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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
Form 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________________to________________
COMMISSION FILE NUMBER 1-5627
ITT Corporation
Incorporated in the State of Delaware
13-5158950
(I.R.S. Employer
Identification Number)
1330 AVENUE OF THE AMERICAS
New York, NY 10019-5490
(Principal Executive Office)
Telephone Number: (212) 258-1000
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
As of August 7, 1995, there were outstanding 115.8 million shares of common
stock ($1 par value) of the registrant.
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ITT CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION:
ITEM 1 Financial Statements:
Consolidated Income -- Second Quarter and Six Months Ended June 30,
1995 and 1994........................................................ 3
Consolidated Balance Sheet -- June 30, 1995 and December 31, 1994.... 4
Consolidated Cash Flow -- Six Months Ended June 30, 1995 and 1994.... 5
Notes to Consolidated Financial Statements........................... 6
Business Segments.................................................... 9
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Second Quarter and Six Months Ended June 30, 1995 and 1994........... 10
PART II OTHER INFORMATION:
ITEM 4 Submission of Matters to a Vote of Security Holders.................. 15
ITEM 6 Exhibits and Reports on Form 8-K..................................... 15
Signature............................................................ 16
Exhibit Index........................................................ 17
2
3
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
ITEM 1.
The following unaudited financial statements, in the opinion of ITT,
reflect all adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the financial position, the results of
operations and cash flow for the periods presented. For a description of
accounting policies, see notes to financial statements in the 1994 annual report
on Form 10-K.
ITT CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME
(In millions except per share)
SIX MONTHS ENDED
SECOND QUARTER JUNE 30,
----------------- -----------------
1995 1994* 1995 1994*
------ ------ ------ ------
Net Sales............................................... $2,337 $2,036 $4,585 $3,727
Cost of Sales........................................... 2,012 1,714 3,954 3,163
------ ------ ------ ------
325 322 631 564
Selling, General and Administrative Expenses............ 171 161 339 311
Service Charges from Affiliated Companies............... 22 19 44 35
Other Operating (Income) Expense........................ (7) 23 6 37
------ ------ ------ ------
139 119 242 181
Interest Expense........................................ (47) (40) (80) (63)
Interest Income......................................... 12 25 21 49
Miscellaneous Income (Expense), net..................... (30) -- (30) --
------ ------ ------ ------
74 104 153 167
Income Tax Expense...................................... (28) (43) (62) (69)
------ ------ ------ ------
Income from Continuing Operations....................... 46 61 91 98
Discontinued Operations:
Operating Earnings, net of tax of $79, $79, $162 and
$160............................................... 163 197 346 373
Gain on Sale of Finance Operations, net of tax of
$264............................................... 403 -- 403 --
Cumulative Effect of Accounting Changes, net of tax
benefit of $8......................................... -- -- -- (11)
------ ------ ------ ------
Net Income.............................................. $ 612 $ 258 $ 840 $ 460
====== ====== ====== ======
EARNINGS (LOSS) PER SHARE
Income from Continuing Operations
Primary............................................... $ .35 $ .44 $ .69 $ .68
Fully Diluted......................................... $ .35 $ .44 $ .69 $ .69
Discontinued Operations
Primary............................................... $ 5.26 $ 1.67 $ 6.97 $ 3.16
Fully Diluted......................................... $ 4.82 $ 1.53 $ 6.39 $ 2.91
Cumulative Effect of Accounting Changes
Primary............................................... $ -- $ -- $ -- $ (.10)
Fully Diluted......................................... $ -- $ -- $ -- $ (.09)
Net Income
Primary............................................... $ 5.61 $ 2.11 $ 7.66 $ 3.74
Fully Diluted......................................... $ 5.17 $ 1.97 $ 7.08 $ 3.51
Cash Dividends declared per common share................ $ .495 $ .495 $ .99 $ .99
---------------
*Restated to reflect Insurance, Hospitality, Entertainment & Information
Services as "Discontinued Operations".
The accompanying notes to financial statements are an integral part of the above
statement.
3
4
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In millions except for shares and per share)
JUNE
30, DECEMBER 31,
1995 1994*
------- ------------
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 411 $ 322
Receivables, net.................................................. 1,433 1,138
Inventories....................................................... 1,028 990
Other current assets.............................................. 127 80
------- ------------
Total current assets........................................... 2,999 2,530
Plant, Property and Equipment, net.................................. 2,199 2,114
Deferred U.S. Income Taxes.......................................... 145 161
Goodwill, net....................................................... 360 365
Other Assets........................................................ 563 407
Net Assets of Discontinued Operations............................... 7,184 5,458
------- ------------
$13,450 $ 11,035
======= ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts payable.................................................. $ 772 $ 774
Accrued expenses.................................................. 1,228 848
Notes payable and current maturities of long-term debt (including
ESOP of $541 and $--).......................................... 1,502 928
------- ------------
Total current liabilities...................................... 3,502 2,550
Non-U.S. Unfunded Pension........................................... 710 610
U.S. Unfunded Pension and Postretirement Costs...................... 375 388
Long-term Debt (including ESOP of $-- and $562)..................... 871 1,712
Deferred Income Taxes -- Foreign, State and Local................... 79 90
Other Liabilities................................................... 401 226
------- ------------
5,938 5,576
------- ------------
Stockholders Equity --
Cumulative preferred stock........................................ 648 655
Common stock: Authorized 200,000,000 shares, $1 par value,
Outstanding 105,906,840 and 105,706,553........................ 106 106
Deferred compensation -- ESOP..................................... (541) (562)
Cumulative translation adjustments................................ (14) (113)
Unrealized loss on securities, net of tax......................... (149) (1,376)
Retained earnings................................................. 7,462 6,749
------- ------------
7,512 5,459
------- ------------
$13,450 $ 11,035
======= ==========
---------------
*Restated to reflect Insurance, Hospitality, Entertainment & Information
Services as "Discontinued Operations".
The accompanying notes to financial statements are an integral part of the above
statement.
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5
ITT CORPORATION
CONSOLIDATED CASH FLOW
(In millions)
SIX MONTHS ENDED
JUNE 30,
------------------
1995 1994*
-------- -----
OPERATING ACTIVITIES
Net Income.............................................................. $ 840 $ 460
Discontinued Operations:
Operating Earnings.................................................... (346) (373)
Gain on Sale of Finance Operations.................................... (403) --
Cumulative Effect of Accounting Changes................................. -- 11
-------- -----
Income from continuing operations..................................... 91 98
Adjustments to income from continuing operations:
Depreciation and amortization......................................... 209 185
Provision for doubtful receivables.................................... 1 1
Loss on divestments -- pretax......................................... -- 1
Change in receivables, inventories, payables and accruals............. (134) (199)
Accrued and deferred taxes............................................ 246 53
Other, net............................................................ (18) 6
-------- -----
Cash from continuing operations......................................... 395 145
Cash (to)/from discontinued operations.................................. (254) 763
-------- -----
Cash from operating activities........................................ 141 908
-------- -----
INVESTING ACTIVITIES
Additions to plant, property and equipment.............................. (165) (124)
Proceeds from divestments............................................... 11,655 14
Acquisitions............................................................ (15) (374)
Other, net.............................................................. (2) (7)
-------- -----
Cash from/(used for) investing activities............................. 11,473 (491)
-------- -----
FINANCING ACTIVITIES
Short-term debt, net.................................................... (28) (4)
Long-term debt repaid................................................... (18) (80)
Repayment of Finance obligations........................................ (11,382) --
Repurchase of common stock.............................................. (38) (74)
Dividends paid.......................................................... (130) (210)
Other, net.............................................................. 18 (6)
-------- -----
Cash used for financing activities.................................... (11,578) (374)
-------- -----
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS....................... 53 5
-------- -----
Increase in cash and cash equivalents................................... 89 48
Cash and Cash Equivalents -- Beginning of period........................ 322 240
-------- -----
Cash and Cash Equivalents -- End of period.............................. $ 411 $ 288
======== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................................. $ 47 $ 57
======== =====
Income Taxes.......................................................... $ 7 $ 32
======== =====
---------------
*Restated to reflect Insurance, Hospitality, Entertainment & Information
Services as "Discontinued Operations".
The accompanying notes to financial statements are an integral part of the above
statement.
5
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
1) PLAN OF DISTRIBUTION
On June 12, 1995, the Board of Directors of ITT Corporation approved,
subject to final terms and shareholder approval, the change in ITT Corporation's
name to ITT Industries, Inc. ("ITT" or the "Corporation") and the distribution
(the "Distribution") to holders of the Corporation's common stock (on a pro-rata
basis) of all outstanding shares of common stock of ITT Destinations, Inc., a
wholly-owned subsidiary holding the Corporation's interests in hospitality,
entertainment and information services businesses ("New ITT") and ITT Hartford
Group, Inc., a wholly-owned subsidiary holding the Corporation's interests in
the insurance business segment ("ITT Hartford"). Under the proposed plan, New
ITT and ITT Hartford will become publicly traded companies. These financial
statements give effect to the proposed Distribution, reflecting the accounts of
the businesses included in the Distribution as discontinued operations for all
periods presented. For purposes of these financial statements, all references to
New ITT and ITT Hartford include those companies, their subsidiaries, affiliated
companies and other assets and liabilities that will be transferred to those
companies prior to the Distribution.
2) DISCONTINUED OPERATIONS
Net income of the Corporation's Discontinued Operations, excluding the gain
on the sale of ITT Financial is comprised of the following:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -------------
1995 1994 1995 1994
---- ---- ---- ----
New ITT................................. $ 46 $ 29 $ 53 $ 37
ITT Hartford............................ 105 157 245 292
ITT Financial........................... 12 11 48 32
ITT Rayonier............................ -- -- -- 12
---- ---- ---- ----
Total Discontinued Operations........... $163 $197 $346 $373
==== ==== ==== ====
In the accompanying financial statements for all periods presented, New ITT
and ITT Hartford are reported as Discontinued Operations. The net assets of New
ITT and ITT Hartford are included in Net Assets of Discontinued Operations in
the accompanying balance sheet. See Exhibits 99(a) and 99(b) for additional
financial information of New ITT and ITT Hartford.
In September 1994, the Corporation announced plans to seek offers for the
purchase of its Finance business segment, comprised primarily of its ITT
Financial Corporation subsidiary. Summarized financial information is as
follows:
SIX MONTHS
ENDED
JUNE 30,
-------------
1995 1994
---- ----
Income Statement Data:
Revenues.................................................. $476 $692
Operating Income.......................................... 79 48
Income from Finance Operations............................ 48 32
Gain on Sale, net of tax.................................. 403 --
6
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
2) DISCONTINUED OPERATIONS -- (CONTINUED)
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
Balance Sheet Data:
Total Assets....................................... $1,960 $ 13,398
Finance Debt....................................... 1,456 11,640
Equity............................................. -- 664
ITT realized gross proceeds totaling $11.7 billion through June 30, 1995
and in July 1995, the Corporation completed additional sales of assets of ITT
Financial Corporation for $.3 billion in cash. Proceeds from these transactions
were used to repay ITT Financial debt. The Corporation recognized an after tax
gain of $403 ($667 pretax) or $3.44 per fully diluted share in the second
quarter including a provision for the remaining asset sales and closedown costs
of ITT Financial Corporation.
In January 1995, the holders of $3.4 billion in ITT Financial term debt
consented to a merger of ITT Financial with the Corporation. The merger was
completed on May 1, 1995. ITT Industries is the surviving corporation and is the
obligor on the debt.
In July 1995, the Corporation announced the successful completion of a
tender offer for an aggregate of $4.1 billion of its debt securities, with an
estimated $3.4 billion, or 82% of the aggregate principal amount having been
tendered. The tender offer was financed with the proceeds of commercial paper
borrowings of approximately $3.7 billion. The Corporation expects to refinance
these commercial paper obligations through proceeds of new borrowings, the
nature and terms of which have yet to be determined. The tender offer resulted
in the Corporation paying a tender premium of approximately $300 after tax ($460
pretax), which will be recorded as an extraordinary loss on the early
extinguishment of debt of approximately $300 after tax.
3) ACQUISITIONS
A cash tender offer for all outstanding shares of Caesars World, Inc. for
approximately $1.7 billion was completed in late January 1995. The acquisition
was accounted for using the purchase method. Accordingly, the purchase price was
allocated to assets acquired based on their estimated fair values. The purchase
price exceeded the fair value of the net assets acquired by $1.1 billion.
Caesars World, Inc., which is part of the Hospitality, Entertainment and
Information Services segments, is reported as a Discontinued Operation, and is
included in the Income Statement of ITT Destinations, Inc. (See Exhibit 99) from
February 1, 1995, the date of acquisition.
The Corporation, in a partnership with Cablevision Systems Corporation,
completed the acquisition of Madison Square Garden Corporation (MSG) on March
10, 1995 for approximately $1 billion. The acquisition of the Corporation's 50%
interest in MSG required initial funding of $610. The Corporation's share of the
results of MSG are also included in the Consolidated Income Statement of ITT
Destinations, Inc. from the date of acquisition.
7
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
4) RECEIVABLES
Receivables consist of the following:
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
Trade................................................ $1,447 $1,148
Accrued for completed work........................... 23 26
Less -- reserves..................................... (37) (36)
-------- ------------
$1,433 $1,138
====== ============
5) INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
Finished Goods....................................... $ 530 $ 452
Work in process...................................... 491 480
Raw materials and supplies........................... 323 355
Less -- reserves..................................... (99) (97)
-- progress payments............................ (217) (200)
-------- ------------
$1,028 $ 990
====== ============
6) PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consists of the following:
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
Land and improvements............................... $ 112 $ 106
Buildings and improvements.......................... 815 788
Machinery and equipment............................. 2,718 2,615
Construction work in progress....................... 344 262
Other............................................... 1,047 858
-------- ------------
5,036 4,629
Less -- accumulated depreciation and amortization... (2,837) (2,515)
-------- ------------
$ 2,199 $ 2,114
======= ============
7) ESOP TERMINATION
In July 1995, the Corporation terminated the ESOP portion of the ITT
Investment and Savings Plan. The trustee of the ESOP then converted the
preferred stock held by the trustee to ITT common stock and sold 5.3 million
shares into the open market. These proceeds will be used to repay the debt
associated with the ESOP during August 1995. At June 30, 1995, the ESOP debt
totaled $541 and is classified as current maturity of long-term debt.
If the conversion of the ESOP preferred stock had occurred on January 1,
1995, primary earnings per share for the three and six months ended June 30,
1995 would have been $5.21 and $7.16, respectively.
8
9
BUSINESS SEGMENT INFORMATION
(In millions)
Business segment information excluding "Discontinued Operations" is as
follows:
OPERATING INCOME/(LOSS)
NET SALES ------------------------------
------------------------------------
SECOND
SECOND QUARTER SIX MONTHS QUARTER SIX MONTHS
---------------- ---------------- ------------- -------------
1995 1994* 1995 1994* 1995 1994* 1995 1994*
------ ------ ------ ------ ---- ----- ---- -----
$1,518 $1,297 $3,028 $2,283 Automotive..................... $109 $104 $205 $164
392 383 762 753 Defense & Electronics.......... 27 23 45 37
316 270 605 519 Fluid Technology............... 29 21 47 38
111 86 190 172 Dispositions & Other........... (1) (4) (6) (17)
------ ------ ------ ------ ---- ----- ---- -----
2,337 2,036 4,585 3,727 Total Segments................. 164 144 291 222
-- -- -- -- Corporate Expenses and Other... (25) (25) (49) (41)
------ ------ ------ ------ ---- ----- ---- -----
$2,337 $2,036 $4,585 $3,727 $139 $119 $242 $181
====== ====== ====== ====== ==== ==== ==== ====
---------------
*Restated to exclude Insurance, Hospitality, Entertainment & Information
Services which are now "Discontinued Operations".
9
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1994
Net income from continuing operations of $46 million or $0.35 per fully
diluted share declined 25% compared with the $61 million or $0.44 per fully
diluted share reported in the 1994 period. The decline was caused by an
after-tax provision of $29 million or $0.25 per fully diluted share for the
expected loss on the disposal of ITT Semiconductors and a portion of ITT
Community Development Corporation. Excluding this provision, net income from
continuing operations was $75 million or $0.60 per fully diluted share, a 23%
improvement due largely to higher volumes in a number of product lines and the
favorable impact of continuing cost reduction programs. Income from discontinued
operations totaled $566 million (including $403 million reflecting the gain on
the sale of ITT Financial) and $197 million for the second quarter of 1995 and
1994, respectively, and represents the results of ITT Hartford, New ITT and ITT
Financial. Net income was $612 million or $5.17 per fully diluted share,
compared with $258 million or $1.97 per fully diluted share in the 1994 period.
Net sales totaling $2.3 billion rose 15% with improvements at Automotive,
Defense & Electronics and Fluid Technology. Gross margin approximated 14% in the
1995 period and 16% in the 1994 period due to higher material costs, while
selling, general and administrative expenses decreased to 7.3% of sales from
7.9% in the 1994 period due to a continuing focus on cost reduction and
efficiency programs. Service charges from affiliated companies represent fees
for advice and assistance related to certain centralized general and
administrative functions. Such services represent advice and assistance in
connection with cash management, legal, accounting, tax and insurance services
and charges totaled $22 million and $19 million in the 1995 and 1994 second
three months, respectively. The fees for these services, which are based upon a
general relations agreement, approximate 1% of sales. Other operating expenses,
which include gains and losses from foreign exchange transactions and other
charges, totaled $(7) million in the 1995 period, compared with $23 million in
the 1994 period. Operating margins (excluding service charges from affiliated
companies) rose to 6.9% in the period, up from 6.8% in the second quarter of
1994, a result of the factors discussed above.
Interest expense, net, benefited in the 1994 period from interest income
totaling $16 million on a note receivable from the sale of Alcatel N.V. in 1992.
Excluding interest income in both periods, interest expense increased to $47
million compared with $40 million in 1994 reflecting higher borrowings primarily
in connection with capital additions.
Miscellaneous Income (Expense) includes the aforementioned provision for
the expected loss on the disposal of ITT Semiconductors and a portion of ITT
Community Development Corporation. The effective income tax rate was 38% in the
1995 period and 41% in 1994. The 1995 period benefited from the utilization of
tax credits in Italy. Excluding these credits, the effective rate was 41%.
Income tax expense decreased by $15 million, to $28 million in the 1995 period,
due to the lower pretax earnings and the previously mentioned tax credits.
Business Segments -- Sales and operating income before service charges from
affiliated companies for each of the Corporation's three major continuing
business segments were as follows for the quarter of 1995 and 1994 ($ in
millions):
OPERATING
SALES INCOME
----------------- -------------
THREE MONTHS THREE MONTHS
----------------- -------------
1995 1994 1995 1994
------ ------ ---- ----
$1,518 $1,297 ................. Automotive ................. $109 $104
10
11
Automotive's 1995 three months results benefited from higher volumes and
the continued impact of cost reduction programs. These benefits were partly
offset by continued pricing pressure from original equipment manufacturers and
higher material and labor costs.
OPERATING
SALES INCOME
----------------- -------------
THREE MONTHS THREE MONTHS
----------------- -------------
1995 1994 1995 1994
------ ------ ---- ----
$ 392 $ 383 ............ Defense & Electronics ............ $ 27 $ 23
At Defense & Electronics, 1995 three month operating income rose on
slightly higher revenues due to improved margins at several units.
OPERATING
SALES INCOME
----------------- -------------
THREE MONTHS THREE MONTHS
----------------- -------------
1995 1994 1995 1994
------ ------ ---- ----
$ 316 $ 270 .............. Fluid Technology .............. $ 29 $ 21
At Fluid Technology, 1995 three month sales and operating income increased
at all units, most significantly at Flygt, due to higher volume and favorable
foreign exchange.
SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1994
Net income from continuing operations of $91 million or $0.69 per fully
diluted share declined 7% compared with the $98 million or $0.69 per fully
diluted share reported in the 1994 period. The decline was caused by an
after-tax provision of $29 million or $0.25 per fully diluted share for the
expected loss on the disposal of ITT Semiconductors and a portion of ITT
Community Development Corporation. Excluding this provision, net income from
continuing operations was $120 million or $0.94 per fully diluted share, a 22%
improvement largely due to the contribution of Electrical Systems Inc. ("ESI"),
the former General Motors' motors and actuators business acquired in March 1994.
Excluding ESI, net income still exceeded the 1994 level due to higher volumes in
a number of product lines and the favorable impact of continuing cost reduction
programs. Income from discontinued operations totaled $749 million (including
$403 million reflecting the gain on the sale of ITT Financial) and $373 million
for the first six months of 1995 and 1994, respectively, and represents the
results of ITT Hartford, New ITT, ITT Financial and, in 1994, Rayonier. Net
income was $840 million or $7.08 per fully diluted share, compared with $460
million or $3.51 per fully diluted share in the 1994 period.
Net sales totaling $4.6 billion rose 23% with improvements at Automotive,
Defense & Electronics and Fluid Technology. Excluding the ESI contribution, net
sales improved 16%. Gross margin approximated 14% in the 1995 period and 15% in
the 1994 period due to higher material costs, while selling, general and
administrative expenses decreased to 7.4% of sales from 8.3% in the 1994 period
due to a continuing focus on cost reduction and efficiency programs. Service
charges from affiliated companies represent fees for advice and assistance
related to certain centralized general and administrative functions. Such
services represent advice and assistance in connection with cash management,
legal, accounting, tax and insurance services and charges totaled $44 million
and $35 million in the 1995 and 1994 first six months, respectively. The fees
for these services, which are based upon a general relations agreement,
approximate 1% of sales. See "Plan of Distribution" Note to Consolidated
Financial Statements herein. Other operating (income) expense, which includes
gains and losses from foreign exchange transactions and other charges, totaled
$6 million in the 1995 period, compared with $37 million in the 1994 period.
Operating margins (excluding service charges from affiliated companies) rose to
6.2% in the six months, up from 5.8% in the first six months of 1994, a result
of the factors discussed above.
Interest expense, net, benefited in the 1994 period from interest income
totaling $32 million on a note receivable from the sale of Alcatel N.V. in 1992.
Excluding interest income in both periods, interest expense
11
12
increased to $80 million compared with $63 million in 1994 reflecting higher
borrowings in connection with the March 1994, ESI acquisition and capital
additions.
Miscellaneous Income (Expense) includes the aforementioned provision for
the expected loss on the disposal of ITT Semiconductors and a portion of ITT
Community Development Corporation. The effective income tax rate approximated
41% in the 1995 and 1994 periods. Income tax expense decreased by $7 million, to
$62 million in the 1995 period, due to the lower pretax earnings.
Business Segments -- Sales and operating income before service charges from
affiliated companies for each of the Corporation's three major continuing
business segments were as follows for the first six months of 1995 and 1994
($ in millions):
OPERATING
SALES INCOME
------------------ -------------
SIX MONTHS SIX MONTHS
------------------ -------------
1995 1994 1995 1994
------ ------- ---- ----
$3,028 $2,283 ................. Automotive ................. $205 $164
Automotive's 1995 six months results benefited significantly from the ESI
acquisition and from higher volumes and the continued impact of cost reduction
programs. These benefits were partly offset by continued pricing pressure from
original equipment manufacturers and higher material and labor costs.
OPERATING
SALES INCOME
------------------ -------------
SIX MONTHS SIX MONTHS
------------------ -------------
1995 1994 1995 1994
------ ------- ---- ----
$ 762 $753 ............ Defense & Electronics ............ $ 45 $ 37
At Defense & Electronics, 1995 six month operating income rose on slightly
higher revenues due to improved margins at several units and a $3 million gain
on the termination of a leasehold interest. Order backlog was $2.2 billion at
both June 30, 1995 and 1994.
OPERATING
SALES INCOME
------------------ -------------
SIX MONTHS SIX MONTHS
------------------ -------------
1995 1994 1995 1994
------ ------- ---- ----
$ 605 $519 .............. Fluid Technology .............. $ 47 $ 38
At Fluid Technology, 1995 six month sales and operating income increased at
all units, most significantly at Flygt due to higher volume and favorable
foreign exchange.
12
13
Discontinued Operations
Net income of the Corporation's Discontinued Operations, excluding the
aforementioned gain on the sale of ITT Financial, is comprised of the following
($ millions):
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -------------
1995 1994 1995 1994
---- ---- ---- ----
New ITT.................................. $ 46 $ 29 $ 53 $ 37
ITT Hartford............................. 105 157 245 292
ITT Financial............................ 12 11 48 32
ITT Rayonier............................. -- -- -- 12
---- ---- ---- ----
$163 $197 $346 $373
==== ==== ==== ====
Results of operations at New ITT comprise those of the Corporation's
Hospitality, Entertainment and Information Services business segments along with
the equity earnings associated with Madison Square Garden Corporation. The net
income improvement of 59% in the 1995 second quarter and 43% in the 1995 six
months reflect, in part, the contribution of Caesars World which was acquired in
late January, 1995. In addition, higher average room rates at ITT Sheraton,
particularly in North America, further contributed to the improvement. The
Information Services business segment, comprised of ITT World Directories and
ITT Educational Services, also posted improved results in the periods on
improved operating margins and favorable foreign exchange.
At ITT Hartford, reported net income declined in the periods due primarily
to excess catastrophe losses in the second quarter caused by windstorms,
hailstorms and flooding in the Southwest United States and by a provision for
the estimated settlement related to the Dow Corning breast implant insurance
claims. These unusual items totaled $56 million after tax in the second quarter
and six month periods. The prior year periods benefited from unusually good
workers compensation results due to the impact of managed care initiatives and
favorable legislative reform. Excluding operations in runoff, the worldwide
property and casualty combined ratio was 105.9 for the first six months of 1995
compared with 104.1 for the first six months of 1994. The combined ratio
includes the impact of excess catastrophe losses and a provision for the
estimated settlement related to Dow Corning breast implant claims. Excluding
these items, the combined ratio for the six months ended June 30, 1995, would
have been 103.9. After tax portfolio gains totaled $18 million and $31 million
in the 1995 second quarter and six months, respectively, compared with $33
million and $40 million in the comparable 1994 periods.
Businesses comprising ITT Financial were sold at various times throughout
the first and second quarters of 1995 with a substantial portion of the cash
proceeds of these sales received through June 30, 1995. A provision for the
remaining asset sales and associated closedown costs has been included in the
after tax gain of $403 million or $3.44 per fully diluted share reflected in the
second quarter. Operating results of these businesses prior to the sale date
improved over the comparable 1994 periods on improved volume and lending
spreads, principally in the commercial lending operations.
ITT Rayonier was spun off to shareholders in February, 1994.
Liquidity and Capital Resources
The Corporation generated EBITDA from continuing operations (defined as
operating income before depreciation and amortization) of $451 million in the
six months ended June 30, 1995, compared with $366 million in the comparable
1994 period, a 23% improvement. The improvement reflects earnings growth,
primarily in the Automotive business segment, which benefited from the ESI
acquisition in March 1994 as well as smaller improvements in the Defense &
Electronics and Fluid Technology business segments. Cash from continuing
operating activities as defined by Statement of Financial Accounting Standards
("SFAS") No. 95 increased to $395 million in the six months ended June 30, 1995,
compared with $145 million in the
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comparable 1994 period. The SFAS definition of cash from continuing operating
activities differs from EBITDA largely due to the inclusion of interest, taxes
and changes in working capital. The improvement reflects the improved operating
results discussed above as well as timing differences with respect to tax
payments and receipts and working capital requirements.
Cash to discontinued operations in the six months ended June 30, 1995
reflects the net cash activity associated with the discontinued insurance and
hospitality, entertainment and information services business segments. The $254
million outflow in the 1995 period compared with the $763 million inflow in the
1994 period reflects the timing of income tax and other intercompany settlements
between the Corporation and the discontinued business segments.
In 1995, the Corporation realized $11.7 billion of proceeds through June 30
from the sale of assets at ITT Financial. From July 1, 1995 through July 31,
1995, the Corporation completed additional ITT Financial asset sales for $.3
billion in cash. Substantially all the proceeds from these transactions were
used to repay ITT Financial indebtedness. In addition, cash from operating
activities was used to fund capital expenditures, corporate dividends and stock
repurchases. In the 1994 period, cash from operating activities was used to fund
the acquisition of ESI ($374 million), to pay corporate dividends and to
repurchase stock.
Gross plant additions totaled $165 million in the first six months of 1995,
with approximately 60% of that total incurred at Automotive, primarily in ABS
and traction control technology. At June 30, 1995, contractual commitments have
been made for additional capital expenditures totaling $264 million in 1995 and
an additional $513 million in future years. Spending on capital expenditures for
the 1994 six months was $124 million, two-thirds of which was at Automotive.
External borrowings (excluding discontinued operations) were $2.4 billion
at June 30, 1995 compared with $2.6 billion at December 31, 1994. Cash and cash
equivalents, also excluding cash from discontinued operations, was $411 million
at June 30, 1995 compared with $322 million at year-end 1994.
Effective January 1, 1994, the Corporation adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", which
requires investments to be reflected at fair value, with the corresponding
impact reported as a separate component of Stockholders' Equity in situations
where those investments are "available for sale", as defined in SFAS No. 115.
The accounting standard does not allow for a corresponding fair value adjustment
to liabilities. Stockholders' Equity can vary significantly between reporting
periods as market interest rates and other factors change.
Stockholders' equity increased by $826 million during the first six months
of 1995, excluding the SFAS No. 115 impact, due to growth in retained earnings
which included the ITT Financial gain on sale of $403 million after tax.
ITT terminated the ESOP portion of the ITT Investment and Savings Plan in
July 1995 and in July 1995 the trustee of the ESOP completed the sale of 5.3
million unallocated shares of ITT Common Stock in the ESOP. The sales proceeds
will be used to repay the debt associated with the ESOP, which totaled $541
million at June 30, 1995. In addition, proceeds from the sale of ITT Financial
assets as well as other non-strategic assets are expected to continue to be used
to repay outstanding borrowings.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At ITT's annual meeting of shareholders held on May 9, 1995, the persons
whose names are set forth below were elected as directors, constituting the
entire Board of Directors, with relevant voting information for each person:
VOTES CAST
---------------------- BROKER
FOR WITHHELD NONVOTES
--------- -------- --------
Bette B. Anderson......................... 99,006,495 1,215,729 0
Rand V. Araskog........................... 98,976,401 1,245,823 0
Nolan D. Archibald........................ 99,118,811 1,103,413 0
Robert A. Burnett......................... 99,008,049 1,214,175 0
Michel David-Weill........................ 99,011,269 1,210,955 0
S. Parker Gilbert......................... 99,161,272 1,060,952 0
Henry Gluck............................... 98,952,488 1,269,736 0
Paul G. Kirk, Jr.......................... 98,404,406 1,817,818 0
Edward C. Meyer........................... 99,029,006 1,193,218 0
Benjamin F. Payton........................ 99,063,754 1,158,470 0
Margita E. White.......................... 99,047,612 1,174,612 0
In addition to the election of directors, the following matters were acted
upon:
(a) The reappointment of Arthur Andersen LLP as independent auditors
for 1995 was ratified by a vote of 97,939,874 shares in favor, 738,812
shares against, 1,543,538 shares abstained, and 0 broker nonvotes.
(b) Amendments to the ITT Corporation Annual Performance-Based
Incentive Plan for Executive Officers were approved by a vote of 90,234,311
shares in favor, 7,798,829 shares against, 2,189,084 shares abstained, and
0 broker nonvotes.
(c) A shareholder proposal calling for ITT to list in the proxy
statement the executive officers earning more than $100,000 annually was
not approved by a vote of 76,637,612 shares against, 10,410,212 shares in
favor, 3,217,277 shares abstained, and 9,957,123 broker nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit Index for a list of exhibits filed herewith.
(b) ITT filed a Form 8-KA2 Current Report dated June 8, 1995 filing as
an exhibit under Item 7 thereto a copy of the Report of Independent
Accountants with respect to certain financial statements of Caesars World,
Inc.
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SIGNATURE
Pursuant to the requirements 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)
By: J.F. DANSKI
---------------------------------
J.F. Danski
Senior Vice President and
Controller
(Chief Accounting Officer)
August 11, 1995
(Date)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
----------- -------------------------------------------------------------------- ---------------
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession None
(3) Articles of Incorporation and by-laws None
(4) Instruments defining the rights of security holders, including
indentures None
(10) Material contracts None
(11) Statement re: computation of per share earnings Filed Herewith
(12) Statements re: computation of ratios
Calculation of ratio of earnings to total fixed charges
Calculation of ratio of earnings to total fixed charges and
preferred dividend requirements of ITT Corporation Filed Herewith
(a) ITT Corporation
(b) ITT Destinations, Inc.
(c) ITT Hartford Group, Inc. and Subsidiaries
(15) Letter re: unaudited interim financial information None
(18) Letter re: change in accounting principles None
(19) Report furnished to security holders None
(22) Published report regarding matters submitted to vote of security
holders None
(23) Consents of experts and counsel None
(24) Power of attorney None
(27) Financial Data Schedule Filed Herewith
(99) Additional Exhibits Filed Herewith
(a) ITT Destinations, Inc. -- Combined Financial Statements
(b) ITT Hartford Group, Inc. -- Consolidated Financial Statements
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