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[ITT INDUSTRIES LOGO]
1998
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 of the Securities Exchange Act of 1934
For The Fiscal Year Ended December 31, 1998
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NOTICE
This document is a copy of the Annual Report filed by ITT Industries, Inc.
with the Securities and Exchange Commission and the New York Stock Exchange. It
has not been approved or disapproved by the Commission nor has the Commission
passed upon its accuracy or adequacy.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from
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COMMISSION FILE NO. 1-5627
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ITT INDUSTRIES, INC.
INCORPORATED IN THE STATE OF INDIANA
13-5158950
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
4 WEST RED OAK LANE, WHITE PLAINS, NY 10604
(PRINCIPAL EXECUTIVE OFFICE)
TELEPHONE NUMBER: (914) 641-2000
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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 (ALSO REGISTERED ON PACIFIC STOCK EXCHANGE)
SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK PURCHASE RIGHTS (ALSO
REGISTERED
ON PACIFIC STOCK EXCHANGE)
8 7/8% SENIOR DEBENTURES DUE JUNE 2003
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
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.... No....
X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on January 31, 1999, was approximately $3.5
billion.
As of February 28, 1999, there were outstanding 91,095,976 shares of Common
Stock, $1 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 13, 1999, is incorporated by reference in
Part III of this Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
PART 1 Business of ITT Industries.................................. 1
I 2 Properties.................................................. 9
3 Legal Proceedings........................................... 9
4 Submission of Matters to a Vote of Security Holders......... 11
* Executive Officers of ITT Industries........................ 11
PART 5 Market for Common Stock and Related Stockholder Matters..... 12
II 6 Selected Financial Data..................................... 13
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 24
8 Financial Statements and Supplementary Data................. 24
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 24
PART 10 Directors and Executive Officers of the Registrant.......... 24
III 11 Executive Compensation...................................... 24
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 24
13 Certain Relationships and Related Transactions.............. 24
PART 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 24
IV
Signatures.......................................................... II-1
Exhibit Index....................................................... II-2
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* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
PART I
ITEM 1. BUSINESS OF ITT INDUSTRIES
ITT Industries, Inc., with 1998 sales of approximately $4.5 billion, is a
global manufacturing company that is engaged directly and through its
subsidiaries in the design and manufacture of a wide range of engineered
products and the provision of related services. We are focused on the four
principal business segments of Connectors & Switches, Defense Products &
Services, Pumps & Complementary Products, and Specialty Products. See
"-- ACQUISITIONS, DIVESTITURES AND RELATED MATTERS" for information concerning
the sale in September, 1998 of our automotive Brake and Chassis business and our
automotive Electrical Systems business.
Our World Headquarters is located at 4 West Red Oak Lane, White Plains, NY
10604. We have approximately 33,000 employees based in 45 countries. Unless the
context otherwise indicates, references herein to "ITT Industries," the
"Company," and such words as "we," "us," and "our" include ITT Industries, Inc.
and its subsidiaries. Our telephone number is (914) 641-2000.
ITT Industries, Inc. is an Indiana corporation incorporated on September 5,
1995 as ITT Indiana, Inc. It is the successor pursuant to a statutory merger of
ITT Corporation, a Delaware corporation ("ITT Delaware"), into ITT Industries
effective December 20, 1995. ITT Delaware, originally incorporated in Maryland
in 1920 as International Telephone and Telegraph Corporation, was reincorporated
in Delaware in 1968. It changed its name to ITT Corporation in 1983. On December
19, 1995, ITT Delaware made a distribution (the "Distribution") to its
stockholders consisting of all the shares of common stock of ITT Destinations,
Inc., a Nevada corporation ("ITT Destinations"), and all the shares of common
stock of ITT Hartford Group, Inc., a Delaware corporation (now known as Hartford
Financial Services Group, Inc. or "The Hartford"), both of which were wholly-
owned subsidiaries of ITT Delaware. In connection with the Distribution, ITT
Destinations changed its name to ITT Corporation, which was acquired in
February, 1998 and merged with another corporation unrelated to ITT Industries.
Reference is made to "-- CERTAIN RELATIONSHIPS AMONG THE PARTIES TO THE
DISTRIBUTION."
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The table below shows, in percentage terms, our consolidated sales and
revenues and operating income (excluding restructuring and nonrecurring items)
attributable to each of our ongoing lines of business for the last three years:
YEAR ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
SALES AND REVENUES
Connectors & Switches..................................... 12% 13% 13%
Defense Products & Services............................... 29 26 27
Pumps & Complementary Products............................ 39 35 27
Specialty Products........................................ 19 20 21
Other..................................................... 1 6 12
--- --- ---
100% 100% 100%
=== === ===
OPERATING INCOME
Connectors & Switches..................................... 16% 15% 14%
Defense Products & Services............................... 30 29 30
Pumps & Complementary Products............................ 45 47 37
Specialty Products........................................ 28 32 39
Other..................................................... (19) (23) (20)
--- --- ---
100% 100% 100%
=== === ===
BUSINESS AND PRODUCTS
CONNECTORS & SWITCHES
Connectors & Switches, with sales and revenues of approximately $527.9
million, $537.7 million, and $501.3 million for 1998, 1997, and 1996,
respectively, maintains a position as one of the world's largest connector
companies based on revenue and is a leading supplier to the industrial and
military/aerospace sectors. Its products are used in telecommunications,
computing, aerospace and industrial applications, as well as network services.
Connectors & Switches develops and manufactures interconnects, cable
assemblies, RF connectors, switches, rubber switchpads, input/output card kits,
smart card connectors, LAN components, network systems, network services and
customer use tooling.
Order backlog for Connectors & Switches in 1998 was $130.2 million,
compared with $131.7 million in 1997 and $150.6 million in 1996.
Connectors & Switches products are marketed primarily under the Cannon(R)
brand name.
The level of activity for Connectors & Switches is affected by overall
economic conditions in the markets served and the competitive position with
respect to price, quality, technical expertise and customer service. See
" -- COMPETITION."
Connectors & Switches companies have an aggregate of approximately 3,800
employees and have 12 facilities located in 8 countries.
DEFENSE PRODUCTS & SERVICES
Defense Products & Services, with sales and revenues of approximately $1.29
billion, $1.10 billion, and $1.01 billion for 1998, 1997 and 1996, respectively,
develops, manufactures and supports high technology electronic systems and
components for worldwide defense and commercial markets. Operations are in North
America, Europe, Asia and the Middle East. Products include tactical
communications equipment, space payloads, operations, maintenance and technical
services, night vision devices, airborne electronic warfare systems and radar.
Defense Products & Services concentrates its efforts primarily in those
market segments where management believes it can be a market leader. It is a
leading supplier of products that management believes will be critical to the
armed forces in the 21st century. This particularly includes products designated
to facilitate communications in the forward area battlefield, night vision
devices that enable soldiers to conduct night combat operations and airborne
electronic warfare systems that protect aircraft from enemy missiles. Management
believes that Defense Products & Services may benefit from trends to
commercialize and outsource military support services.
In tactical communications, the ITT Aerospace/Communications Division
manufactures products, including voice and data systems, that facilitate
communications in the forward area battlefield. The ITT Aerospace/Communications
Division produces the Single Channel Ground and Airborne Radio System
("SINCGARS") and has a contract to produce the Near Term Digital Radio ("NTDR"),
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which has data transmission capacity twenty times greater than SINCGARS.
In space payloads, the ITT Aerospace/Communications Division produces
sophisticated sounding and imaging instruments such as those used by the
National Oceanographic and Atmospheric Agency in remote sensing/navigation space
payloads to track hurricanes, tornadoes and other weather patterns.
In operations, maintenance and technical services, ITT Systems provides
military base operations support, equipment and facility maintenance, and
training services for government sites around the world. It also provides
advanced technology services and customized products to government, industrial
and commercial customers in the areas of information technology, consulting and
technical assistance, military systems effects and analysis, and hardware
design, test and evaluation.
ITT Night Vision provides United States and allied soldiers with the
capability to conduct night combat operations with the production of advanced
goggles for airborne and ground applications. ITT Night Vision is the leading
full service supplier to the United States and allied military forces of
Generation III night vision products. ITT Night Vision also produces a
commercial line of night vision products for law enforcement and marine
applications.
ITT Avionics produces airborne electronic warfare systems, such as the
Airborne Self-Protection Jammer ("ASPJ"), to help protect aircraft from
radar-guided weapons. ITT Avionics was selected by the United States Army to
develop the next-generation fully integrated airborne electronic warfare system
for rotary wing aircraft called a Suite of Integrated Radio Frequency
Countermeasures ("SIRFC"). ITT Avionics, teamed with Lockheed Martin Sanders,
was also awarded the development contract for the United States Integrated
Defensive Countermeasures ("IDECM") program for fixed wing aircraft such as the
F/A-18 E/F fighter fleet.
ITT Gilfillan produces and installs ship and air defense radar and air
traffic control systems both in the United States and elsewhere. The GaAsTEK
unit produces gallium arsenide chips and modules for use in radar and other
electronic systems.
The following table illustrates the percentage of sales and revenues by
product group for the periods specified:
YEAR ENDED
DECEMBER 31,
----------------------
1998 1997 1996
---- ---- ----
Tactical Communications..................................... 20% 29% 29%
Space Payloads.............................................. 16 14 13
Operations, Maintenance and Technical Services.............. 33 28 29
ITT Night Vision............................................ 12 11 11
Airborne Electronic Warfare................................. 11 10 10
Radar and Other............................................. 8 8 8
---- ---- ----
100% 100% 100%
==== ==== ====
Defense Products & Services sells its products to a wide variety of
governmental and non-governmental entities located throughout the world.
Approximately 98% of 1998 sales and revenues of Defense Products & Services was
to governmental entities, of which approximately 74% was to the United States
Government (principally in defense programs). Defense Products & Services, along
with Racal Electronics and British Aerospace, have entered into a joint venture
to develop the Bowman Program, a tactical communications system for the British
Armed Forces.
A substantial portion of the work of Defense Products & Services 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 United States Government. Apart from the United States
Government, no other governmental or commercial customer accounted for more than
5% of 1998 sales and revenues for Defense Products & Services.
Sales and revenues to non-governmental entities as a percentage of total
sales and revenues for Defense Products & Services were 2% in 1998, 1% in 1997,
and 1% in 1996. Certain products sold by Defense Products & Services have
particular commercial application, including night vision devices, radar systems
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and gallium arsenide computer chips and modules. In addition, Defense Products &
Services, in partnership with California Commercial Spaceport, Inc. in a venture
known as Spaceport Systems International, provides full service payload
processing and launch capability for small to medium satellite systems in low
polar earth orbits.
Order backlog for Defense Products & Services in 1998 was $2.22 billion,
compared with $2.11 billion in 1997 and $2.14 billion in 1996.
The level of activity in Defense Products & Services is affected by overall
defense budgets, the portion of those defense budgets devoted to products and
services of the type provided by Defense Products & Services, and other factors.
See "-- COMPETITION."
Defense Products & Services companies have an aggregate of approximately
10,800 employees and have 61 facilities in 9 countries.
PUMPS & COMPLEMENTARY PRODUCTS
Pumps & Complementary Products, with sales and revenues of approximately
$1.77 billion, $1.46 billion, and $1.02 billion for 1998, 1997 and 1996,
respectively, is a worldwide enterprise engaged in the design, development,
production, sale and after-sale support of products, systems and services used
to move, handle, transfer, control and contain fluids. With sales and revenues
in more than 135 countries, Pumps & Complementary Products is a leading global
supplier of pumps, valves, heat exchangers, mixers and controls for the
management of fluids.
The majority of Pumps & Complementary Products' sales and revenues are in
North America and Western Europe. Principal markets are water supply and
wastewater treatment, industrial and process, and construction. Industrial and
process market activity includes strong market positions in chemical processing,
pulp and paper, and in selected segments of the hydrocarbon processing industry,
power, mining and general industrial markets. Construction market activity
includes residential, commercial and municipal well water pumps and systems,
heating, ventilation and air conditioning segments of the residential and
non-residential construction market and in construction site dewatering.
Sales are made worldwide directly and through independent distributors and
representatives. Pumps & Complementary Products is structured in three worldwide
product groups. No single customer accounted for more than 2% of 1998 sales and
revenues for Pumps & Complementary Products.
ITT Flygt, with 1998 sales of approximately $593.4 million, is a pioneer in
submersible technology and is the world leader in submersible pumping and mixing
products. About half of ITT Flygt's worldwide sales come from wastewater
treatment markets. Other sales are to construction, mining and industrial
markets. Brand names include Aercor(R), Flygt(R), Sanitaire(R), and WPCC(R).
Commercial Products, with 1998 sales and revenues of approximately $652.0
million, offers a range of products, including dry-mount pumps and heat
exchangers, control and accessory products for liquid based heating and cooling
systems, residential well water pumps, and pumps for light industrial, original
equipment manufacturers and irrigation markets. Brand names include Bell &
Gossett(R), Goulds(R), ITT Standard(R), Lowara(R), McDonnell & Miller(R), and
others.
Industrial Pumps, with 1998 sales and revenues of approximately $545.7
million, offers a broad line of pumps and valves for industrial, process and
heavy duty commercial applications worldwide. Brand names include A-C Pump(R),
Goulds(R), Richter(R), Vogel(R), and others.
The following table illustrates the percentage of sales and revenues by
product group for the periods specified:
YEAR ENDED
DECEMBER 31,
----------------------
1998 1997 1996
---- ---- ----
Flygt....................................................... 33% 41% 61%
Commercial Products......................................... 36 32 25
Industrial Pumps............................................ 31 27 14
--- --- ---
100% 100% 100%
=== === ===
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Our management believes that Pumps & Complementary Products has a solid
technology base and proven expertise in designing its products to meet customer
needs, and that the continuing development of new products will enable Pumps &
Complementary Products to maintain and build market leadership positions in
served markets.
Order backlog for Pumps & Complementary Products was $274.4 million in
1998, compared with $266.8 million in 1997 and $160.8 million in 1996.
The level of activity in Pumps & Complementary Products is dependent upon
economic conditions in the markets served, weather conditions, in the case of
municipal markets, the ability of municipalities to fund projects for products
and services of the type provided by Pumps & Complementary Products, and other
factors. See "-- COMPETITION."
Pumps & Complementary Products companies have an aggregate of approximately
11,200 employees and have 158 facilities in 45 countries.
SPECIALTY PRODUCTS
Specialty Products, with sales and revenues of approximately $849.3
million, $823.2 million and $780.9 million for 1998, 1997 and 1996,
respectively, produces fluid handling materials such as stainless steel and
flexible tubing, specialty shock absorbers and brake friction materials for the
transportation industry, engineered valves, controls, and switches for
industrial and aerospace applications, and products for the marine and leisure
markets. Operations are located in Europe, North America and South America.
Products under this segment are marketed under brand names including
Conoflow(R), Dia-Flo(R), Galfer(R), Jabsco(R), Koni(R), Marlow(R), Neo-Dyn(R),
Pure-Flo(R), and Rule(R), and under the name ITT(R) Aerospace Controls.
The following table illustrates the percentage of sales by product group
for the periods specified:
YEAR ENDED
DECEMBER 31,
----------------------
1998 1997 1996
---- ---- ----
Fluid Handling Systems...................................... 43% 45% 46%
Shock Absorbers............................................. 11 10 11
Friction Material........................................... 18 18 16
Aerospace................................................... 8 7 7
Engineered Valves........................................... 9 9 10
Marine & Leisure............................................ 10 10 9
Other....................................................... 1 1 1
--- --- ---
100% 100% 100%
=== === ===
The level of activity for Specialty Products depends upon economic
conditions in the, shock absorber, fluid handling friction material aerospace,
marine and leisure and related markets.
Specialty Products companies have an aggregate of approximately 6,900
employees and have 42 facilities located in 11 countries. Order backlog is not a
significant factor in this segment.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "BUSINESS SEGMENT INFORMATION" in the "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for further details with respect to business
segments.
ACQUISITIONS, DIVESTITURES, AND RELATED MATTERS
On September 25, 1998, we completed the sale to Continental AG and certain
of its subsidiaries of our business of designing, developing, manufacturing, and
marketing brake systems and chassis modules for the automotive industry
worldwide for approximately $1.93 billion in cash. That business was conducted
through various direct and indirect subsidiaries, and joint ventures in which we
held an ownership interest.
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On September 28, 1998, we completed the sale to Valeo SA and certain of its
subsidiaries of our business of designing, developing, manufacturing, and
marketing electrical motors and actuators, air management and engine cooling
products, wiper and washer systems, lamps, power antennas, switches and sensors
for the automotive industry worldwide for approximately $1.7 billion in cash.
That business was conducted through various direct and indirect subsidiaries,
and joint ventures in which we held an ownership interest.
After-tax proceeds from the sales of our automotive Brake and Chassis and
our automotive Electrical Systems businesses have been directed to reducing
debt, funding acquisitions, investing in our remaining businesses and
repurchasing our shares. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- HIGHLIGHTS -- SALES OF ITT AUTOMOTIVE
BUSINESSES AND -- SHARE REPURCHASE" for further information regarding the sales
of automotive businesses and our share repurchase program).
In 1998, we acquired A.G. Johansons Metallfabrik AB, Rule Industries, Inc.,
Sinton Engineering Co. Limited, and Sinton (UK) Limited, for our Specialty
Products segment and The Great American Gumball Company for our Connectors &
Switches segment.
We also made significant acquisitions in 1997 with Goulds Pumps,
Incorporated for our Pumps & Complementary Products segment and Kaman Sciences
Corporation for our Defense Products & Services segment.
Throughout this three-year period we disposed of a number of non-core
businesses.
GEOGRAPHIC MARKETS
The geographic sales base of Connectors & Switches is predominantly in
Europe, which accounted for 47% of 1998 sales and revenues, and the United
States, which accounted for 42% of 1998 sales and revenues. Connectors &
Switches has two joint ventures in China and a wholly-owned subsidiary in Japan
which together supply connectors and switch products across a broad market
spectrum, including the communications, industrial and consumer sectors.
The geographic sales base of Defense Products & Services is predominantly
the United States, which accounted for approximately 83% of 1998 sales and
revenues. Management of Defense Products & Services has begun to increase its
international defense business and anticipates growth opportunities in the
Asia/Pacific region, Europe and the Middle East.
The geographic sales base of Pumps & Complementary Products is broad. In
1998, approximately 45% of the sales and revenues of Pumps & Complementary
Products was derived from the United States, while approximately 32% was derived
from Western Europe. The geographic sales mix differs among products and among
divisions of Pumps & Complementary Products. Our management anticipates growth
opportunities in Eastern Europe and Central Asia, Africa/Middle East, Latin
America and the Asia/Pacific region. In China, Pumps & Complementary Products
has manufacturing and distribution facilities to produce and sell submersible
pumps for the sewage handling and mining markets and a joint venture that
produces vertical turbine pumps and includes a foundry operation. It also has
joint venture sales and manufacturing and other operations in Eastern Europe,
Latin America, Africa/Middle East and other locations in the Asia/Pacific
region.
The geographic sales base of Specialty Products is predominantly in North
America and Europe. In 1998, approximately 52% of sales and revenues of
Specialty Products were to customers in the United States, and approximately 38%
of sales were to customers in Western Europe. Management of ITT Industries sees
growth opportunities in South America, Mexico and Asia, particularly in China.
See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further geographical
information concerning sales and revenues and long lived assets.
COMPETITION
Substantially all of our operations are in highly competitive businesses.
The nature of the competition varies across all business segments. A number of
large companies engaged in the manufacture and sale of similar lines of products
and the provision of similar services are included in the competition, as are
many small enterprises with only a few products or services. Technological
innovation, price, quality, reliability, and service are primary
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factors in the markets served by the various segments of our businesses.
In Connectors & Switches, competitive pressures continue on a global basis.
In most of the markets served, competition is based primarily upon price,
quality, technical expertise and customer service.
In Defense Products & Services, government defense budgets, particularly in
the United States, generally have leveled off after years of significant
declines. Business consolidations continue to change the competitive
environment. We have adjusted to these changes by focusing on the defense
electronics and services markets, by making process improvements, and through
capacity rationalization. In most of the markets served by Defense Products &
Services, competition is based primarily upon price, quality, technological
expertise, cycle time and service.
The Pumps & Complementary Products business is affected by strong
competition, changing economic conditions, industry overcapacity that leads to
intense pricing pressures, and public bidding in some markets. Management of
Pumps & Complementary Products responds to competitive pressures by utilizing
strong distribution networks, strong brand names, broad product lines focused on
market niches, a global customer base, a continuous stream of new products
developed from a strong technology base, a focus on quality and customer
service, and through continuous cost improvement programs.
In Specialty Products, competition is a significant factor which has
resulted in increased pressure to reduce prices and, therefore, costs. Product
capability, quality, engineering support, and experience are also important
competitive factors.
EXPOSURE TO CURRENCY FLUCTUATIONS
Our companies conduct operations worldwide. We, therefore, are exposed to
the effects of fluctuations in relative currency values. Although our companies
engage in various hedging strategies with respect to their foreign currency
exposure where appropriate, it is not possible to hedge all such exposure.
Accordingly, our operating results may be impacted by fluctuations in relative
currency values.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- MARKET RISK EXPOSURES".
CYCLICALITY
Many of the markets in which our businesses operate are cyclical and can be
affected by general economic conditions in those markets. Since we manufacture
and sell products used in historically cyclical industries, such as the
construction, mining and minerals, transportation, automotive, and aerospace
industries, we could be adversely affected by negative cycles affecting those
and other industries.
GOVERNMENTAL REGULATION AND RELATED MATTERS
A number of our businesses are subject to governmental regulation by law or
through contractual arrangements. Our Defense Products & Services businesses
perform work under contracts with the United States Department of Defense and
similar agencies in certain other countries. These contracts are subject to
security and facility clearances under applicable governmental regulations,
including regulations requiring background investigations for high-level
security clearances for our executive officers. Most of such contracts are
subject to termination by the respective governmental parties on various
grounds, although such terminations have rarely occurred in the past.
ENVIRONMENTAL MATTERS
We are subject to stringent environmental laws and regulations concerning
air emissions, water discharges and waste disposal. Such environmental laws and
regulations include the Federal Clean Air Act, the Clean Water Act, the
Resource, Conservation and Recovery Act, and the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA" or "Superfund").
Environmental requirements are significant factors affecting all operations.
Management believes that our companies closely monitor all of their respective
environmental responsibilities, together with trends in environmental laws. We
have established an internal program to assess compliance with applicable
environmental requirements for all of our facilities, both domestic and
overseas. The program is
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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.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- RISKS AND UNCERTAINTIES -- ENVIRONMENTAL MATTERS" and
"LEGAL PROCEEDINGS".
RAW MATERIALS
All of our businesses require various raw materials (e.g., metals and
plastics), the availability and prices of which may fluctuate. Although some
cost increases may be recovered through increased prices to customers, our
operating results are exposed to such fluctuations. We attempt to control such
costs through various purchasing programs and otherwise. In recent years, our
businesses have not experienced significant difficulties in obtaining an
adequate supply of raw materials necessary for our manufacturing processes.
RESEARCH, DEVELOPMENT AND ENGINEERING
Our businesses require substantial commitment of resources to research,
development and engineering activities to maintain significant positions in the
markets we serve. Such activities are conducted in laboratory and engineering
facilities at several of our major manufacturing locations. Although most of our
funds dedicated to research, development and engineering activities are applied
to areas of high technology, such as aerospace and applications involving
electronic components, these activities are important in all of our business
segments. Expenditures by ITT Industries for research, development, and
engineering relating to our on-going lines of business totaled $267.6 million in
1998, $266.6 million in 1997 and $266.3 million in 1996. Of those amounts 67.4%
in 1998, 68.4% in 1997 and 58.4% in 1996 was expended pursuant to customer
contracts.
INTELLECTUAL PROPERTY
While we own and control a number of patents, trade secrets, confidential
information, trademarks, trade names, copyrights and other intellectual property
rights which, in the aggregate, are of material importance to our business,
management believes that our business, as a whole, is not materially dependent
upon any one intellectual property or related group of such properties. We are
licensed to use certain patents, technology and other intellectual property
rights owned and controlled by others, and, similarly, other companies are
licensed to use certain patents, technology and other intellectual property
rights owned and controlled by us.
Patents, patent applications and license agreements will expire or
terminate over time by operation of law, in accordance with their terms or
otherwise. Such expiration or termination of such patents, patent applications
and license agreements is not expected by our management to have a material
adverse effect on our financial position, results of operations or cash flows.
As a result of the Distribution, we obtained the exclusive right and
license to use the "ITT" name, mark and logo with respect to the businesses that
we operated on the date of Distribution and in the operation of any businesses
closely related thereto. We also have the non-exclusive right to use the "ITT"
name, mark and logo in the operation of any new business we operate so long as
such new business is not included in ITT Destinations' or The Hartford's
businesses on the date of Distribution or businesses closely related thereto.
These rights and licenses are perpetual, subject to the maintenance of certain
quality standards and other terms of the operative license agreement, and are
considered by our management to be of material importance to ITT Industries.
EMPLOYEES
As of December 31, 1998, ITT Industries and its subsidiaries employed an
aggregate of approximately 33,000 people. Of this number, approximately 18,300
are employees in the United States, of whom approximately 30.4% are represented
by labor unions. Generally, labor relations have been maintained in a normal and
satisfactory manner.
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DISCONTINUED OPERATIONS
In September, 1998 we completed the sale of our automotive Brake and
Chassis business and the sale of our automotive Electrical Systems business. As
a result of these sales, these two units, as well as several other small
previously sold automotive units, have been accounted for as discontinued
operations.
See "DISCONTINUED OPERATIONS" in the "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS" for further information concerning discontinued operations.
CERTAIN RELATIONSHIPS AMONG THE PARTIES TO THE DISTRIBUTION
ITT Delaware, ITT Destinations and The Hartford entered into a Distribution
Agreement (the "Distribution Agreement") providing for, among other things,
certain corporate transactions required to effect the Distribution and other
arrangements among the three parties subsequent to the Distribution.
The Distribution Agreement provides for, among other things, assumptions of
liabilities and cross-indemnities generally designed to allocate the financial
responsibility for the liabilities arising out of or in connection with (i) the
former automotive, defense & electronics, and fluid technology segments to ITT
Industries and its subsidiaries, (ii) the hospitality, entertainment and
information services businesses to ITT Destinations and its subsidiaries, and
(iii) the insurance businesses to The Hartford and its subsidiaries. The
Distribution Agreement also provides for the allocation of the financial
responsibility for the liabilities arising out of or in connection with former
and present businesses not described in the immediately preceding sentence to or
among ITT Industries, ITT Destinations and The Hartford on a shared basis. The
Distribution Agreement provides that neither ITT Industries, ITT Destinations
nor The Hartford will take any action that would jeopardize the intended tax
consequences of the Distribution.
ITT Industries, ITT Destinations and The Hartford also entered into
agreements in connection with the Distribution relating to intellectual
property, tax, and employee benefit matters.
Two members of the Board of Directors of ITT Industries also serve on the
Board of Directors of The Hartford.
On February 23, 1998, ITT Corporation (so renamed from ITT Destinations
after the Distribution) was acquired by Starwood Hotels & Resorts Worldwide,
Inc. While the Distribution Agreement continues in full force and effect, it
cannot be determined at this time what effect, if any, such acquisition of ITT
Corporation may have with respect to ongoing obligations under the Distribution
Agreement and related matters.
------------------------
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FORWARD-LOOKING STATEMENTS" for information regarding
forward-looking statements and cautionary statements relating thereto.
------------------------
ITEM 2. PROPERTIES
Our principal executive offices are in leased premises located in White
Plains, NY. We consider the many offices, plants, warehouses and other
properties that we own or lease to be in good condition and generally suitable
for the purposes for which they are used. These properties are located in
several states in the United States, as well as in numerous countries throughout
the world. See "BUSINESS OF ITT INDUSTRIES" for further information with respect
to properties in each of our business segments, including the numbers of
facilities and countries in which they are located.
ITEM 3. LEGAL PROCEEDINGS
ITT Industries and its subsidiaries are responsible, in whole or in part,
or are alleged to be responsible for environmental investigation and remediation
at approximately 130 sites in North America and Europe. Of those sites, ITT
Industries has received notice that it is considered a Potentially Responsible
Party ("PRP") at approximately 43 sites by the United States Environmental
Protection Agency ("EPA") and/or a similar state agency under
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CERCLA or its state equivalent. In many of these proceedings, ITT Industries'
liability is considered de minimis. At 16 of these sites, formerly operated by
subsidiaries of the Company, liability and/or defense costs are being divided
equally among the three parties to the Distribution Agreement. The remaining
cases are generally either actions brought by private parties relating to sites
formerly owned or operated by subsidiaries of the Company seeking to recoup
incurred costs or shift environmental liability to ITT Industries pursuant to
contractual language, or situations discovered by ITT Industries through its
internal environmental assessment program.
ITT Industries has been involved since 1991 in an environmental proceeding
in California relating to the San Fernando Valley aquifer. ITT Industries is one
of numerous PRPs who are alleged by the EPA to have contributed to the
contamination of the aquifer. ITT Industries and other allegedly responsible
parties have completed an allocation arbitration and have commenced the clean-up
required by the EPA. Lockheed Martin Corporation, one of such parties,
challenged the allocation arbitration in the Superior Court, Los Angeles County.
The lower court ruled in ITT Industries' favor; however, Lockheed Martin has
appealed. Oral argument has been scheduled for Spring of 1999. In January, 1999,
the EPA filed a complaint in the United States District Court for the Central
District of California against ITT Industries and Lockheed Martin Corporation,
United States v. ITT Industries, Inc. and Lockheed Martin Corp. CV99-00552 SVW
AIJX, to recover costs it has incurred in connection with the foregoing. The
matter is the subject of ongoing negotiations with the EPA. ITT Industries has
filed a suit against its insurers in the California Superior Court, Los Angeles
County, ITT Corporation, et al. v. Pacific Indemnity Corporation et al. for
recovery of costs it has incurred in connection with this and other
environmental matters. ITT Industries already has negotiated settlements with
certain defendant insurance companies, is engaged in negotiations with others,
and is prepared to pursue its legal remedies where reasonable negotiations are
not productive.
While there can be no assurance as to the ultimate outcome of any
litigation involving ITT Industries, management does not believe any pending
legal proceeding will result in a judgment or settlement that will have, after
taking into account ITT Industries' existing provisions for such liabilities, a
material adverse effect on ITT Industries' financial position, results of
operations or cash flows.
Reference is made to "BUSINESS OF ITT INDUSTRIES -- CERTAIN RELATIONSHIPS
AMONG THE PARTIES TO THE DISTRIBUTION" for information concerning the allocation
of certain liabilities.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matter was submitted to a vote of our shareholders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF ITT INDUSTRIES
The following information is provided regarding the executive officers of
ITT Industries:
DATE OF
AGE AT YEAR OF ELECTION
FEBRUARY 1, INITIAL ELECTION TO PRESENT
NAME 1999 POSITION AS AN OFFICER POSITION
---- ---- -------- ------------- --------
Ralph D. Allen.................... 57 Vice President, Director of 1981 12/19/95
Investor Relations
Travis Engen...................... 54 Chairman and Chief Executive and 1987 12/19/95
Director
Donald E. Foley................... 47 Vice President and Treasurer 1996 5/21/96
Gerard Gendron.................... 46 Vice President 1998 10/27/98
Louis J. Giuliano................. 52 President and Chief Operating Officer 1988 10/27/98
Martin Kamber..................... 50 Senior Vice President, Director of 1995 12/19/95
Corporate Development
Heidi Kunz........................ 44 Executive Vice President and Chief 1995 10/27/98
Financial Officer
Richard J. Labrecque.............. 60 Executive Vice President 1985 10/27/98
Vincent A. Maffeo................. 48 Senior Vice President and General 1995 12/19/95
Counsel
Thomas R. Martin.................. 45 Senior Vice President, Director of 1996 3/9/99
Corporate Relations
Richard W. Powers................. 57 Vice President, Director of Taxes and 1991 12/19/95
Assistant Secretary
Marvin R. Sambur.................. 52 Vice President 1998 10/27/98
James P. Smith, Jr................ 56 Senior Vice President, Director of 1995 12/19/95
Human Resources
Edward W. Williams................ 60 Vice President and Controller 1998 10/27/98
Each of the above-named officers was elected to his or her present position
to serve at the pleasure of the Board of Directors. Mr. Engen has an employment
agreement with ITT Industries providing, among other things, for his employment
as Chairman and Chief Executive through December 31, 1999.
Throughout the past five years, all of the above-named officers have held
executive positions with ITT Industries or with its predecessor, ITT Delaware,
bearing at least substantially the same responsibilities as those borne in their
present offices, except that (i) Mr. Engen, prior to his election as Chairman
and Chief Executive (1995) (having yielded his position as President in 1998),
was Executive Vice President of ITT Delaware (1991); (ii) Mr. Foley, prior to
his election as Vice President and Treasurer, was Assistant Treasurer of
International Paper Company; (iii) Mr. Gendron, prior to his election as Vice
President, was and continues as President of our Connectors & Switches business
(1997) and, prior to that, its Vice President (1995), and, prior to that, its
Controller (1992); (iv) Mr. Giuliano, prior to his election as President and
Chief Operating Officer, was Senior Vice President (1995) and, prior to that was
Senior Vice President of ITT Delaware in addition to being President of our
Defense & Electronics business; (v) Mr. Kamber, prior to his election as Senior
Vice President, Director of Corporate Development, was Vice President, Corporate
Development, of ITT Automotive, Inc. (1993); (vi) Ms. Kunz, prior to her
election as Executive Vice President and Chief Financial Officer, was Senior
Vice President and Chief Financial Officer (1995) and, prior to that was Vice
President (1994) and Treasurer (1993) of General Motors Corporation; (vii) Mr.
Labrecque, prior to his election as Executive Vice President, was Senior Vice
President (1995), and prior to that was Vice President of ITT Delaware; (viii)
Mr. Maffeo, prior to his election as Senior Vice President and General Counsel,
was Vice President and General Counsel of ITT Automotive, Inc.; (ix) Mr. Martin,
prior to his election as Senior Vice President, Director of Corporate Relations,
was Vice President, Director of Corporate Relations (1996), and, prior to that,
was Vice President of Corporate Communications of Federal Express Corp. (1995)
and, prior to that, was Managing Director of Public Relations of Federal Express
Corp. (x) Mr. Powers, prior to his election as Vice President, Director of
Taxes, was Vice President of ITT Delaware; (xi) Mr. Sambur, prior to his
election as Vice President, was President of our
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Aerospace/Communications Division (1991); (xii) Mr. Smith, prior to his election
as Senior Vice President, was Executive Vice President of ITT Sheraton
Corporation (1993); and (xiii) Mr. Williams, prior to his election as Vice
President and Controller, was Vice President and Controller of our Defense &
Electronics business.
PART II
ITEM 5. MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
COMMON STOCK -- MARKET PRICES AND DIVIDENDS
1998 1997
---------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
IN DOLLARS
Three Months Ended
March 31................................................. $38.94 $28.13 $26.38 $22.38
June 30.................................................. 38.44 32.88 27.75 22.13
September 30............................................. 38.13 29.50 33.69 25.00
December 31.............................................. 40.88 30.69 33.38 28.75
The above table reflects the range of market prices of our common stock as
reported in the consolidated transaction reporting system of the New York Stock
Exchange, the principal market in which this security is traded (under the
trading symbol "IIN"). During the period from January 1, 1999 through February
28, 1999, the high and low reported market prices of our common stock were
$40.88 and $37.50, respectively.
We declared dividends of $.15 per share of common stock in each of the four
quarters of 1997 and 1998 and in the first quarter of 1999.
The payment and level of future cash dividends by ITT Industries will be
subject to the discretion of our Board of Directors. Dividend decisions will be
based on, and affected by, a number of factors, including our operating results
and financial requirements. Although our management presently contemplates that
dividends will be paid at the present dividend rate for the foreseeable future,
there can be no assurance that such dividends will be paid.
There were 52,371 holders of record of our common stock on February 28,
1999.
Pursuant to our previously announced share repurchase program as of
February 28, 1999, we repurchased 27,349,283 shares for $974,222,733.
ITT Industries common stock is listed on the following exchanges:
Frankfurt, London, Midwest, New York, Pacific, and Paris.
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ITEM 6. SELECTED FINANCIAL DATA
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
RESULTS AND POSITION
Sales and revenues................ $4,492.7 $4,207.6 $3,744.5 $3,726.7 $3,415.7
Operating income (loss)(a)........ (74.6) 141.3 246.0 (41.6) 127.8
Income (loss) from continuing
operations(a)................... (97.6) 11.9 66.4 (130.8) 44.4
Net income........................ 1,532.5 108.1 222.6 707.9 1,021.8
Income from continuing operations,
as adjusted(b).................. 146.0 95.9 66.4 19.7 44.4
Expenditures on plant additions... 212.9 212.5 176.0 213.2 164.1
Depreciation and amortization..... 195.6 196.9 187.3 177.8 157.2
Total assets...................... 5,048.8 5,058.4 3,976.9 4,290.6 9,530.0
Total assets, excluding
discontinued operations......... 5,048.8 4,127.0 2,929.6 3,216.8 3,012.1
Long-term debt.................... 515.5 531.2 582.2 930.7 1,681.9
Total debt........................ 767.1 2,172.6 1,368.0 1,554.4 2,570.7
Cash dividends declared per common
share........................... .60 .60 .60 .99 1.98
EARNINGS PER SHARE
Income from continuing operations,
as adjusted(b)
Basic........................... $ 1.29 $ .81 $ .56 $ .18 $ .08
Diluted......................... $ 1.29 $ .79 $ .55 $ .18 $ .20
Net income
Basic........................... $ 13.55 $ .91 $ 1.89 $ 6.24 $ 8.65
Diluted......................... $ 13.55 $ .89 $ 1.85 $ 6.18 $ 8.02
- ---------------
(a) Income from continuing operations in 1998 and 1997 include charges of $399.4
and $137.8 pretax, respectively, or $243.6 and $84.0, after-tax,
respectively, for restructuring and other items as described in Note 5.
(b) Income from continuing operations in 1998, as adjusted, excludes the items
in note (a) above and $83.2, after-tax, for operating income from
discontinued operations and $1,546.9, after-tax, for gain on sales of ITT
Automotive operations. The 1997 income from continuing operations, as
adjusted, excludes the items in note (a) above and operating income from
discontinued operations of $101.8, after-tax; and a charge for the
cumulative effect of accounting change of $5.6, after-tax. The 1996 income
from continuing operations, as adjusted, excludes operating income from
discontinued operations of $156.2, after-tax.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
HIGHLIGHTS
For the years ended December 31, ITT Industries, Inc. (the "Company")
reported the following (in millions):
1998(A) 1997(B) 1996
-------- -------- --------
Total sales and revenues from continuing operations......... $4,492.7 $4,207.6 $3,744.5
Operating income from continuing operations................. $ 324.8 $ 279.1 $ 246.0
Income from continuing operations, after-tax................ $ 146.0 $ 95.9 $ 66.4
- ---------------
The above amounts exclude discontinued operations for all years.
(a) 1998 figures are adjusted to exclude restructuring and nonrecurring items of
$399.4 pretax or $243.6 after-tax.
(b) 1997 figures are adjusted to exclude restructuring and nonrecurring items of
$137.8 pretax or $84.0 after-tax.
SALES OF ITT AUTOMOTIVE BUSINESSES: During 1998, the Company sold its
automotive Brake and Chassis business to Continental AG of Germany and its
automotive Electrical Systems business to Valeo SA of France. The transactions
were completed at the end of the third quarter for total proceeds of $3.7
billion. The after-tax proceeds of approximately $2.7 billion have been, and
will continue to be used to reduce debt, fund acquisitions, invest in the
Company's remaining businesses, and repurchase shares on the open market. See
"Risks and Uncertainties" and Note 19 "Commitments and Contingencies" in the
Notes to Consolidated Financial Statements.
NEW BUSINESS SEGMENTS: In the third quarter of 1998, the Company realigned its
businesses into four new reporting segments, which highlight the diversity and
balance of the Company's portfolio, and better define each of the Company's
continuing businesses. The four new segments are as follows:
Connectors & Switches: This business, formerly included within the "Defense
& Electronics" segment, consists of the Company's products marketed under the
Cannon(R) brand. These products include connectors, switches and cabling used in
telecommunications, computing, aerospace and industrial applications, as well as
network services.
Defense Products & Services: The businesses in this segment are those that
directly serve the military and government agencies with products and services.
These products include air traffic control systems, jamming devices that guard
military planes against radar-guided weapons, digital combat radios, night
vision devices, and satellite instruments. Approximately 33% of the sales and
revenues in this segment are generated through contracts for technical and
support services, which are provided to the military and other government
agencies.
Pumps & Complementary Products: This segment contains the Company's pump
businesses, including brands such as Flygt(R), Goulds(R), Bell & Gossett(R), A-C
Pump(R), Lowara(R), and Vogel(R). Businesses within this segment also supply
mixers, heat exchangers and related products with brand names such as McDonnell
& Miller(R) and ITT Standard(R) in addition to those brand names mentioned
above.
Specialty Products: Businesses in the Specialty Products segment produce
engineered valves and switches for industrial and aerospace applications,
products for the marine and leisure markets, specialty shock absorbers, brake
friction materials and fluid handling materials such as stainless steel and
flexible tubing for the transportation industry.
RESTATEMENT: Prior years' financial statements have been restated to reflect
the discontinued status of the automotive businesses sold in 1998, as well as
some automotive businesses sold in previous years, and to reflect the new
reporting segments. Unless otherwise indicated, all financial data has been
restated to reflect continuing operations only and all segment related
information has been restated to reflect the four new reporting segments.
ACQUISITIONS: During 1998, the Company continued to make acquisitions intended
to
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strengthen market positions and present the highest potential for creating
value. Most notably, the Company acquired Rule Industries, Inc., Sinton
Engineering Co. Limited and Sinton (UK) Limited, and A.G. Johansons Metallfabrik
AB in its Specialty Products segment, and The Great American Gumball Company in
the Connectors & Switches segment.
RESTRUCTURING AND NONRECURRING ITEMS: In anticipation of a relatively flat
economic environment, the Company announced a structural cost reduction program
on December 2, 1998. The objective of this program is to reduce the structural
cost of doing business and to increase leverage when historical growth trends
resume. The actions taken affect all four segments and include rationalization
of operating locations, consolidation of sales and distribution facilities,
workforce reductions and product pruning. The actions taken also include write-
downs of assets of businesses to be sold and an increase in environmental
reserves. The total restructuring and other nonrecurring charges recorded in the
fourth quarter of 1998 amounted to $368.6 million pretax. Along with actions
taken earlier in 1998, the total restructuring and nonrecurring items for all of
1998 amounted to $399.4 million pretax. Reference is made to Note 5 in the
accompanying Notes to the Consolidated Financial Statements.
SHARE REPURCHASE: In July 1998, the Board of Directors approved and the Company
began a $1.1 billion share repurchase program. This program would use some of
the proceeds from the sales of the two automotive businesses. As of February 28,
1999, approximately 27.3 million shares had been repurchased at an average price
of approximately $35.62 per share for an aggregate amount of approximately
$974.2 million.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997: Net
sales and revenues in 1998 were $4.49 billion, an increase of $285.1 million, or
6.8% compared to 1997. Defense Products & Services' sales and revenues increased
by $197.7 million, or 18%, due primarily to the Kaman Sciences acquisition at
the end of 1997 and increases in international sales. Pumps & Complementary
Products' sales increased $309.8 million, or 21.2%, due primarily to the
inclusion of Goulds (a 1997 acquisition) for an additional five months.
Specialty Products' sales increased $26.1 million, or 3.2%, due to increased
sales volume in aerospace controls, friction material and shock absorber
businesses as well as the acquisitions of Rule, Sinton, and A.G. Johansons.
These improvements were partly offset by the impact of the General Motors
strike. These increases more than offset the loss of sales due to the
dispositions of non-core businesses.
Gross margin increased to 23.6% in 1998 compared to 22.8% in 1997. This
improvement is largely due to cost reductions implemented early in the year at
Connectors & Switches, to offset the weakening market conditions in Asia and a
decline in sales of Mobile Communications products.
Selling, general and administrative expenses of $730.0 million reflect an
increase of $66.3 million, or 10% over 1997, primarily due to the inclusion of
Goulds for an additional five months and Kaman Sciences (a year-end 1997
acquisition) for the full year.
Restructuring and nonrecurring items totaled $399.4 million pretax in 1998
and $137.8 million pretax in 1997.
Other operating expenses of $4.4 million in 1998 and $15.5 million in 1997
include gains and losses from foreign exchange transactions, gains and losses on
sales of assets, and other charges. The $11.1 million favorable variance is
mostly due to higher gains on the sales of fixed assets offset partially by
unfavorable foreign exchange.
The total operating loss in 1998 of $74.6 million includes the
aforementioned restructuring and nonrecurring items of $399.4 million. Excluding
the restructuring and nonrecurring items, operating income was $324.8 million,
an improvement of 16.4% over the 1997 amount of $279.1 million. The increase in
operating income is attributable to improvements across all segments.
Interest expense decreased to $125.8 million in 1998 from $133.2 million in
1997. A portion of the proceeds from the automotive sales was used to
significantly reduce the Company's debt level. The debt reduction primarily
occurred late in the third quarter, thus, the entire annualized interest cost
savings is not reflected. The reduction in debt and subsequent reduction in
interest expense towards the end of
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1998 more than offset increases in interest expense earlier in the year.
Interest income increased to $43.4 million in 1998 from $17.5 million in 1997,
primarily due to higher marketable securities investments ("cash equivalents")
generated from the remaining proceeds from the automotive sales.
Miscellaneous expense of $3.0 million in 1998 and $6.1 million in 1997
includes the results of joint venture investments.
Operating income, net of tax, from discontinued operations declined to
$83.2 million in 1998 from $101.8 million in 1997. The decline was primarily due
to the absence of any income being reflected in the fourth quarter of 1998 for
the automotive businesses that were sold at the end of the third quarter. In
addition, after-tax charges of $18.5 million were recorded in the fourth quarter
of 1998 for residual exposures related to discontinued businesses sold in
previous years as provided for in the 1995 Distribution Agreement under which
ITT Corporation, a Delaware corporation, was divided into three separate and
unrelated entities.
Net income in 1998 was $1.53 billion or $13.55 per diluted share compared
to $108.1 million or $.89 per diluted share in 1997. Included in 1998 net income
is income from discontinued operations of $1.63 billion, or $14.41 per diluted
share, which includes the gains on the sales of automotive operations of $1.55
billion. Excluding the income from discontinued operations, automotive gains,
and restructuring and nonrecurring items, net income was $146.0 million. In
addition, net income for 1997 was also negatively impacted as a result of the
implementation of the Emerging Issues Task Force Issue No. 97-13, which required
that reengineering costs incurred in connection with software installation
efforts be expensed as incurred and that costs previously capitalized be
written-off. As a consequence, net income for 1997 was adversely impacted by
$5.6 million after-tax, or $.05 per diluted share.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996: Net
sales and revenues in 1997 were $4.21 billion, compared with net sales and
revenues of $3.74 billion in 1996. The increase was primarily at the Company's
Pumps & Complementary Products segment as well as the Defense Products &
Services segment. Higher sales at the Pumps & Complementary Products segment
were a result of the May 1997 acquisition of Goulds. Higher sales at the Defense
Products & Services segment resulted from strong order input. These increases
more than offset the loss of sales due to the divestiture of non-core
businesses.
Gross margin increased to 22.8% in 1997, compared to 21.0% in 1996. The
improvement was mainly due to changes in the Company's business portfolio
through acquisitions, dispositions, and market share gains. The Company improved
the mix of its higher-margin businesses in the Pumps & Complementary Products
segment, Defense Products & Services segment, and Connectors & Switches segment,
in addition to disposing of lower-margin, non-core businesses.
Selling, general and administrative expenses of $663.7 million in 1997
reflect an increase of $99.6 million over 1996. The acquisition of Goulds in May
1997 added $85.1 million of such expenses in 1997 compared to 1996.
Restructuring and nonrecurring items were $137.8 million in 1997. The
Company recognized charges of $65.8 million for estimated losses on the
divestitures of non-core businesses, as well as a charge of $15.0 million to
increase environmental reserves. Also in 1997, asset write-offs and
restructuring charges of $57.0 million were recognized at the Specialty Products
and the Pumps & Complementary Products segments for the rationalization of
production capacity and related workforce reductions.
Other operating expenses were $15.5 million in 1997 compared to other
operating income of $22.3 million in 1996. The unfavorable variance was mostly
due to higher amortization expense resulting from the acquisition of Goulds in
May 1997 and larger net gains on the sales of assets in 1996.
Interest expense decreased to $133.2 million in 1997 from $169.0 million in
1996, reflecting a restructuring of outstanding debt and increasing the amount
of floating rate debt. Interest income decreased to $17.5 million in 1997 from
$32.7 million in 1996, primarily as a result of maintaining lower cash balances
by using available cash to reduce debt.
Miscellaneous expense was $6.1 million in 1997 compared to miscellaneous
income of $1.0 million in 1996. Losses from joint venture
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investments were reported in 1997, as compared to income in 1996.
Income from continuing operations was $11.9 million, or $.10 per diluted
share in 1997, compared with $66.4 million, or $.55 per diluted share in 1996.
The decline was mainly due to the $84.0 million of after-tax restructuring and
nonrecurring items, or $.69 per diluted share. Excluding the restructuring and
nonrecurring items, 1997 income from continuing operations was $95.9 million, or
$.79 per diluted share.
Operating income, net of tax, from discontinued operations declined to
$101.8 million in 1997 from $156.2 million in 1996. The decline was primarily
due to after-tax restructuring and nonrecurring items of $53.1 million recorded
in 1997.
Net income in 1997 was $108.1 million, or $.89 per diluted share, compared
with $222.6 million, or $1.85 per diluted share, in 1996.
BUSINESS SEGMENTS
Sales and revenues and operating income for each of the Company's four
major business segments were as follows (in millions):
DEFENSE PUMPS & DISPOSITIONS,
CONNECTORS & PRODUCTS & COMPLEMENTARY SPECIALTY OTHER &
YEAR ENDED DECEMBER 31, SWITCHES SERVICES PRODUCTS PRODUCTS ELIMINATIONS CORPORATE TOTAL
- ----------------------- ------------ ---------- ------------- --------- ------------- --------- --------
1998
Sales and revenues...... $ 527.9 $1,293.4 $1,770.0 $849.3 $ 52.1 $ -- $4,492.7
Operating income (loss):
Before restructuring
and nonrecurring
items............... 52.7 97.9 145.5 90.9 5.4 (67.6) 324.8
Restructuring and
nonrecurring
items............... (102.4) (69.6) (147.6) (9.0) 31.0 (101.8) (399.4)
------- -------- -------- ------ ------ ------- --------
Total operating income
(loss)................ $ (49.7) $ 28.3 $ (2.1) $ 81.9 $ 36.4 $(169.4) $ (74.6)
1997
Sales and revenues...... $ 537.7 $1,095.7 $1,460.2 $823.2 $290.8 $ -- $4,207.6
Operating income (loss):
Before restructuring
and nonrecurring
items............... 41.9 81.4 130.2 89.6 (4.1) (59.9) 279.1
Restructuring and
nonrecurring
items............... -- -- (44.1) (12.9) (65.8) (15.0) (137.8)
------- -------- -------- ------ ------ ------- --------
Total operating income
(loss)................ $ 41.9 $ 81.4 $ 86.1 $ 76.7 $(69.9) $ (74.9) $ 141.3
1996
Sales and revenues...... $ 501.3 $1,011.9 $1,018.1 $780.9 $432.3 $ -- $3,744.5
Total operating income
(loss)................ $ 34.0 $ 73.2 $ 91.5 $ 96.0 $ 4.9 $ (53.6) $ 246.0
Sales and revenues for Connectors & Switches were off 1.8% from 1997 due to
lower demand in Asia and a decline in sales of Mobile Communications products.
These reductions were partly offset by significant revenue increases in the
Network Systems, Switches, and RF Products units. Excluding restructuring and
nonrecurring items, operating income increased 25.8% over 1997 due to improved
cost structure and the launch of new commercial products. In 1997, sales
increased 7.3% over 1996 and operating income in 1997 increased 23.3% over 1996.
The improvement in sales was mainly due to better conditions in the interconnect
market, especially in the Information Systems portion of the market. The
improvement in operating income was mostly due to strong market conditions, cost
reductions, and new product launches. Connectors & Switches' order backlog was
$130.2 million at December 31, 1998 compared to $131.7 million at year-end 1997.
Sales and revenues for Defense Products & Services increased 18% over 1997
due to the acquisition of Kaman Sciences and an increase in international sales.
The segment has experienced six consecutive years of double-digit growth in
sales outside the United States. International sales now represent 21.6% of
sales, up from 15.4% in 1997. Excluding restructuring and nonrecurring items,
operating income increased 20.3% in 1998 due to increased sales and revenues as
mentioned above and continued productivity improvements.
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The 1997 sales and revenues increased 8.3% over 1996 due to strong order input
received for the SINCGARS tactical communication products and other defense
products. The 1997 operating income increased 11.2% over 1996 resulting
primarily from the higher sales of defense products. Defense Products &
Services' order backlog was $2.22 billion at December 31, 1998 compared with
$2.11 billion at year-end 1997. Approximately 98% of 1998, 1997 and 1996 Defense
Products & Services' sales and revenues were to governmental entities, of which
74%, 83% and 78%, respectively, were to the military and space programs of the
U.S. government.
Pumps & Complementary Products' sales for the year increased 21.2% over
sales in 1997 primarily due to the inclusion of Goulds for an additional five
months in 1998. In addition, slower industrial markets offset stronger
water/waste water activity. Sales in North America were up due to an increase in
U.S. market share of nearly two percentage points, as well as favorable weather
conditions including a dry Southwest and wet Northeast. Excluding restructuring
and nonrecurring items, operating income increased 11.8% due to the inclusion of
Goulds for an additional five months and continued cost control activities and
consolidation efforts in this segment. Sales in 1997 increased 43.4% over sales
in 1996. The increase was mainly due to the acquisition of Goulds in May 1997,
which also accounted for the $38.7 million increase in operating profit before
restructuring and nonrecurring items.
Specialty Products' sales for the year were $849.3 million, up $26.1
million or 3.2%, due to increased sales volume in the aerospace controls,
friction material and shock absorber businesses. The acquisitions of Rule,
Sinton and A.G. Johansons also contributed to the improvement. Further, the
segment was unfavorably impacted by the General Motors strike. Excluding
restructuring and nonrecurring items, operating income was up 1.5%. The 1997
sales were 5.4% higher than 1996 sales. The increase was mainly due to higher
sales of friction materials and fluid handling products, which more than offset
unfavorable pricing pressures. Operating profit for 1997, before restructuring
and nonrecurring items, declined $6.4 million. The decline was mainly due to
unfavorable pricing pressures and foreign exchange.
RESTRUCTURING AND NONRECURRING ITEMS
During 1998 the Company recorded restructuring and nonrecurring items of
$20.1 million in the first quarter, $10.7 million in the second quarter, and
$368.6 million in the fourth quarter. The majority of these charges relate to
the structural cost reduction program, which was announced by the Company on
December 2, 1998. In anticipation of a relatively flat economic environment, the
Company has undertaken a program to reduce the structural cost of doing business
and to increase leverage when historical growth trends resume. The actions taken
affect all four segments and include rationalization of operating locations,
consolidation of sales and distribution facilities, workforce reductions and
product pruning. The actions taken also include write-downs of businesses to be
sold and an increase in environmental reserves.
In total, restructuring charges of $185.6 million, write-offs of $180.3
million and other of $33.5 million were recorded. Of the total $399.4 million
pretax charges, it is expected that cash of $188.8 million will be used to
complete the various actions included in the plan. All actions contemplated in
the plan are expected to be completed within approximately one year, including
all divestitures of non-core businesses. The restructuring charges include
severance and other related costs for gross headcount reductions of 2,422. Since
the majority of the charges were recorded late in the fourth quarter, only a
relatively small amount of the expected cash to complete the actions had been
spent as of the end of December 31, 1998. Except for environmental remediation
costs, which will extend over many years, the majority of the cash expenditures
to complete the plan are expected to be incurred in 1999.
The restructuring and nonrecurring charges recorded in 1998 are expected to
generate future cash savings for the period 1999-2003 in the amount of $364.2
million. These savings are due to lower costs for facilities and lower salaries
and wages. The restructuring and nonrecurring charges recorded in 1998 are
expected to generate non-cash savings for the period 1999-2003 in the amount of
$78.1 million. These savings are due to lower depreciation expense and lower
goodwill amortization.
During 1997, the Company recorded restructuring and nonrecurring items of
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$137.8 million. Most of this charge was recorded in the third quarter, when the
Company took several actions to strengthen its operating performance and improve
operating efficiencies. The 1997 restructuring charges break down across our
business segments as follows: Pumps & Complementary Products $44.1 million;
Specialty Products $12.9 million; and Headquarters and Other $80.8 million. The
charge consists of $64.7 million for the write-down to fair value of the net
assets of two non-core businesses expected to be divested, $57.0 million for
asset write-offs and severance costs associated with the closure and
consolidation of facilities and related workforce reductions, $15.0 million for
an increase in environmental reserves, and $1.1 million loss on the sale of a
non-core business. The projected cash to complete these actions was $36.4
million. All cash expenditures contemplated by the charges, except for some
minor litigation issues and ongoing environmental remediation efforts, have been
incurred by the end of 1998.
For more details of the restructuring and nonrecurring items recorded in
1998 and 1997, see Note 5 in Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash from operating activities of $188.5 million and total divestiture
proceeds of $3.7 billion were used primarily for debt repayment of approximately
$1.48 billion, repurchases of common stock of $830.8 million, capital
expenditures of $212.9 million, acquisitions of $79.6 million, dividend payments
of $70.5 million, and $624.7 million to fund the Company's discontinued
automotive operations and to pay sales-related costs.
DIVESTITURES: During the third quarter of 1998, the Company sold its automotive
Brake and Chassis and Electrical Systems businesses for combined proceeds of
$3.7 billion. As of December 31, 1998, taxes paid on the gains were
approximately $439.1 million. Additional taxes relating to the gains on the
sales will be paid in 1999. In addition to the taxes, approximately $106.0
million of the costs associated with the sales have been paid by the end of
1998. In the current year, the Company also divested its Barton fluid
measurement and Pomona electronics units. Total proceeds from divestitures
amounted to $3.75 billion for the year.
SHARE REPURCHASE: During 1998, the Company repurchased 22,477,283 shares as a
part of its share repurchase program announced on July 29, 1998. The total cost
of the share repurchases was $830.8 million for 1998. In addition, 1,262,422,
2,323,814, and 522,132 shares in 1998, 1997 and 1996, respectively, were
repurchased in connection with stock option exercises.
CASH FLOWS: Cash flows from operating activities were $188.5 million in 1998, a
decrease of $209.2 million, or 52.6% from $397.7 million generated in 1997. In
1998, working capital cash requirements increased, primarily due to higher
inventory levels, the timing of accounts receivable collections, and lower
payables throughout the segments. The decrease in other net operating activities
was mainly due to the timing of pension related payments and a larger
reclassification of gains from asset sales compared to prior years, resulting
primarily from the sales of Barton and Pomona units, to proceeds from the sale
of assets.
DEBT AND CREDIT FACILITIES: External debt at December 31, 1998 was $767.1
million, compared to $2.17 billion at December 31, 1997. Proceeds from the
divestiture of the Company's automotive businesses were used to significantly
reduce the debt level. The maximum amount of borrowing available under the
Company's revolving credit agreement at December 31, 1998 was $1.50 billion.
ADDITIONS TO PLANT, PROPERTY AND EQUIPMENT: Capital expenditures during 1998
were $212.9 million, a slight increase from $212.5 million in 1997.
Approximately 35.3% of the 1998 spending was incurred at Pumps & Complementary
Products related to expansion of production capacity and distribution of
submersible pumps, new product lines and expansion into developing countries.
Approximately 25.1% was incurred at Specialty Products related to expansion of
production capacity at Friction Materials plants and installation of assembly
equipment at Shock and Fluid Handling plants to cover new models. The Shocks'
facility was expanded to house new assembly equipment. Additions to plant,
property and equipment in future periods are expected to be somewhat higher than
1998
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levels and are expected to be funded through the internal cash flows of the
Company.
At December 31, 1998, contractual commitments have been made for future
expenditures totaling $35.1 million.
ACQUISITIONS: During 1998, the Company acquired Rule, Sinton, A.G. Johansons,
and The Great American Gumball Company for which it paid a total of $79.6
million. The acquisitions were accounted for as purchases and, accordingly, the
results of operations of each acquired company are included in the income
statement from the date of acquisition. The Company expects to use a portion of
the proceeds from the sales of the automotive Brake and Chassis and Electrical
Systems businesses to finance additional acquisitions. In 1997, the Company
acquired Goulds, Kaman Sciences, and several smaller businesses for which it
paid a total of $1.03 billion.
MARKET RISK EXPOSURES
The Company, in the normal course of doing business, is exposed to the risks
associated with changes in interest rates, currency exchange rates, and
commodity prices. To limit the risks from such fluctuations, the Company enters
into various hedging transactions that have been authorized pursuant to the
Company's policies and procedures. See Note 1, "Accounting Policies", and Note
16, "Financial Instruments", in the Notes to Consolidated Financial Statements.
To manage exposure to interest rate movements and to reduce its borrowing
costs, the Company has borrowed in several currencies and from various sources
and has used interest rate swaps. At December 31, 1998, the Company's cash and
cash equivalents exceeded its short-term and long-term debt obligations. Based
on this position, which the Company does not expect to continue into 1999, and
the Company's overall exposure to interest rate changes, a 42 basis point
increase in interest rates (which is equivalent to 10% of the Company's weighted
average short-term interest rate at December 31, 1998) on the Company's cash and
cash equivalents, and on its floating rate debt obligations and related interest
rate derivatives, would have a $3.0 million positive effect on the Company's
pretax earnings in the year ending December 31, 1999. A similar 42 basis point
change in interest rates would have a $17.1 million effect on the fair value of
the Company's fixed rate debt and related interest rate derivatives.
The multinational operations of the Company are exposed to foreign currency
exchange rate risk. The Company utilizes foreign currency denominated forward
contracts to hedge against adverse changes in foreign exchange rates. Such
contracts generally have durations of less than one year. The Company has also
utilized foreign currency denominated debt instruments to selectively hedge its
net long-term investments in foreign countries. The Company's largest exposures
to foreign exchange rates primarily exist with the Deutsche Mark, Belgian Franc,
Swedish Krona, and Italian Lira against the U.S. Dollar.
A 10% adverse change in currency exchange rates for the Company's foreign
currency derivatives and other foreign currency denominated financial
instruments, held as of December 31, 1998, would have an impact of approximately
$41.6 million on the fair value of such instruments. The Company uses derivative
instruments to hedge exposures, and as such, the quantification of the Company's
market risk for foreign exchange financial instruments does not account for the
offsetting impact of the Company's underlying investment and transactional
positions.
The Company purchases various non-ferrous metals for use in the production
of certain of its products and on a limited basis, in 1997, used commodity based
financial instruments to hedge the cost of anticipated purchases of non-ferrous
metals. The contracts expired in 1998. Commodity derivative activity is not
material to the Company's consolidated financial position, results of
operations, or cash flows.
INCOME TAXES
FOREIGN TAX CREDITS: As a global company, the Company makes provisions for, and
pays taxes, in numerous jurisdictions, some of which impose income taxes in
excess of equivalent U.S. domestic rates. Credit for such taxes is generally
available under U.S. tax laws when earnings are remitted or deemed to be
remitted to the U.S. As of the end of 1998, the Company was able to fully
utilize credits for income taxes paid in foreign jurisdictions in its U.S.
consolidated tax return. However, in future years
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the Company may not be able to fully utilize such credits.
DEFERRED TAX ASSETS: The Company had a deferred tax asset of $367.4 million at
December 31, 1998 and $295.3 million at December 31, 1997. The deferred tax
asset for both periods is composed of U.S., foreign, and state and local
deferred tax assets. The increase of $72.1 million is substantially due to the
restructuring and other nonrecurring items recorded in 1998 and certain expenses
related to the automotive sales that are not deductible in tax returns in 1998.
It is management's expectation that the Company will have sufficient future
taxable income from continuing operations to utilize these deductions in future
periods.
RISKS AND UNCERTAINTIES
SALES OF BUSINESSES: The Company from time to time has made dispositions of
various businesses, including the dispositions of most of its automotive
businesses referred to in "Highlights -- Sales of ITT Automotive Businesses"
herein. Certain of those dispositions have resulted in various claims or legal
actions. Although it cannot be determined at this time whether or to what extent
the Company will face obligations with respect to such claims or legal actions,
management does not believe that any such obligation would have a material
adverse effect on the cash flows, results of operations, or financial condition
of the Company and its subsidiaries on a consolidated basis. See Note 19
"Commitments and Contingencies" in Notes to Consolidated Financial Statements.
ENVIRONMENTAL MATTERS: The Company is subject to stringent environmental laws
and regulations that affect its operating facilities and impose liability for
the cleanup of past discharges of hazardous substances. In the United States,
these laws include the Federal Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, and the Comprehensive Environmental Response,
Compensation and Liability Act. Management believes that the Company is in
substantial compliance with these and all other applicable environmental
requirements. Environmental compliance costs are accounted for as normal
operating expenses.
In estimating the costs of environmental investigation and remediation, the
Company considers, among other things, regulatory standards, its prior
experience in remediating contaminated sites, and the professional judgment of
environmental experts. It is difficult to estimate the total costs of
investigation and remediation due to various factors, including incomplete
information regarding particular sites and other potentially responsible
parties, uncertainty regarding the extent of contamination and the Company's
share, if any, of liability for such problems, the selection of alternative
remedies, and changes in cleanup standards. When it is possible to create
reasonable estimates of liability with respect to environmental matters, the
Company establishes reserves in accordance with generally accepted accounting
principles. Insurance recoveries are recorded when fixed and determinable.
Although the outcome of the Company's various remediation efforts presently
cannot be predicted with a high level of certainty, management does not expect
that these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
YEAR 2000 READINESS DISCLOSURE: The year 2000 ("Y2K") issue arises because many
computer systems and other equipment with embedded technology use only two
digits to define the applicable year and may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in failures or
miscalculations causing disruptions of normal business activities and
operations. The Company has undertaken initiatives and developed processes
intended to ensure that its computer systems and other equipment with embedded
technology are in a state of Y2K readiness so that such failures and
miscalculations can be avoided or their effects mitigated if they occur.
The Company, through the efforts of its information technology,
manufacturing, purchasing, engineering, quality assurance and other
professionals, has conducted a comprehensive inventory and assessment of
software and equipment to determine their state of Y2K readiness. Such
professionals determined that it would be necessary to modify, upgrade or
replace portions of such software and equipment. The process of modifying and
upgrading or replacing such software and equipment has been under way since
early 1997. As of December 31, 1998, the Company estimates that approximately
80% of
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software and equipment essential to the operations of the business, and 75% of
all other software and equipment, has been modified, upgraded or replaced and
tested to confirm Y2K compliance, based upon the number of items the Company has
identified which require remediation. The Company believes that all software and
equipment essential to the operations of the business will be made Y2K compliant
by early in the third quarter 1999, and all other software and equipment deemed
to require modification, upgrading or replacement should be completed by the end
of the third quarter 1999.
The Company has also been engaged in communications with its vendors,
service providers and other third parties with which it has business
relationships to determine the extent to which these third parties are engaged
in activities to assure their own Y2K readiness, and to determine the extent to
which the Company would be vulnerable to a third party's failure to address its
own issues. The Company is continuing the process of determining third party Y2K
readiness and as of December 31, 1998 had communicated with all critical
suppliers and vendors who supply products and services critical to the
operations of the Company's businesses. The Company has utilized questionnaires,
telephone interviews, site visits and audits in an effort to assess preparedness
of such suppliers and vendors, and, based on the results of these efforts,
believes that approximately 30% of such suppliers and vendors were Y2K ready as
of December 31, 1998. The Company hopes to be able to complete its assessment of
supplier/vendor Y2K readiness by early April, 1999. Alternative supply
arrangements or other contingency plans will be considered for those critical
suppliers/vendors who are not assessed as being Y2K ready by then.
The Company is developing contingency plans and estimates of the costs of
implementing such plans in the event the Company or certain third parties fail
to complete their Y2K readiness initiatives on a timely basis. Such contingency
plans may include: stockpiling raw materials, increasing inventory levels,
qualifying alternate sources of supply, considering alternative power sources,
scheduling factory holiday shutdown after the new year, and other similar
measures. The Company expects to continue its risk analysis and contingency
planning throughout 1999, as additional information regarding Y2K readiness of
third parties becomes known.
The Company derives approximately 34% of its consolidated revenues from
outside of the United States, primarily Western Europe, the United Kingdom and
Canada. The Company is also developing contingency plans and cost estimates of
implementing such plans that it believes at this time may be necessary to
mitigate the effect of possible business and operating disruptions in other
countries resulting from lack of Y2K readiness of third parties in such
countries.
The Company anticipates that the "most reasonably likely worst case
scenario" associated with the Y2K issue would result from disruptions in its
supply chain with respect to materials used in the manufacturing process or
other products and services provided by third parties essential to the Company's
operations. However, the Company does not believe that any such disruption
should have a material effect on the Company's financial condition.
Currently, the Company estimates that the aggregate cost of its Y2K
initiatives will total approximately $20 million. As of December 31, 1998,
approximately $10.6 million of costs related to its Y2K initiatives have been
incurred, approximately 80% of which has been expensed. The Company does not
separately track the cost of internal professionals who are involved in its Y2K
readiness activities; however such costs are principally related to their
payroll costs. The Company does not believe that the costs of these Y2K
initiatives should be material to the Company's consolidated financial
condition, results of operations, or cash flows. However, a failure by the
Company to complete the necessary modifications, upgrades, replacements and
testing on a timely basis or to develop and implement appropriate contingency
plans could result in lost or delayed sales and revenue. In addition, if third
parties, including those in countries outside of the United States, fail to
complete their Y2K readiness programs on a timely basis, the Company's results
could be negatively affected.
The costs of the Company's Y2K readiness initiatives and the dates on which
the Company believes that it and the operating segments will complete such
activities are estimates and subject to change. Actual results could differ from
those currently anticipated. Specific factors that could cause such differences
include, but
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are not limited to, the availability and cost of personnel trained in Y2K
issues; the ability to identify, assess, modify, upgrade, replace and test all
relevant software and equipment; the failure of third parties to satisfactorily
address their Y2K issues on a timely basis; the failure of countries outside the
United States in which the Company conducts business to satisfactorily address
Y2K issues; and similar uncertainties.
EURO CONVERSION ISSUE: The Company is addressing issues raised by the
conversion to the Euro, such as assessing whether cross-border price
transparency will affect price structures for similar products and adapting its
information technology systems. The Company's efforts to adapt its systems
differ at its various European operations. All operations are able to
accommodate Euro-denominated invoicing and purchasing transactions. The
Company's European operations are formulating plans to accommodate all
Euro-denominated transactions and triangulation conventions by January 1, 2002,
and some of these operations have already implemented the utilization of the
Euro as a transactional currency. The Company anticipates that its costs in
connection with the Euro conversion will not be material. Further, the Company
does not anticipate that the conversion from the legacy currencies to the Euro
would have a material adverse impact on its consolidated financial condition,
results of operations, or cash flows.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document, including in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations (most particularly, material presented under "Restructuring and
Nonrecurring Items", "Liquidity and Capital Resources", "Market Risk Exposures",
and "Risks and Uncertainties"), that are not historical facts, constitute
"Forward-Looking Statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual results
or performance of the Company and its businesses to be materially different from
that expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business conditions;
political, social and economic conditions and local regulations in the countries
in which the Company conducts its businesses; government regulations and
compliance therewith; demographic changes; sales and revenues mix; pricing
levels; changes in sales and revenues to, or the identity of, significant
customers; changes in technology; industry capacity and production rates;
ability of outside third parties to comply with their commitments; competition;
capacity constraints; availability of raw materials and adequate labor;
availability of appropriate professional expertise; availability of liquidity
sufficient to meet the Company's needs; the ability to adapt to changes
resulting from acquisitions and divestitures and to effect cost reduction
programs and various other factors referenced in this Management's Discussion
and Analysis.
Our Connectors & Switches business could be affected by the economic
conditions in foreign markets, both those in which we currently participate, and
those that we are trying to enter; the level of defense funding by domestic and
foreign governments; and the cyclical nature of the industry.
Our Defense Products & Services business could be affected by factors
including the level of defense funding by domestic and foreign governments; our
ability to receive contract awards; and our ability to develop and market
products and services for customers outside of traditional markets.
Our Pumps & Complementary Products business could be affected by factors
including global economic conditions; governmental funding levels; international
demand for fluid management products; the ability to successfully expand into
new geographic markets; weather conditions; and continued demand for replacement
parts.
Our Specialty Products business could be affected by the cyclical nature of
the transportation industries; strikes at major auto producers; and
international demand for fluid management products.
The Company assumes no obligation to update forward-looking statements to
reflect actual results or changes in or additions to the factors affecting such
forward-looking statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 7A is provided under the caption "Market
Risk Exposures" in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations and in the Notes to Consolidated Financial
Statements herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedule herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 with respect to directors is
incorporated herein by reference to the definitive proxy statement involving the
election of directors filed or to be filed by ITT Industries with the Securities
and Exchange Commission pursuant to Regulation 14A within 120 days after the end
of the fiscal year covered by this Form 10-K Annual Report.
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 ITT
Industries."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. See Index to Consolidated Financial Statements and Schedule
appearing on page F-1 for a list of the financial statements and schedule
filed as a part of this report.
2. See Exhibit Index appearing on pages II-2, II-3 and II-4 for a list
of the exhibits filed or incorporated herein as a part of this report.
(b) On October 13, 1998, ITT Industries, Inc. filed a Form 8-K Current
Report to report the closing of the sales of its automotive Brake and Chassis
business and its automotive Electrical Systems business.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
PAGE
----
Report of Management........................................ F-2
Report of Independent Public Accountants.................... F-3
Consolidated Income Statements for the three years ended
December 31, 1998......................................... F-4
Consolidated Statements of Comprehensive Income for the
three years ended December 31, 1998....................... F-5
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-6
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998................................... F-7
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 1998............... F-8
Notes to Consolidated Financial Statements.................. F-9
Business Segment Information................................ F-24
Geographical Information.................................... F-25
Sales and Revenues by Product Category...................... F-25
Quarterly Results for 1998 and 1997......................... F-27
Valuation and Qualifying Accounts........................... S-1
F-1
29
ITT INDUSTRIES, INC. AND SUBSIDIARIES
REPORT OF MANAGEMENT
The management of ITT Industries, Inc. is responsible for the preparation
and integrity of the information contained in the consolidated financial
statements and other sections of this document. The consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and, where necessary, include amounts that are based on management's
informed judgments and estimates. Other information herein is consistent with
the consolidated financial statements.
ITT Industries' consolidated financial statements are audited by Arthur
Andersen LLP, independent public accountants, whose appointment is ratified by
the shareholders. Management has made ITT Industries' financial records and
related data available to Arthur Andersen LLP, and believes that the
representations made to the independent public accountants are valid and
complete.
ITT Industries' system of internal controls is a major element in
management's responsibility to assure that the consolidated financial statements
present fairly the Company's financial condition. The system includes both
accounting controls and the internal auditing program, which are designed to
provide reasonable assurance that the Company's assets are safeguarded, that
transactions are properly recorded and executed in accordance with management's
authorization, and that fraudulent financial reporting is prevented or detected.
ITT Industries' internal controls provide for the careful selection and
training of personnel and for appropriate divisions of responsibility. The
controls are documented in written codes of conduct, policies, and procedures
that are communicated to ITT Industries' employees. Management continually
monitors the system of internal controls for compliance. In addition, based upon
management's assessment of risk, both operational and financial, special reviews
are performed by contracted auditors to periodically test the effectiveness of
selected controls. The independent public accountants also evaluate internal
controls and perform tests of procedures and accounting records to enable them
to express their opinion on ITT Industries' consolidated financial statements.
They also make recommendations for improving internal controls, policies, and
practices. Management takes appropriate action in response to each
recommendation.
The Audit Committee of the Board of Directors, composed of non-employee
directors, meets periodically with management and with the independent public
accountants and contracted auditors to evaluate the effectiveness of the work
performed by them in discharging their respective responsibilities.
/s/ TRAVIS ENGEN
- ------------------------------------------------------
Travis Engen
Chairman and
Chief Executive
/s/ HEIDI KUNZ
- ------------------------------------------------------
Heidi Kunz
Executive Vice President and
Chief Financial Officer
F-2
30
ITT INDUSTRIES, INC AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ITT Industries, Inc.:
We have audited the consolidated financial statements of ITT Industries,
Inc. (an Indiana corporation) and subsidiaries as of December 31, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998, as
described in the accompanying Index to Consolidated Financial Statements and
Schedule. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ITT
Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1997,
the Company changed its method of accounting for reengineering costs incurred in
connection with the development and installation of software for internal use in
accordance with the Emerging Issues Task Force Issue No. 97-13.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
STAMFORD, CONNECTICUT
JANUARY 27, 1999
F-3
31
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Sales and revenues........................................ $4,492.7 $4,207.6 $3,744.5
-------- -------- --------
Costs of sales and revenues............................... 3,165.9 2,982.7 2,690.4
Selling, general and administrative expenses.............. 730.0 663.7 564.1
Research, development and engineering expenses............ 267.6 266.6 266.3
Restructuring and nonrecurring items...................... 399.4 137.8 --
Other operating expenses (income)......................... 4.4 15.5 (22.3)
-------- -------- --------
Total costs and expenses........................ 4,567.3 4,066.3 3,498.5
-------- -------- --------
Operating income (loss)................................... (74.6) 141.3 246.0
Interest expense.......................................... (125.8) (133.2) (169.0)
Interest income........................................... 43.4 17.5 32.7
Miscellaneous income (expense)............................ (3.0) (6.1) 1.0
-------- -------- --------
Income (loss) from continuing operations before income tax
expense................................................. (160.0) 19.5 110.7
Income tax (expense) benefit.............................. 62.4 (7.6) (44.3)
-------- -------- --------
Income (loss) from continuing operations.................. (97.6) 11.9 66.4
Discontinued operations:
Operating income, net of tax of $53.1, $65.1 and
$104.1............................................... 83.2 101.8 156.2
Gain on sales of ITT Automotive, net of tax of $835.0... 1,546.9 -- --
Cumulative effect of accounting change, net of tax benefit
of $3.6................................................. -- (5.6) --
-------- -------- --------
Net income................................................ $1,532.5 $ 108.1 $ 222.6
======== ======== ========
EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations
Basic................................................... $ (.86) $ .10 $ .56
Diluted................................................. $ (.86) $ .10 $ .55
Discontinued operations
Basic................................................... $ 14.41 $ .86 $ 1.33
Diluted................................................. $ 14.41 $ .84 $ 1.30
Cumulative effect of accounting change
Basic................................................... -- (.05) --
Diluted................................................. -- (.05) --
Net income
Basic................................................... $ 13.55 $ .91 $ 1.89
Diluted................................................. $ 13.55 $ .89 $ 1.85
AVERAGE COMMON SHARES -- BASIC............................ 113.1 118.4 117.9
AVERAGE COMMON SHARES -- DILUTED.......................... 113.1 121.0 120.4
The accompanying Notes to Consolidated Financial Statements
are an integral part of the above statements.
F-4
32
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------
PRETAX TAX (EXPENSE) AFTER-TAX
INCOME (EXPENSE) BENEFIT AMOUNT
---------------- ------------- ---------
Net income...................................... $1,532.5
Other income (loss):
Foreign currency translation:
Adjustments arising during period.......... $ 18.0 $ 3.0 21.0
Reclassifications included in net income... (182.7) (22.1) (204.8)
Unrealized gain (loss) on investment
securities................................. (2.1) -- (2.1)
------- ------ --------
Total other income (loss)............. $(166.8) $(19.1) (185.9)
--------
COMPREHENSIVE INCOME............................ $1,346.6
========
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------
PRETAX TAX (EXPENSE) AFTER-TAX
INCOME (EXPENSE) BENEFIT AMOUNT
---------------- ------------- ---------
Net income...................................... $108.1
Other income (loss):
Foreign currency translation:
Adjustments arising during period.......... $ 38.3 $(7.5) 30.8
Reclassifications included in net income... (24.1) (1.1) (25.2)
Unrealized gain (loss) on investment
securities................................. 1.6 -- 1.6
------ ----- ------
Total other income (loss)............. $ 15.8 $(8.6) 7.2
------
COMPREHENSIVE INCOME............................ $115.3
======
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------
PRETAX TAX (EXPENSE) AFTER-TAX
INCOME (EXPENSE) BENEFIT AMOUNT
---------------- ------------- ---------
Net income...................................... $222.6
Other income (loss):
Foreign currency translation:
Adjustments arising during period.......... $6.5 $(6.4) 0.1
---- ----- ------
Total other income (loss)............. $6.5 $(6.4) 0.1
------
COMPREHENSIVE INCOME............................ $222.7
======
The accompanying Notes to Consolidated Financial Statements
are an integral part of the above statements.
F-5
33
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
1998 1997
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 880.9 $ 192.2
Receivables, net.......................................... 842.6 727.1
Inventories, net.......................................... 578.9 572.4
Other current assets...................................... 80.0 82.7
-------- --------
Total current assets.............................. 2,382.4 1,574.4
Plant, property and equipment, net.......................... 991.6 1,031.2
Deferred income taxes....................................... 367.4 295.3
Goodwill, net............................................... 865.3 859.6
Other assets................................................ 442.1 366.5
Net assets of discontinued operations....................... -- 931.4
-------- --------
$5,048.8 $5,058.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Commercial paper.......................................... $ -- $ 698.4
Accounts payable.......................................... 396.2 409.3
Accrued expenses.......................................... 932.9 701.7
Accrued taxes............................................. 570.1 143.4
Notes payable and current maturities of long-term debt.... 251.6 943.0
-------- --------
Total current liabilities......................... 2,150.8 2,895.8
Pension benefits............................................ 178.0 165.1
Postretirement benefits other than pensions................. 241.9 263.9
Long-term debt.............................................. 515.5 531.2
Other liabilities........................................... 662.6 380.1
-------- --------
3,748.8 4,236.1
Shareholders' Equity:
Common stock: Authorized -- 200,000,000 shares, $1 par
value per share Outstanding -- 95,967,976 shares and
118,445,827 shares..................................... 96.0 118.4
Capital surplus........................................... -- 397.0
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on investment securities........ (0.5) 1.6
Cumulative translation adjustments..................... (67.0) 116.8
-------- --------
(67.5) 118.4
Retained earnings......................................... 1,271.5 188.5
-------- --------
1,300.0 822.3
-------- --------
$5,048.8 $5,058.4
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of the above statements.
F-6
34
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- -------
OPERATING ACTIVITIES
Net income.............................................. $ 1,532.5 $ 108.1 $ 222.6
Discontinued operations:
Operating income...................................... (83.2) (101.8) (156.2)
Gain on sales of ITT Automotive....................... (1,546.9) -- --
Cumulative effect of accounting change.................. -- 5.6 --
--------- --------- -------
Income (loss) from continuing operations................ (97.6) 11.9 66.4
Adjustments to income (loss) from continuing operations:
Depreciation.......................................... 157.5 166.9 177.7
Amortization.......................................... 38.1 30.0 9.6
Nonrecurring charges.................................. 430.5 136.7 --
Change in receivables, inventories, accounts payable,
and accrued expenses.................................. (137.6) 100.0 (68.1)
Change in accrued and deferred taxes.................... (136.4) (43.9) 53.8
Other, net.............................................. (66.0) (3.9) 2.3
--------- --------- -------
Cash from operating activities........................ 188.5 397.7 241.7
--------- --------- -------
INVESTING ACTIVITIES
Additions to plant, property and equipment.............. (212.9) (212.5) (176.0)
Acquisitions............................................ (79.6) (1,026.2) --
Proceeds from sale of assets............................ 3,745.1 21.1 133.4
Other, net.............................................. 3.9 (0.8) (0.1)
--------- --------- -------
Cash from (used for) investing activities............. 3,456.5 (1,218.4) (42.7)
--------- --------- -------
FINANCING ACTIVITIES
Short-term debt, net.................................... (1,419.8) 1,058.6 (111.4)
Long-term debt repaid................................... (61.4) (259.7) (66.5)
Long-term debt issued................................... 9.0 1.4 1.1
Repurchase of common stock.............................. (830.8) (67.8) (11.4)
Dividends paid.......................................... (70.5) (71.1) (53.4)
Other, net.............................................. 39.5 36.0 31.1
--------- --------- -------
Cash from (used for) financing activities............. (2,334.0) 697.4 (210.5)
--------- --------- -------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS...... 2.4 (10.9) (12.1)
--------- --------- -------
CASH FROM (USED FOR) DISCONTINUED OPERATIONS............ (624.7) 204.5 51.3
--------- --------- -------
Increase in cash and cash equivalents................... 688.7 70.3 27.7
Cash and cash equivalents -- beginning of year.......... 192.2 121.9 94.2
--------- --------- -------
CASH AND CASH EQUIVALENTS -- END OF YEAR................ $ 880.9 $ 192.2 $ 121.9
========= ========= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.............................................. $ 121.8 $ 111.9 $ 158.7
Income taxes.......................................... $ 107.1 $ 84.2 $ 24.2
The accompanying Notes to Consolidated Financial Statements
are an integral part of the above statements.
F-7
35
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SHARES OUTSTANDING DOLLARS
----------------------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- -------- ------ ------
COMMON STOCK
Beginning balance.................. 118,445,827 118,436,579 117,068,833 $ 118.4 $118.4 $117.1
Stock incentive plans.............. 1,261,854 2,333,062 1,889,878 1.3 2.3 1.8
Repurchases........................ (1,262,422) (2,323,814) (522,132) (1.3) (2.3) (0.5)
Stock repurchase program........... (22,477,283) -- -- (22.4) -- --
----------- ----------- ----------- -------- ------ ------
Ending Balance..................... 95,967,976 118,445,827 118,436,579 $ 96.0 $118.4 $118.4
----------- ----------- ----------- -------- ------ ------
CAPITAL SURPLUS
Beginning balance.................. $ 397.0 $418.2 $398.5
Stock incentive plans.............. 28.7 43.3 31.7
Repurchases........................ (46.9) (64.5) (12.0)
Stock repurchase program........... (378.8) -- --
-------- ------ ------
Ending Balance..................... $ -- $397.0 $418.2
-------- ------ ------
UNREALIZED GAIN (LOSS) ON INVESTMENT
SECURITIES, NET OF TAX
Beginning balance.................. $ 1.6 $ -- $ --
Unrealized gain (loss)............. (2.1) 1.6 --
-------- ------ ------
Ending Balance..................... $ (0.5) $ 1.6 $ --
-------- ------ ------
CUMULATIVE TRANSLATION ADJUSTMENTS
Beginning balance.................. $ 116.8 $111.2 $111.1
Translation of foreign currency
financial statements............. 21.0 30.8 0.1
Sale of net foreign investments.... (204.8) (25.2) --
-------- ------ ------
Ending Balance..................... $ (67.0) $116.8 $111.2
-------- ------ ------
RETAINED EARNINGS
Beginning balance.................. $ 188.5 $151.4 $ --
Net income......................... 1,532.5 108.1 222.6
Common stock dividend declared --
$.60, $.60 and $.60.............. (68.1) (71.0) (71.2)
Stock repurchase program........... (381.4) -- --
-------- ------ ------
Ending Balance..................... $1,271.5 $188.5 $151.4
-------- ------ ------
TOTAL SHAREHOLDERS' EQUITY........... $1,300.0 $822.3 $799.2
======== ====== ======
The accompanying Notes to Consolidated Financial Statements
are an integral part of the above statements.
F-8
36
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
1. ACCOUNTING POLICIES
CONSOLIDATION PRINCIPLES: The consolidated financial statements are prepared in
accordance with generally accepted accounting principles and include the
accounts of all majority-owned subsidiaries. All significant intercompany
transactions have been eliminated.
SALES AND REVENUE RECOGNITION: ITT Industries, Inc. (the "Company") recognizes
revenues as services are rendered and recognizes sales as products are shipped
to customers. Sales from long-term contracts in the Defense business are
recognized on the percentage of completion method, generally based on the ratio
of units delivered to total units. Losses on long-term contracts are recognized
when events and circumstances indicate that a loss will be incurred.
RESEARCH, DEVELOPMENT AND ENGINEERING: Significant costs are incurred each year
in connection with research, development, and engineering ("RD&E") programs that
are expected to contribute to future earnings. Such costs are charged to income
as incurred, except to the extent recoverable under existing contracts.
Approximately 67.4%, 68.4%, and 58.4% of total RD&E costs were expended pursuant
to customer contracts for each of the three years ended December 31, 1998, 1997,
and 1996, respectively.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
INVENTORIES: Most inventories are valued at the lower of cost (first-in,
first-out or "FIFO") or market. A full absorption procedure is employed using
standard cost techniques that are customarily reviewed and adjusted annually.
Potential losses from obsolete and slow-moving inventories are provided for when
identified. Goulds' domestic inventories are valued using the last-in, first-out
("LIFO") method and represent 12.3% of total 1998 inventories. There would not
have been a material difference in the value of inventories if the FIFO method
had been used by the Company to value all inventories.
ASSET IMPAIRMENT LOSSES: The Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate that the assets
may be impaired and the undiscounted net cash flows estimated to be generated by
those assets are less than their carrying amounts.
PLANT, PROPERTY AND EQUIPMENT: Plant, property and equipment, including
capitalized interest applicable to major project expenditures, are recorded at
cost. The Company normally claims the maximum depreciation deduction allowable
for tax purposes. In general, for financial reporting purposes, depreciation is
provided on a straight-line basis over the useful economic lives of the assets
involved as follows: buildings and improvements -- 5 to 40 years, machinery and
equipment -- 2 to 10 years, and other -- 5 to 40 years. Gains or losses on sale
or retirement of assets are included in income.
GOODWILL: The excess of cost over the fair value of net assets acquired is
amortized on a straight-line basis generally over a 40 year period. Accumulated
amortization was $50.8 and $40.6 at December 31, 1998 and 1997, respectively.
FOREIGN CURRENCY TRANSLATION: Balance sheet accounts are translated at the
exchange rate in effect at each year-end and income accounts are translated at
the average rates of exchange prevailing during the year. The national
currencies of the foreign companies are generally the functional currencies.
(Gains) losses from foreign currency transactions are reported currently in
other operating expenses (income) and were $(2.2), $(5.5), and $(3.1) in 1998,
1997, and 1996, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company has used a variety of derivative
financial instruments, including interest rate swaps and foreign currency
forward contracts and/or swaps as a means of hedging exposure to interest rate
and foreign currency risks. The Company and its subsidiaries are end-users and
do not utilize these instruments for speculative purposes. The Company has
rigorous standards regarding the financial stability and credit standing of its
major counterparties.
F-9
37
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Should the swap be 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.
ENVIRONMENTAL REMEDIATION COSTS: 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. The Company's estimated liability is
reduced to reflect the anticipated participation of other potentially
responsible parties in those instances where it is probable that such parties
are legally responsible and financially capable of paying their respective
shares of the relevant costs. These accruals are adjusted periodically as
assessment and remediation efforts progress or as additional technical or legal
information becomes available. Actual costs to be incurred at identified sites
in future periods may vary from the estimates, given inherent uncertainties in
evaluating environmental exposures. Accruals for environmental liabilities are
generally included in the balance sheet as "Other liabilities" at undiscounted
amounts and exclude claims for recoveries from insurance companies or other
third parties. Recoveries from insurance companies or other third parties are
recorded as "Other assets" when it is probable that a claim will be realized.
EARNINGS PER SHARE: Basic earnings per share is based on the weighted average
number of common shares outstanding. Diluted earnings per share is based on the
weighted average number of common shares outstanding and potentially dilutive
common shares, which include stock options. However, potential common shares are
not included in the computation of any diluted per share amount when a loss from
continuing operations exists, even when the Company reports net income.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS: Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform with the current year presentation.
RESTATEMENTS: Prior years' financial statements have been restated to reflect
the discontinued status of the ITT Automotive businesses sold in 1998, ITT
Automotive businesses sold in previous years, and for the new segment structure
resulting from the sales of the ITT Automotive businesses and the implementation
of Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information".
2. CHANGES IN ACCOUNTING POLICIES
In January 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires the disclosure of comprehensive income, which
includes, in addition to net income, other comprehensive income consisting of
unrealized gains and losses which bypass the traditional income statement and
are recorded directly into a separate section of shareholders' equity on the
balance sheet. The components of other comprehensive income for the Company
consist of unrealized gains and losses relating to the translation of foreign
currency financial statements, hedges of net foreign investments, and certain
investment securities.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative's fair value be
F-10
38
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement and
requires companies to formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. This statement shall be effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999,
which, for the Company, would be the calendar year beginning January 1, 2000.
The Company has not yet quantified the impacts of adopting SFAS No. 133 on
reported financial results and has not determined the timing of, or method of,
adoption. However, given the current level of the Company's derivative and
hedging activities, the impact is not expected to be material.
In December 1997, the Company changed its method of accounting for
reengineering costs incurred in connection with the development and installation
of software for internal use in accordance with Emerging Issues Task Force
("EITF") Issue No. 97-13. EITF Issue No. 97-13 requires that reengineering costs
which previously could be deferred and amortized be expensed as incurred and
costs previously capitalized be written off in the current year.
3. EARNINGS PER SHARE
A reconciliation of the data used in the calculation of basic and diluted
earnings per share computations for income from continuing operations is as
follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
Basic Earnings Per Share
Income (loss) from continuing operations available to
common shareholders..................................... $(97.6) $ 11.9 $ 66.4
====== ====== ======
Average common shares outstanding......................... 113.1 118.4 117.9
====== ====== ======
Basic earnings per share.................................... $ (.86) $ .10 $ .56
====== ====== ======
Diluted Earnings Per Share
Income (loss) from continuing operations available to
common shareholders..................................... $(97.6) $ 11.9 $ 66.4
====== ====== ======
Average common shares outstanding......................... 113.1 118.4 117.9
------ ------ ------
Add: Stock options........................................ --(a) 2.6(b) 2.5(b)
====== ====== ======
Average common shares outstanding on a diluted basis...... 113.1 121.0 120.4
====== ====== ======
Diluted earnings per share.................................. $(.86) $ .10 $ .55
====== ====== ======
- ---------------
(a) Stock Options of 3,291,544 at the end of 1998 are not included in the
computation of diluted earnings per share because the Company has a loss
from continuing operations and inclusion of the options would be
antidilutive.
(b) Options to purchase 205,900 and 1,924,300 shares of common stock at $31.94
and $25.38 per share were outstanding at December 31, 1997 and 1996,
respectively, but were not included in the computation of diluted EPS
because the options' exercise price was greater than the annual average
market price of the common shares. These options, which expire in 2007 and
2006, were outstanding at the end of the respective periods.
4. ACQUISITIONS
On June 25, 1998 the Company acquired Rule Industries, Inc. ("Rule")from
Kennametal, Inc. for $62.6. The purchase price exceeded the fair value of the
net assets acquired by $53.1 and has been recorded as goodwill, which is being
amortized over 40 years. Rule
F-11
39
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
manufactures marine products, including submersible pumps, anchors and
compasses, and has annual sales of approximately $25. The Company also made
three other small acquisitions during 1998: A.G. Johansons Metallfabrik AB,
Sinton Engineering Co. Limited and Sinton (UK) Limited for our Specialty
Products segment, and The Great American Gumball Company for our Connectors &
Switches segment. These acquisitions were accounted for using the purchase
method. The results of these businesses and of Rule were not material in
relation to the Company's consolidated results of operations.
On May 23, 1997, the Company acquired Goulds Pumps, Incorporated (Goulds)
for a purchase price of $865.2. Complementing the Company's existing pump
businesses, Goulds has been a leader in the manufacture and marketing of high
quality pumps for residential, chemical, sewage and drainage, pulp and paper,
agricultural, mining, and a variety of other applications. The acquisition was
funded with short-term borrowings and was accounted for using the purchase
method. The purchase price was allocated to the assets acquired and the
liabilities assumed. The excess of the purchase price, plus assumed liabilities
of $442, over the fair value of assets acquired was $688 and has been recorded
as goodwill which is being amortized generally over a period of 40 years. The
operating results of Goulds have been included in the consolidated income
statements from the date of acquisition. The following unaudited pro forma
financial information presents results as if the acquisition had occurred at the
beginning of the respective periods.
YEARS ENDED
DECEMBER 31,
----------------------
1997 1996
-------- --------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
Net sales................................................... $4,509.8 $4,518.9
Net income.................................................. 97.0 204.8
Earnings per share -- Basic................................. .82 1.74
Earnings per share -- Diluted............................... .80 1.70
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional depreciation expense as a
result of a step-up in the basis of fixed assets, additional amortization
expense as a result of goodwill arising from the purchase, and increased
interest expense on acquisition debt. The pro forma results are not necessarily
indicative of the results of operations which actually would have resulted had
the purchase been in effect at the beginning of the respective periods or of
future results.
On December 30, 1997, the Company acquired Kaman Sciences Corporation
(renamed ITT Systems & Sciences Corporation) for a purchase price of
approximately $135. ITT Systems & Sciences Corporation supplies the government
with high technology services in information systems. The acquisition was funded
with short-term borrowings and was accounted for using the purchase method. The
purchase price, plus assumed liabilities of $23, exceeded the fair value of
assets acquired by approximately $111, which is being amortized over a 40 year
period and has been recorded as goodwill.
During 1997, the Company also acquired several other businesses at a net
cost of $103.7. The results of operations of these businesses and of ITT Systems
& Sciences Corporation were not material in relation to the Company's
consolidated results of operations.
5. RESTRUCTURING AND NONRECURRING ITEMS
During 1998, the Company recorded restructuring and other nonrecurring
items of $20.1 in the first quarter, $10.7 in the second quarter, and $368.6 in
the fourth quarter. The majority of these charges relate to the structural cost
reduction program which was announced by the Company on December 2, 1998. In
anticipation of a relatively flat economic
F-12
40
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
environment, the Company has undertaken a program to reduce the structural cost
of doing business and to increase leverage when historical growth trends resume.
The actions taken affect all four segments and include rationalization of
operating locations, consolidation of sales and distribution facilities,
workforce reductions and product pruning. These actions also include write-downs
of businesses to be sold and an increase in reserves for environmental
exposures.
Restructuring and nonrecurring items for the year ended December 31, 1998,
are detailed in the table below.
RESTRUCTURING WRITE-OFFS OTHER TOTAL
------------- ---------- ----- ------
Connectors & Switches....................................... $ 61.2 $ 41.2 $ -- $102.4
Defense Products & Services................................. 20.5 49.1 -- 69.6
Pumps & Complementary Products.............................. 94.7 52.9 -- 147.6
Specialty Products.......................................... 4.2 1.5 3.3 9.0
Corporate and Other......................................... 5.0 35.6 30.2 70.8
------ ------ ----- ------
Total....................................................... $185.6 $180.3 $33.5 $399.4
====== ====== ===== ======
The projected aggregate cash impact to complete these actions is
approximately $188.8. The projected aggregate future cash savings for the period
1999-2003 are approximately $364.2. The projected aggregate future non-cash
savings for the same period are approximately $78.1. The projected future cash
savings consist of lower facility operating costs and lower salary and wage
expenditures. The projected future non-cash savings consist of lower
depreciation and goodwill amortization. All of the actions contemplated by the
plan are expected to be completed within approximately one year. As of December
31, 1998, approximately $8.4 of the planned cash expenditures have been
incurred. Except for environmental remediation costs, which will extend over
many years, the majority of the remaining cash expenditures will be incurred in
1999.
The restructuring activities to be undertaken involve the closure of
facilities, sales offices and distribution centers worldwide; facility
consolidations; the discontinuance of product lines; and reductions in workforce
to reduce costs and improve profitability. In Connectors & Switches, several
labor intensive operations in Europe are to be consolidated into a low wage
facility in Eastern Europe and other site consolidations will occur to eliminate
duplication of processes and to relocate to lower cost areas. Defense Products &
Services expects to exit two facilities in the United States. In Pumps &
Complementary Products, twenty facilities, including distribution centers, sales
offices and manufacturing locations, are being closed and eight product lines
are being discontinued. Costs which are not directly related to exit activities
and which are expected to benefit future periods, such as costs to relocate and
train employees, will be expensed as incurred. Estimated severance costs
included in restructuring are $92.5. The Company expects to reduce its workforce
by an aggregate of 2,422 persons. As of December 31, 1998, aggregate headcount
reductions were 425 persons.
Asset write-offs have been taken when current events and circumstances
indicate that asset values may be impaired using the criteria of SFAS No. 121.
Write-offs in Connectors & Switches relate to assets which have become idle or
are expected to be taken out of service, because sales volumes have not
materialized, and to assets which are deemed to be impaired because their net
book values exceeded the estimated future cash flows to be generated by those
assets. The majority of the idle assets have no value because of their
specialized nature or because of their poor condition and have been written off.
The impaired assets have been written down to estimated fair values. Write-offs
also include certain capitalized software costs which have no future utility
since the business has chosen to implement a new software platform and goodwill
in the amount of $6.6 related to two products for which a substantial decline in
sales over the next few years is anticipated. Write-offs in Defense Products &
Services represent the write-down to
F-13
41
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of net assets which are expected to be sold in 1999. Estimates of
fair values were developed internally based upon anticipated future cash flows
to be generated.
Pumps & Complementary Products undertook a review of certain of its
operations where current events and circumstances indicate that asset values may
be impaired. It was determined that goodwill of $22.5 related to operations in
Venezuela and Mexico had no value, and that assets of the Richter business were
overvalued by approximately $9.1. Also included in this charge are write-offs of
$11.1 related to information systems which will no longer be used due to
migrations to new information system platforms and other asset write-downs of
$10.2. At Corporate, the Company has written down to fair value the net assets
of three non-core businesses expected to be divested by the end of 1999.
Estimated fair values were developed internally based upon preliminary
discussions with potential buyers.
Other at Corporate of $30.2 includes a charge of $44.2, net of expected
future recoveries, for anticipated costs to remediate certain environmental
sites, and gains on the sale of two non-core businesses. Additional
environmental charges of $3.3 were recorded in Specialty Products.
During 1997, the Company recorded restructuring and nonrecurring charges of
$137.8. Most of this charge was recorded in the third quarter, when the Company
took several actions to strengthen its operating performance and improve
operating efficiencies. The 1997 restructuring charges break down across the
business segments as follows: Pumps & Complementary Products $44.1; Specialty
Products $12.9; and Corporate and Other $80.8. The charge included $64.7 for the
write-down to fair value of the net assets of two non-core businesses expected
to be divested and which have since been sold, $57.0 for asset write-offs and
severance costs associated with the closure and consolidation of facilities and
related workforce reductions of 25 persons, $15.0 to increase environmental
reserves, and a $1.1 loss on the sale of a non-core business. The projected cash
to complete these actions was $36.4. All cash expenditures contemplated by the
charges, except for some minor litigation issues and ongoing environmental
remediation efforts, were incurred by the end of 1998.
At December 31, 1998 and 1997, reserve balances for restructuring
activities were $138.4 and $22.2, respectively.
6. DISCONTINUED OPERATIONS
On September 28, 1998, the Company closed the sale of its automotive
Electrical Systems business to Valeo, SA of France for approximately $1,700.
This transaction followed the sale of the Company's Brake and Chassis unit to
Continental AG of Germany for approximately $1,930 completed on September 25,
1998. As a result of the sales, these two units, as well as several other small
previously sold automotive units, have been accounted for as discontinued
operations.
The revenues and expenses of the discontinued automotive operations have
been removed from the consolidated income statements for all periods presented,
with the income from discontinued operations, net of tax, reflected below income
from continuing operations. The assets and liabilities of the discontinued
automotive operations have been reclassified to net assets of discontinued
operations in the consolidated balance sheet as of December 31, 1997. The cash
used for the operations of the discontinued automotive operations in the
consolidated statements of cash flows is reflected in "Cash from (Used for)
Discontinued Operations".
The consolidated balance sheet as of December 31, 1998 reflects accrued
taxes of $460.7 resulting from the gain on the sale of the discontinued
automotive operations. Management expects the majority of the taxes to be paid
by the end of 1999.
Revenues of the discontinued automotive operations for the nine months
ended September 30, 1998 were $3,030.4. Revenues of the discontinued automotive
operations for the years ended December 31, 1997 and 1996 were $4,627.1 and
$5,031.6, respectively.
In 1998, the Company reported operating income, net of tax, from
discontinued operations of $83.2. This amount included $101.7 of after-
F-14
42
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax income from the Company's discontinued automotive operations, partially
offset by $18.5 of after-tax expense for adjustments of reserves relating to ITT
Financial, which was reflected as a discontinued operation starting in 1994 and
the majority of which was sold in 1995.
See Note 19 "Commitments and Contingencies" for further information
regarding various claims and legal actions relating to dispositions of
businesses, including the dispositions of most of the Company's automotive
businesses referred to herein.
7. MISCELLANEOUS INCOME (EXPENSE)
Miscellaneous income (expense) includes the following:
1998 1997 1996
----- ----- ----
Earnings (losses) of companies on an equity basis........... $(1.1) $(2.1) $0.8
Other income (expense)...................................... (1.9) (4.0) 0.2
----- ----- ----
$(3.0) $(6.1) $1.0
===== ===== ====
8. INCOME TAXES
Income tax data from continuing operations is as follows:
1998 1997 1996
------- ------ ------
Pretax income (loss)
U.S....................................................... $(142.0) $ (4.0) $ 49.3
Foreign................................................... (18.0) 23.5 61.4
------- ------ ------
$(160.0) $ 19.5 $110.7
======= ====== ======
(Provision) benefit for income tax
Current
U.S. federal.............................................. $ 14.8 $(36.6) $(30.6)
State and local........................................... (7.3) (2.9) (2.9)
Foreign................................................... 15.7 (38.7) (18.5)
------- ------ ------
23.2 (78.2) (52.0)
------- ------ ------
Deferred
U.S. federal.............................................. 48.0 40.3 13.4
State and local........................................... (0.1) 0.7 0.3
Foreign................................................... (8.7) 29.6 (6.0)
------- ------ ------
39.2 70.6 7.7
------- ------ ------
Total income tax (expense) benefit.......................... $ 62.4 $ (7.6) $(44.3)
======= ====== ======
A reconciliation of the tax (provision) benefit at the U.S. statutory rate
to the effective income tax (expense) benefit rate as reported is as follows:
1998 1997 1996
---- ----- -----
Tax (provision) benefit at U.S. statutory rate.............. 35.0% (35.0)% (35.0)%
Foreign tax rate differential............................... 2.0 (4.8) (2.8)
Taxes on repatriation of foreign earnings................... 5.7 (4.9) (7.4)
State income taxes, net of federal benefit.................. (3.0) (7.2) (1.5)
Goodwill.................................................... (5.3) (19.0) (0.3)
Research & expenditures credit.............................. 3.9 18.7 0.8
Tax audit issues............................................ -- -- 7.7
Tax benefit of foreign sales corporation.................... 0.8 7.9 --
Other....................................................... (0.1) 5.3 (1.5)
---- ----- -----
Effective income tax (expense) benefit rate................. 39.0% (39.0)% (40.0)%
==== ===== =====
F-15
43
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes are established for all temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and for tax purposes.
Deferred tax assets (liabilities), for which no valuation allowances have
been provided, include the following:
DECEMBER 31,
----------------
1998 1997
------ ------
Employee benefits........................................... $ 26.9 $ 83.4
Accelerated depreciation.................................... (92.8) (57.2)
Reserves.................................................... 357.8 144.4
Long-term contracts......................................... 7.7 11.9
Uniform capitalization...................................... 11.3 14.1
Loss carryforward........................................... -- 39.5
Other....................................................... 31.7 28.6
------ ------
$342.6 $264.7
====== ======
No provision was made for U.S. taxes payable on accumulated undistributed
foreign earnings of approximately $361.0, since these amounts are permanently
reinvested.
Shareholders' equity at December 31, 1998 and 1997 reflects tax benefits
related to the exercise of stock options of approximately $4.5 and $7.9,
respectively.
9. RECEIVABLES, NET
Receivables consist of the following:
DECEMBER 31,
----------------
1998 1997
------ ------
Trade....................................................... $753.5 $719.3
Accrued for completed work.................................. 22.3 26.8
Other....................................................... 89.5 --
Less -- reserves............................................ (22.7) (19.0)
------ ------
$842.6 $727.1
====== ======
10. INVENTORIES, NET
Inventories consist of the following:
DECEMBER 31,
------------------
1998 1997
------- -------
Finished goods.............................................. $ 206.2 $ 275.0
Work in process............................................. 511.6 379.3
Raw materials............................................... 209.8 219.0
Less -- reserves............................................ (115.0) (67.2)
-- progress payments.................................... (233.7) (233.7)
------- -------
$ 578.9 $ 572.4
======= =======
11. OTHER CURRENT ASSETS
At December 31, 1998 and 1997, other current assets consist primarily of
advance payments on contracts and prepaid expenses.
F-16
44
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PLANT, PROPERTY AND EQUIPMENT, NET
Plant, property and equipment consist of the following:
DECEMBER 31,
----------------------
1998 1997
--------- ---------
Land and improvements....................................... $ 51.5 $ 61.1
Buildings and improvements.................................. 346.7 366.3
Machinery and equipment..................................... 1,295.8 1,277.0
Construction work in progress............................... 103.9 95.8
Other....................................................... 509.1 489.1
--------- ---------
2,307.0 2,289.3
Less accumulated depreciation and amortization.............. (1,315.4) (1,258.1)
--------- ---------
$ 991.6 $ 1,031.2
========= =========
13. OTHER ASSETS
At December 31, 1998 and 1997, other assets consist primarily of prepaid pension
and employee benefit plan costs, equity investments, and expected recoveries
from third parties in relation to environmental and other claims.
14. LEASES AND RENTALS
Rental expenses under operating leases were $45.3, $55.0 and $49.4 for 1998,
1997 and 1996, respectively. Future minimum operating lease payments under
long-term operating leases as of December 31, 1998 are shown below. Future
commitments under capital leases are not significant.
1999........................................................ $ 48.5
2000........................................................ 37.6
2001........................................................ 28.5
2002........................................................ 19.7
2003........................................................ 18.8
2004 and thereafter......................................... 71.8
------
Total minimum lease payments................................ $224.9
======
15. DEBT
Debt consists of the following:
DECEMBER 31,
-------------------
1998 1997
------- --------
Commercial paper............................................ $ -- $ 698.4
======= ========
Bank loans and other short-term............................. $ 201.6 $ 895.5
Long-term................................................... 561.1 574.5
Capital lease obligations................................... 4.4 4.2
------- --------
767.1 1,474.2
Less -- current maturities.................................. (251.6) (943.0)
------- --------
Long-term debt.............................................. $ 515.5 $ 531.2
======= ========
The weighted average interest rate for bank loans and other short-term
borrowings was 3.61% and 4.98% at December 31, 1998 and 1997, respectively. The
fair value of the Company's bank loans and other short-term loans approximate
carrying value. The estimated fair value of long-term debt at December 31, 1998
and 1997 was $626.8 and $653.7, respectively, based on discounted cash flows
using the Company's incremental borrowing rates for similar maturities.
F-17
45
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company maintains a revolving credit agreement which expires in
November, 2000 with 61 domestic and foreign banks providing aggregate
commitments of $1.5 billion. These commitments were unused at December 31, 1998.
The interest rate for borrowings under these agreements is generally based on
the London Interbank Offered Rate (LIBOR), plus a spread which reflects the
Company's debt rating. The provisions of these agreements require the Company to
maintain certain financial ratios and restrict indebtedness. Commitment fees on
these revolving credit agreements range from .060% to .150% of the total
commitment, based on the Company's current debt ratings.
Long-term debt and capital lease maturities and interest rate percentages
as of December 31, 1998 were:
BELOW 6.0- 7.0- 8.0- 9.0- OVER
6.0 6.99 7.99 8.99 9.99 10.0 TOTAL
----- ------ ------ ----- ----- ----- ------
1999...................................... $ 5.6 $ 8.4 $ 5.1 $ 0.1 $ -- $30.8 $ 50.0
2000...................................... 7.6 0.3 6.9 0.2 -- -- 15.0
2001...................................... 1.0 58.9 0.7 13.8 18.9 -- 93.3
2002...................................... 0.9 3.9 0.7 0.2 -- -- 5.7
2003...................................... 0.2 0.2 0.7 13.7 -- -- 14.8
Thereafter................................ 46.1 31.9 289.5 28.6 32.8 -- 428.9
----- ------ ------ ----- ----- ----- ------
Total --1998.............................. $61.4 $103.6 $303.6 $56.6 $51.7 $30.8 $607.7
===== ====== ====== ===== ===== ===== ======
Total -- 1997............................. $58.9 $102.0 $310.4 $79.2 $49.3 $25.8 $625.6
===== ====== ====== ===== ===== ===== ======
The above balances as of December 31, 1998 and 1997 include amortizable
debt discounts of $42.2 and $46.9, respectively. Assets pledged to secure
indebtedness (including mortgage loans) amount to approximately $53.4 as of
December 31, 1998.
16. FINANCIAL INSTRUMENTS
The Company uses a variety of derivative financial instruments, including
interest rate swaps, foreign currency forward contracts and/or swaps, and on a
limited basis, commodity collar contracts, as a means of hedging exposure to
interest rates, foreign currency, and commodity price risks.
The Company's credit risk associated with these derivative contracts is
generally limited to the unrealized gain on those contracts with a positive fair
market value, reduced by the effects of master netting agreements, should any
counterparty fail to perform as contracted. The counterparties to the Company's
derivative contracts consist of a number of major international financial
institutions. The Company continually monitors the credit quality of these
financial institutions and does not expect non-performance by any counterparty.
FINANCING STRATEGIES AND INTEREST RATE RISK MANAGEMENT: The Company maintains a
global debt portfolio to fund its operations. The Company and its subsidiaries
at times use interest rate and cross currency interest rate swaps to manage the
Company's debt portfolio, the related financing costs, and interest rate
structure.
At December 31, 1998 and 1997, the Company had interest rate swaps
outstanding with notional values totaling DM 150 million. These swaps were
designed to manage the interest exposure of the Company's short-term debt.
During 1997, the Company effectively terminated interest rate swaps with
notional values totaling DM 260 million and original maturities ranging from
1998 to 2000 by entering into offsetting swaps with identical terms and
maturities. These swaps and related counterswaps were accounted for at fair
market value at the time of termination. Related gains and losses were recorded
in income because such swaps no longer were deemed effective as hedges of the
Company's underlying Deutsche Mark debt. The outstanding DM 150 million interest
rate swap agreements maturing in the year 2000 require the Company to pay
interest at fixed rates averaging 6.96% and receive interest at floating rates
based on the Frankfurt Interbank Offered Rate which averaged 3.25% on December
31, 1998.
F-18
46
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Company held cross currency interest rate swap
agreements, with notional values totaling approximately $212. These swaps were
terminated on August 17, 1998.
FOREIGN CURRENCY RISK MANAGEMENT: The Company and its subsidiaries have
significant foreign operations and conduct business in various foreign
currencies. The Company and its subsidiaries may periodically hedge transactions
in currencies other than their own functional currency and non-functional
currency cash flows and obligations, including intercompany financings. Changes
in the spot rate of debt instruments designated as hedges of the net investment
in a foreign subsidiary are reflected in the cumulative translation adjustment
component of shareholders' equity. The Company regularly monitors its foreign
currency exposures and ensures that hedge contract amounts do not exceed the
amounts of the underlying exposures.
At December 31, 1998, the Company held foreign currency forward and swap
contracts with notional amounts totaling approximately $460 to hedge foreign
currency exposures. The Company's most significant foreign currency exposures
are in the Deutsche Mark, Belgian Franc, and Swedish Krona. The majority of
these contracts mature as of March 31, 1999.
COMMODITY PRICE RISK MANAGEMENT: The Company has utilized commodity
derivatives, on a limited basis, to hedge its anticipated purchases of
non-ferrous metals used in the production of certain pump products. As of
December 31, 1997, the Company held two zero cost collars with a total notional
amount of $3.5, with a weighted average ceiling of $2,500 (in whole dollars) per
metric ton and with a weighted average floor of $2,034 (in whole dollars) per
metric ton. These contracts matured in 1998. At December 31, 1998, the Company
did not have any commodity derivatives.
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS: The fair values of the
Company's derivative financial instruments are as follows:
(PAYABLE)/RECEIVABLE
---------------------------------------
DEC. 31, 1998 DEC. 31, 1997
----------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- ------
Interest rate swaps......................................... $(3.7) $(8.5) $ (6.1) $(11.5)
Cross currency interest rate swaps.......................... $ -- $ -- $ 38.7 $ 44.1
Currency forwards/swaps..................................... $(1.9) $(2.1) $ 4.8 $ (0.3)
Commodity collars........................................... $ -- $ -- $ -- $ (0.3)
The following method and assumptions were used to estimate the fair value
of these derivative financial instruments:
CURRENCY AND COMMODITY CONTRACTS AND INTEREST RATE SWAP AGREEMENTS: The fair
value of commodity contracts and currency and interest rate swap agreements is
estimated based on quotes from the market makers of these instruments and
represents the estimated amounts that the Company would expect to receive or pay
to terminate the agreements at the reporting date.
FOREIGN CURRENCY EXCHANGE CONTRACTS: The fair values associated with the
foreign currency contracts has been estimated by valuing the net position of the
contracts using the applicable spot rates and forward rates as of the reporting
date.
17. EMPLOYEE BENEFIT PLANS
PENSION PLANS: The Company and its subsidiaries sponsor numerous defined
benefit pension plans. The Company funds employee pension benefits, except in
some countries outside the U.S. where funding is not required. The plans' assets
are comprised of a broad range of domestic and foreign securities, fixed income
investments and real estate. In addition to Company sponsored pension plans,
certain employees of the Company participate in multi-employer pension plans
sponsored by local or national unions. The Company's contribution to such plans
amounted to $1.1, $3.9, and $3.9 for the years ended 1998, 1997, and 1996,
respectively.
POSTRETIREMENT HEALTH AND LIFE: The Company and its subsidiaries provide health
F-19
47
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
care and life insurance benefits for certain eligible retired employees. The
Company has prefunded a portion of the health care and life insurance
obligations, where such prefunding can be accomplished on a tax effective basis.
The plans' assets are comprised of a broad range of domestic and foreign
securities, fixed income investments, and real estate.
INVESTMENT AND SAVINGS PLANS: The Company sponsors numerous defined
contribution savings plans which allow employees to contribute a portion of
their pretax and/or after-tax income in accordance with specified guidelines.
Several of the plans require the Company to match a percentage of the employee
contributions up to certain limits. Matching contributions charged to income
amounted to $17.9, $14.6 and $13.9 for the years ended 1998, 1997 and 1996,
respectively.
The first table below contains a reconciliation of the changes in the
benefit obligations, the changes in plan assets, and the weighted average
assumptions for the periods ending December 31, 1998 and 1997, respectively. The
second table below contains the components of net periodic benefit cost for the
years ended 1998, 1997, and 1996, respectively.
PENSION OTHER BENEFITS
-------------------- ------------------
1998 1997 1998 1997
-------- -------- ------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $3,055.5 $2,719.7 $ 423.0 $ 363.3
Service cost................................................ 58.4 54.2 4.8 5.0
Interest cost............................................... 215.4 211.5 29.5 28.7
Amendments made during the year............................. (25.3) 0.3 -- --
Actuarial loss.............................................. 206.3 177.6 23.6 16.5
Obligations of acquired companies (transferred to others)... 32.4 118.5 (4.8) 40.0
Benefits paid............................................... (205.5) (204.3) (33.0) (30.5)
Effect of currency translation.............................. (3.1) (22.0) -- --
-------- -------- ------- -------
Benefit obligation at end of year........................... $3,334.1 $3,055.5 $ 443.1 $ 423.0
======== ======== ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $3,067.7 $2,595.2 $ 187.5 $ 164.7
Actual return on plan assets................................ 445.3 551.8 20.3 28.5
Assets of acquired companies (transferred to others)........ 29.6 111.4 -- --
Employer contributions...................................... 55.9 17.3 -- --
Employee contributions...................................... 1.0 0.9 -- --
Benefits paid............................................... (206.0) (202.3) (4.0) (5.7)
Effect of currency translation.............................. (4.9) (6.6) -- --
-------- -------- ------- -------
Fair value of plan assets at end of year.................... $3,388.6 $3,067.7 $ 203.8 $ 187.5
======== ======== ======= =======
Funded status............................................... $ 54.5 $ 12.2 $(239.3) $(235.5)
Unrecognized net transition (asset)......................... (11.3) (15.3) -- --
Unrecognized net actuarial (gain) loss...................... (66.2) (84.8) 22.6 1.5
Unrecognized prior service cost............................. 53.3 88.7 (25.2) (29.9)
-------- -------- ------- -------
Prepaid (accrued) benefit cost recognized in the balance
sheet..................................................... $ 30.3 $ 0.8 $(241.9) $(263.9)
======== ======== ======= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount rate............................................... 6.70% 7.25% 6.75% 7.25%
Expected return on plan assets.............................. 9.63% 9.73% 9.75% 9.75%
Rate of future compensation increase........................ 4.91% 5.01% 5.00% 5.00%
F-20
48
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION OTHER BENEFITS
----------------------------- --------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ------ ------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................ $ 58.4 $ 54.2 $ 51.0 $ 4.8 $ 5.0 $ 4.0
Interest cost............................... 215.4 211.5 195.6 29.5 28.7 27.9
Expected return on plan assets.............. (252.4) (230.8) (208.5) (18.1) (15.5) (14.1)
Amortization of transitional obligation
(asset)................................... (5.9) (5.9) (5.8) -- -- --
Amortization of net actuarial (gain) loss... 6.4 7.4 19.0 (1.3) (1.4) 0.1
Amortization of prior service cost.......... 10.7 11.4 12.2 (4.7) (4.7) (4.7)
------- ------- ------- ------ ------ ------
Net periodic benefit cost................... $ 32.6 $ 47.8 $ 63.5 $ 10.2 $ 12.1 $ 13.2
------- ------- ------- ------ ------ ------
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 7.8% for 1998, decreasing ratably to 6.0% in
the year 2001. Increasing the table of health care trend rates by one percent
per year would have the effect of increasing the benefit obligation by $25.2 and
the aggregate service and interest cost components by $2.1; a decrease of one
percent in the trend rate would reduce the benefit obligation by $22.1 and the
aggregate service and interest cost components by $1.8. To the extent that
actual experience differs from the inherent assumptions, the effect will be
amortized over the average future service of the covered active employees.
18. SHAREHOLDERS' EQUITY
CAPITAL STOCK: The Company has authority to issue an aggregate of 250,000,000
shares of capital stock, of which 200,000,000 have been designated as "Common
Stock" having a par value of $1 per share and 50,000,000 have been designated as
"Preferred Stock" not having any par or stated value. Of the shares of Preferred
Stock, 300,000 shares have initially been designated as "Series A Participating
Cumulative Preferred Stock" (the "Series A Stock"). Such Series A Stock is
issuable pursuant to the provisions of a Rights Agreement dated as of November
1, 1995 between the Company and The Bank of New York, as Rights Agent (the
"Rights Agreement"). Capitalized terms herein not otherwise defined are as
defined in the Rights Agreement.
The rights issued pursuant to the Rights Agreement (the "Rights") are
currently attached to, and trade with, the Common Stock. The Rights Agreement
provides, among other things, that if any person acquires more than 15% of the
outstanding Common Stock, the Rights will entitle the holders other than the
Acquiring Person (or its Affiliates or Associates) to purchase Series A Stock at
a significant discount to its market value. Rights beneficially owned by the
Acquiring Person, including one of its Affiliates or Associates, become null and
void and nontransferable. Rights generally are exercisable at any time after the
Distribution Date and at or prior to the earlier of the 10th anniversary of the
date of the Rights Agreement or the Redemption Date. The Company may, subject to
certain exceptions, redeem the Rights as provided for in the Rights Agreement.
Each 1/1,000th of a share of Series A Stock would be entitled to vote and
participate in dividends and certain other distributions on an equivalent basis
with one share of Common Stock. Under certain circumstances specified in the
Rights Agreement, the Rights become nonredeemable for a period of time and the
Rights Agreement may not be amended during such period.
As of December 31, 1998 and 1997, 49,180,032 shares and 26,702,181 shares
of Common Stock were held in treasury, respectively.
STOCK INCENTIVE PLANS: The Company's stock option incentive plans provide for
the awarding of options on common shares to employees, exercisable over ten-year
periods. Certain options become exercisable upon the attainment of specified
market price appreciation of the Company's common shares or at nine years after
the date of grant. Other options become exercisable upon the earlier of the
attainment of specified market price appreciation of the Company's common shares
or over a three-year period commencing with the date of grant. The remaining
options become exercisable over a three-year period commencing with the date of
grant. The exercise price per share is the fair
F-21
49
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market value on the date each option is granted. In 1998 and 1997, the Company
made shares available for the exercise of stock options by purchasing shares in
the open market. During 1996, the Company made shares available from shares held
by the Company in treasury and from purchasing shares in the open market.
A summary of the status of the Company's stock option incentive plans as of
December 31, 1998, 1997, and 1996, and changes during the years then ended is
presented below (shares in thousands):
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
Outstanding at beginning of year...... 11,457 $19.31 11,764 $17.53 11,619 $15.76
Granted............................... 2,108 31.18 2,367 25.60 2,114 25.32
Exercised............................. (1,255) 19.62 (2,324) 16.21 (1,879) 15.08
Canceled or expired................... (135) 28.11 (350) 22.44 (90) 24.11
------- ------ ------- ------ ------- ------
Outstanding at end of year............ 12,175 $21.24 11,457 $19.31 11,764 $17.53
======= ====== ======= ====== ======= ======
Options exercisable at year-end....... 10,347 $19.47 10,573 $18.92 7,817 $15.14
======= ====== ======= ====== ======= ======
Weighted-average fair value of options
granted during the year............. $11.68 $ 8.53 $ 6.87
====== ====== ======
The Company accounts for these plans pursuant to Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined based on the fair value at the grant dates consistent with SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
1998 1997 1996
-------- ------ ------
Net income
As reported............................................... $1,532.5 $108.1 $222.6
Pro forma............................................... 1,520.1 99.0 214.8
Basic earnings per share
As reported............................................... $ 13.55 $ .91 $ 1.89
Pro forma............................................... 13.44 .84 1.82
Diluted earnings per share
As reported............................................... $ 13.55 $ .89 $ 1.85
Pro forma............................................... 13.44 .82 1.78
Because the method of accounting prescribed by SFAS No. 123 is not required
to be applied to options granted prior to January 1, 1995, the resulting pro
forma effect may not be representative of that expected in future years.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model and the following weighted-average
assumptions for grants in 1998, 1997, and 1996: dividend yield of 2.14%, 2.35%,
and 2.40%, respectively; expected volatility of 38%, 31%, and 23%, respectively;
expected life of six years; and risk-free interest rate of 5.66%, 6.45%, and
6.15%, respectively.
F-22
50
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's stock
options at December 31, 1998 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
--------------- ------ ---------------- ---------------- ------ ----------------
$ 8.31 -- 9.89........... 1,098 2.4 years $ 8.84 1,098 $ 8.84
13.78 -- 17.91........... 3,452 5.3 years 15.73 3,452 15.73
20.32 -- 28.38........... 5,424 7.2 years 23.19 5,423 23.19
31.13 -- 37.50........... 2,201 9.0 years 31.25 374 31.27
------ --------- ------ ------ ------
12,175 10,347
====== ======
As of December 31, 1998, 3,275,000 shares were available for future grants.
Effective January 1, 1999, option shares available for future grants increased
to 5,452,000 as a result of the annual limitation formula established in the ITT
Industries, Inc. 1994 Incentive Stock Plan. The incentive stock plan also
provides for awarding restricted stock subject to a restriction period in which
the stock cannot be sold, exchanged, or pledged. During 1998, pursuant to the
ITT Industries, Inc. 1996 Restricted Stock Plan for Non-Employee Directors, the
Company awarded 10,688 restricted shares with five-year restriction periods in
payment of the annual retainer for such directors.
19. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in various claims and other
legal actions including those related to government contracts, environmental
issues, dispositions of businesses, and other matters. Some of these claims and
other actions include claims for substantial amounts. Reserves have been
established where the outcome is probable and can be reasonably estimated. While
the ultimate results of these legal actions and related claims cannot be
determined, the Company does not expect that they will have a material adverse
effect on its consolidated financial position, results of operations, or cash
flows.
In the ordinary course of business, and similar to other industrial
companies, the Company is subject to extensive and changing federal, state,
local, and foreign environmental laws and regulations. As of December 31, 1998,
the Company or its subsidiaries are responsible, or are alleged to be
responsible for environmental investigation and remediation at sites in North
America and Europe. The Company has received notice that it is considered a
potentially responsible party (PRP) at a number of those sites by the United
States Environmental Protection Agency (EPA) and/or a similar state agency under
the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA
or Superfund) or its state equivalent. In many of these proceedings, the
Company's liability is considered de minimis. In Glendale, California, the
Company is involved in an EPA proceeding relating to the San Fernando Valley
aquifer. The Company is one of numerous PRPs who are alleged by the EPA to have
contributed to the contamination of the aquifer. Currently, the Company is
involved with the PRPs in funding the cleanup required by the EPA. The Company
has filed a suit against its insurers for recovery of the costs it has incurred
in connection with this and other environmental matters.
The Company has accrued for environmental remediation costs associated with
identified sites consistent with the policy set forth in Note 1 "Accounting
Policies". In management's opinion, the total amounts accrued and related
receivables are appropriately based on existing facts and circumstances. It is
difficult to estimate the total costs of investigation and remediation due to
various factors, including incomplete information regarding particular sites and
other potentially responsible parties, uncertainty regarding the extent of
contamination and the Company's share, if any, of liability for such problems,
the selection of alternative remedies, and changes in cleanup standards. In the
event that future remediation expenditures are in excess of
F-23
51
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts accrued, management does not anticipate that they will have a material
adverse effect on the consolidated financial position, results of operations, or
liquidity of the Company.
20. BUSINESS SEGMENT INFORMATION
DEFENSE PUMPS & DISPOSITIONS,
CONNECTORS & PRODUCTS & COMPLEMENTARY SPECIALTY OTHER &
SWITCHES SERVICES PRODUCTS PRODUCTS ELIMINATIONS(B) CORPORATE TOTAL
------------ ---------- ------------- --------- --------------- --------- --------
1998
Sales and revenues............. $ 527.9 $1,293.4 $1,770.0 $849.3 $ 52.1 $ -- $4,492.7
Operating income (loss):
Before restructuring and
nonrecurring items......... 52.7 97.9 145.5 90.9 5.4 (67.6) 324.8
Restructuring and
nonrecurring items......... (102.4) (69.6) (147.6) (9.0) 31.0 (101.8) (399.4)
------- -------- -------- ------ -------- -------- --------
After restructuring and
nonrecurring items......... (49.7) 28.3 (2.1) 81.9 36.4 (169.4) (74.6)
Earnings of companies on an
equity basis................. (0.3) (1.6) 0.5 0.3 -- -- (1.1)
------- -------- -------- ------ -------- -------- --------
Total segment profit........... (50.0) 26.7 (1.6) 82.2 36.4 (169.4) (75.7)
Net interest expense........... (82.4)
Miscellaneous income
(expense)(a)................. (1.9)
--------
Income (loss) from continuing
operations before income
taxes........................ $ (160.0)
========
Long-lived assets.............. 128.3 122.8 347.3 206.8 156.5 29.9 991.6
Investment in companies on an
equity basis................. 0.1 13.2 11.9 5.1 -- 0.5 30.8
Total assets................... 333.1 644.8 1,741.1 588.3 252.6 1,488.9 5,048.8
Gross plant additions.......... 39.2 26.4 75.1 53.5 5.1 13.6 212.9
Depreciation................... 33.9 25.3 56.6 34.3 5.3 2.1 157.5
Amortization................... 1.0 3.1 20.6 7.3 6.1 -- 38.1
1997
Sales and revenues............. $ 537.7 $1,095.7 $1,460.2 $823.2 $ 290.8 $ -- $4,207.6
Operating income (loss):
Before restructuring and
nonrecurring items......... 41.9 81.4 130.2 89.6 (4.1) (59.9) 279.1
Restructuring and
nonrecurring items......... -- -- (44.1) (12.9) (65.8) (15.0) (137.8)
------- -------- -------- ------ -------- -------- --------
After restructuring and
nonrecurring items......... 41.9 81.4 86.1 76.7 (69.9) (74.9) 141.3
Earnings of companies on an
equity basis................. (0.5) (2.5) 1.0 (0.1) -- -- (2.1)
------- -------- -------- ------ -------- -------- --------
Total segment profit........... 41.4 78.9 87.1 76.6 (69.9) (74.9) 139.2
Net interest expense........... (115.7)
Miscellaneous income
(expense)(a)................. (4.0)
--------
Income (loss) from continuing
operations before income
taxes........................ $ 19.5
========
Long-lived assets.............. 135.1 121.5 355.0 219.2 172.6 27.8 1,031.2
Investment in companies on an
equity basis................. 0.5 13.2 14.4 4.7 -- 1.1 33.9
Total assets................... 323.6 585.1 1,818.7 504.7 1,274.5 551.8 5,058.4
Gross plant additions.......... 31.8 35.6 53.9 53.7 30.5 7.0 212.5
Depreciation................... 33.6 24.7 44.3 32.4 29.8 2.1 166.9
Amortization................... 1.5 0.3 16.1 10.1 2.0 -- 30.0
F-24
52
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFENSE PUMPS & DISPOSITIONS,
CONNECTORS & PRODUCTS & COMPLEMENTARY SPECIALTY OTHER &
SWITCHES SERVICES PRODUCTS PRODUCTS ELIMINATIONS(B) CORPORATE TOTAL
------------ ---------- ------------- --------- --------------- --------- --------
1996
Sales and revenues............. $ 501.3 $1,011.9 $1,018.1 $780.9 $ 432.3 $ -- $3,744.5
Operating income (loss):
Before restructuring and
nonrecurring items......... 34.0 73.2 91.5 96.0 4.9 (53.6) 246.0
Restructuring and
nonrecurring items......... -- -- -- -- -- -- --
------- -------- -------- ------ -------- -------- --------
After restructuring and
nonrecurring items......... 34.0 73.2 91.5 96.0 4.9 (53.6) 246.0
Earnings of companies on an
equity basis................. (0.3) (1.9) 1.9 1.1 -- -- 0.8
------- -------- -------- ------ -------- -------- --------
Total segment profit........... 33.7 71.3 93.4 97.1 4.9 (53.6) 246.8
Net interest expense........... (136.3)
Miscellaneous income
(expense)(a)................. 0.2
--------
Income (loss) from continuing
operations before income
taxes........................ $ 110.7
========
Long-lived assets.............. 145.2 102.5 168.9 201.3 333.9 22.6 974.4
Investment in companies on an
equity basis................. 3.3 8.6 7.6 5.5 -- -- 25.0
Total assets................... 360.2 412.9 627.6 463.5 1,568.8 543.9 3,976.9
Gross plant additions.......... 31.8 22.2 35.6 32.5 50.5 3.4 176.0
Depreciation................... 31.4 27.3 30.7 30.2 56.0 2.1 177.7
Amortization................... 0.6 0.3 4.1 7.0 (2.4) -- 9.6
- ---------------
(a) Excludes earnings of companies on an equity basis
(b) Includes net assets from discontinued operations 1997 -- $931.4,
1996 -- $1,047.3
SALES AND REVENUES LONG-LIVED ASSETS
-------------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ------ -------- ------
GEOGRAPHICAL INFORMATION
United States............................ $2,570.4 $2,377.3 $2,047.1 $639.0 $ 679.1 $509.9
Western Europe........................... 1,227.8 1,229.6 1,167.2 312.3 308.2 436.9
Asia Pacific............................. 280.5 260.2 269.7 22.6 25.6 10.9
Other.................................... 414.0 340.5 260.5 17.7 18.3 16.7
-------- -------- -------- ------ -------- ------
Total Segments........................... $4,492.7 $4,207.6 $3,744.5 $991.6 $1,031.2 $974.4
======== ======== ======== ====== ======== ======
1998 1997 1996
-------- -------- --------
SALES AND REVENUES BY PRODUCT CATEGORY
Pumps & Complementary Products.............................. $1,767.8 $1,457.3 $1,015.8
Defense Products............................................ 765.7 720.1 676.7
Connectors & Switches....................................... 577.7 591.7 550.3
Defense Services............................................ 527.7 375.6 335.2
Fluid Handling.............................................. 362.2 366.0 355.9
Brakes...................................................... 150.6 146.9 126.2
Engineered Valves........................................... 116.5 108.7 105.7
Shock Absorbers............................................. 91.5 85.6 85.8
Marine Products............................................. 87.8 76.9 73.0
Measuring Devices........................................... 17.3 78.6 72.7
Semiconductors.............................................. -- 162.3 254.8
Other....................................................... 27.9 37.9 92.4
-------- -------- --------
Total....................................................... $4,492.7 $4,207.6 $3,744.5
======== ======== ========
F-25
53
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Combined Defense Products & Services had sales and revenues from the United
States government of $1,008.6, $925.2 and $869.9 for 1998, 1997, and 1996,
respectively. Apart from the United States government, no other government or
commercial customer accounted for 10% or more of sales and revenues for the
Company.
CONNECTORS & SWITCHES: This business, formerly included within the "Defense &
Electronics" segment, consists of the Company's products marketed under the
Cannon(R) brand. These products include connectors, switches and cabling used in
telecommunications, computing, aerospace and industrial applications as well as
network services. The Connectors & Switches segment represents about 12% of the
Company's sales and revenues and 16% of its operating income before
restructuring and nonrecurring items.
DEFENSE PRODUCTS & SERVICES: The businesses in this segment are those that
directly serve the military and government agencies with products and services.
These include air traffic control systems, jamming devices that guard military
planes against radar guided missiles, digital combat radios, night vision
devices and satellite instruments. Approximately 33% of the sales and revenues
in this segment are generated through contracts for technical and support
services which the Company provides for the military and other government
agencies. Approximately 78%, 85% and 86% of 1998, 1997, and 1996 Defense
Products & Services sales and revenues, respectively, were to the U.S.
government. The Defense Products & Services segment, represents about 29% of the
Company's sales and revenues and 30% of its operating income before
restructuring and nonrecurring items.
PUMPS & COMPLEMENTARY PRODUCTS: This segment contains the Company's pump
businesses, including brands such as Flygt(R), Goulds(R), Bell & Gossett(R), A-C
Pump(R), Lowara(R) and Vogel(R), making the Company the world's largest pump
producer. Businesses within this segment also supply mixers, heat exchangers and
related products with brands such as McDonnell & Miller(R) and ITT Standard(R)
brand names in addition to those mentioned above. This segment represents
approximately 39% of the Company's sales and revenues and approximately 45% of
its operating income before restructuring and nonrecurring items.
SPECIALTY PRODUCTS: Businesses in the Specialty Products segment produce
engineered valves and switches for industrial and aerospace applications,
products for the marine and leisure markets, fluid handling materials such as
stainless steel and flexible tubing for various industrial markets, and
specialty shock absorbers and brake friction materials for the transportation
industry. The Specialty Products segment accounts for approximately 19% of the
Company's sales and revenues and approximately 28% of its operating income
before restructuring and nonrecurring items.
DISPOSITIONS AND OTHER: This includes the operating results and assets of units
other than "Discontinued Operations", including ITT Community Development
Corporation, ITT Semiconductors, other non-core businesses, and other businesses
which have been sold.
CORPORATE: This primarily includes the operating results, and assets of
corporate headquarters.
F-26
54
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. QUARTERLY RESULTS FOR 1998 AND 1997
THREE MONTHS ENDED
--------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
-------- -------- -------- -------- --------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS; (UNAUDITED)
1998
Sales and revenues............................... $1,099.2 $1,125.3 $1,048.0 $1,220.2 $4,492.7
Costs of sales and revenues(a)................... 848.8 850.5 798.5 935.7 3,433.5
Income (loss) from continuing operations(b)...... 8.0 30.2 26.9 (162.7) (97.6)
Net income (loss)................................ 55.6 69.3 1,588.8 (181.2) 1,532.5
Income (loss) from continuing operations per
share
-- Basic....................................... $ .07 $ .25 $ .23 $ (1.59) $ (.86)
-- Diluted..................................... $ .07 $ .25 $ .23 $ (1.59) $ (.86)
Net income (loss) per share
-- Basic(c).................................... $ .47 $ .59 $ 13.82 $ (1.77) $ 13.55
-- Diluted(c).................................. $ .46 $ .57 $ 13.45 $ (1.77) $ 13.55
Common stock information
Price range: High................................ $ 38.94 $ 38.44 $ 38.13 $ 40.88 $ 40.88
Low................................... $ 28.13 $ 32.88 $ 29.50 $ 30.69 $ 28.13
Close................................. $ 38.06 $ 37.38 $ 33.88 $ 39.75 $ 39.75
Dividends per share.............................. $ .15 $ .15 $ .15 $ .15 $ .60
1997
Sales and revenues............................... $ 928.9 $1,020.7 $1,077.4 $1,180.6 $4,207.6
Costs of sales and revenues(a)................... 734.1 792.4 836.6 886.2 3,249.3
Income (loss) from continuing operations(d)...... 10.5 28.6 (65.4) 38.2 11.9
Cumulative effect of accounting change........... -- -- -- (5.6) (5.6)
Net income (loss)................................ 44.3 82.6 (91.1) 72.3 108.1
Income (loss) from continuing operations per
share
-- Basic....................................... $ .09 $ .24 $ (.55) $ .32 $ .10
-- Diluted..................................... $ .09 $ .24 $ (.55) $ .32 $ .10
Net income (loss) per share
-- Basic....................................... $ .37 $ .70 $ (.77) $ .61 $ .91
-- Diluted..................................... $ .37 $ .69 $ (.77) $ .60 $ .89
Common stock information
Price range: High................................ $ 26.38 $ 27.75 $ 33.69 $ 33.38 $ 33.69
Low................................... $ 22.38 $ 22.13 $ 25.00 $ 28.75 $ 22.13
Close................................. $ 22.38 $ 25.75 $ 33.19 $ 31.38 $ 31.38
Dividends per share.............................. $ .15 $ .15 $ .15 $ .15 $ .60
- ---------------
(a) Includes research, development, and engineering expenses.
(b) Income from continuing operations in 1998 for the quarters ended March 31,
June 30, and Dec. 31, include charges of $12.3, $6.5, and $224.8 after-tax,
for restructuring and nonrecurring items as described in Note 5.
(c) Quarterly and full year earnings per share amounts were calculated
independently based on the average common shares and potentially dilutive
shares applicable to each period. Because of the repurchase of common stock
in 1998, the sum of the four quarters does not equal the calculation for the
full year 1998.
(d) Income from continuing operations in 1997 for the quarters ended June 30 and
Sept. 30, include charges of $0.7 and $83.3, after-tax, for restructuring
and nonrecurring items as described in Note 5.
The above table reflects the range of market prices of the Company's common
stock for 1998 and 1997. The prices are as reported in the consolidated
transaction reporting system of the New York Stock Exchange, the principal
market in which the Company's common stock is traded, under the symbol "IIN".
The Company's common stock is listed on the following exchanges: Frankfurt,
London, Midwest, New York, Pacific, and Paris.
During the period from January 1, 1999 through February 28, 1999, the high
and low reported market prices of the Company's common stock were $40.88 and
$37.50. The Company declared dividends of $.15 per common share in the first
quarter of 1999. There were approximately 52,371 holders of record of the
Company's common stock on February 28, 1999.
F-27
55
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
BALANCE CHARGED TO WRITE-OFF/
AT COSTS AND TRANSLATION PAYMENTS BALANCE AT
JANUARY 1 EXPENSES ADJUSTMENT OTHER DECEMBER 31
--------- ---------- ----------- ---------- -----------
YEAR ENDED DECEMBER 31, 1998
Trade Receivables -- Allowance for
doubtful accounts................ $ 19.0 $ 9.5 $ 0.2 $ (6.0) $ 22.7
Restructuring...................... 22.2 185.6 (69.4) 138.4
YEAR ENDED DECEMBER 31, 1997
Trade Receivables -- Allowance for
doubtful accounts................ $ 14.6 $ 7.9 $ (0.4) $ (3.1) $ 19.0
Restructuring...................... -- 57.0 (34.8) 22.2
YEAR ENDED DECEMBER 31, 1996
Trade Receivables -- Allowance for
doubtful accounts................ $ 15.7 $ 2.1 $ (0.3) $ (2.9) $ 14.6
S-1
56
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, AND BY THE UNDERSIGNED IN THE
CAPACITY INDICATED.
ITT INDUSTRIES, INC.
By /s/ EDWARD W. WILLIAMS
-----------------------------------
EDWARD W. WILLIAMS
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
March 29, 1999
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/ TRAVIS ENGEN Chairman and Chief Executive and March 9, 1999
- ------------------------------------------ Director
TRAVIS ENGEN
(PRINCIPAL EXECUTIVE OFFICER)
/s/ HEIDI KUNZ Executive Vice President and Chief March 9, 1999
- ------------------------------------------ Financial Officer
HEIDI KUNZ
(PRINCIPAL FINANCIAL OFFICER)
/s/ RAND V. ARASKOG Director March 9, 1999
- ------------------------------------------
RAND V. ARASKOG
/s/ ROBERT A. BURNETT Director March 9, 1999
- ------------------------------------------
ROBERT A. BURNETT
/s/ CURTIS J. CRAWFORD Director March 9, 1999
- ------------------------------------------
CURTIS J. CRAWFORD
/s/ S. PARKER GILBERT Director March 9, 1999
- ------------------------------------------
S. PARKER GILBERT
/s/ CHRISTINA A. GOLD Director March 9, 1999
- ------------------------------------------
CHRISTINA A. GOLD
/s/ EDWARD C. MEYER Director March 9, 1999
- ------------------------------------------
EDWARD C. MEYER
/s/ SIDNEY TAUREL Director March 9, 1999
- ------------------------------------------
SIDNEY TAUREL
II-1
57
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
3
(a) ITT Industries, Inc.'s Restated
Articles of Incorporation........... Incorporated by reference to Exhibit
3(i) to ITT Industries' Form 10-Q for
the quarterly period ended June 30,
1997 (CIK No. 216228, File No.
1-5627).
(b) Form of Rights Agreement between ITT
Indiana, Inc. and The Bank of New
York, as Rights Agent............... Incorporated by reference to Exhibit 1
to ITT Industries' Form 8-A dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(c) ITT Industries, Inc.'s By-laws, as
amended............................. Filed herewith.
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.
9 Voting Trust Agreement..................... None.
10 Material contracts
(a) ITT Industries 1997 Long-Term
Incentive Plan...................... Incorporated by reference to Appendix
II to ITT Industries' Proxy Statement
dated March 26, 1997 (CIK No.
216228, File No. 1-5627).
(b) ITT Industries 1997 Annual Incentive
Plan for Executive Officers......... Incorporated by reference to Appendix
I to ITT Industries' Proxy Statement
dated March 26, 1997 (CIK No.
216228, File No. 1-5627).
(c) Form of Travis Engen's employment
agreement........................... Incorporated by reference to Exhibit
10.16 to ITT Industries' Form 8-B
dated December 20, 1995 (CIK No.
216228, File No. 1-5627).
(d) Amendment to Employment Agreement
between ITT Industries and Travis
Engen............................... Incorporated by reference to Exhibit
10(e) to ITT Industries' Form 8-K
Current Report dated June 5, 1997
(CIK No. 216228, File No. 1-5627).
(e) Form of group life insurance plan for
non-employee members of the Board of
Directors........................... Incorporated by reference to exhibits
to ITT Delaware's Form 10-K for the
fiscal year ended December 31, 1983
(CIK No. 216228, File No. 1-5627).
(f) ITT Industries, Inc. 1986 Incentive
Stock
Plan................................ Incorporated by reference to ITT
Delaware's Registration Statement on
Form S-8 (Registration No. 33-5412)
(CIK No. 216228, File No. 1-5627).
II-2
58
EXHIBIT
NUMBER DESCRIPTION LOCATION
(g) 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.
1-5627).
(h) ITT Industries, Inc. Senior Executive
Severance Pay Plan.................. Incorporated by reference to Exhibit
10.15 to ITT Industries' Form 8-B
dated December 20, 1995 (CIK No.
216228, File No. 1-5627).
(i) ITT Industries Special Senior
Executive Severance Pay Plan........ Incorporated by reference to Exhibit
10(j) to ITT Industries' Form 10-K
for the fiscal year ended December
31, 1996 (CIK No. 216228, File No.
1-5627).
(j) 1994 ITT Industries, Inc. Incentive
Stock Plan.......................... Incorporated by reference to Appendix
A to ITT Delaware's Proxy Statement
dated March 28, 1994 (CIK No.
216228, File No. 1-5627).
(k) ITT Industries, Inc. 1996 Restricted
Stock Plan for Non-Employee
Directors, as amended............... Filed herewith.
(l) Distribution Agreement among ITT
Corporation, ITT Destinations, Inc.
and ITT Hartford Group, Inc......... Incorporated by reference to Exhibit
10.1 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(m) Intellectual Property License
Agreement between and among ITT
Corporation, ITT Destinations, Inc.
and ITT Hartford Group, Inc......... Incorporated by reference to Exhibit
10.2 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(n) Tax Allocation Agreement among ITT
Corporation, ITT Destinations, Inc.
and ITT Hartford Group, Inc......... Incorporated by reference to Exhibit
10.3 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(o) Employee Benefit Services and
Liability Agreement among ITT
Corporation, ITT Destinations, Inc.
and ITT Hartford Group, Inc......... Incorporated by reference to Exhibit
10.7 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(p) Five-year Competitive Advance and
Revolving Credit Facility Agreement
dated as of November 10, 1995....... Incorporated by reference to Exhibit
10.9 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
II-3
59
EXHIBIT
NUMBER DESCRIPTION LOCATION
(q) Trade Name and Trademark License
Agreement........................... Incorporated by reference to Exhibit
10(r) to ITT Industries' Form 8-K
Current Report dated June 5, 1997
(CIK No. 216228, File No. 1-5627).
(r) ITT Industries Enhanced Severance Pay
Plan................................ Incorporated by reference to Exhibit
10(s) to ITT Industries' Form 8-K
Current Report dated June 5, 1997
(CIK No. 216228, File No. 1-5627).
(s) Agreement with Valeo SA with respect
to the sale of the Automotive
Electrical Systems Business......... Incorporated by reference to Exhibit
10(b) to ITT Industries' Form 10-Q
Quarterly Report for the quarterly
period ended June 30, 1998 (CIK No.
216228, File No. 1-5627).
(t) Agreement with Continental AG with
respect to the sale of the
Automotive Brakes and Chassis
Business............................ Incorporated by reference to Exhibit
2.1 to ITT Industries' Form 8-K
Current Report dated October 13,
1998 (CIK No. 216228, File No.
1-5627).
11 Statement re computation of per share
earnings................................. Not required to be filed.
12 Statement re computation of ratios......... Filed herewith.
13 Annual report to security holders, Form
10-Q or quarterly report to security Not required to be filed.
holders..................................
16 Letter re change in certifying None.
accountant.................................
18 Letter re change in accounting None.
principles.................................
21 Subsidiaries of the Registrant............. Filed herewith.
22 Published report regarding matters
submitted to vote of security holders.... Not required to be filed.
23 Consent of Arthur Andersen LLP............. Filed herewith.
24 Power of attorney.......................... None.
27 Financial data schedule.................... Filed herewith.
99 Additional exhibits........................ None.
II-4