return on plan assets | | | | 14.1 | % | | | | 24.1 | % | | | (31.2 | )% | | | | |
| | | | | | | | | | | | | | | | | | | |
The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 7.8%7.3% for 2011,2012, decreasing ratably to 5.0% in 2019. Increasing the health care trend rates by one percent per year would have the effect of increasing the benefit obligation by $36$23 and the aggregate annual service and interest cost components by $3.$2. A decrease of one percent in the health care trend rate would reduce the benefit obligation by $30$19 and the aggregate annual service and interest cost components by $2.$1. 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.
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 the Company’s U.S. SRP, which are managed on a commingled basis in a master investment trust. With respect to the master investment trust, the Company allows itself broad discretion to invest tactically to respond to changing market conditions, while staying reasonably within the targeted 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
Prior to the markets, while generatingexcess-of-market returnsDistribution, the domestic postretirement benefit plan assets were included in the master investment trust that also included assets of plans contributed to Exelis and mitigating manager-concentration risk.
78
Xylem. At the distribution date, the master trust and all of its investments were transferred to Exelis and ITT received a cash contribution from Exelis proportionate to its share of investments in the master trust which was subsequently invested through a newly established master trust. At December 31, 2011, the plan assets have been invested on a temporary basis. As a result of these developments, the actual asset allocation, targeted asset allocation and mix of investments in the master trust has changed from the prior year.
ITT CORPORATION AND SUBSIDIARIES
The following table provides the actualallocation of plan assets held in the master investment trust by asset allocations of these U.S. plans,category, as of December 31, 20102011 and 2009,2010, and the related targeted asset allocation ranges by asset category.
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Allocation
| |
| | | | 2010 | | | | 2009 | | | | Range | |
| Domestic equities | | | | 25 | % | | | | 25 | % | | | | 25%-75% | |
| Alternative investments | | | | 47 | | | | | 47 | | | | | 20%-45% | |
| International equities | | | | 18 | | | | | 17 | | | | | 10%-45% | |
| Fixed income | | | | 2 | | | | | 4 | | | | | 0%-60% | |
| Cash and other | | | | 8 | | | | | 7 | | | | | 0%-30% | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | Targeted
Allocation
Range | | 2010 | | Targeted
Allocation
Range |
Domestic equities | | | | 33 | % | | | | 30-40 | % | | | | 25 | % | | | | 25-75 | % |
Alternative investments | | | | 0 | % | | | | 0 | % | | | | 47 | % | | | | 20-45 | % |
International equities | | | | 27 | % | | | | 20-40 | % | | | | 18 | % | | | | 10-45 | % |
Fixed income | | | | 35 | % | | | | 25-45 | % | | | | 2 | % | | | | 0-60 | % |
Cash and other | | | | 5 | % | | | | 0-5 | % | | | | 8 | % | | | | 0-30 | % |
| | | | | | | | | | | | | | | | | | | | | |
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, 2010,2011, non-U.S. plansplan assets of approximately $2 million 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. |
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.
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ITT CORPORATION AND SUBSIDIARIES
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 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. Other employee benefit plan assets include an investment in a structured security valued using broker quotes. Due to the significance of unobservable inputs involved in the broker quote, the investment is classified within Level 3 of the fair value hierarchy. |
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ITT CORPORATION AND SUBSIDIARIES
The following table provides the fair value of plan assets held by our postretirement benefit plans, at December 31,
20102011 and
2009,2010, by asset class.
| | | | | | | | | | | | | | | | | | | | |
| | | Pension | | Other Benefits |
| 2011 | | Total | | Level 2 | | Total | | Level 3 |
Asset Category | | | | | | | | | | | | | | | | | | | | |
Equities: | | | | | | | | | | | | | | | | | | | | |
Domestic | | | $ | 60 | | | | $ | 60 | | | | $ | – | | | | $ | – | |
International | | | | 33 | | | | | 33 | | | | | – | | | | | – | |
Emerging Markets | | | | 16 | | | | | 16 | | | | | – | | | | | – | |
Fixed income | | | | 63 | | | | | 63 | | | | | – | | | | | – | |
Cash and other | | | | 12 | | | | | 12 | | | | | 8 | | | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | |
Total | | | $ | 184 | | | | $ | 184 | | | | $ | 8 | | | | $ | 8 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| | | | Pension | | | Other Benefits | | | | Pension | | | | Other Benefits | |
| | | | | |
| | | | Total | | | | Level 1 | | | | Level 2 | | | Level 3 | | | Total | | | | Level 1 | | | | Level 2 | | | | Level 3 | | | | Total | | | | Level 1 | | | | Level 2 | | | | Level 3 | | | | Total | | | | Level 1 | | | | Level 2 | | | | Level 3 | |
Asset Category | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equities Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Domestic | | | $ | 1,026 | | | | $ | 775 | | | | $ | 154 | | | $ | 97 | | | $ | 81 | | | | $ | 68 | | | | $ | 8 | | | | $ | 5 | | | | $ | 957 | | | | $ | 737 | | | | $ | 142 | | | | $ | 78 | | | | $ | 75 | | | | $ | 63 | | | | $ | 8 | | | | $ | 4 | |
| Developed markets | | | | 495 | | | | | 364 | | | | | 19 | | | | 112 | | | | 19 | | | | | 13 | | | | | — | | | | | 6 | | | | | 455 | | | | | 339 | | | | | 23 | | | | | 93 | | | | | 15 | | | | | 10 | | | | | — | | | | | 5 | |
| Emerging markets | | | | 447 | | | | | 194 | | | | | 217 | | | | 36 | | | | 24 | | | | | 10 | | | | | 12 | | | | | 2 | | | | | 397 | | | | | 158 | | | | | 211 | | | | | 28 | | | | | 20 | | | | | 8 | | | | | 11 | | | | | 1 | |
| ITT Stock | | | | 52 | | | | | 52 | | | | | — | | | | — | | | | 3 | | | | | 3 | | | | | — | | | | | — | | | | | 49 | | | | | 49 | | | | | — | | | | | — | | | | | 2 | | | | | 2 | | | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Subtotal – equity securities | | | | 2,020 | | | | | 1,385 | | | | | 390 | | | | 245 | | | | 127 | | | | | 94 | | | | | 20 | | | | | 13 | | | | | 1,858 | | | | | 1,283 | | | | | 376 | | | | | 199 | | | | | 112 | | | | | 83 | | | | | 19 | | | | | 10 | |
| Private equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Buyout funds(a) | | | | 989 | | | | | — | | | | | 154 | | | | 835 | | | | 53 | | | | | — | | | | | 8 | | | | | 45 | | | | | 884 | | | | | — | | | | | 1 | | | | | 883 | | | | | 44 | | | | | — | | | | | — | | | | | 44 | |
Distressed funds(b) | | | | 230 | | | | | — | | | | | — | | | | 230 | | | | 12 | | | | | — | | | | | — | | | | | 12 | | | | | 181 | | | | | — | | | | | — | | | | | 181 | | | | | 9 | | | | | — | | | | | — | | | | | 9 | |
Venture/growth equity funds(c) | | | | 45 | | | | | — | | | | | — | | | | 45 | | | | 2 | | | | | — | | | | | — | | | | | 2 | | | | | 33 | | | | | — | | | | | — | | | | | 33 | | | | | 2 | | | | | — | | | | | — | | | | | 2 | |
Mezzanine funds(d) | | | | 33 | | | | | — | | | | | — | | | | 33 | | | | 2 | | | | | — | | | | | — | | | | | 2 | | | | | 28 | | | | | — | | | | | — | | | | | 28 | | | | | 1 | | | | | — | | | | | — | | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Subtotal – private equity | | | | 1,297 | | | | | — | | | | | 154 | | | | 1,143 | | | | 69 | | | | | — | | | | | 8 | | | | | 61 | | | | | 1,126 | | | | | — | | | | | 1 | | | | | 1,125 | | | | | 56 | | | | | — | | | | | — | | | | | 56 | |
| Absolute return (hedge funds): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fund of funds(e) | | | | 290 | | | | | — | | | | | 58 | | | | 232 | | | | 15 | | | | | — | | | | | 2 | | | | | 13 | | | | | 319 | | | | | — | | | | | 57 | | | | | 262 | | | | | 15 | | | | | — | | | | | 2 | | | | | 13 | |
Fixed income/multi-strat(f) | | | | 354 | | | | | — | | | | | 162 | | | | 192 | | | | 19 | | | | | — | | | | | 9 | | | | | 10 | | | | | 319 | | | | | — | | | | | 146 | | | | | 173 | | | | | 16 | | | | | — | | | | | 7 | | | | | 9 | |
Equity long/short(g) | | | | 128 | | | | | — | | | | | 80 | | | | 48 | | | | 7 | | | | | — | | | | | 4 | | | | | 3 | | | | | 120 | | | | | — | | | | | 80 | | | | | 40 | | | | | 6 | | | | | — | | | | | 4 | | | | | 2 | |
Macro(h) | | | | 12 | | | | | — | | | | | 12 | | | | — | | | | 1 | | | | | — | | | | | 1 | | | | | — | | | | | 38 | | | | | — | | | | | 38 | | | | | — | | | | | 2 | | | | | — | | | | | 2 | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Subtotal – absolute return | | | | 784 | | | | | — | | | | | 312 | | | | 472 | | | | 42 | | | | | — | | | | | 16 | | | | | 26 | | | | | 796 | | | | | — | | | | | 321 | | | | | 475 | | | | | 39 | | | | | — | | | | | 15 | | | | | 24 | |
| Fixed Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed income | | | | 184 | | | | | 8 | | | | | 176 | | | | — | | | | 18 | | | | | — | | | | | 10 | | | | | 8 | | | | | 231 | | | | | 13 | | | | | 218 | | | | | — | | | | | 23 | | | | | 1 | | | | | 14 | | | | | 8 | |
| Other: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commodities | | | | 233 | | | | | — | | | | | 200 | | | | 33 | | | | 13 | | | | | — | | | | | 11 | | | | | 2 | | | | | 179 | | | | | — | | | | | 153 | | | | | 26 | | | | | 9 | | | | | — | | | | | 8 | | | | | 1 | |
| Cash and other, net | | | | 104 | | | | | 4 | | | | | 74 | | | | 26 | | | | 6 | | | | | 1 | | | | | 4 | | | | | 1 | | | | | 118 | | | | | 109 | | | | | (6 | ) | | | | 15 | | | | | 8 | | | | | 7 | | | | | (1 | ) | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Subtotal – other | | | | 337 | | | | | 4 | | | | | 274 | | | | 59 | | | | 19 | | | | | 1 | | | | | 15 | | | | | 3 | | | | | 297 | | | | | 109 | | | | | 147 | | | | | 41 | | | | | 17 | | | | | 7 | | | | | 7 | | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | $ | 4,622 | | | | $ | 1,397 | | | | $ | 1,306 | | | $ | 1,919 | | | $ | 275 | | | | $ | 95 | | | | $ | 69 | | | | $ | 111 | | | | $ | 4,308 | | | | $ | 1,405 | | | | $ | 1,063 | | | | $ | 1,840 | | | | $ | 247 | | | | $ | 91 | | | | $ | 55 | | | | $ | 101 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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ITT CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension | | Other Benefits |
| 2010 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 3 |
Asset Category | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Domestic | | | $ | 47 | | | | $ | 36 | | | | $ | 7 | | | | $ | 4 | | | | $ | – | | | | $ | – | |
International | | | | 15 | | | | | 10 | | | | | – | | | | | 5 | | | | | – | | | | | – | |
Emerging Markets | | | | 19 | | | | | 8 | | | | | 9 | | | | | 2 | | | | | – | | | | | – | |
Private equity(a) | | | | 55 | | | | | – | | | | | 7 | | | | | 48 | | | | | – | | | | | – | |
Absolute return (hedge funds) (b) | | | | 32 | | | | | – | | | | | 12 | | | | | 20 | | | | | – | | | | | – | |
Commodities, fixed income and other | | | | 19 | | | | | – | | | | | 16 | | | | | 3 | | | | | 8 | | | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | $ | 187 | | | | $ | 54 | | | | $ | 51 | | | | $ | 82 | | | | $ | 8 | | | | $ | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (a) | | Private equity includes a diversified range of strategies, including 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 $499 where ownership of the partnership interest is directly held and $442 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) | | Ventureventure and growth equity private equity funds are partnership investment vehicles that provide seed or growth capital tostart-upsand early stage companies, usually in high-growth industries, such as information and clean technology, health care and biotechnology.mezzanine funds. |
|
(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) | (b) | Absolute return hedge funds primarily include 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) | | Fixedstrategies and fixed income/multi-stratmulti-strategy absolute return funds, are partnership investment vehicles thatwhich invest in multiple investment strategies such as macro, equity long/short, convertible arbitrage and event driven, often with the intent to diversifyof diversifying risk and reducereducing 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. |
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ITT CORPORATION AND SUBSIDIARIES
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
Securities | | Private
Equity | | Absolute
Returns | | Commodities,
Fixed Income
and Other | | Total |
Level 3 balance – December 31, 2009 | | | $ | 9 | | | | $ | 47 | | | | $ | 21 | | | | $ | 2 | | | | $ | 79 | |
Realized gains (losses), net | | | | – | | | | | 4 | | | | | – | | | | | – | | | | | 4 | |
Unrealized gains (losses), net | | | | 2 | | | | | 2 | | | | | 1 | | | | | – | | | | | 5 | |
Purchases/(sales), net | | | | – | | | | | – | | | | | (2 | ) | | | | 1 | | | | | (1 | ) |
Transfers in (out), net | | | | – | | | | | (5 | ) | | | | – | | | | | – | | | | | (5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 balance – December 31, 2010 | | | | 11 | | | | | 48 | | | | | 20 | | | | | 3 | | | | | 82 | |
Realized gains (losses), net | | | | (1 | ) | | | | 3 | | | | | – | | | | | – | | | | | 2 | |
Unrealized gains (losses), net | | | | – | | | | | – | | | | | – | | | | | – | | | | | – | |
Purchases/(sales) and settlements, net | | | | (10 | ) | | | | (51 | ) | | | | (20 | ) | | | | (3 | ) | | | | (84 | ) |
Transfers in (out), net | | | | – | | | | | – | | | | | – | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 balance – December 31, 2011 | | | $ | – | | | | $ | – | | | | $ | – | | | | $ | – | | | | $ | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Equity
| | | | Private
| | | Absolute
| | | Fixed
| | | | | | | | | |
| | | | Securities | | | | Equity | | | Returns | | | Income | | | | Other | | | | Total | |
| Level 3 balance – 12/31/08 | | | $ | 274 | | | | $ | 988 | | | $ | 783 | | | $ | 40 | | | | $ | 126 | | | | $ | 2,211 | |
| Realized gains (losses), net | | | | (1 | ) | | | | 26 | | | | 3 | | | | – | | | | | 1 | | | | | 29 | |
| Unrealized gains (losses), net | | | | 70 | | | | | 20 | | | | 84 | | | | – | | | | | 2 | | | | | 176 | |
| Purchases/(sales), net | | | | 5 | | | | | 89 | | | | (186 | ) | | | – | | | | | 8 | | | | | (84 | ) |
| Transfers in (out), net | | | | (149 | ) | | | | (1 | ) | | | (209 | ) | | | (40 | ) | | | | (96 | ) | | | | (495 | ) |
| Foreign currency translation | | | | – | | | | | 3 | | | | – | | | | – | | | | | – | | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 balance – 12/31/09 | | | | 199 | | | | | 1,125 | | | | 475 | | | | – | | | | | 41 | | | | | 1,840 | |
Realized gains (losses), net | | | | – | | | | | 85 | | | | 8 | | | | – | | | | | – | | | | | 93 | |
Unrealized gains (losses), net | | | | 41 | | | | | 46 | | | | 30 | | | | – | | | | | 2 | | | | | 119 | |
Purchases/(sales), net | | | | 4 | | | | | 13 | | | | (41 | ) | | | – | | | | | 17 | | | | | (7 | ) |
Transfers in (out), net | | | | – | | | | | (124 | ) | | | – | | | | – | | | | | – | | | | | (124 | ) |
Foreign currency translation | | | | 1 | | | | | (2 | ) | | | – | | | | – | | | | | (1 | ) | | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 balance – 12/31/10 | | | $ | 245 | | | | $ | 1,143 | | | $ | 472 | | | $ | – | | | | $ | 59 | | | | $ | 1,919 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table presents a reconciliationThere have been no significant realized or unrealized gains and losses, purchases, sales or transfers of the beginning and ending balances of fair value measurementassets within our other employee-related benefit plans measured using significant unobservable inputs (Level 3):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Equity
| | | | Private
| | | Absolute
| | | Fixed
| | | | | | | | | |
| | | | Securities | | | | Equity | | | Returns | | | Income | | | | Other | | | | Total | |
| Level 3 balance – 12/31/08 | | | $ | 14 | | | | $ | 50 | | | $ | 40 | | | $ | 10 | | | | $ | 6 | | | | $ | 120 | |
| Realized gains (losses), net | | | | – | | | | | 1 | | | | – | | | | 1 | | | | | – | | | | | 2 | |
| Unrealized gains (losses), net | | | | 4 | | | | | 1 | | | | 4 | | | | – | | | | | – | | | | | 9 | |
| Purchases/(sales), net | | | | – | | | | | 4 | | | | (9 | ) | | | (1 | ) | | | | 1 | | | | | (5 | ) |
| Transfers in (out), net | | | | (8 | ) | | | | – | | | | (11 | ) | | | (2 | ) | | | | (4 | ) | | | | (25 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 balance – 12/31/09 | | | | 10 | | | | | 56 | | | | 24 | | | | 8 | | | | | 3 | | | | | 101 | |
Realized gains (losses), net | | | | – | | | | | 5 | | | | – | | | | – | | | | | – | | | | | 5 | |
Unrealized gains (losses), net | | | | 3 | | | | | 6 | | | | 4 | | | | – | | | | | – | | | | | 13 | |
Purchases/(sales), net | | | | – | | | | | 1 | | | | (2 | ) | | | – | | | | | – | | | | | (1 | ) |
Transfers in (out), net | | | | – | | | | | (7 | ) | | | – | | | | – | | | | | – | | | | | (7 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 balance – 12/31/10 | | | $ | 13 | | | | $ | 61 | | | $ | 26 | | | $ | 8 | | | | $ | 3 | | | | $ | 111 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Funding requirements under Internal Revenue ServiceIRS 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. In addition, we fund certain of our international pension plans in countries where funding is allowable and tax-efficient. We made contributions of $76$21 and $161$5 to pension plans during 20102011 and 2009, respectively, including voluntary contributions to the U.S. SRP of $50 and $100 during the fourth quarter of 2010, and 2009, respectively. We currently anticipate making contributions to our global pension plans in the range of $90$20 to $110$25 during 2011,2012, of which $20 is expected to be$2 has been made in the first quarter.
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ITT CORPORATION AND SUBSIDIARIES
Estimated Future Benefit Payments
The following table provides the projected timing of payments for benefits earned to date and the expectation that certain future service will be earned by current active employees for our pension and other employee-related benefit plans.
| | | | | | | | | | | | | | | |
| | | U.S.
Pension | | Int’l
Pension | | Other
Benefits |
2012 | | | $ | 15 | | | | $ | 3 | | | | $ | 11 | |
2013 | | | | 15 | | | | | 3 | | | | | 11 | |
2014 | | | | 16 | | | | | 4 | | | | | 11 | |
2015 | | | | 16 | | | | | 4 | | | | | 12 | |
2016 | | | | 17 | | | | | 4 | | | | | 12 | |
2017 – 2021 | | | $ | 93 | | | | $ | 17 | | | | $ | 61 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | Other
| |
| | | | Pension | | | | Benefits | |
| 2011 | | | $ | 368 | | | | $ | 53 | |
| 2012 | | | | 375 | | | | | 54 | |
| 2013 | | | | 383 | | | | | 55 | |
| 2014 | | | | 391 | | | | | 56 | |
| 2015 | | | | 402 | | | | | 56 | |
| 2016 – 2020 | | | | 2,162 | | | | | 289 | |
| |
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ITT CORPORATION AND SUBSIDIARIES
NOTE 1718 Long-Term Incentive Employee CompensationNOTE 18
Long-Term Incentive Employee Compensation
Our long-term incentive awards program compriseshistorically has comprised three components: non-qualified stock options (NQOs), restricted stockshares and units (RS) and a target cash award (TSR). We account for NQOs and RS as equity-based compensation awards. TSR awards are cash settled and accounted for as liability-based compensation.
The ITT Amended and Restated 2003 Equity2011 Omnibus Incentive Plan (2003 Equity(2011 Incentive Plan) was approved by shareholders and established in May of 20032011 to provide for the awarding of options on common shares and full value restricted common shares or units to employees and non-employee directors. The number of shares initially available for issuance to participants under the 2011 Incentive Plan was 4.6. The 2011 Incentive Plan replaced the 2003 Incentive Plan on a prospective basis and no future grants will be made under the ITT Amended and Restated 2003 Equity Incentive Plan (2003 Incentive Plan). However, any shares remaining available for issuance under the 2003 Incentive Plan as of the date of 2011 Incentive Plan shareholder approval became available for grant under the 2011 Incentive Plan. In connection with the Distribution, and per the terms of the 2011 Incentive Plan, an equitable adjustment which preserved the intrinsic value of the awards under this planafter giving effect to the distribution of Exelis and Xylem was 12.2.made (referred to as the Equitable Adjustment). As of December 31, 2010, 2.92011, 41.1 shares were available for future grants.grants under the 2011 Incentive Plan. ITT makes shares available for the exercise of stock options or vesting of restricted shares or units by purchasing shares in the open market or by issuing shares from treasury stock.
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&Ageneral and administrative expenses, and are reduced by an estimated forfeiture rate. These costs impacted our consolidated results of operations as follows:
| | | | | | | | | | | | | | | |
| | | 2011(a) | | 2010 | | 2009 |
Share-based compensation expense, equity-based awards | | | $ | 23 | | | | $ | 14 | | | | $ | 16 | |
Share-based compensation expense, liability-based awards | | | | 2 | | | | | (4 | ) | | | | 2 | |
| | | | | | | | | | | | | | | | |
Total share-based compensation expense in operating income (loss) | | | | 25 | | | | | 10 | | | | | 18 | |
Tax benefit | | | | 8 | | | | | 3 | | | | | 6 | |
| | | | | | | | | | | | | | | | |
Share-based compensation expense, net of tax | | | $ | 17 | | | | $ | 7 | | | | $ | 12 | |
| | | | | | | | | | | | | | | | |
| (a) | Share-based compensation expense incurred during 2011 includes $13 classified as a Transformation cost in the Consolidated Income Statement related to the modification of equity awards. |
| | | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | | 2008 | |
| Compensation costs on equity-based awards | | | $ | 28 | | | | $ | 29 | | | | $ | 31 | |
| Compensation costs on liability-based awards | | | | (5 | ) | | | | 5 | | | | | 24 | |
| | | | | | | | | | | | | | | | |
| Total compensation costs, pre-tax | | | $ | 23 | | | | $ | 34 | | | | $ | 55 | |
| | | | | | | | | | | | | | | | |
| Future tax benefit | | | $ | 7 | | | | $ | 10 | | | | $ | 18 | |
| | | | | | | | | | | | | | | | |
At December 31, 2010,2011, there was $43$22 of total unrecognized compensation cost related to non-vested awards granted under the stock option and restricted stock plans.awards. This cost is expected to be recognized ratably over a weighted-average period of 1.82.44 years.
Conversion and Cancellation of Outstanding Equity at Spin Date
In connection with the Distribution, ITT modified its outstanding equity awards on October 31, 2011 (the modification date). For equity awards issued through employee compensation arrangements, the awards were generally modified such that, following the Distribution, the employee only held equity in their future employer and the intrinsic value of the awards was preserved through the Equitable Adjustment. Awards held by members of the Board of Directors were modified so that the awardee continued to hold an award in each of the three companies following the Distribution.
As a result of the Equitable Adjustment, an option modification expense of $9 was recorded for awards that were fully vested on the modification date, and an addition $1 of incremental fair value will be recorded in future periods as unvested awards vest. A portion of the option modification charge was allocated to discontinued operations for employees who transferred to Exelis or Xylem. Further, subsequent to the Distribution, ITT will only recognize compensation cost for awards that were unvested on the modification date for employees who remained with ITT.
Pursuant to the completion of the Distribution on October 31, 2011, 1.2 stock options and 0.5 restricted equity awards held by the employees of Exelis and Xylem were converted to equity awards in the underlying common stock of their respective employer and were cancelled as ITT equity awards.
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. Options granted between 2004 and 2009 were awarded with a contractual term of seven years. Options granted prior to 2004 and during 2010 and 2011 were awarded with a contractual term of ten years. The exercise price per share is the fair market value of the underlying common stock on the date each option is granted.
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ITT CORPORATION AND SUBSIDIARIES
A summary of the status of our NQOs as of December 31, 2011, 2010 2009 and 20082009 and changes during the years then ended is presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
| STOCK OPTIONS | | SHARES | | WEIGHTED-
AVERAGE
EXERCISE
PRICE | | SHARES | | WEIGHTED-
AVERAGE
EXERCISE
PRICE | | SHARES | | WEIGHTED-
AVERAGE
EXERCISE
PRICE |
Outstanding – January 1 | | | | 3.7 | | | | $ | 85.08 | | | | | 4.0 | | | | $ | 80.58 | | | | | 4.1 | | | | $ | 79.66 | |
Granted | | | | 0.3 | | | | | 115.36 | | | | | 0.4 | | | | | 106.60 | | | | | 0.4 | | | | | 67.18 | |
Exercised | | | | (0.7 | ) | | | | 76.27 | | | | | (0.6 | ) | | | | 62.90 | | | | | (0.4 | ) | | | | 52.64 | |
Cancelled or expired(a) | | | | (1.3 | ) | | | | 92.76 | | | | | (0.1 | ) | | | | 97.56 | | | | | (0.1 | ) | | | | 91.88 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding on Distribution Date before Equitable Adjustment | | | | 2.0 | | | | | 88.52 | | | | | – | | | | | – | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding on Distribution Date after Equitable Adjustment | | | | 8.0 | | | | | 16.18 | | | | | – | | | | | – | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
November/December 2011 Activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Granted | | | | 0.7 | | | | | 20.28 | | | | | – | | | | | – | | | | | – | | | | | – | |
Exercised | | | | (0.7 | ) | | | | 13.87 | | | | | – | | | | | – | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding – December 31 | | | | 8.0 | | | | $ | 16.70 | | | | | 3.7 | | | | $ | 85.08 | | | | | 4.0 | | | | $ | 80.58 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Options exercisable – December 31 | | | | 6.3 | | | | $ | 16.03 | | | | | 3.0 | | | | $ | 83.72 | | | | | 3.2 | | | | $ | 78.98 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (a) | Includes 1.2 shares cancelled in connection with the Distribution of Exelis and Xylem, with a corresponding weighted average exercise price of $92.20. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | | | | 2008 | |
| | | | | | | | WEIGHTED-
| | | | | | WEIGHTED-
| | | | | | | | WEIGHTED-
| |
| | | | | | | | AVERAGE
| | | | | | AVERAGE
| | | | | | | | AVERAGE
| |
| | | | | | | | EXERCISE
| | | | | | EXERCISE
| | | | | | | | EXERCISE
| |
| STOCK OPTIONS | | | SHARES | | | | PRICE | | | SHARES | | | PRICE | | | | SHARES | | | | PRICE | |
| Outstanding – 1/1 | | | | 8.1 | | | | $ | 40.29 | | | | 8.1 | | | $ | 39.83 | | | | | 8.7 | | | | $ | 38.13 | |
| Granted | | | | 0.7 | | | | | 53.30 | | | | 0.9 | | | | 33.59 | | | | | 0.6 | | | | | 53.57 | |
| Exercised | | | | (1.1 | ) | | | | 31.45 | | | | (0.8 | ) | | | 26.32 | | | | | (1.0 | ) | | | | 32.82 | |
| Canceled or expired | | | | (0.3 | ) | | | | 48.78 | | | | (0.1 | ) | | | 45.94 | | | | | (0.2 | ) | | | | 44.31 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding – 12/31 | | | | 7.4 | | | | $ | 42.54 | | | | 8.1 | | | $ | 40.29 | | | | | 8.1 | | | | $ | 39.83 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options exercisable – 12/31 | | | | 5.9 | | | | $ | 41.86 | | | | 6.4 | | | $ | 39.49 | | | | | 6.8 | | | | $ | 37.02 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 2011, 2010 and 2009 was $30, $22 and 2008 was $22, $18, and $30, respectively.
The amount of cash received from the exercise of stock options was $62, $35 and $20 for 2011, 2010 and 2009, respectively. The income tax benefit realized during 2011, 2010
and 2009 associated with stock option exercises and lapses of restricted stock was $17, $14 and $11, 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 decreasedlapses as a financing activity. Excess tax benefits arising from stock option exercises and cash provided by financing activities increased byrestricted stock lapses were $7, $6 and $3 for 2011, 2010 and $7 for 2010, 2009, and 2008, respectively.Therespectively. The following table summarizes information about ITT’s stock options at December 31, 2010:2011:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | OPTIONS OUTSTANDING | | | OPTIONS EXERCISABLE | |
| | | | | | | | | WEIGHTED-
| | | | | | | | | | | | | | WEIGHTED-
| | | | | | | | | |
| | | | | | | | | AVERAGE
| | | | WEIGHTED-
| | | | | | | | | | AVERAGE
| | | | WEIGHTED-
| | | | | |
| | | | | | | | | REMAINING
| | | | AVERAGE
| | | AGGREGATE
| | | | | | | REMAINING
| | | | AVERAGE
| | | | AGGREGATE
| |
RANGE OF EXERCISE
| | | | | | | | CONTRACTUAL
| | | | EXERCISE
| | | INTRINSIC
| | | | | | | CONTRACTUAL
| | | | EXERCISE
| | | | INTRINSIC
| |
| PRICES | | | | NUMBER | | | | LIFE (IN YEARS) | | | | PRICE | | | VALUE | | | NUMBER | | | | LIFE (IN YEARS) | | | | PRICE | | | | VALUE | |
| $ | 10-$20 | | | | | 0.1 | | | | | – | | | | $ | 18.44 | | | $ | 3 | | | | 0.1 | | | | | – | | | | $ | 18.44 | | | | $ | 3 | |
| $ | 20-$30 | | | | | 0.4 | | | | | 1.0 | | | | | 25.37 | | | | 12 | | | | 0.4 | | | | | 1.0 | | | | | 25.37 | | | | | 11 | |
| $ | 30-$40 | | | | | 2.6 | | | | | 3.4 | | | | | 34.43 | | | | 45 | | | | 2.0 | | | | | 2.9 | | | | | 34.79 | | | | | 34 | |
| $ | 40-$50 | | | | | 2.2 | | | | | 1.6 | | | | | 45.05 | | | | 16 | | | | 2.2 | | | | | 1.5 | | | | | 45.03 | | | | | 16 | |
| $ | 50-$60 | | | | | 2.0 | | | | | 5.0 | | | | | 54.18 | | | | – | | | | 1.2 | | | | | 2.9 | | | | | 54.77 | | | | | – | |
| $ | 60-$70 | | | | | 0.1 | | | | | 4.0 | | | | | 66.83 | | | | – | | | | – | (a) | | | | 3.9 | | | | | 67.16 | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 7.4 | | | | | 3.1 | | | | | 42.54 | | | $ | 76 | | | | 5.9 | | | | | 2.2 | | | | | 41.86 | | | | $ | 64 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | OPTIONS OUTSTANDING | | OPTIONS EXERCISABLE |
RANGE OF
EXERCISE
PRICES | | NUMBER | | WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL
LIFE (IN YEARS) | | WEIGHTED-
AVERAGE
EXERCISE
PRICE | | AGGREGATE
INTRINSIC
VALUE | | NUMBER | | WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL
LIFE (IN YEARS) | | WEIGHTED-
AVERAGE
EXERCISE
PRICE | | AGGREGATE
INTRINSIC
VALUE |
$5-$10 | | 0.2 | | (b) | | $ 9.46 | | $ 2 | | 0.2 | | (b) | | $ 9.46 | | $ 2 |
$10-$15 | | 2.9 | | 2.2 | | 12.98 | | 18 | | 2.6 | | 1.9 | | 13.04 | | 16 |
$15-$20 | | 3.3 | | 1.9 | | 18.21 | | 5 | | 3.0 | | 1.2 | | 18.02 | | 5 |
$20-$26 | | 1.6 | | 7.2 | | 21.19 | | – | | 0.5 | | 2.2 | | 22.04 | | – |
| | | | | | | | | | | | | | | | | |
| | 8.0 | | 3.0 | | $16.70 | | $25 | | 6.3 | | 1.6 | | $16.03 | | $23 |
| | | | | | | | | | | | | | | | | |
| (b) | | |
(a) | | Amount rounds to less than 0.1The contractual life of the 0.2 options ended on January 2, 2012. |
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ITT CORPORATION AND SUBSIDIARIES
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on ITT’s closing stock price of $52.11$19.33 as of December 31, 2010,2011, 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” “out-of-the-money” as of December 31, 2010,2011, included as exercisable in the preceding table was 2.1.
1.7.As of December 31, 2010,2011, the total number of stock options expected to vest (including those that have already
vested) was 7.3.7.9. These stock options have a weighted-average exercise price of $42.46,$16.65, an aggregate intrinsic value of $75$25 and a weighted-average remaining contractual life of 3.02.9 years.
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ITT CORPORATION AND SUBSIDIARIES
The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends.Thedividends. The following are weighted-average assumptions for 2011, 2010 2009 and 2008:2009:
| | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | 2008 | |
| Dividend yield | | | | 1.88 | % | | | | 2.54 | % | | | 1.31 | % |
| Expected volatility | | | | 27.06 | % | | | | 38.77 | % | | | 28.69 | % |
| Expected life (in years) | | | | 7.0 | | | | | 4.7 | | | | 4.7 | |
| Risk-free rates | | | | 3.06 | % | | | | 2.20 | % | | | 2.31 | % |
| Weighted-average grant date fair value | | | $ | 14.50 | | | | $ | 9.60 | | | $ | 13.46 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | November 7,
2011 Grants | | 2011
Grants Before
Distribution | | 2010 | | 2009 |
Dividend yield | | | | 1.79 | % | | | | 1.73 | % | | | | 1.88 | % | | | | 2.54 | % |
Expected volatility | | | | 39.30 | % | | | | 24.74 | % | | | | 27.06 | % | | | | 38.77 | % |
Expected life (in years) | | | | 7.0 | | | | | 7.0 | | | | | 7.0 | | | | | 4.7 | |
Risk-free rates | | | | 1.51 | % | | | | 3.05 | % | | | | 3.06 | % | | | | 2.20 | % |
Weighted-average grant date fair value | | | $ | 6.97 | | | | $ | 29.70 | | | | $ | 29.00 | | | | $ | 19.20 | |
| | | | | | | | | | | | | | | | | | | | | |
Expected volatilities arefor option grants prior to the Distribution were based on ITT’s stock price history, including implied volatilities from traded options on our stock. Expected volatilities for option grants subsequent to the Distribution were based on a peer average of historical and implied volatility. 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 stockRS typically vests three years from the date of grant. Holders of restricted stockshares have the right to receive dividends and vote on the shares. Holders of restricted units have the right to receive cumulative dividends, which are subject to forfeiture, at the vesting date. If an employee leaves the Company prior to vesting, whether through resignation or termination for cause, the restricted stockRS is forfeited. If an employee retires or is terminated other than for cause, a pro rata portion of the restricted stockRS may vest. Included within restricted stock outstanding are 0.20.1 vested shares that have been deferred until termination of service per individual award agreements. As of December 31, 2010,2011, the total number of restricted stockRS expected to vest was 1.4.1.3.
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ITT CORPORATION AND SUBSIDIARIES
The table below provides a rollforward of outstanding restricted stockRS for each of the previous three years ended.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
| RESTRICTED STOCK | | SHARES | | WEIGHTED-
AVERAGE
GRANT DATE
FAIR VALUE | | SHARES | | WEIGHTED-
AVERAGE
GRANT DATE
FAIR VALUE | | SHARES | | WEIGHTED-
AVERAGE
GRANT DATE
FAIR VALUE |
Outstanding – January 1 | | | | 0.9 | | | | $ | 89.70 | | | | | 0.8 | | | | $ | 88.72 | | | | | 0.7 | | | | $ | 103.92 | |
Granted | | | | 0.3 | | | | | 115.18 | | | | | 0.3 | | | | | 106.50 | | | | | 0.3 | | | | | 67.76 | |
Lapsed | | | | (0.3 | ) | | | | 99.53 | | | | | (0.2 | ) | | | | 108.88 | | | | | (0.2 | ) | | | | 105.66 | |
Cancelled(c) | | | | (0.6 | ) | | | | 95.30 | | | | | – | | | | | 89.50 | | | | | – | | | | | 109.88 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding on Distribution Date before equitable adjustment | | | | 0.3 | | | | | 93.42 | | | | | – | | | | | – | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding on Distribution Date after equitable adjustment | | | | 1.0 | | | | | 17.94 | | | | | – | | | | | – | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
November/December 2011 Activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Granted | | | | 0.4 | | | | | 20.27 | | | | | – | | | | | – | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding – December 31 | | | | 1.4 | | | | $ | 18.55 | | | | | 0.9 | | | | $ | 89.62 | | | | | 0.8 | | | | $ | 88.72 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (c) | Includes 0.5 RS cancelled in connection with the Distribution of Exelis and Xylem, with a corresponding weighted average grant date fair value of $95.14. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | | | | 2008 | |
| | | | | | | | WEIGHTED
| | | | | | WEIGHTED
| | | | | | | | WEIGHTED
| |
| | | | | | | | AVERAGE
| | | | | | AVERAGE
| | | | | | | | AVERAGE
| |
| | | | | | | | GRANT
| | | | | | GRANT
| | | | | | | | GRANT
| |
| | | | | | | | DATE
| | | | | | DATE
| | | | | | | | DATE
| |
| RESTRICTED STOCK | | | SHARES | | | | FAIR VALUE | | | SHARES | | | FAIR VALUE | | | | SHARES | | | | FAIR VALUE | |
| Outstanding – 1/1 | | | | 1.7 | | | | $ | 44.36 | | | | 1.5 | | | $ | 51.96 | | | | | 1.3 | | | | $ | 50.93 | |
| Granted | | | | 0.5 | | | | | 53.25 | | | | 0.7 | | | | 33.88 | | | | | 0.4 | | | | | 53.57 | |
| Lapsed | | | | (0.4 | ) | | | | 54.44 | | | | (0.4 | ) | | | 52.83 | | | | | (0.1 | ) | | | | 45.76 | |
| Canceled | | | | (0.1 | ) | | | | 44.75 | | | | (0.1 | ) | | | 54.94 | | | | | (0.1 | ) | | | | 55.89 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding – 12/31 | | | | 1.7 | | | | $ | 44.81 | | | | 1.7 | | | $ | 44.36 | | | | | 1.5 | | | | $ | 51.96 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TheRestricted units represented approximately 63%, 21% and 19% of total RS 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 0.6 years.
at December 31, 2011, 2010 and 2009, respectively.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 312 to 365 as of December 31, 2010. We reassess the fair value of our TSR awards on a quarterly basis at the end of each reporting period using actual total shareholder return data over the elapsed performance period as well as a Monte Carlo simulation. The fair value of the outstanding awards at December 31, 2010 and 2009 was $2 and $27, respectively.
Payment, if any,
typically occurs during the first quarter of each year and is based on the TSR performance comparison measured against targets established at the time of the award.
The total cash paidHowever, no payments were made during 2011 as the TSR performance metric for the 2008 to 2010 performance period was less than the minimum stipulated in the TSR Award Agreement. During 2010 and 2009, payments totaling $18 and $21 were made to settle the
vested 2007 and 2006 TSR
liabilityawards, respectively.In connection with the Distribution, a proportionate number of outstanding TSR awards vested corresponding to the percentage of time passed between original grant date and
October 31, 2011 (the vested portion). The fair value of the vested portion on October 31, 2011 was $18, $21nil, as the performance factor for each TSR grant was below the floor threshold. The unvested portion of TSR awards (the percent of time remaining between October 31, 2011 and $19, during the years endedawards originally stated vest end date) were modified depending on the year of grant. The 2009 TSR awards were modified to settle via a cash payment in December 2011 of less than $1, equal to the unvested portion at target payout of 100%. The unvested portion of the 2010 2009 and 2008, respectively. At December 31, 2010, total unrecognized2011 TSR awards were modified through the granting of RSU awards with a grant date fair value equal to the unvested portion at target. The replacement RSU awards maintain the vesting date established in the original TSR award agreement. No compensation costs projectedexpense was recognized in connection with these modifications as the incremental fair value resulting from the modification pertains to the unvested portion of the original TSR award. The deferred compensation cost of $2 will be incurred, based on current performance measurements,recognized straight-line over the remaining vesting period
84
periods.
ITT CORPORATION AND SUBSIDIARIES
is $4. This cost is expected to be recognized ratably over a weighted-average period of 2.0 years.
NOTE 1819 Capital StockNOTE 19
ITT has authority to issue an aggregate of 550300 shares of capital stock, of which 500250 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, 20102011 and 2009.2010.
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ITT CORPORATION AND SUBSIDIARIES
The stockholders of ITT common stock are entitled to receive dividends when and as declared by ITT’s Board of Directors. Dividends are paid quarterly. Dividends declared were $1.00, $0.85$1.591, $2.00 and $0.70$1.70 per common share in 2011, 2010, and 2009, and 2008, respectively.
On October 27, 2006, a three-year $1 billion share repurchase program was approved by our Board of Directors. On December 16, 2008, the provisions of the share repurchase program were modified by our Board of Directors to replace the original three-year term with an indefinite term. Through December 2008, we had repurchased 7.13.6 million shares for $431, including commission fees, under the $1 billion share repurchase program. No shares werehave been repurchased in 2010 or 2009.
since December 2008.We make shares available for the exercise of stock options and vesting of restricted stock by purchasing shares in the open market or by issuing shares from treasury stock. During 2010,2011, we issued 1.40.8 shares from our treasury account related to equity compensation arrangements. As of December 31, 2011 and 2010, 10.6 and 2009, 22.9 and 24.011.5 shares of Common Stock were held in our treasury account, respectively.
On October 31, 2011, the distribution of Exelis and Xylem from ITT was completed. On October 31, 2011, the stockholders of record as of the Record Date received one share of Xylem common stock and one share of Exelis common stock for each share of ITT common stock held as of the Record Date. The Distribution was completed pursuant to a Distribution Agreement, effective as of October 25, 2011, among ITT, Exelis and Xylem.
On October 31, 2011, we completed the 1:2 Reverse Stock Split. The par value of our common stock remained $1 per share following the 1:2 Reverse Stock Split. All preferred and common stock shares available, issued and outstanding, as well as share prices and earnings per share give effect to the 1:2 Reverse Stock Split in all periods presented. Cash payments made to settle fractional shares resulting from the 1:2 Reverse Stock Split were immaterial.
NOTE 1920 Commitments and ContingenciesNOTE 20
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 asbestos liabilities, 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 defend vigorously 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 conditionposition on a consolidated basis, in the foreseeable future, unless otherwise noted below.
Asbestos Matters
Background
Background
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 products sold by us or our subsidiaries 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, 2010,2011, there were 103,575105,486 open claims against ITT filed in various state and federal courts alleging injury as a result of exposure to asbestos.Activityasbestos. Activity related to these asserted asbestos claims during the period was as follows:
| | | | | | | | | | | |
| | | | 2010(b) | | | | 2009 | |
Pending claims(a) – 1/1 | | | | 104,679 | | | | | 103,006 | |
| New claims | | | | 5,865 | | | | | 4,274 | |
| Settlements | | | | (991 | ) | | | | (1,081 | ) |
| Dismissals | | | | (6,469 | ) | | | | (4,728 | ) |
Adjustment(c) | | | | 491 | | | | | 3,208 | |
| | | | | | | | | | | |
Pending claims(a) – 12/31 | | | | 103,575 | | | | | 104,679 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010(b) | | 2009 |
Pending claims(a) – January 1 | | | | 103,575 | | | | | 104,679 | | | | | 103,006 | |
New claims | | | | 5,691 | | | | | 5,865 | | | | | 4,274 | |
Settlements | | | | (1,426 | ) | | | | (991 | ) | | | | (1081 | ) |
Dismissals | | | | (2,354 | ) | | | | (6,469 | ) | | | | (4,728 | ) |
Adjustment(c) | | | | – | | | | | 491 | | | | | 3,208 | |
Pending claims(a) – December 31 | | | | 105,486 | | | | | 103,575 | | | | | 104,679 | |
| (a) | |
(a) | We had previously indicated thatExcludes 34,869 claims related to maritime actions, almost all of which were filed in the United States District Court for the Northern District of Ohio, were not included in the count of asserted claims because the Company believed they would not be litigated. In August 2010, these cases were dismissed. |
| |
| (b) | In September 2010, ITT executed an amended cost-sharing agreement related to a business we disposed of a number of years ago. The amendedcost sharing agreement provides that responsibility for a sharing of costs associated with claims resolved gradually transitions away from ITT, such that ITT will have no responsibility for claims resolved between 2010 and 2019 naming ITT or the entity which acquired the disposed business. Excluded from thebeginning no later than July 1, 2022. The table above isexcludes claim activity associated with the amended cost-sharing agreement for claims that were not filed against ITT. |
| |
| (c) | Reflects an adjustment to increase the number of open claims as a result of transitioning claims data from our primary insurance companiescarriers to an internal database.a third party claims administrator. |
At December 31, 2011, the jurisdictions with highest pending claims counts against ITT include Mississippi (approximately 40,000 claims), New York (approximately 30,000 claims), and Florida (approximately 7,000 claims).
Frequently, plaintiffs are unable to identify any ITT or Goulds Pumps product as a source of asbestos exposure. In
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ITT CORPORATION AND SUBSIDIARIES
addition, in a large majority of the 103,575claims pending claims against the Company, the plaintiffs are unable to demonstrate any injury. Many of those claims have been placed on inactive dockets (including 39,98539,604 claims in Mississippi). Our experience to date
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ITT CORPORATION AND SUBSIDIARIES
is that a substantial portion of resolved claims have been dismissed without payment by the Company. As a result, management believes that a large majority of the 103,575 openpending claims have little or no value. The average cost per claim, including indemnity and defense costs, resolved in 2011 and 2010 and 2009 was $16$19 thousand and $12$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.
Beginning in the third quarter of 2009, theThe Company recordedrecords an undiscounted asbestos liability, including legal fees, for 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. PriorThe asbestos liability has not been discounted to present value due to the third quarterinability to reliably forecast the timing of 2009, we only recognized a liability for pending claims. 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 at that time due to a number of factors. To begin with, our primary insurance carriers managed and paid all settlement 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 a 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 negotiatedcoverage-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 settlements and dismissals by disease type, necessary to estimate our exposure to potential future asbestos claims. In the third quarter of 2009 and 2010, 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.
cash flows. The methodology used to estimate our total liability for pending and unasserted future asbestos claims estimated to be filed over the next 10 years relies on and includes the following key factors:
following: | | |
| | 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;experience; |
|
| | n | an | analysis of the Company’s pending cases, by disease type; |
|
| | n | an | analysis of the Company’s most recent historyexperience 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 settlementindemnity costs and resolved claims; |
|
| | n | an | adjustment for inflation in the future average settlement value of claims and defense costs; and |
|
| | n | an | analysis of the time over whichCompany’s recent experience with regard to the Company is likelylength of time to resolve asbestos claims. |
The forecast period used to estimate our potential exposure to pending and projected asbestos claims is a
judgment based on a number of factors, including the number and type of claims filed, recent experience with pending claims activity and whether that experience will continue into the future, the jurisdictions where claims are filed, the effect of any legislative or judicial developments, and the likelihood of any comprehensive asbestos legislation at the federal level. These factors have both positive and negative effects on the dynamics of asbestos litigation in the tort system and, accordingly, our estimate of the asbestos exposure. Developments related to asbestos tend to be long-cycle, changing over multi-year periods. Accordingly, we monitor these and other factors and periodically assess whether an alternative forecast period is appropriate.
The Company retains a consulting firm to assist management in estimating the potential liability for pending asbestos claims and for claims estimated to be filed over the next 10 years based on the methodology described above. Our methodology determines a point estimate based on our assessment of the value of each underlying assumption, rather than a range of reasonably possible outcomes. 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 factorsassumptions discussed above, other factors includeadditional uncertainty related to asbestos claims and estimated costs arises from the long latency period prior to the manifestation of thean asbestos-related disease, changes in available medical treatments and changes in medical costs, of medical treatment, the impact ofchanges in plaintiff behavior resulting from bankruptcies of other companies that are potential or 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
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ITT CORPORATION AND SUBSIDIARIES
10 years, we do not believe there is a reasonable basis for estimating those costs at this time.
We record ana corresponding asbestos-related asset that represents our best estimate of probable recoveries from insurers and other responsible parties for the estimated asbestos liabilities. In developing this estimate, the Company considerscoverage-in-place and other settlement agreements with its insurers and contractual agreements with other responsible parties, as well as a number of additional factors. These additional factors reviewed include current levels of future cost recovery, experience, the financial viability of the insurance companies or other responsible parties, the method by which losses will be allocated to the various insurance policies and the years covered by those policies, the extent to which settlement and defense costs will be reimbursed by the insurance policies, and interpretation of the various policy and contract terms and limits and their interrelationships. The timing and amount of reimbursements will vary due to the lag between when ITT pays an amount to defend or settle a claim and when a reimbursement is received, differing policy terms, and certain gaps in our insurance coverage as a result of some uninsured periods,
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ITT CORPORATION AND SUBSIDIARIES
insurer insolvencies.insolvencies, and prior insurance settlements. In addition, the Company retains an insurance consulting firm to assist management in estimating probable recoveries for pending asbestos claims and for claims estimated to be filed over the next 10 years based on the analysis of policy terms, the likelihood of recovery provided by ourexternal legal counsel assuming the continued viability of those insurance carriers and other responsible parties whichthat are currently solvent, and incorporating risk mitigation judgments where policy terms or other factors wereare not certain.
As partcertain, and allocating asbestos settlement and defense costs between our insurers and other responsible parties.The Company has negotiated with certain of its insurers and other responsible parties to reimburse the Company for a portion of its settlement and/or defense costs as incurred through “coverage-in-place” agreements, policy buyout and settlement agreements and a cost sharing agreement which provides that responsibility for costs associated with claims resolved gradually transitions away from ITT, such that ITT will have no responsibility for claims resolved beginning no later than July 1, 2022. These agreements, in the aggregate, represent approximately 60% of the recorded asbestos-related asset.
Estimating our ongoing reviewexposure to pending asbestos claims and those that may be filed in the future is subject to significant uncertainty and risk as there are multiple variables that can affect the timing, severity, quality, quantity and resolution of our net asbestos exposure, each quarter we assess the most recent data available for the key inputs and assumptions, comparing the dataclaims. Any predictions with respect to the expectations on whichvariables impacting the most recent annualestimate of the asbestos liability and related asset estimates were based. 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 asbestos exposures, although it is probable that the Company will incur additional costs for asbestos claims filed beyond the next 10 years which could be material, we do not believe there is a reasonable basis for estimating those costs at this time.
Income Statement Charges
In the third quarter, each year, we conduct a detailed study with the assistance of outside consultants to review and update, as appropriate, the underlying assumptions used to estimate our asbestos liability and related assets. Additionally, we periodically reassess the time horizon over which a reasonable estimate of unasserted claims can be projected.
2010 Charge
In the third quarter of 2010, we conducted ouran annual detailed study with the assistance of outside consultants to review and update the underlying assumptions used in our asbestos liability and
related asset estimates. During this study, the underlying assumptions wereare updated based on our actual experience since our last detailed review in the third quarter of 2009,annual study, a reassessment of the appropriate reference period of years of experience used in determining each assumption and our expectations regarding future conditions, including inflation. Based on the results of this study, we increasedadjusted our estimated undiscounted asbestos liability, including legal fees, by ($44), $691 reflectingand $708, in 2011, 2010 and 2009, respectively. These charges reflect 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. The increase in our estimated liability isin the third quarter of 2011 was a result of several developments, including a reduction in the assumed rate of increase in future average settlement costs and an expectation of lower defense costs relative to indemnities paid. These favorable factors were offset in part by increased activity in several higher-cost jurisdictions, increasing the number of cases expected to be adjudicated. The increase in our estimated liability in the third quarter of 2010 was a result of several developments, including higher settlement costs and significantly increased activity in several higher-cost jurisdictions, increasing the number of cases to be adjudicated and the expected legal costs.
The increase in our estimated liability in the third quarter of 2009 was a result of recording an estimated liability to claims estimated to be filed. Prior to 2009, the Company only recorded a liability for pending asbestos claims due to the inability to estimate the potential exposure.Further, in the third quarter of 2010,2011 the Company recorded a $372 increase$76 reduction in its asbestos-related assets based on the results of this study.the annual studies, whereas in the third quarter 2010 and 2009 the Company increased its asbestos-related asset by $371 and $485, respectively. These assets comprise an insurance asset, as well as receivables from other responsible parties. See discontinued operations discussion below for further information about receivables from parties other than insurers.
In addition to charges associated with the annual reassessment, beginning in the fourth quarter of 2009, the Company also records a net asbestos charge each quarter to maintain a rolling 10 year forecast period.
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ITT CORPORATION AND SUBSIDIARIES
For the full yearyears ended December 31, 2011, 2010 and 2009, the netincome statement effects of asbestos charge can be summarized as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | |
| | | | Pre-tax | | | | After-tax | | | Pre-tax | | | After-tax | |
| Continuing operations | | | $ | 385 | | | | $ | 247 | | | $ | 238 | | | $ | 148 | |
| Discontinued operations | | | | (10 | ) | | | | (6 | ) | | | 9 | | | | 6 | |
| | | | | | | | | | | | | | | | | | | |
| Total | | | $ | 375 | | | | $ | 241 | | | $ | 247 | | | $ | 154 | |
| | | | | | | | | | | | | | | | | | | |
87
charges consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Year Ended December 31, 2011 | | Continuing Operations | | Discontinued Operations | | |
| | Liability | | Asset | | Net | | Liability | | Asset | | Net | | Total |
Provision | | | $ | 85 | | | | $ | 26 | | | | $ | 59 | | | | $ | 24 | | | | $ | 21 | | | | $ | 3 | | | | $ | 62 | |
Remeasurement | | | | 38 | | | | | (3 | ) | | | | 41 | | | | | (82 | ) | | | | (73 | ) | | | | (9 | ) | | | | 32 | |
Asbestos-related costs before tax | | | $ | 123 | | | | $ | 23 | | | | | 100 | | | | $ | (58 | ) | | | $ | (52 | ) | | | | (6 | ) | | | | 94 | |
Tax benefit | | | | | | | | | | | | | | (37 | ) | | | | | | | | | | | | | | 2 | | | | | (35 | ) |
Asbestos-related costs, net of tax | | | | | | | | | | | | | $ | 63 | | | | | | | | | | | | | | $ | (4 | ) | | | $ | 59 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Year Ended December 31, 2010 | | Continuing Operations | | Discontinued Operations | | |
| | Liability | | Asset | | Net | | Liability | | Asset | | Net | | Total |
Provision | | | $ | 67 | | | | $ | 12 | | | | $ | 55 | | | | $ | 50 | | | | $ | 50 | | | | $ | – | | | | $ | 55 | |
Remeasurement | | | | 524 | | | | | 194 | | | | | 330 | | | | | 167 | | | | | 177 | | | | | (10 | ) | | | | 320 | |
Asbestos-related costs before tax | | | $ | 591 | | | | $ | 206 | | | | | 385 | | | | $ | 217 | | | | $ | 227 | | | | | (10 | ) | | | | 375 | |
Tax benefit | | | | | | | | | | | | | | (144 | ) | | | | | | | | | | | | | | 4 | | | | | (140 | ) |
Asbestos-related costs, net of tax | | | | | | | | | | | | | $ | 241 | | | | | | | | | | | | | | $ | (6 | ) | | | $ | 235 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Year Ended December 31, 2009 | | Continuing Operations | | Discontinued Operations | | |
| | Liability | | Asset | | Net | | Liability | | Asset | | Net | | Total |
Provision | | | $ | 56 | | | | $ | 28 | | | | $ | 28 | | | | $ | 2 | | | | $ | 6 | | | | $ | (4 | ) | | | $ | 24 | |
Remeasurement | | | | 644 | | | | | 434 | | | | | 210 | | | | | 64 | | | | | 51 | | | | | 13 | | | | | 223 | |
Asbestos-related costs before tax | | | $ | 700 | | | | $ | 462 | | | | | 238 | | | | $ | 66 | | | | $ | 57 | | | | | 9 | | | | | 247 | |
Tax benefit | | | | | | | | | | | | | | (95 | ) | | | | | | | | | | | | | | (3 | ) | | | | (98 | ) |
Asbestos-related costs, net of tax | | | | | | | | | | | | | $ | 143 | | | | | | | | | | | | | | $ | 6 | | | | $ | 149 | |
ITT CORPORATION AND SUBSIDIARIES
Changes in Financial Position:
The Company’s estimated asbestos exposure, net of expected recoveries from insurers and other responsible parties, for the resolution of all pending claims and unasserted asbestos claims estimated to be filed in the next 10 years was $642$714 and $267$641 as of December 31, 2011 and 2010, and 2009, respectively.Therespectively. The following table provides a rollforward of the estimated total asbestos liability and related assets for the years ended December 31, 2011 and 2010, and 2009, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | 2010 |
| | | Liability | | Asset | | Net | | Liability | | Asset | | Net |
Balance as of January 1 | | | $ | 1,676 | | | | $ | 1,035 | | | | $ | 641 | | | | $ | 933 | | | | $ | 667 | | | | $ | 266 | |
Changes in estimate during the period: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | | | 123 | | | | | 23 | | | | | 100 | | | | | 591 | | | | | 206 | | | | | 385 | |
Discontinued operations | | | | (58 | ) | | | | (52 | ) | | | | (6 | ) | | | | 217 | | | | | 227 | | | | | (10 | ) |
Cash activity | | | | (73 | ) | | | | (52 | ) | | | | (21 | ) | | | | (54 | ) | | | | (54 | ) | | | | – | |
Other adjustments | | | | – | | | | | – | | | | | – | | | | | (11 | ) | | | | (11 | ) | | | | – | |
Balance as of December 31 | | | $ | 1,668 | | | | $ | 954 | | | | $ | 714 | | | | $ | 1,676 | | | | $ | 1,035 | | | | $ | 641 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current portion | | | | 139 | | | | | 133 | | | | | 6 | | | | | 117 | | | | | 105 | | | | | 12 | |
Noncurrent portion | | | | 1,529 | | | | | 821 | | | | | 708 | | | | | 1,559 | | | | | 930 | | | | | 629 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | |
| | | | Liability | | | | Asset | | | Net | | | Liability | | | Asset | | | Net | |
| Balance as of January 1 | | | $ | 933 | | | | $ | 666 | | | $ | 267 | | | $ | 228 | | | $ | 201 | | | $ | 27 | |
| Changes in estimate during the period: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | | | 591 | | | | | 206 | | | | 385 | | | | 700 | | | | 462 | | | | 238 | |
| Discontinued operations | | | | 217 | | | | | 227 | | | | (10 | ) | | | 67 | | | | 58 | | | | 9 | |
| Net cash activity | | | | (54 | ) | | | | (54 | ) | | | — | | | | (62 | ) | | | (55 | ) | | | (7 | ) |
| Other adjustments | | | | (11 | ) | | | | (11 | ) | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31 | | | $ | 1,676 | | | | $ | 1,034 | | | $ | 642 | | | $ | 933 | | | $ | 666 | | | $ | 267 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
The total asbestos liability and related assets as December 31, 2010 and 2009 includes $117 and $66 presented within accrued liabilities and $105 and $62 presented within other current assets on our Consolidated Balance Sheets, respectively.
The asbestos liability and related receivables are based upon current, known information.management’s best estimate of future events. However, future events affecting the key factors and other variables for either the asbestos liability or the related receivables could cause the actual costs and recoveries to be materially higher or lower than currently estimated. Due to these uncertainties, as well as our inability to reasonably estimate any additional asbestos liability for claims which may be filed beyond the next 10 years, it is not possible to predict the ultimate outcome of the cost of resolving theall pending and allestimated unasserted asbestos claims. We believe it is possible that future events affecting the key factors and other variables within the next 10 years, as well as the cost of asbestos claims filed beyond the next 10 years, net of expected recoveries, could have a material adverse effect on our financial position, results of operations orand cash flows.
At December 31, 2011 and 2010, $234 and 2009, $292 and $75 of the asbestos liability and $285$233 and $64$285 of the related asset, respectively, related to a business which we disposed of a number of years ago that is reported as a discontinued operation. The increase in the liability and asset resulted fromis subject to an amended cost-sharing agreement that was executed in September 2010 with the entity that acquired the disposed business. The amended agreement providedprovides for a sharing of the claims settled between 2010 and 2019 naming ITT or the entity which acquired the disposed business. In future years, the liability for sharing the claims gradually transitions away from ITT, such that ITT will have no responsibility for claims resolved in 9 to 10 years. Under the prior cost-sharing agreement, costs were shared equally.beginning no later than July 1, 2022. The amended cost-sharing agreement also provides for the sharing of certain insurance policies. Prior to executing the amended cost-sharing agreement in September 2010, we recorded a liability for this discontinued operation based on pending claims and unasserted claims estimated to be filed over the next 10 years against ITT. As part of amending the cost-sharing agreement, ITT was provided with the key data necessary to estimate the exposure related to the shared pending and estimated future claims. The estimate of the additional liability and asset recorded as a result of the amended cost-sharing agreement werein 2010 was calculated in a manner consistent with the approach used to estimate ITT’s stand-alone asbestos liabilities and assets.
WeUsing the estimated liability as of December 31, 2011 (for claims filed or estimated to be filed through 2021), we have estimated that we will be able to recover 62%57% of the asbestos settlementindemnity and defense costs for pending claims as well as unasserted claims estimated to be filed over the next 10 years from our insurers or other responsible parties. However, there is uncertainty in estimating when cash payments related to the
recorded asbestos liability will be fully expended and such cash payments will continue for a number of years past 2021 due to the significant proportion of future claims included in the estimated asbestos liability and the lag time between the date a claim is filed and when it is resolved. In addition, because there are gaps in our insurance coverage, reflecting uninsured periods, the insolvency of certain insurers and prior insurance settlements, and we expectour expectation that certain policies from some of our primary insurers will exhaust within the next 10 years, actual insurance reimbursements vary from period to period and the anticipated recovery percentagerate is expected to decline for potential additional asbestos liabilities. Insurance coverage in the tenth year of our estimate of the asbestos claims liability is currently projected to be approximately 25%.over time. 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. predict and subject to a high degree of uncertainty.
Subject to the qualifications regardingthese inherent uncertainties, previously described, it is expected that future annual cash payments, net of recoveries related to pending claims and unasserted claims to be filed within the next 10 years, will extend through approximately 20222026 due to the length of time lag between the filing of a claim and its
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ITT CORPORATION AND SUBSIDIARIES
resolution. Certain of our primary coverage in place agreements are expected to exhaust in the next twelve months, which will result in higher net cash outflows for the short-term. These annual net cash outflows are projected to average $25$10 to $20, net of tax benefits over the next five years, as compared to an average of approximately $10 to $15$6, net of tax benefits in the past three years, and increase to an average of approximately $50$35 to $60$45, net of tax over the remainder of the projection period.
Recovery rates for the tenth year of our model are currently projected to be approximately 27% of cash spent on settlements and defense costs.Environmental
In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and remediation of sites in various countries. These sites are in various stages of investigationand/or remediation and in many of these proceedings our liability is considered de minimis. We have 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 ownedand/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 investigationand/or remediation. These sites include instances where we have been identified as a potentially responsible party under federal and state environmental laws and regulations.
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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 accrued liabilities for these environmental matters represent the best estimatesmanagement’s estimate of undiscounted costs to be incurred related to the investigation andenvironmental assessment or remediation of environmental media such as water, soil, soil vapor, air and structures,efforts, as well as related legal fees. These estimates, and related accruals, are reviewed periodicallyquarterly and updatedadjusted for progress of investigation and remediation efforts and changes in facts andas additional technical or legal circumstances. Liabilities for these environmental expendituresinformation become available.
Environmental remediation reserves are recorded on an undiscounted basis.
It is difficultsubject to numerous inherent uncertainties that affect our ability to estimate our share of the final costs of investigation and remediation due to various factors, includingcosts. Such uncertainties involve incomplete information regarding particular sites and other potentially responsible parties, uncertainty regarding the nature and extent of investigation orcontamination at each site, the extent of remediation andrequired under existing regulations, our share, if any, of any remediation liability, for such conditions, the selection ofwidely varying cost estimates associated with potential alternative remedial approaches, the length of time required to remediate a particular site, the potential effects of continuing improvements in remediation technology, and changes in environmental standards and regulatory requirements. In our opinion, the total amount accrued is appropriate based on existing facts and circumstances. We do not anticipate these liabilities will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
The following table illustrates the activity related to our accrued liabilities for these environmental matters.
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Environmental liability – 1/1 | | | $ | 140 | | | | $ | 135 | |
| Accruals added during the period | | | | — | | | | | 1 | |
| Change in estimates for pre-existing accruals | | | | 14 | | | | | 18 | |
| Payments | | | | (15 | ) | | | | (14 | ) |
| | | | | | | | | | | |
| Environmental liability – 12/31 | | | $ | 139 | | | | $ | 140 | |
| | | | | | | | | | | |
| | | | | | | | | | |
| | | 2011 | | 2010 |
Environmental liability – January 1 | | | $ | 100 | | | | $ | 101 | |
Accruals added during the period | | | | – | | | | | – | |
Change in estimates for pre-existing accruals | | | | 13 | | | | | 10 | |
Payments | | | | (11 | ) | | | | (11 | ) |
Environmental liability – December 31 | | | $ | 102 | | | | $ | 100 | |
The following table illustrates the reasonably possible low- and high end range of estimated liability, and number of active sites for these environmental matters.
| | | | | | | | | | |
| | | 2011 | | 2010 |
Low-end range | | | $ | 81 | | | | $ | 82 | |
High end range | | | $ | 175 | | | | $ | 180 | |
Number of active environmental investigation and remediation sites | | | | 64 | | | | | 65 | |
While actual costs to be incurred at identified sites in future periods may vary from our current estimates given the inherent uncertainties in evaluating environmental exposures, we do not anticipate changes in our estimated liabilities for identified sites will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
| | | | | | | | | | | |
| | | | 2010 | | | | 2009 | |
| Low-end range | | | $ | 117 | | | | $ | 113 | |
| High end range | | | $ | 251 | | | | $ | 249 | |
| Number of active environmental investigation and remediation sites | | | | 99 | | | | | 98 | |
| | | | | | | | | | | |
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 caseIn 2011, ITT filed a Motion for Summary Judgment on PEIC’s obligation to pay defense costs. That motion is now backcurrently pending before the Superior Court and the partiescourt. Mandatory settlement conferences are engaged in further discovery.
anticipated to be held later this year.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 losses described above. During this coverage litigation, we entered intocoverage-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. In December 2011, Goulds Pumps reached an agreement in principle to resolve its claims against Fireman’s Fund and, in January 2012, we reached an agreement in principle with another insurer. In early January 2012, ITT and Goulds Pumps filed a putative class action against Travelers Casualty and Surety Company alleging that Travelers is unilaterally reinterpreting language contained in older Aetna policies so as to avoid paying on asbestos claims.ITT Corporation and Goulds Pumps, Inc., v. Travelers Casualty and Surety Company (f/k/a Aetna Casualty and Surety Company,) U.S.D.C. CT. CA No. 3:12-CU 00038. We continue to negotiate settlement agreements with other insurers, where appropriate.
On December 20, 2011, the Ad Hoc Committee of ITT Bondholders filed a Complaint in New York State court alleging that ITT breached the early redemption provisions of certain bonds issued in 2009. In 2009, ITT issued $500 in bonds maturing in 2019 at an interest rate of 6.125%. The documents governing the bonds contained certain provisions governing early redemptions. On September 20, 2011, ITT notified the holders of the debt that it intended to redeem the bonds on October 20, 2011 in accordance with the terms of the governing documents. On October 18, 2011, the redemption price was disclosed. The Plaintiffs contend that ITT used an improper discount rate in calculating the redemption price and otherwise failed to comply with required redemption procedures. If the Plaintiffs’ claims are preparedsustained, ITT could be required to pursue legal remedies againstpay up to $15 in additional redemption fees and interest to all holders of the remaining defendants where reasonable negotiations are not productive.bonds; however, the costs
ITT provides an indemnity to U.S. Silica Company (USS) 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
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past several years, the majority of the silica cases involving PGS have been dismissed without payment. Currently there are approximately 3,000 cases pending against PGS. The Company expects that the majority of the remaining casesassociated with this matter, if any, will also be dismissed. In addition, USS is currently filing insurance claims directly with our insurer, and that insurer has been paying the claims. We will continue to seek past defense costs for these cases from our insurers. 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 expected insurance recoveries, are shared with certain previously wholly-owned subsidiaries.
On March 27, 2007, we reached a settlement relating to an investigation of our ITT Night Vision Division’s complianceExelis and Xylem in accordance with the International TrafficDistribution Agreement. See Note 4, “Discontinued Operations,” for further information about the Distribution Agreement and shared liabilities. As of December 31, 2011, no amounts were accrued for this matter as the company is in Arms Regulations (ITAR) pursuant to which we pled guilty to two violations based on the exportearly stages of defense articles without a license andevaluating the omission of material facts in required export reports. We were assessed a total of $50 in fines, forfeitures and penalties. 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. We were also assessed a deferred prosecution monetary penalty of $50 which is being reduced for monies spent, during the five-year period following the date of the Plea Agreement, to accelerate and further the development and fielding of advanced night vision technology.claim. 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. During 2007NOTE 21 Guarantees, Indemnities and 2008, the Company also received notice of four shareholder derivative actions each filed in the U.S. District Court for the Southern District of New York. On July 10, 2010, the Court granted the Defendants’ Motion to Terminate the proceedings. The matter is now concluded.NOTE 2021
Guarantees, Indemnities and Warranties
As part of the Distribution, ITT provided certain indemnifications and cross-indemnifications among ITT, Exelis and Xylem, subject to limited exceptions with respect to certain employee claims. The indemnifications address a variety of subjects, including asserted and unasserted product liability matters (e.g., asbestos claims, product warranties) which relate to products manufactured, repaired and/or sold prior to the Distribution Date. The indemnifications are indefinite. The indemnification associated with pending and future asbestos claims does not expire. In addition, ITT, Exelis and Xylem agreed to certain cross-indemnifications with respect to other liabilities and obligations. ITT expects Exelis and Xylem to fully perform under the terms of the Distribution Agreement and therefore has not recorded a liability for matters for which we have been indemnified. In addition, we are not aware of any claims or other circumstances that would give rise to material payments to Xylem or Exelis under the indemnity provided by ITT.
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 these indemnifications and are not aware of any claims or other information that would give rise to material payments under such indemnities.
We have a number$192 of guarantees, letters of credit and similar arrangements outstanding at December 31, 2010, the substantial majority of which pertain2011 primarily pertaining to ourcommercial or performance under long-term sales contracts.guarantees and insurance matters. We didhave not haverecorded any recorded loss contingencies under these performance guarantees, letters of credit and similar arrangements as of December 31, 2010 and 20092011 as the likelihood of ITT nonperformance by ITT or ITT’s subsidiaries is considered remote. We also haveFrom time to time, we may provide certain third-party guarantees that may be affected by various conditions and external factors, some of which could require that payments be made under such guarantees. We do not consider the maximum exposure or current recorded liabilities under our third-party guarantees to be material either individually or in the aggregate. We do not believe such payments would have a material adverse impact on theour financial position, results of operations or cash flows on a consolidated basis.
In December 2007, we entered into a sale leaseback agreement for our corporate aircraft, with the aircraft leased to ITT under a five-year operating lease. We havelease and ITT provided a residual value guarantee to the lessor for the future value of the aircraft with a maximum paymentaircraft. During the second quarter of $42. At expiration of the lease, however, if the fair value of2011, we purchased the aircraft is less thanfrom the lessor for $50, payment under the price stated in the sale leaseback agreement, and as such the sale leaseback agreement and the associated residual value guarantee would be equal towere terminated. In connection with this transaction, we settled a previously recorded $22 residual value guarantee and recognized an additional charge of $3, presented within G&A expenses, as the difference betweenpurchase price exceeded the fair value of the aircraft at expirationthe date of termination of the leasesale leaseback agreement. One of the corporate aircraft was sold for a gain of $3 and $50, provided that such payment shall not exceed $42. Atthe other aircraft was distributed to Exelis, and accordingly, at December 31, 2010,2011, ITT no longer owned any corporate aircraft.
In December 2011, the projected fair valueFlagler County Board of Commissioners approved the termination of certain construction obligations associated with a 1984 Development Order for Development of Regional Impact (“DRI”) known as Hammock Dunes, Florida. On February 1, 2012, the Flagler County Board of Commissioners released ITT from further material obligations related to the DRI and cancelled the $10 bond issued in its favor by ITT to secure the construction obligations under the DRI. As a result of the aircraft at expiration ofapproval to terminate the lease is estimated to be $22 less thanconstruction obligation in December 2011, the guaranteed amount. As this estimated loss exceeds the $5 gain we realized and deferred from the sale of the aircraft as a loss contingency, we haveCompany released its $10 previously recorded an additional accrual of $17 during 2010 in our Consolidated Financial Statements.contingent liability for these construction obligations.
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ITT warrants numerous products, the terms of which vary widely. In general, ITT warrants its products against defect and specific non-performance. In the certain markets, such as automotive, businesses,aerospace and rail, 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.Therecall. The table included
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below provides changes in the product warranty accrual for December 31, 20102011 and 2009.
| | | | | | | | | |
| | | 2010 | | | 2009 | |
| Warranty accrual – 1/1 | | $ | 67 | | | $ | 57 | |
| Warranty expense | | | 43 | | | | 38 | |
| Payments | | | (39 | ) | | | (29 | ) |
| Other | | | 1 | | | | 1 | |
| | | | | | | | | |
| Warranty accrual – 12/31 | | $ | 72 | | | $ | 67 | |
| | | | | | | | | |
2010. | | | | | | | | | | |
| | | 2011 | | 2010 |
Warranty accrual – January 1 | | | $ | 27 | | | | $ | 24 | |
Warranty expense | | | | 8 | | | | | 13 | |
Payments | | | | (9 | ) | | | | (10 | ) |
| | | | | | | | | | | |
Warranty accrual – December 31 | | | $ | 26 | | | | $ | 27 | |
| | | | | | | | | | | |
NOTE 21 Business22 Segment InformationNOTE 22
Segment Information
In connection with the Distribution, we reorganized our businesses into four reportable segments: Industrial Process, Motion Technologies, ICS, and Control Technologies. The Company’s businessreportable segments are reportedpresented on the same basis usedin which
management internally for evaluatingevaluates performance and allocates resources. All segment information has been reclassified based on our current segment structure.
Industrial Process manufactures engineered fluid process equipment serving a diversified mix of customers in global infrastructure industries such as oil & gas, mining, power generation, chemical and other process markets and is an aftermarket service provider.
Motion Technologies manufactures brake pad, shock absorber and damping technologies for allocating resources. Our three reporting segmentsthe global automotive, truck, trailer and public bus and rail transportation markets.
Interconnect Solutions manufactures a wide range of highly specialized connector products that make it possible to transfer signal and power in various electronic devices that are referred to as: Defense Electronicsutilized in aerospace, industrial, defense and oil & Services (Defense segment), Fluid Technology (Fluid segment),gas markets.
Control Technologies manufactures specialized equipment, including actuation, valves, switches, vibration isolation, custom-energy absorption, and Motion & Flow Control (Motion & Flow segment). regulators for the aerospace, military and industrial markets.
Corporate and Other consists of corporate office expenses including compensation, benefits, occupancy, depreciation, and other administrative costs, as well as charges 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, company owned life insurance, deferred tax assets, insurance receivables and 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. Products include tactical communications equipment, electronic warfare and force protection equipment, radar systems, integrated structures equipment and imaging and sensor equipment, which includes night vision goggles, as well as weather, location, surveillance and other related technologies. Services include air traffic management, information and cyber solutions, large-scale systems engineering and integration and defense technologies. The U.S. Government accounted for 86% of Defense segment revenue.
Fluid –Our Fluid segment is a provider of water transport and wastewater treatment systems, pumps and related technologies, and other water and fluid control products with residential, commercial, and industrial applications.
Motion & Flow –Our Motion & Flow segment comprises a group of businesses providing products and services for the areas of transportation, defense, aerospace, industrial, computer, telecommunications, medical, marine, and food & 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2010 | | | 2009 | | | 2008 | |
| | | | PRODUCT
| | | SERVICE
| | | TOTAL
| | | PRODUCT
| | | SERVICE
| | | TOTAL
| | | PRODUCT
| | | SERVICE
| | | TOTAL
| |
| | | | REVENUE | | | REVENUE | | | REVENUE | | | REVENUE | | | REVENUE | | | REVENUE | | | REVENUE | | | REVENUE | | | REVENUE | |
| Defense | | | $ | 3,602 | | | $ | 2,295 | | | $ | 5,897 | | | $ | 3,788 | | | $ | 2,279 | | | $ | 6,067 | | | $ | 3,925 | | | $ | 2,139 | | | $ | 6,064 | |
| Fluid | | | | 3,475 | | | | 195 | | | | 3,670 | | | | 3,220 | | | | 143 | | | | 3,363 | | | | 3,693 | | | | 148 | | | | 3,841 | |
| Motion & Flow | | | | 1,430 | | | | 11 | | | | 1,441 | | | | 1,245 | | | | 8 | | | | 1,253 | | | | 1,575 | | | | 8 | | | | 1,583 | |
| Eliminations | | | | (13 | ) | | | — | | | | (13 | ) | | | (9 | ) | | | — | | | | (9 | ) | | | (12 | ) | | | — | | | | (12 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | $ | 8,494 | | | $ | 2,501 | | | $ | 10,995 | | | $ | 8,244 | | | $ | 2,430 | | | $ | 10,674 | | | $ | 9,181 | | | $ | 2,295 | | | $ | 11,476 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | OPERATING INCOME | | | OPERATING MARGIN | |
| | | | 2010 | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | | 2008 | |
| Defense | | | $ | 752 | | | $ | 761 | | | $ | 715 | | | | 12.8 | % | | | 12.5 | % | | | 11.8 | % |
| Fluid | | | | 479 | | | | 393 | | | | 469 | | | | 13.1 | % | | | 11.7 | % | | | 12.2 | % |
| Motion & Flow | | | | 179 | | | | 118 | | | | 192 | | | | 12.4 | % | | | 9.4 | % | | | 12.1 | % |
| Corporate and Other | | | | (510 | ) | | | (378 | ) | | | (178 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | $ | 900 | | | $ | 894 | | | $ | 1,198 | | | | 8.2 | % | | | 8.4 | % | | | 10.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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equipment. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | REVENUE | | OPERATING INCOME (LOSS) | | OPERATING MARGIN |
| | | 2011 | | 2010 | | 2009 | | 2011 | | 2010 | | 2009 | | 2011 | | 2010 | | 2009 |
Industrial Process | | | $ | 767 | | | | $ | 694 | | | | $ | 719 | | | | $ | 91 | | | | $ | 79 | | | | $ | 72 | | | | | 11.9 | % | | | | 11.4 | % | | | | 10.0 | % |
Motion Technologies | | | | 634 | | | | | 548 | | | | | 491 | | | | | 85 | | | | | 85 | | | | | 48 | | | | | 13.4 | % | | | | 15.5 | % | | | | 9.8 | % |
Interconnect Solutions | | | | 418 | | | | | 413 | | | | | 341 | | | | | 38 | | | | | 37 | | | | | 19 | | | | | 9.1 | % | | | | 9.0 | % | | | | 5.6 | % |
Control Technologies | | | | 318 | | | | | 275 | | | | | 243 | | | | | 55 | | | | | 29 | | | | | 32 | | | | | 17.3 | % | | | | 10.5 | % | | | | 13.2 | % |
Asbestos-related costs, net | | | | – | | | | | – | | | | | – | | | | | (100 | ) | | | | (385 | ) | | | | (238 | ) | | | | – | | | | | – | | | | | – | |
Transformation costs | | | | – | | | | | – | | | | | – | | | | | (396 | ) | | | | – | | | | | – | | | | | – | | | | | – | | | | | – | |
Eliminations / Corporate costs and Other | | | | (18 | ) | | | | (22 | ) | | | | (24 | ) | | | | (20 | ) | | | | (29 | ) | | | | (54 | ) | | | | – | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | $ | 2,119 | | | | $ | 1,908 | | | | $ | 1,770 | | | | $ | (247 | ) | | | $ | (184 | ) | | | $ | (121 | ) | | | | (11.7 | )% | | | | (9.6 | )% | | | | (6.8 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | PLANT, PROPERTY
| | | | | | | | | | | | DEPRECIATION AND
| |
| | | | TOTAL ASSETS | | | & EQUIPMENT, NET | | | CAPITAL EXPENDITURES | | | AMORTIZATION | |
| | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | | 2008 | |
| Defense | | | $ | 4,149 | | | $ | 4,153 | | | $ | 434 | | | $ | 402 | | | $ | 107 | | | $ | 115 | | | $ | 87 | | | $ | 134 | | | $ | 154 | | | $ | 147 | |
| Fluid | | | | 4,077 | | | | 2,930 | | | | 518 | | | | 393 | | | | 109 | | | | 74 | | | | 81 | | | | 100 | | | | 73 | | | | 69 | |
| Motion & Flow | | | | 1,350 | | | | 1,323 | | | | 230 | | | | 235 | | | | 52 | | | | 56 | | | | 64 | | | | 53 | | | | 57 | | | | 56 | |
| Corporate and Other | | | | 2,862 | | | | 2,723 | | | | 23 | | | | 20 | | | | 60 | | | | 26 | | | | 16 | | | | 10 | | | | 5 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | $ | 12,438 | | | $ | 11,129 | | | $ | 1,205 | | | $ | 1,050 | | | $ | 328 | | | $ | 271 | | | $ | 248 | | | $ | 297 | | | $ | 289 | | | $ | 274 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | PLANT, PROPERTY
| |
| | | | REVENUE(a) | | | & EQUIPMENT, NET | |
| Geographic Information | | | 2010 | | | 2009 | | | 2008 | | | 2010 | | | 2009 | |
| United States | | | $ | 7,305 | | | $ | 7,362 | | | $ | 7,779 | | | $ | 739 | | | $ | 603 | |
| Western Europe | | | | 1,970 | | | | 1,814 | | | | 2,098 | | | | 305 | | | | 317 | |
| Asia Pacific | | | | 663 | | | | 577 | | | | 604 | | | | 70 | | | | 65 | |
| Other | | | | 1,057 | | | | 921 | | | | 995 | | | | 91 | | | | 65 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total | | | $ | 10,995 | | | $ | 10,674 | | | $ | 11,476 | | | $ | 1,205 | | | $ | 1,050 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | TOTAL ASSETS | | CAPITAL
EXPENDITURES | | DEPRECIATION AND
AMORTIZATION |
| | | 2011 | | 2010 | | 2011 | | 2010 | | 2009 | | 2011 | | 2010 | | 2009 |
Industrial Process | | | $ | 624 | | | | $ | 529 | | | | $ | 25 | | | | $ | 19 | | | | $ | 13 | | | | $ | 13 | | | | $ | 11 | | | | $ | 10 | |
Motion Technologies | | | | 431 | | | | | 383 | | | | | 33 | | | | | 28 | | | | | 37 | | | | | 27 | | | | | 25 | | | | | 25 | |
Interconnect Solutions | | | | 343 | | | | | 309 | | | | | 17 | | | | | 16 | | | | | 11 | | | | | 10 | | | | | 9 | | | | | 10 | |
Control Technologies | | | | 411 | | | | | 401 | | | | | 6 | | | | | 4 | | | | | 5 | | | | | 13 | | | | | 13 | | | | | 15 | |
Corporate and Other | | | | 1,862 | | | | | 1,671 | | | | | 22 | | | | | 60 | | | | | 26 | | | | | 11 | | | | | 8 | | | | | 5 | |
Discontinued operations | | | | – | | | | | 9,322 | | | | | – | | | | | – | | | | | – | | | | | – | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | $ | 3,671 | | | | $ | 12,615 | | | | $ | 103 | | | | $ | 127 | | | | $ | 92 | | | | $ | 74 | | | | $ | 66 | | | | $ | 65 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | REVENUE(a) | | TOTAL ASSETS | | PLANT, PROPERTY
& EQUIPMENT, NET |
| Geographic Information | | 2011 | | 2010 | | 2009 | | 2011 | | 2010 | | 2011 | | 2010 |
United States | | | $ | 792 | | | | $ | 742 | | | | $ | 710 | | | | $ | 2,321 | | | | $ | 2,247 | | | | $ | 123 | | | | $ | 111 | |
Other developed markets(a)(b) | | | | 728 | | | | | 663 | | | | | 594 | | | | | 941 | | | | | 721 | | | | | 121 | | | | | 115 | |
Emerging markets | | | | 599 | | | | | 503 | | | | | 466 | | | | | 409 | | | | | 325 | | | | | 80 | | | | | 74 | |
Discontinued operations | | | | – | | | | | – | | | | | – | | | | | – | | | | | 9,322 | | | | | – | | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | $ | 2,119 | | | | $ | 1,908 | | | | $ | 1,770 | | | | $ | 3,671 | | | | $ | 12,615 | | | | $ | 324 | | | | $ | 299 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| (a) | Revenue to external customers is attributed to individual regions based upon the destination of product or service delivery. Germany represented 11.0%, 10.7% and 10.6% of total revenues for the years ended December 31, 2011, 2010 and 2009, respectively. |
| (b) | Luxembourg represented 12.6% and 1.9% of total assets, excluding assets of discontinued operations, at December 31, 2011 and 2010, respectively. |
The following table provides revenue by product category, net of intercompany balances.
| | | | | | | | | | | | | | | |
| | | 2011 | | 2010 | | 2009 |
Pumps and complementary products | | | $ | 692 | | | | $ | 633 | | | | $ | 650 | |
Pump support and maintenance services | | | | 67 | | | | | 52 | | | | | 57 | |
Friction products | | | | 524 | | | | | 446 | | | | | 386 | |
Shock absorber equipment | | | | 110 | | | | | 101 | | | | | 104 | |
Connectors equipment | | | | 413 | | | | | 405 | | | | | 335 | |
CT Aerospace products | | | | 193 | | | | | 165 | | | | | 148 | |
CT Industrial products | | | | 120 | | | | | 106 | | | | | 90 | |
| | | | | | | | | | | | | | | | |
Total | | | $ | 2,119 | | | | $ | 1,908 | | | | $ | 1,770 | |
| | | | | | | | | | | | | | | | |
No individual customer accounted for greater than 10% of consolidated ITT revenue during any of the three years presented.
NOTE 23 Immaterial CorrectionsNOTE 23
Immaterial Corrections
During the fourth quarter of 2011, management concluded the previously issued consolidated financial statements required adjustments to reflect certain immaterial corrections. Prior to the distribution of Exelis and Xylem, the Company had evaluated and concluded that the identified amounts were not material to any of its previously issued financial statements. Although management believes the amounts, individually and in the aggregate, were, and continue to be, immaterial to prior periods, management concluded that the prior period corrections to the post-Distribution financial statements are appropriate.
The Company has revised amounts previously reported in the consolidated financial statements to reflect certain adjustments, primarily related to income taxes, cumulative translation adjustments, and other adjustments, related to previously unrecorded immaterial adjustments identified during the preparation of prior years’ financial statements.
| | | | | | | | | | | | | | | |
| | | | 2010 | | | | 2009 | | | 2008 | |
| Defense segment: | | | | | | | | | | | | | | |
| Defense products | | | $ | 3,600 | | | | $ | 3,785 | | | $ | 3,924 | |
| Defense services | | | | 2,295 | | | | | 2,279 | | | | 2,139 | |
| Fluid segment: | | | | | | | | | | | | | | |
| Pumps & complementary products and services | | | | 3,667 | | | | | 3,363 | | | | 3,840 | |
| Motion & Flow segment: | | | | | | | | | | | | | | |
| Automotive and rail equipment | | | | 552 | | | | | 495 | | | | 567 | |
| Connectors equipment | | | | 405 | | | | | 335 | | | | 445 | |
| Aerospace products | | | | 127 | | | | | 117 | | | | 134 | |
| Other products | | | | 349 | | | | | 300 | | | | 427 | |
| | | | | | | | | | | | | | | |
| Total | | | $ | 10,995 | | | | $ | 10,674 | | | $ | 11,476 | |
| | | | | | | | | | | | | | | |
Subsequent Events
On January 12, 2011,
ITT CORPORATION AND SUBSIDIARIES
As a result of these adjustments, basic and diluted earnings per share were adjusted by $0.07 and ($0.16) for 2010 and 2009, respectively, which includes $0.03 and ($0.09) in 2010 and 2009, respectively, related to discontinued operations. The impact of these adjustments are detailed in the Company announced that its Boardtables below.
Income Statement as of Directors had unanimously approved a plan to separate the Company’s businesses into three distinct, publicly traded companies. Following completionDecember 31, 2010
| | | | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, 2010 | | As Previously
Reported with
Reclassification
For Discontinued
Operations (Note 4) | | Adjustments | | As Adjusted
and with
Reclassification
For Discontinued
Operations |
General and administrative expenses | | | $ | 179 | | | | $ | (3 | ) | | | $ | 176 | |
Operating loss | | | | (187 | ) | | | | 3 | | | | | (184 | ) |
Loss from continuing operations before income tax expense | | | | (279 | ) | | | | 3 | | | | | (276 | ) |
Loss from continuing operations | | | | (135 | ) | | | | 3 | | | | | (132 | ) |
Income from discontinued operations | | | | 933 | | | | | 3 | | | | | 936 | |
Net income | | | $ | 798 | | | | $ | 6 | | | | $ | 804 | |
Income Statement as of December 31, 2009
| | | | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, 2009 | | As Previously
Reported with
Reclassification
For Discontinued
Operations (Note 4) | | Adjustments | | As Adjusted
and with
Reclassification
For Discontinued
Operations |
General and administrative expenses | | | $ | 195 | | | | $ | 6 | | | | $ | 201 | |
Operating loss | | | | (115 | ) | | | | (6 | ) | | | | (121 | ) |
Loss from continuing operations before income tax expense | | | | (202 | ) | | | | (6 | ) | | | | (208 | ) |
Income tax expense | | | | (98 | ) | | | | 1 | | | | | (97 | ) |
Loss from continuing operations | | | | (104 | ) | | | | (7 | ) | | | | (111 | ) |
Income from discontinued operations | | | | 748 | | | | | (8 | ) | | | | 740 | |
Net income | | | $ | 644 | | | | $ | (15 | ) | | | $ | 629 | |
107
ITT CORPORATION AND SUBSIDIARIES
Balance Sheet at December 31, 2010
| | | | | | | | | | | | | | | |
| DECEMBER 31, 2010 | | As Previously
Reported with
Reclassification
For Discontinued
Operations (Note 4) | | Adjustments | | As Adjusted
and with
Reclassification
For Discontinued
Operations |
Assets | | | | | | | | | | | | | | | |
Current assets of discontinued operations | | | $ | 3,459 | | | | $ | (2 | ) | | | $ | 3,457 | |
Total current assets | | | | 4,426 | | | | | (2 | ) | | | | 4,424 | |
Deferred income taxes (noncurrent) | | | | 339 | | | | | (19 | ) | | | | 320 | |
Noncurrent assets of discontinued operations | | | | 5,871 | | | | | (6 | ) | | | | 5,865 | |
Total non-current assets | | | | 8,216 | | | | | (25 | ) | | | | 8,191 | |
Total assets | | | | 12,642 | | | | | (27 | ) | | | | 12,615 | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | |
Accrued liabilities | | | | 408 | | | | | (11 | ) | | | | 397 | |
Current liabilities of discontinued operations | | | | 1,883 | | | | | 9 | | | | | 1,892 | |
Total current liabilities | | | | 2,743 | | | | | (2 | ) | | | | 2,741 | |
Other non-current liabilities | | | | 322 | | | | | 3 | | | | | 325 | |
Noncurrent liabilities of discontinued operations | | | | 1,902 | | | | | 15 | | | | | 1,917 | |
Total noncurrent liabilities | | | | 5,395 | | | | | 18 | | | | | 5,413 | |
Total liabilities | | | | 8,138 | | | | | 16 | | | | | 8,154 | |
Shareholders’ Equity: | | | | | | | | | | | | | | | |
Retained earnings | | | | 5,499 | | | | | (58 | ) | | | | 5,441 | |
Postretirement benefit plans | | | | (1,360 | ) | | | | 1 | | | | | (1,359 | ) |
Cumulative translation adjustments | | | | 262 | | | | | 14 | | | | | 276 | |
Total shareholders’ equity | | | | 4,504 | | | | | (43 | ) | | | | 4,461 | |
Total liabilities and shareholders’ equity | | | $ | 12,642 | | | | $ | (27 | ) | | | $ | 12,615 | |
| | | | | | | | | | | | | | | | |
Certain of the transaction, ITT will continueadjustments described above, or portions thereof, relate to tradeperiods prior to 2010. The cumulative effect of those adjustments to retained earnings as of January 1, 2009 and December 31, 2009 is reflected as a change of $51 and $66, respectively.
Cash Flows
The adjustments had no effect on the New York Stock Exchange as an industrial company that supplies highly engineered solutions in the aerospace, transportation, energy and industrial markets. Under the plan, ITT shareholders will own shares in all three corporations following the completioneach of the transaction. The transaction is anticipated to be completed by the end of 2011.
Under the plan, ITT would execute tax-free spinoffs to shareholders of its water-related businesses and its Defense & Information Solutions segment. The water-related business will include the Water & Wastewater division and the Residential & Commercial Water division, as well as the Flow Control division that is currently reportedsubtotals within the Motion & Flow Control segment. The Industrial Process division, which is currently reported within the Fluid segment, will continue to operate as a subsidiaryConsolidated Statement of the new ITT Corporation.
92
Cash Flows.
SUPPLEMENTAL FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2010 QUARTERS | | | 2009 QUARTERS(a) | |
| | | | FIRST(a) | | | SECOND | | | THIRD | | | FOURTH | | | FIRST | | | SECOND | | | THIRD | | | FOURTH | |
| Revenue | | | $ | 2,578 | | | $ | 2,739 | | | $ | 2,643 | | | $ | 3,035 | | | $ | 2,506 | | | $ | 2,719 | | | $ | 2,640 | | | $ | 2,809 | |
| Gross profit | | | | 718 | | | | 781 | | | | 768 | | | | 908 | | | | 660 | | | | 769 | | | | 760 | | | | 835 | |
| Income from continuing operations(b) | | | | 144 | | | | 226 | | | | 12 | | | | 272 | | | | 184 | | | | 200 | | | | 64 | | | | 193 | |
| Net income | | | | 146 | | | | 238 | | | | 145 | | | | 269 | | | | 185 | | | | 201 | | | | 59 | | | | 199 | |
| Basic earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | | $ | 0.78 | | | $ | 1.23 | | | $ | 0.07 | | | $ | 1.47 | | | $ | 1.01 | | | $ | 1.09 | | | $ | 0.35 | | | $ | 1.06 | |
| Net income | | | $ | 0.80 | | | $ | 1.29 | | | $ | 0.79 | | | $ | 1.45 | | | $ | 1.01 | | | $ | 1.10 | | | $ | 0.32 | | | $ | 1.09 | |
| Diluted earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | | $ | 0.78 | | | $ | 1.22 | | | $ | 0.07 | | | $ | 1.46 | | | $ | 1.01 | | | $ | 1.09 | | | $ | 0.35 | | | $ | 1.05 | |
| Net income | | | $ | 0.79 | | | $ | 1.28 | | | $ | 0.78 | | | $ | 1.44 | | | $ | 1.01 | | | $ | 1.10 | | | $ | 0.32 | | | $ | 1.08 | |
| Common stock price per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| High | | | $ | 55.61 | | | $ | 57.99 | | | $ | 50.79 | | | $ | 53.24 | | | $ | 51.42 | | | $ | 46.91 | | | $ | 52.71 | | | $ | 56.95 | |
| Low | | | $ | 47.41 | | | $ | 44.17 | | | $ | 42.05 | | | $ | 45.06 | | | $ | 31.94 | | | $ | 37.26 | | | $ | 41.15 | | | $ | 48.43 | |
| Close | | | $ | 53.61 | | | $ | 44.92 | | | $ | 46.83 | | | $ | 52.11 | | | $ | 38.47 | | | $ | 44.50 | | | $ | 52.15 | | | $ | 49.74 | |
| Dividends per share | | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.2125 | | | $ | 0.2125 | | | $ | 0.2125 | | | $ | 0.2125 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(a) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 QUARTERS | | 2010 QUARTERS |
| | | FIRST | | SECOND | | THIRD | | FOURTH | | FIRST | | SECOND | | THIRD | | FOURTH |
Revenue | | | $ | 533 | | | | $ | 553 | | | | $ | 515 | | | | $ | 518 | | | | $ | 501 | | | | $ | 464 | | | | $ | 473 | | | | $ | 470 | |
Gross profit | | | | 168 | | | | | 176 | | | | | 155 | | | | | 156 | | | | | 157 | | | | | 147 | | | | | 150 | | | | | 153 | |
(Loss) income from continuing operations(a)(b) | | | | (22 | ) | | | | 19 | | | | | (29 | ) | | | | (546 | ) | | | | — | | | | | 11 | | | | | (150 | ) | | | | 7 | |
Income from discontinued operations | | | | 143 | | | | | 151 | | | | | 138 | | | | | 16 | | | | | 140 | | | | | 226 | | | | | 303 | | | | | 267 | |
Net income(b) | | | | 121 | | | | | 170 | | | | | 109 | | | | | (530 | ) | | | | 140 | | | | | 237 | | | | | 153 | | | | | 274 | |
Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | | $ | (0.23 | ) | | | $ | 0.20 | | | | $ | (0.32 | ) | | | $ | (5.86 | ) | | | $ | — | | | | $ | 0.12 | | | | $ | (1.63 | ) | | | $ | 0.07 | |
Discontinued operations | | | | 1.54 | | | | | 1.63 | | | | | 1.49 | | | | | 0.18 | | | | | 1.52 | | | | | 2.46 | | | | | 3.28 | | | | | 2.91 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | $ | 1.31 | | | | $ | 1.83 | | | | $ | 1.17 | | | | $ | (5.68 | ) | | | $ | 1.52 | | | | $ | 2.58 | | | | $ | 1.65 | | | | $ | 2.98 | |
Diluted earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | | $ | (0.23 | ) | | | $ | 0.20 | | | | $ | (0.32 | ) | | | $ | (5.86 | ) | | | $ | – | | | | $ | 0.12 | | | | $ | (1.63 | ) | | | $ | 0.07 | |
Discontinued operations | | | | 1.54 | | | | | 1.62 | | | | | 1.49 | | | | | 0.18 | | | | | 1.51 | | | | | 2.44 | | | | | 3.28 | | | | | 2.89 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | $ | 1.31 | | | | $ | 1.82 | | | | $ | 1.17 | | | | $ | (5.68 | ) | | | $ | 1.51 | | | | $ | 2.56 | | | | $ | 1.65 | | | | $ | 2.96 | |
Common stock price per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
High | | | $ | 128.00 | | | | $ | 122.08 | | | | $ | 120.26 | | | | $ | 94.98 | | | | $ | 111.22 | | | | $ | 115.98 | | | | $ | 101.58 | | | | $ | 106.48 | |
Low | | | $ | 103.60 | | | | $ | 108.80 | | | | $ | 80.50 | | | | $ | 16.67 | | | | $ | 94.82 | | | | $ | 88.34 | | | | $ | 84.10 | | | | $ | 90.12 | |
Close | | | $ | 120.10 | | | | $ | 117.86 | | | | $ | 84.00 | | | | $ | 19.33 | | | | $ | 107.22 | | | | $ | 89.84 | | | | $ | 93.66 | | | | $ | 104.22 | |
Dividends per share | | | $ | 0.50 | | | | $ | 0.50 | | | | $ | 0.50 | | | | $ | 0.091 | | | | $ | 0.50 | | | | $ | 0.50 | | | | $ | 0.50 | | | | $ | 0.50 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
All per share amounts presented give effect to the 1:2 Reverse Stock Split completed on October 31, 2011. All amounts reflect the correction of certain immaterial adjustments as described in Note 23, “Immaterial Corrections.”
Results from continuing operations presented in the table above, including revenue, gross profit and income from continuing operations have been restated to reflect the Distribution of Exelis and Xylem and the 2010 sale of CAS Inc. as a discontinued operation.
| |
(b)(a) | Third quarter 20102011 and 20092010 results include a $205$63 and $131$212 net after-tax charge to income from continuing operations, respectively, primarily associated with the reassessment and initial 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.respectively. See Note 19,20, “Commitments and Contingencies” for further information. |
| (b) | |
Note: | Earnings per share is computed usingThe quarterly periods of 2011 have been recast to reflect certain Transformation costs as discontinued operations following the weighted-average number of shares outstanding during that quarter, while earnings per share for the fiscal year is computed using the weighted-average number of shares outstanding during the year. Thus, the sumcompletion of the earnings per share for eachDistribution. Transformation costs, net of tax are included in the four quarters may not equal earnings per share for the fiscal year.quarterly results as follows: |
93
| | | | | | | | | | | | | | | | | | | | |
| | | 2011 QUARTERS |
Transformation Costs, net of tax | | | | FIRST | | | | | SECOND | | | | | THIRD | | | | | FOURTH | |
| | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | | $ | 40 | | | | $ | 3 | | | | $ | 16 | | | | $ | 198 | |
Discontinued operations | | | | 23 | | | | | 43 | | | | | 77 | | | | | 30 | |
| | | | | | | | | | | | | | | | | | | | | |
Total Transformation costs | | | | 63 | | | | | 46 | | | | | 93 | | | | | 228 | |
| | | | | | | | | | | | | | | | | | | | | |
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ITT Corporation
(Registrant)
| | |
ITT Corporation (Registrant) |
| |
| By: | | /s/ S/ JANICE M. KLETTNER |
| | Janice M. Klettner Vice President and Chief Accounting Officer (Principal accounting officer) |
Janice M. Klettner
Vice President and Chief Accounting Officer
(Principal accounting officer)
29, 2012
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/ DENISE L. RAMOS Denise L. Ramos (Principal executive officer) | | | | |
/s/ Steven R. Loranger
Steven R. Loranger (Principal executive officer) | | Chairman, President and
Chief Executive Officer and President and and Director | | February 24, 201129, 2012 |
| | |
/S/ THOMAS M. SCALERA Thomas M. Scalera (Principal financial officer) | | | | |
/s/ Denise L. Ramos
Denise L. Ramos (Principal financial officer) | | Senior Vice President and
Chief Financial Officer | | February 24, 201129, 2012 |
| | | | |
/s/ S/ JANICE M. KLETTNER Janice M. Klettner
Janice M. Klettner (Principal(Principal accounting officer) | | Vice President and
Chief Accounting Officer | | February 24, 201129, 2012 |
| | |
/S/ ORLANDO D. ASHFORD Orlando D. Ashford | | | | |
/s/ Curtis J. Crawford
Curtis J. Crawford | | Director | | February 24, 201129, 2012 |
| | |
/S/ G. PETER D’ALOIA G. Peter D’Aloia | | Director | | February 29, 2012 |
| | |
/s/ S/ DONALD DEFOSSET, JR. Donald DeFosset, Jr. | | Director | | February 29, 2012 |
| | |
/S/ CHRISTINA A. GOLD Christina A. Gold
Christina A. Gold | | Director | | February 24, 201129, 2012 |
| | |
/S/ PAUL J. KERN Paul J. Kern | | | | |
/s/ Ralph F. Hake
Ralph F. Hake | | Director | | February 24, 201129, 2012 |
| | |
/S/ FRANK T. MACINNIS Frank T. MacInnis | | | | |
/s/ John J. Hamre
John J. Hamre | | Director | | February 24, 201129, 2012 |
| | |
/S/ LINDA S. SANFORD Linda S. Sanford | | | | |
/s/ Paul J. Kern
Paul J. Kern | | Director | | February 24, 201129, 2012 |
| | |
/S/ MARKOS I. TAMBAKERAS Markos I. Tambakeras | | | | |
/s/ Frank T. MacInnis
Frank T. MacInnis | | Director | | February 24, 201129, 2012 |
II-2
EXHIBIT INDEX
| | | | | | |
EXHIBIT NUMBER | | | | |
/s/ Surya N. Mohapatra
Surya N. Mohapatra | | Director | | February 24, 2011 |
| | | | |
/s/ Linda S. Sanford
Linda S. Sanford | | Director | | February 24, 2011 |
| | | | |
/s/ Markos I. Tambakeras
Markos I. Tambakeras | | Director | | February 24, 2011 |
II-2
EXHIBIT INDEX
| | | | | | |
EXHIBIT
| | | | |
NUMBER | | DESCRIPTION | | LOCATION |
|
| |
| | (33.1 | ) | | (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). |
| | |
| (3.2 | ) | | | | (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. |
| | (103.3 | ) | | Material contractsAmended and Restated By-laws of ITT | | Incorporated by reference to Exhibit 3.1 of ITT Corporation’s Form 8-K Current Report dated October 5, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| | (3.4 | ) | | Articles of Amendment of the Articles of Incorporation of ITT Corporation | | Incorporated by reference to Exhibit 3.1 of ITT Corporation’s Form 8-K Current Report dated October 31, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (4.1 | ) | | Indenture, dated as of September 20, 2011, between Exelis Inc., ITT Corporation, as guarantor, and Union Bank, N.A., as trustee | | Incorporated by reference to Exhibit 4.1 of ITT Corporation’s Form 8-K Current Report dated September 21, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (4.2 | ) | | Indenture, dated as of September 20, 2011, between Xylem Inc., ITT Corporation, as guarantor, and Union Bank, N.A., as trustee | | Incorporated by reference to Exhibit 4.2 of ITT Corporation’s Form 8-K Current Report dated September 21, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (4.3 | ) | | Form of Exelis Inc. 4.250% Senior Notes due 2016 | | Incorporated by reference to Exhibit 4.3 of ITT Corporation’s Form 8-K Current Report dated September 21, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (4.4 | ) | | Form of Exelis Inc. 4.250% Senior Notes due 2021 | | Incorporated by reference to Exhibit 4.4 of ITT Corporation’s Form 8-K Current Report dated September 21, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (4.5 | ) | | Form of Exelis Inc. 4.250% Senior Notes due 2016 | | Incorporated by reference to Exhibit 4.5 of ITT Corporation’s Form 8-K Current Report dated September 21, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (4.6 | ) | | Form of Exelis Inc. 4.250% Senior Notes due 2021 | | Incorporated by reference to Exhibit 4.6 of ITT Corporation’s Form 8-K Current Report dated September 21, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (4.7 | ) | | Registration Rights Agreement, dated as of September 20, 2011, between Exelis Inc., ITT Corporation and Barclays Capital Inc., Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the Initial Purchases | | Incorporated by reference to Exhibit 4.7 of ITT Corporation’s Form 8-K Current Report dated September 21, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (4.8 | ) | | Registration Rights Agreement, dated as of September 20, 2011, between Xylem Inc., ITT Corporation and J.P. Morgan Securities LLC, RBS Securities Inc. and Wells Fargo Securities, LLC., as representatives of the Initial Purchasers. | | Incorporated by reference to Exhibit 4.8 of ITT Corporation’s Form 8-K Current Report dated September 21, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.01 | ) | | Distribution Agreement, dated as of October 25, 2011, among ITT Corporation, Xylem Inc. and Exelis Inc. | | Incorporated by reference to Exhibit 10.1 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.02 | ) | | Benefits and Compensation Matters Agreement, dated as of October 25, 2011, among ITT Corporation, Xylem Inc. and Exelis Inc. | | Incorporated by reference to Exhibit 10.2 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.03 | ) | | Tax Matters Agreement, dated as of October 25, 2011, among ITT Corporation, Xylem Inc. and Exelis Inc. | | Incorporated by reference to Exhibit 10.3 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.04 | ) | | Master Transition Services Agreement, dated as of October 25, 2011, among ITT Corporation, Xylem Inc. and Exelis Inc. | | Incorporated by reference to Exhibit 10.4 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.05 | ) | | ITT Transitional Trademark License Agreement – Exelis, dated as of October 25, 2011, between ITT Manufacturing Enterprises LLC and Exelis Inc. | | Incorporated by reference to Exhibit 10.5 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.06 | ) | | Master Lease Agreement and Master Sublease Agreement, dated as of October 25, 2011 and September 30, 2011, respectively | | Incorporated by reference to Exhibit 10.6 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2011 (CIK No. 216228, File No. 1-5672). |
II-3
| | | | | | |
EXHIBIT NUMBER | | | DESCRIPTION | | LOCATION |
| | |
| (10.07 | ) | | Four-Year Competitive Advance and Revolving Credit Facility Agreement, dated as of October 25, 2011 among ITT Corporation and Other Parties Signatory Thereto | | Incorporated by reference to Exhibit 10.7 of ITT Corporation’s Form 10-Q for the quarter ended September 30, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.08 | )* | | Steve Loranger Resignation Agreement | | Incorporated by reference to Exhibit 10.1 of ITT Corporation’s Form 8-K dated October 14, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.09 | )* | | 2011 Omnibus Incentive Plan | | Incorporated by reference to Exhibit 4.3 of ITT Corporation’s Registration Statement on Form S-8 as filed on October 28, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.10 | )* | | ITT Corporation Retirement Savings Plan for Salaried Employees (effective October 31, 2011) | | Incorporated by reference to Exhibit 4.4 of ITT Corporation’s Registration Statement on Form S-8 as filed on October 28, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.11 | )* | | ITT Deferred Compensation Plan | | Incorporated by reference to Exhibit 4.5 of ITT Corporation’s Registration Statement on Form S-8 as filed on October 28, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.12 | )* | | ITT Corporation Form of Non-Qualified Stock Option Agreement (Band A Employees) | | Incorporated by reference to Exhibit 10.01 of ITT Corporation’s Form 10-Q for the quarter ended March 31, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.13 | )* | | ITT Corporation Form of Non-Qualified Stock Option Agreement (Non-Band A Employees) | | Incorporated by reference to Exhibit 10.02 of ITT Corporation’s Form 10-Q for the quarter ended March 31, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.14 | )* | | ITT Corporation Form of Restricted Stock Award Agreement | | Incorporated by reference to Exhibit 10.03 of ITT Corporation’s Form 10-Q for the quarter ended March 31, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.15 | )* | | ITT Corporation Form TSR Award Agreement | | Incorporated by reference to Exhibit 10.04 of ITT Corporation’s Form 10-Q for the quarter ended March 31, 2011 (CIK No. 216228, File No. 1-5672). |
| | |
| (10.16 | )* | | 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). |
| | |
| | (10.310.17 | )* | | 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). |
| | |
| | (10.410.18 | )* | | 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). |
| | |
| | (10.510.19 | )* | | 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). |
| | |
| | (10.610.20 | )* | | 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). |
| | |
| | (10.710.21 | )* | | 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). |
II-4
| | | | | | |
EXHIBIT NUMBER | | | DESCRIPTION | | LOCATION |
| | |
| | (10.810.22 | )* | | 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). |
| | |
| | (10.910.23 | )* | | 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). |
| | |
| | (10.1010.24 | )* | | 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). |
| | |
| | (10.1110.25 | )* | | 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). |
| | |
| | (10.1210.26 | )* | | 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). |
II-3
| | | | | | |
EXHIBIT
| | | | |
NUMBER | | DESCRIPTION | | LOCATION |
|
|
| | (10.1310.27 | )* | | 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). |
| | |
| | (10.1410.28 | )* | | 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). |
| | |
| | (10.1510.29 | )* | | 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). |
| | |
| | (10.1610.30 | )* | | 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). |
| | |
| | (10.1710.31 | )* | | 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). |
| | |
| | (10.1810.32 | )* | | 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). |
| | |
| | (10.1910.33 | ) | | 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). |
| | |
| | (10.2810.34 | )* | | 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). |
| | |
| | (10.2910.35 | )* | | 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). |
| | |
| | (10.3010.36 | ) | | Amended and Restated364-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). |
II-5
| | | | | | |
EXHIBIT NUMBER | | | DESCRIPTION | | LOCATION |
| | |
| | (10.3210.37 | )* | | 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). |
| | |
| | (10.3310.38 | ) | | 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). |
| | |
| | (10.3410.39 | )* | | 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). |
| | |
| | (10.3510.40 | )* | | 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). |
| | |
| | (10.3610.41 | )* | | 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). |
| | |
| | (10.3710.42 | ) | | 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). |
| | |
| | (10.3810.43 | ) | | 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). |
| | |
| | (10.3910.44 | )* | | 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). |
II-4
| | | | | | |
EXHIBIT
| | | | |
NUMBER | | DESCRIPTION | | LOCATION |
|
|
| | (10.4110.45 | ) | | 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). |
| | |
| | (10.4210.46 | ) | | 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). |
| | |
| | (10.4310.47 | ) | | 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). |
| | |
| | (10.4410.48 | ) | | 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). |
| | |
| | (10.4510.49 | ) | | 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). |
| | |
| | (10.4610.50 | ) | | 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). |
| | |
| | (10.4710.51 | ) | | 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). |
| | |
| | (10.4810.52 | ) | | 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). |
| | |
| | (10.4910.53 | ) | | 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). |
II-6
| | | | | | |
EXHIBIT NUMBER | | | DESCRIPTION | | LOCATION |
| | |
| | (10.5010.54 | ) | | 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). |
| | |
| | (10.5110.55 | ) | | 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). |
| | |
| | (10.5210.56 | ) | | 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). |
| | |
| | (10.5310.57 | ) | | 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). |
| | |
| | (10.5410.58 | ) | | 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). |
| | |
| | (10.5510.59 | )* | | 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). |
| | |
| | (10.5610.60 | )* | | 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). |
| | |
| | (10.5710.61 | )* | | 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). |
| | |
| (10.62 | )* | | Employment Agreement dated as of October 4, 2011 and effective as of October 31, 2011 between ITT Corporation and Denise L. Ramos. | | Incorporated by reference to Exhibit 10.1 of ITT Corporation’s Form 8-K/A dated October 17, 2011 (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. |
II-5
| | | | | | |
EXHIBIT
| | | | |
NUMBER | | DESCRIPTION | | LOCATION |
|
|
| | (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 | | NoneNone. |
| | |
| | (31.1 | ) | | Certification pursuant toRule 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 toRule 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-7
| | | | | | |
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. |
| (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, FileNo. 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). |
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| | (101 | ) | | The following materials from ITT Corporation’s Annual Report onForm 10-K for the year ended December 31, 2010,2011, 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 | | Submitted electronically with this report. |
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* | Management compensatory plan |
II-6
* Management compensatory planII-8
