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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
__________ to __________
COMMISSION FILE NUMBER 1-5627
ITT INDUSTRIES, INC.
INCORPORATED IN THE STATE OF INDIANA 13-5158950
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
4 West Red Oak Lane, White Plains, NY 10604
(Principal Executive Office)
TELEPHONE NUMBER: (914) 641-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of October 31, 1999, there were outstanding 87,914,595 shares of
common stock ($1 par value per share) of the registrant.
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ITT INDUSTRIES, INC.
TABLE OF CONTENTS
PAGE
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Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Condensed Income Statements -- Three Months and Nine
Months Ended September 30, 1999 and 1998................................ 2
Consolidated Condensed Balance Sheets -- September 30, 1999 and
December 31, 1998....................................................... 3
Consolidated Condensed Statements of Cash Flows -- Nine Months Ended
September 30, 1999 and 1998.............................................. 4
Notes to Consolidated Condensed Financial Statements ........................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Three Months and Nine Months Ended September 30, 1999 and 1998............... 8
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings............................................................ 13
Item 6. Exhibits and Reports on Form 8-K............................................. 13
Signature............................................................................. 14
Exhibit Index......................................................................... 15
3
PART I.
ITEM 1. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
The following unaudited consolidated condensed financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) and, in the opinion of management, reflect all
adjustments (which include normal recurring adjustments) necessary for a fair
presentation of the financial position, results of operations, and cash flows
for the periods presented. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC rules.
The Company believes that the disclosures made are adequate to make the
information presented not misleading. Certain amounts in the prior periods'
consolidated condensed financial statements have been reclassified to conform
with the current period presentation. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's 1998 Annual Report on Form 10-K.
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Sales and revenues .................................. $ 1,106.4 $ 1,048.0 $ 3,389.8 $ 3,272.5
----------- ----------- ----------- -----------
Costs of sales and revenues ......................... 780.5 723.1 2,393.7 2,295.2
Selling, general, and administrative expenses ....... 164.0 177.3 510.9 544.3
Research, development, and engineering expenses...... 63.7 75.5 199.9 202.6
Restructuring and nonrecurring items ................ -- -- -- 30.8
----------- ----------- ----------- -----------
Total costs and expenses ............................ 1,008.2 975.9 3,104.5 3,072.9
----------- ----------- ----------- -----------
Operating income .................................... 98.2 72.1 285.3 199.6
Interest expense .................................... (22.6) (31.2) (60.4) (104.6)
Interest income ..................................... 10.7 4.8 28.5 15.4
Miscellaneous income (expense), net ................. -- (1.6) 0.9 (3.6)
----------- ----------- ----------- -----------
Income from continuing operations before income
taxes................................................ 86.3 44.1 254.3 106.8
Income tax expense .................................. (31.9) (17.2) (94.1) (41.7)
----------- ----------- ----------- -----------
Income from continuing operations ................... 54.4 26.9 160.2 65.1
Discontinued operations:
Operating income, net of tax of $9.6 and $65.0....... -- 15.0 -- 101.7
Gain on sales of ITT Automotive, net of tax of
$849.7 in each period ............................ -- 1,546.9 -- 1,546.9
----------- ----------- ----------- -----------
Net income .......................................... $ 54.4 $ 1,588.8 $ 160.2 $ 1,713.7
=========== =========== =========== ===========
EARNINGS PER SHARE:
Income from continuing operations
Basic ............................................. $ .62 $ .23 $ 1.79 $ .56
Diluted ........................................... .60 .23 1.73 .54
Discontinued operations
Basic ............................................. -- 13.58 -- 14.07
Diluted ........................................... -- 13.22 -- 13.71
Net income
Basic ............................................. .62 13.81 1.79 14.63
Diluted ........................................... .60 13.45 1.73 14.25
Cash dividends declared per common share ............ $ .15 $ .15 $ .45 $ .45
- ----------
The accompanying notes to consolidated condensed financial statements are an
integral part of the above statements.
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ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT FOR SHARES AND PER SHARE)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents ................................ $ 218.9 $ 880.9
Receivables, net ......................................... 852.1 842.6
Inventories, net ......................................... 586.0 578.9
Other current assets ..................................... 78.8 80.0
---------- ----------
Total current assets .................................. 1,735.8 2,382.4
Plant, property, and equipment, net ........................ 807.9 991.6
Deferred U.S. income taxes ................................. 362.6 367.4
Goodwill, net .............................................. 1,006.3 865.3
Other assets ............................................... 432.3 442.1
---------- ----------
$ 4,344.9 $ 5,048.8
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......................................... $ 338.1 $ 396.2
Accrued expenses ......................................... 809.5 932.9
Accrued taxes ............................................ 331.9 570.1
Notes payable and current maturities of long-term debt ... 403.1 251.6
---------- ----------
Total current liabilities ............................. 1,882.6 2,150.8
Pension and postretirement costs ........................... 395.7 419.9
Long-term debt ............................................. 478.0 515.5
Other liabilities .......................................... 530.9 662.6
---------- ----------
3,287.2 3,748.8
Shareholders' Equity:
Cumulative Preferred Stock: Authorized 50,000,000 shares,
No par value, none issued ............................. -- --
Common stock:
Authorized 200,000,000 shares, $1 par value per share
Outstanding 87,914,595 shares and 95,967,976 shares ... 87.9 96.0
Capital surplus .......................................... -- --
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on investment securities ....... (1.3) (0.5)
Cumulative translation adjustments .................... (87.0) (67.0)
---------- ----------
(88.3) (67.5)
Retained earnings ........................................ 1,058.1 1,271.5
---------- ----------
1,057.7 1,300.0
---------- ----------
$ 4,344.9 $ 5,048.8
========== ==========
- ----------
The accompanying notes to consolidated condensed financial statements are an
integral part of the above balance sheets.
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ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
---- ----
OPERATING ACTIVITIES
Net income .............................................. $ 160.2 $ 1,713.7
Discontinued operations:
Operating income ...................................... -- (101.7)
Gain on sales of ITT Automotive ....................... -- (1,546.9)
-------- ----------
Income from continuing operations ....................... 160.2 65.1
-------- ----------
Adjustments to income from continuing operations:
Depreciation .......................................... 111.1 124.0
Amortization .......................................... 25.1 28.2
Restructuring and nonrecurring charges ................ -- 30.8
Payments made for restructuring ......................... (41.7) --
Change in receivables, inventories, accounts payable, and
Accrued expenses .................................... (94.3) (130.5)
Change in accrued and deferred taxes .................... 34.4 (9.6)
Other, net .............................................. (2.6) (53.3)
-------- ----------
Cash from operating activities ...................... 192.2 54.7
-------- ----------
INVESTING ACTIVITIES
Additions to plant, property, and equipment ............. (138.6) (115.1)
Proceeds from sale of assets ............................ 71.3 3,709.7
Acquisitions ............................................ (232.6) (79.7)
Other, net .............................................. 5.8 1.4
-------- ----------
Cash (used for) from investing activities ........... (294.1) 3,516.3
-------- ----------
FINANCING ACTIVITIES
Short-term debt, net .................................... 210.3 (999.1)
Long-term debt repaid ................................... (70.6) (23.2)
Long-term debt issued ................................... 1.4 --
Repurchase of common stock .............................. (394.3) (359.1)
Dividends paid .......................................... (42.4) (52.7)
Other, net .............................................. 26.7 104.7
-------- ----------
Cash (used for) financing activities ................ (268.9) (1,329.4)
-------- ----------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS ...... (14.4) 5.2
CASH FROM (USED FOR) DISCONTINUED OPERATIONS ............ (276.8) (101.0)
-------- ----------
(Decrease) Increase in cash and cash equivalents ....... (662.0) 2,145.8
Cash and cash equivalents -- beginning of period ........ 880.9 192.2
-------- ----------
Cash and cash equivalents -- end of period .............. $ 218.9 $ 2,338.0
======== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period from continuing operations:
Interest .............................................. $ 55.6 $ 99.2
======== ==========
Income taxes, net of refunds .......................... $ 20.2 $ 78.4
======== ==========
- ----------
The accompanying notes to consolidated condensed financial statements are an
integral part of the above statements.
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ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)
1) RESTRUCTURING: At December 31, 1998, the reserve balance for restructuring
actions was $138.4 million. In the first nine months of 1999, the Company made
cash payments of $41.7 million, recorded $1.1 million of reversals related to
the sale of a business unit and applied $4.2 million of asset impairment and
other items. The reserve balance at September 30, 1999 for restructuring was
$91.4 million. As reported in the 1998 Annual Report, restructuring activities
include plans to reduce workforce by approximately 2,400 persons. At September
30, 1999, cumulative headcount reductions were 1,498 persons. The restructuring
activities are progressing according to plans as discussed in the 1998 Annual
Report.
2) RECEIVABLES, NET
Receivables consist of the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Trade .............................. $ 795.9 $ 753.5
Other .............................. 79.4 111.8
Less reserves ...................... (23.2) (22.7)
-------- --------
$ 852.1 $ 842.6
======== ========
3) INVENTORIES, NET
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Finished goods ............................. $ 203.3 $ 206.2
Work in process ............................ 453.2 511.6
Raw materials .............................. 197.5 209.8
Less -- reserves ........................... (113.8) (115.0)
-- progress payments .................. (154.2) (233.7)
-------- --------
$ 586.0 $ 578.9
======== ========
4) PLANT, PROPERTY, AND EQUIPMENT, NET
Plant, property, and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Land and improvements ...................... $ 68.0 $ 51.5
Buildings and improvements ................. 318.5 346.7
Machinery and equipment .................... 1,151.0 1,295.8
Construction work in progress .............. 99.7 103.9
Other ...................................... 377.6 509.1
---------- ----------
2,014.8 2,307.0
Less -- accumulated depreciation and
amortization ........................... (1,206.9) (1,315.4)
---------- ----------
$ 807.9 $ 991.6
========== ==========
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ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)
5) COMPREHENSIVE INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- ---------- -------- ----------
Net income:
Continuing operations ......................................... $ 54.4 $ 26.9 $ 160.2 $ 65.1
Discontinued operations:
Operating income ........................................... -- 15.0 -- 101.7
Gain on sales of ITT Automotive ............................ -- 1,546.9 -- 1,546.9
-------- ---------- -------- ----------
Total ........................................................... 54.4 1,588.8 160.2 1,713.7
Other comprehensive income (loss):
Foreign currency translation adjustments ...................... (6.6) 1.3 (14.1) (10.0)
Reclassification included in net income ....................... -- (182.6) -- (182.6)
-------- ---------- -------- ----------
(6.6) (181.3) (14.1) (192.6)
Unrealized gain (loss) on investment securities during period.. (2.1) (2.7) (0.9) (2.3)
-------- ---------- -------- ----------
Other comprehensive income (loss), before tax ............... (8.7) (184.0) (15.0) (194.9)
Income benefit (tax) for other comprehensive income ........... 4.7 (14.7) (5.8) (16.6)
-------- ---------- -------- ----------
Other comprehensive income (loss), after tax ................ (4.0) (198.7) (20.8) (211.5)
-------- ---------- -------- ----------
Comprehensive income ............................................ $ 50.4 $ 1,390.1 $ 139.4 $ 1,502.2
======== ========== ======== ==========
Note: The $182.6 pre-tax reclassification adjustment for the three month and
nine month periods ended September 30, 1998, was due to the sales of
the Company's discontinued automotive businesses.
6) CALCULATION OF EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1999 1998 1999 1998
-------- --------- --------- ---------
BASIC BASIS --
Income from continuing operations ................. $ 54.4 $ 26.9 $ 160.2 $ 65.1
-------- --------- --------- ---------
Average common shares outstanding ................. 87.9 115.0 89.5 117.1
-------- --------- --------- ---------
Earnings Per Share ................................ $ .62 $ .23 $ 1.79 $ .56
========= ========== ========== ==========
DILUTED BASIS --
Income from continuing operations ................. $ 54.4 $ 26.9 $ 160.2 $ 65.1
-------- --------- --------- ---------
Average common shares outstanding ................. 87.9 115.0 89.5 117.1
Add: Stock options ................................ 2.7 3.1 3.0 3.2
-------- --------- --------- ---------
Average common shares outstanding- diluted basis... 90.6 118.1 92.5 120.3
-------- --------- --------- ---------
Earnings Per Share ................................ $ .60 $ .23 $ 1.73 $ .54
========= ========== ========== ==========
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ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)
7) ACQUISITIONS
On September 10, 1999 the Company acquired Flojet Corporation ("Flojet"), a
privately held company, for approximately $142, consisting of $132 in cash and
$10 in notes payable. Flojet manufactures air and electric driven pumps, motors,
and dispensing equipment for a variety of industries, including beverage,
general industrial equipment, agricultural/lawn and garden, recreational
vehicle, leisure marine, and water purification. Flojet has annual sales of
approximately $50.
During the first nine months of 1999, the Company also made six acquisitions for
a total of approximately $100. The results of these businesses were not material
in relation to the Company's consolidated results of operations.
On October 29, 1999 the Company completed the purchase of STX Pte. Ltd. ("STX")
from Singapore-based San Teh, Ltd., for approximately $110. STX manufactures
conductive rubber switches used in keypads for mobile telephones, high-end
remote control units, and keyless entry systems. STX has annual sales of
approximately $64.
Each of the aforementioned acquisitions has been or will be accounted for using
the purchase method. The purchase price allocations have been prepared on a
preliminary basis and changes are expected as evaluations of assets and
liabilities are completed and as additional information becomes available. The
excess of the purchase price over the fair value of the assets acquired and the
liabilities assumed have or will be recorded as goodwill, and will be amortized
over a period not to exceed 40 years.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net income from continuing operations for the third quarter of 1999 was
$54.4 million, or $.60 per diluted share. This compares to $26.9 million, or
$.23 per diluted share from the comparable period last year. The increase in net
income of $27.5 million was attributable to higher operating income resulting
from higher sales volume, restructuring and other cost reduction initiatives,
and a significant reduction in interest expense.
Sales and revenues for the third quarter of 1999 increased $58.4 million
from the third quarter of 1998 due to increases of $41.8 million in our Defense
Products & Services segment, $22.5 million in our Specialty Products segment,
and $3.8 million in our Pumps & Complementary Products segment. Selling, general
and administrative expenses decreased $13.3 million from last year primarily due
to cost reduction initiatives.
In the third quarter of 1998, the Company recorded $16.0 million for various
restructuring projects at Connectors & Switches and a $16.0 million gain on the
sale of Pomona Electronics. Excluding nonrecurring charges, ongoing segment
margin increased 1.6 percentage points from the third quarter of 1998.
Interest expense, net of interest income, was $14.5 million lower in the
third quarter of 1999 compared to last year. The decrease was due to using a
portion of the proceeds from the automotive sales to significantly lower the
Company's debt level.
The effective income tax rate for the third quarter of 1999 was 37%, compared
with 39% for the third quarter of 1998. The reduction in the effective income
tax rate is due to implementation of tax planning strategies.
Business Segments - Sales and revenues and operating income of the Company's
business segments for the three months ended September 30, 1999, and 1998 were
as follows (in millions):
Defense Pumps & Dispositions,
Three months ended Connectors Products & Complementary Specialty Other & Grand
September 30,1999 & Switches Services Products Products Eliminations Corporate Total
- ----------------- ---------- ---------- ------------- --------- ------------- --------- -----
Sales and revenues $ 127.4 $ 319.9 $ 441.2 $ 216.2 $ 1.7 $ -- $ 1,106.4
Operating Income $ 15.9 $ 24.2 $ 44.0 $ 26.5 $ (0.1) $ (12.3) $ 98.2
Three months ended
September 30,1998
- -----------------
Sales and revenues $ 129.3 $ 278.1 $ 437.4 $ 193.7 $ 9.5 $ -- $ 1,048.0
Operating Income $ (4.1) $ 23.2 $ 37.4 $ 14.2 $ 17.7 $ (16.3) $ 72.1
Connectors & Switches' sales and revenues decreased $1.9 million compared with
the third quarter of 1998. This was mainly due to softness in the military,
aerospace and commercial aircraft businesses, partially offset by growth in the
switches business. Operating income increased $20.0 million primarily due to
cost reduction initiatives instituted this year and a $16.0 million charge taken
in 1998 for restructuring projects.
Defense Products & Services' sales and revenues for the third quarter of 1999
increased $41.8 million compared with the third quarter of 1998 due to increased
sales of our SINCGARS and Night Vision products. Operating income increased $1.0
million in the third quarter of 1999 compared with the same period last year
mainly due to higher sales volume.
Pumps & Complementary Products' sales for the third quarter of 1999 increased
$3.8 million compared with the same period last year. The continued softness in
the industrial end-use markets was partially offset by improvements at our Fluid
Handling and Water Technology divisions. Operating income increased $6.6 million
in the third quarter of 1999 compared with the third quarter of 1998 due to cost
reduction initiatives.
Specialty Products' sales for the third quarter of 1999 increased $22.5 million
compared with the third quarter of 1998. The increase is due to higher
automotive build rates in North America, increased market share in Europe and
the impact of the General Motors strike last year. Operating income increased
$12.3 million in the third quarter of 1999 compared with the same period last
year due to higher sales volume.
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10
Corporate expenses decreased $4.0 million in the third quarter of 1999 compared
to last year mainly due to lower costs from corporate restructuring efforts
initiated in the fourth quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
Net income from continuing operations was $160.2 million, or $1.73 per
diluted share. This compares to $83.9 million of net income or $0.70 per diluted
share, excluding nonrecurring items of $18.8 million ($30.8 before tax), for
1998. The increase in net income of $76.3 million was mainly attributable to
higher sales volume, restructuring and other cost reduction initiatives and a
significant reduction in interest expense.
Sales and revenues for the first nine months of 1999 increased $117.3
million from the first nine months of 1998 primarily due to an increase of $97.3
million in our Defense Products & Services segment and an increase of $90.5
million in our Specialty Products segment. These increases were partially offset
by decreases of $22.3 million in our Connectors & Switches segment and $9.3
million in our Pumps & Complementary Products segment. Selling, general and
administrative expenses decreased by $33.4 million compared to last year
primarily due to cost reduction initiatives.
The first nine months of 1998 had nonrecurring charges of $30.8 million.
This consisted of $25.7 million for the closure of a plant, $16.0 million of
restructuring projects at Connectors & Switches, and $20.1 million of accruals
for anticipated legal expenses and losses on the divestitures of non-core
businesses. These costs were partially offset by $31.0 million of gains on the
sales of Barton and Pomona Electronics. Excluding nonrecurring charges,
operating segment margin increased 1.2 percentage points from the first nine
months of 1998.
Interest expense, net of interest income, decreased $57.3 million in the
first nine months of 1999 compared to last year. The decrease was due to using a
portion of the proceeds from the automotive sales to significantly lower the
Company's debt level.
The effective income tax rate for the first nine months of 1999 was 37%,
compared with 39% for the same period last year. The reduction in the effective
income tax rate is due to implementation of tax planning strategies.
Business Segments - Sales and revenues, operating income and total assets of the
Company's business segments for the nine months ended September 30, 1999, and
1998 were as follows (in millions):
Defense Pumps & Dispositions,
Nine months ended Connectors Products & Complementary Specialty Other & Grand
September 30, 1999 & Switches Services Products Products Eliminations Corporate Total
- ----------------- ---------- ---------- ------------- --------- ------------- --------- -----
Sales and revenues $ 372.4 $ 1,023.2 $ 1,284.0 $ 703.0 $ 7.2 $ -- $ 3,389.8
Operating Income $ 43.1 $ 70.3 $ 116.4 $ 98.8 $ 0.3 $ (43.6) $ 285.3
Total Assets $ 311.0 $ 641.1 $ 1,746.0 $ 737.0 $ 78.3 $ 831.5 $ 4,344.9
Nine months ended
September 30, 1998
- ------------------
Sales and revenues $ 394.7 $ 925.9 $ 1,293.3 $ 612.5 $ 46.1 $ -- $ 3,272.5
Operating Income $ 20.1 $ 67.4 $ 79.5 $ 65.9 $ 35.9 $ (69.2) $ 199.6
Total Assets $ 325.7 $ 602.9 $ 1,840.1 $ 607.3 $ 370.2 $ 2,699.9 $ 6,446.1
Connectors & Switches' sales and revenues decreased $22.3 million from the prior
year mainly due to weak demand in the connectors business in Europe and North
America. This was partially offset by growth in the switches business. Operating
income increased $23.0 million from the prior year mainly due to cost reduction
initiatives instituted this year and a $16.0 million charge taken in 1998 for
restructuring projects.
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11
Defense Products & Services' sales and revenues increased $97.3 million from the
prior year principally due to a $25.6 million claim settlement on a prior year
project in our Aerospace and Communications division and higher sales volume in
our Night Vision unit. Operating income was $2.9 million higher in the first
nine months of 1999 compared to the same period last year mainly due to higher
sales volume and the receipt of a $5.3 million settlement in the second quarter
of 1999. During the first nine months of 1999, the Company recorded $28.3
million in charges for loss contracts, warranty provisions, asset impairments
and other matters.
Pumps & Complementary Products' sales decreased $9.3 million compared to the
same period last year. The decrease was primarily due to weakness in the
industrial end-use markets. Operating income increased $11.2 million compared to
1998 due to cost reduction initiatives. This increase excludes a 1998
restructuring charge of $25.7 million for the shut down of a pump manufacturing
facility in Cincinnati, Ohio.
Specialty Products' sales increased $90.5 million compared to the same period
last year. The increase is primarily due to higher automotive build rates in
North America, increased market share in Europe, the impact of the General
Motors strike last year and $16.4 million due to the acquisition of Rule
Industries, Inc. in June 1998. Operating income for the first nine months of
1999 increased $32.9 million compared to last year due to higher sales volume
and cost reduction initiatives.
Corporate expenses, excluding a $20.1 million charge for restructuring recorded
in the first quarter of 1998, decreased $5.5 million in the first nine months of
1999 compared to the comparable period. Expenses recorded during the first nine
months of 1999 for tax organization costs, terminated projects and other matters
were more than offset by lower costs due to corporate restructuring efforts
initiated in the fourth quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash from operating activities of $192.2 million, increase in debt of $141.1
million, divestiture proceeds of $71.3 million and $662.0 million of cash and
cash equivalents were used primarily for repurchases of common stock of $394.3
million, capital expenditures of $138.6 million, acquisitions of $232.6 million,
dividend payments of $42.4 million, and $276.8 million for costs related to
discontinued operations.
STATUS OF RESTRUCTURING ACTIVITIES: During 1998, the Company recorded
restructuring charges to close facilities, discontinue product lines and reduce
headcount. As of September 30, 1999, the Company had closed 16 of the planned 25
facilities, discontinued 16 of the planned 19 product lines and reduced the
workforce by 1,498, or approximately 62% of the planned aggregate reduction of
approximately 2,400 persons.
CASH FLOWS: Cash from operating activities in the first nine months of 1999
was $192.2 million, an increase of $137.5 million from the first nine months of
1998. This increase excludes $1.6 billion of income from discontinued operations
in the first nine months of 1998. The main driver of the increase is higher
earnings, better working capital management and lower tax payments. The first
nine months of 1999 reflects cash payments of $41.7 million for restructuring.
ADDITIONS TO PLANT, PROPERTY AND EQUIPMENT: Capital expenditures during the
first nine months of 1999 were $138.6 million, an increase of $23.5 million from
the first nine months of 1998. The majority of the increase was in our Defense
Products & Services segment related to the purchase of a building.
ACQUISITIONS: During the first nine months of 1999 the Company acquired
Water Pollution Control Corporation, Hydro Air Industries, Inc., FloJet Corp.,
K&M Electronics, made an equity investment in EarthWatch Inc. and acquired two
other small companies. The aggregate of these investments was $232.6 million,
net of cash acquired of $2.5 million. During the first nine months of 1998, the
Company acquired Rule Industries, Inc. for $63.3 million and four other small
companies.
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DIVESTITURES: During the first nine months of 1999, the Company had two
divestitures, Palm Coast Utility, and Carbon Industries that generated $56.2
million of cash. The remaining $15.1 million of proceeds from the sale of assets
for the first nine months of 1999, represents plant, property and equipment
sales across all of our businesses. In 1998, the Company sold its automotive
Brake and Chassis and Electrical Systems businesses, Barton fluid measurement
and Pomona Electronics units for a total of $3.7 billion.
SHARE REPURCHASE: The Company's $1.1 billion stock repurchase program was
completed in the first quarter of 1999. During the course of the program,
initiated in July of 1998, ITT Industries repurchased 30.5 million of its shares
on the open market, at an average price of approximately $36 per share.
DEBT AND CREDIT FACILITIES: External debt at September 30, 1999 was $881.1
million, compared with $767.1 million at December 31,1998. Cash and cash
equivalents were $218.9 million at September 30, 1999, compared to $880.9
million at year end 1998. On August 1, 1999, the Company redeemed all of its
outstanding 8 3/4% senior debentures due March 1, 2006 and 9 1/4% senior
debentures due July 15, 2001. The maximum amount of borrowing available under
the Company's revolving credit agreements at September 30, 1999 was $1.5
billion.
NEW ACCOUNTING STANDARD: In June 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities"-Deferral of the Effective Date of
FASB Statement No. 133, deferring the effective date of Statement 133 for one
year. Consequently, SFAS 133 will now be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000, which, for the Company would be
the calendar year beginning January 1, 2001. SFAS 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
133 also requires that changes in the derivative's fair value be 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. The Company has not yet quantified
the impacts of adopting SFAS 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.
YEAR 2000 UPDATE: As presented in the Company's Form 10-K Annual Report for the
fiscal year ended December 31, 1998, the Company has conducted a comprehensive
inventory and assessment of its software and equipment to determine their state
of year 2000 "Y2K" readiness. As of September 30, 1999, the Company estimates
that all software and equipment essential to the operations of the business, as
well as all other software and equipment, have been modified, upgraded or
replaced and tested to confirm Y2K compliance, based upon the number of items
the Company has identified which require remediaton. The Company is continuing
the process of determining third party Y2K readiness and as of September 30,
1999 had communicated with all critical suppliers and vendors who supply
products and services critical to the operations of the Company's business. The
Company has utilized questionnaires, telephone interviews, site visits and
audits in an effort to assess preparedness of such suppliers and vendors. Over
98% of our critical suppliers have advised us that they expect to be fully
compliant on a timely basis and we have verified that they are substantially
compliant as of September 30, 1999 based on the results of the efforts described
above. Alternative supply arrangements or other contingency plans are being
addressed for those critical suppliers/vendors who we believe may not be Y2K
compliant before year-end. Currently, the Company estimates that the aggregate
cost of its Y2K initiatives will total approximately $19.5 million,
substantially all of which was incurred as of September 30, 1999. Approximately
75% of total costs have been expensed with the balance being capitalized.
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FORWARD-LOOKING STATEMENTS
Certain material presented herein consists of forward-looking statements which
involve known and unknown risks, uncertainties and other important factors that
could cause actual results to differ materially from those expressed in or
implied from such forward-looking statements. Such factors include those set
forth in Item 1. Business and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking Statements in
the ITT Industries, Inc. Form 10-K Annual Report for the fiscal year ended
December 31, 1998 and other of its filings with the Securities and Exchange
Commission, to which reference is hereby made.
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Part II.
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to the Form 10-K Annual Report for the fiscal year
ended December 31, 1998 filed by ITT Industries. The second full paragraph under
Item 3. Legal Proceedings therein concerning environmental matters relating to
the San Fernando Valley aquifer and other matters, as amended in the ITT
Industries Form 10-Q for the quarterly period ended June 30, 1999, is hereby
deleted and replaced in its entirety with the following:
"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 and Lockheed Martin
appealed. On appeal, the California Court of Appeals upheld the
decision of the Superior Court. Lockheed Martin's petition for review
to the California Supreme Court was denied in August 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. In May 1999, the EPA and the PRPs,
including ITT Industries and Lockheed Martin, reached an agreement in
principle on a consent decree settling that case. The consent decree is
awaiting approval from the EPA. In a suit filed several years ago by
ITT Industries in the California Superior Court, Los Angeles County,
ITT Corporation, et al. v. Pacific Indemnity Corporation et al. against
its insurers, ITT Industries is seeking recovery of costs it incurred
in connection with this and other environmental matters. In April 1999,
the Superior Court granted partial summary judgment under California
law, dismissing certain claims in the California action. The California
Court of Appeals has accepted ITT Industries' petition for review of
the Superior Court's order. Argument was scheduled for August 1999;
however, it has now been continued to an indefinite date. In April
1999, ITT Industries initiated a new coverage action in New Jersey, ITT
Industries, Inc. et al. v. Federal Ins. Co. et al., (Middlesex County,
No. L-1919-99), involving new environmental insurance claims as well as
claims pending but dormant before the court in California. ITT
Industries' insurers challenged the convenience of New Jersey as the
forum for this action. In its ruling on the motion, the Court dismissed
the non-New Jersey claims, deferred action on certain New Jersey claims
and retained jurisdiction over one New Jersey claim. ITT Industries 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."
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit Index for a list of exhibits filed herewith.
(b) ITT Industries did not file any Form 8-K Current Reports during the
quarter for which this Report is filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITT Industries, Inc.
(Registrant)
By Edward W. Williams
------------------------------------
Edward W. Williams
Vice President and Controller
(Principal accounting officer)
November 15, 1999
(Date)
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EXHIBIT INDEX
Exhibit
No. Description Location
--- ----------- --------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession None
(3) Articles of Incorporation and by-laws None
(4) Instruments defining the rights of security holders, including
indentures None
(10) Material contracts
(k) ITT Industries 1996 Restricted Stock Plan
for Non-Employee Directors, as amended Filed Herewith
(11) Statement re computation of per share earnings See Note 6 to
Notes to
Consolidated
Financial
Statements
(15) Letter re unaudited interim financial information None
(18) Letter re change in accounting principles None
(19) Report furnished to security holders None
(22) Published report regarding matters submitted to vote of security
holders None
(23) Consents of experts and counsel None
(24) Power of attorney None
(27) Financial Data Schedule Filed Herewith
(99) Additional Exhibits None
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