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 March 31, 1998
TRANSACTION 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 April 30, 1998, there were outstanding 118,445,259 shares of
common stock ($1 par value per share) of the registrant.
ITT INDUSTRIES, INC.
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Condensed Income Statements
Three Months Ended
March 31, 1998 and 1997 2
Consolidated Condensed Balance Sheets
March 31, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations:
Three Months Ended March 31, 1998 and 1997 8
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
Exhibit Index 12
1
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 only 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 1997 Annual Report on Form 10-K.
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(In millions, except per share)
(unaudited)
Three Months Ended
March 31,
1998 1997
Net sales $ 2,143.5 $ 2,166.6
------- -------
Cost of sales 1,672.2 1,742.7
Selling, general, and
administrative expenses 215.4 186.4
Research, development, and
engineering expenses 121.0 126.0
Other operating expenses 10.3 8.2
------- -------
Total costs and expenses 2,018.9 2,063.3
------- -------
Operating income 124.6 103.3
Interest expense (39.1) (33.3)
Interest income 6.6 3.4
Miscellaneous expense, net (.9) (.8)
------- -------
Income before income taxes 91.2 72.6
Income tax expense (35.6) (28.3)
------- -------
Net income $ 55.6 $ 44.3
======= =======
Earnings Per Share:
Net income
Basic $ .47 $ .37
Diluted $ .46 $ .37
Cash dividends declared per
common share $ .15 $ .15
__________
The accompanying notes to consolidated condensed financial statements
are an integral part of the above statements.
2
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except for shares and per share)
March 31, December 31,
1998 1997
(unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 160.1 $ 192.2
Receivables, net 1,473.6 1,252.4
Inventories, net 791.4 812.8
Other current assets 142.8 120.0
------- -------
Total current assets 2,567.9 2,377.4
Plant, property, and equipment, net 1,906.1 2,024.3
Deferred U.S. income taxes 263.6 258.8
Goodwill, net 1,095.2 1,116.5
Other assets 430.8 443.5
------- -------
$ 6,263.6 $ 6,220.5
======= =======
Liabilities and Shareholders' Equity
Current Liabilities:
Commercial paper $ 1,025.0 $ 698.4
Accounts payable 726.5 848.3
Accrued expenses 896.0 884.3
Accrued taxes 218.2 161.5
Notes payable and current
maturities of long-term debt 658.2 952.4
------- -------
Total current liabilities 3,523.9 3,544.9
Pension and postretirement costs 932.0 938.5
Long-term debt 528.6 532.2
Deferred foreign, state and local
income taxes 37.2 31.6
Other liabilities 401.3 351.0
------- -------
5,423.0 5,398.2
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 118,445,259 shares
and 118,445,827 shares 118.4 118.4
Capital surplus 391.6 397.0
Accumulated other comprehensive income:
Unrealized gain on investment
securities 1.5 1.6
Cumulative translation adjustments 102.8 116.8
------ ------
104.3 118.4
Retained earnings 226.3 188.5
------ ------
840.6 822.3
------- -------
$ 6,263.6 $ 6,220.5
======= =======
__________
The accompanying notes to consolidated condensed financial statements
are an integral part of the above balance sheets.
3
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(unaudited)
Three Months Ended
March 31,
1998 1997
Operating Activities
Net income $ 55.6 44.3
Adjustments to net income:
Depreciation 91.3 99.1
Amortization 17.1 10.9
Change in receivables,
inventories, accounts payable,
and accrued expenses (291.7) (170.7)
Change in accrued and
deferred taxes 61.8 43.2
Other, net (37.6) 26.4
------ ------
Cash from (used for)
operating activities (103.5) 53.2
------ ------
Investing Activities
Additions to plant, property,
and equipment (60.1) (75.7)
Proceeds from the sale of
assets 130.8 2.3
Acquisitions (7.9) (7.6)
Other, net .9 (2.4)
----- -----
Cash from (used for)
investing activities 63.7 (83.4)
----- -----
Financing Activities
Short-term debt, net 49.4 111.3
Long-term debt repaid (10.4) (121.1)
Repurchase of common stock (13.6) (14.7)
Dividends paid (17.8) (17.8)
Other, net 7.6 8.9
----- ------
Cash from (used for)
financing activities 15.2 (33.4)
----- ------
Exchange Rate Effects on Cash
and Cash Equivalents (7.5) 3.2
----- ------
Decrease in cash and cash
equivalents (32.1) (60.4)
Cash and cash equivalents-
beginning of period 192.2 121.9
------ ------
Cash and cash equivalents-
end of period $ 160.1 $ 61.5
====== ======
Supplemental Disclosures of
Cash Flow Information:
Cash paid (received) during the
period for:
Interest $ 33.2 $ 27.0
====== ======
Income taxes $ (10.1) $ (6.5)
====== ======
__________
The accompanying notes to consolidated condensed financial
statements are an integral part of the above statements.
4
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In millions, except per share, unless otherwise stated)
1) Receivables, net
Receivables consist of the following:
March 31, December 31,
1998 1997
Trade $ 1,490.1 $ 1,265.8
Accrued for
completed work 23.0 26.8
Less reserves (39.5) (40.2)
-------- --------
$ 1,473.6 $ 1,252.4
======== ========
2) Inventories, net
Inventories consist of the following:
March 31, December 31,
1998 1997
Finished goods $ 293.5 $ 352.4
Work in process 533.5 438.8
Raw materials 309.0 340.6
Less--reserves (136.9) (85.0)
--progress payments (207.7) (234.0)
------- -------
$ 791.4 $ 812.8
======= =======
3) Plant, Property, and Equipment, net
Plant, property, and equipment consist of the following:
March 31, December 31,
1998 1997
Land and improvements $ 108.1 $ 110.5
Buildings and improvements 663.2 688.7
Machinery and equipment 2,824.8 2,932.6
Construction work in
progress 293.3 303.2
Other 508.2 495.4
-------- --------
4,397.6 4,530.4
Less--accumulated
depreciation and
Amortization (2,491.5) (2,506.1)
-------- --------
$ 1,906.1 $ 2,024.3
======== ========
5
4) New Accounting Pronouncement
In June of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") 130, "Reporting
Comprehensive Income", which is effective for financial statements for
fiscal years beginning after December 15, 1997. SFAS 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 ITT
Industries, Inc. consist of unrealized gains and losses relating to the
translation of foreign currency financial statements, hedges of net
foreign investments, and certain investment securities.
Comprehensive Income
Three Months Ended
March 31
1998 1997
Net income........................................$ 55.6 $ 44.3
Other comprehensive income:
Foreign currency translation adjustments........ (15.0) 20.6
Unrealized losses on investment securities...... (.1) --
----- -----
Other comprehensive income/(loss), before tax. (15.1) 20.6
Income tax related to other comprehensive income. 1.0 (3.1)
----- -----
Other comprehensive income, after tax..........(14.1) 17.5
Comprehensive income................ $ 41.5 $ 61.8
===== =====
6
5) Calculation of Earnings Per Share
Three Months Ended
March 31,
1998 1997
BASIC BASIS
Net income $ 55.6 $ 44.3
----- -----
Average common shares
outstanding 118.4 118.4
----- -----
Earnings Per Share $ .47 .37
==== ====
DILUTED BASIS
Net income $ 55.6 $ 44.3
----- -----
Average common shares
outstanding 118.4 118.4
Add: Stock options 3.2 2.2
----- -----
Average common shares
outstanding on a diluted basis 121.6 120.6
----- -----
Earnings Per Share $ .46 $ .37
==== ====
6) Subsequent Event
On April 13, 1998, the Company completed the sale of its Barton fluid
measurement business to Barton Instrument Systems, L.L.C., an affiliate
of American Commercial Holdings, Inc. of Lexington, Kentucky. The cash
proceeds from the sale were $31.4 million.
The Barton unit produces process measurement instruments and systems,
most notably for the oil and gas industry. It had 1997 sales of
approximately $78 million, and employs 550 people at five locations in
the U.S., Canada, and Great Britain.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three months ended March 31, 1998 compared with three months ended
March 31, 1997
Net income of $55.6 million, or $.46 per diluted share, compared with
net income of $44.3 million, or $.37 per diluted share, reported in the
first quarter of 1997. The increase in net income was attributable to
higher earnings from all three of the Company's major businesses, the
absence of losses on companies held for disposition, and the
recognition of a $20.0 million pre-tax gain on the sale of the
Company's Precision Die Casting (PDC) business. The previous factors
more than offset higher interest expense and $20.1 million of pre-tax
accruals for anticipated legal expenses and losses on the divestitures
of non-core businesses.
Net sales for the first quarter of 1998 declined slightly from the
first quarter of 1997. The decline in sales was mainly due to the
divestitures of the semiconductors unit and selected businesses of the
automotive unit and unfavorable foreign exchange translation, which
more than offset sales increases from the acquisitions of Goulds Pumps
and Kaman Sciences and volume gains at the Automotive and Defense &
Electronics units. Selling, general and administrative expenses of
$215.4 million compared to $186.4 million last year. The increase from
last year was primarily due to the acquisition of Goulds Pumps.
Operating margin of 5.8% improved significantly from 4.8% last year due
to continuing operational rationalization and cost cutting as well as
the substitution of higher margin acquisitions for lower margin
divestitures. Operating profit was $124.6 million in the first quarter
of 1998, compared to $103.3 million last year.
Interest expense for the first quarter of 1998 was $39.1 million,
compared with $33.3 million in the first quarter of 1997. The increase
in interest expense was due to a higher average level of debt which
more than offset a lower average interest rate resulting from a debt
restructuring. Interest income was $6.6 million in the current
quarter, compared to $3.4 million in the prior quarter, a result of
maintaining higher cash balances.
The effective income tax rates for both quarters was 39%. Income tax
expense increased to $35.6 million due to higher pre-tax earning.
Business Segments - Unaudited sales and operating income of the
Company's business segments were as follows for the three months ended
March 31, 1998, and 1997 (in millions):
Three months
ended Defense & Fluid Dispositions Corporate Grand
March 31,1998 Automotive Electronics Technology &Other & Other Total
- ----------------------------------------------------------------------------------
Net Sales $1,192.7 $473.6 $472.4 $4.8 $ - $2,143.5
Operating
Income:
Before non-
recurring
items 75.5 30.0 35.1 0.6 (16.5) 124.7
Non-recurring
items 20.0 --- --- --- (20.1) (0.1)
- -----------------------------------------------------------------------------------
Total operating
income $ 95.5 $ 30.0 $ 35.1 $0.6 $(36.6) $ 124.6
8
[CAPTION]
Three months
ended Defense & Fluid Dispositions Corporate Grand
March 31,1997 Automotive Electronics Technology & Other & Other Total
- -----------------------------------------------------------------------------------
Net Sales $1,393.0 $409.3 $307.5 $56.8 $ --- $2,166.6
Operating
Income:
Before non-
recurring
items 74.0 25.1 23.9 (4.7) (15.0) 103.3
Non-recurring
items ----- ----- ----- ----- ---- -----
- -----------------------------------------------------------------------------------
Total operating
income $ 74.0 $ 25.1 $ 23.9 $(4.7) $(15.0) $ 103.3
Automotive's revenues decreased 14.4% from the prior year mainly due to
divestitures and unfavorable foreign currency translation, which more
than offset volume gains for the brakes and switches businesses.
Operating income, excluding a non-recurring $20.0 million pre-tax gain
on the sale of PDC, was up $1.5 million from the prior year, providing
an improved margin of 6.3%, compared to 5.3% in the prior year. The
improvement in operating margin was mainly due to continued cost
reductions and the divestiture of less profitable operations, which
more than offset lower prices.
ITT Defense & Electronics' revenue was up 15.7% from the prior year
principally due to stronger international sales and the acquisition of
Kaman Sciences, now called ITT Systems & Sciences. Operating income
was 19.5% higher in the 1998 period mainly due to higher volume and
productivity improvements.
ITT Fluid Technology's 1998 first quarter sales increased 53.6%
compared to the first quarter of 1997. The improvement was primarily
due to the acquisition of Goulds Pumps in May 1997, which more than
offset poor market conditions in Asia, weak demand in the petrochemical
and mining segments, and unfavorable foreign currency translation.
Operating income increased $11.2 million primarily due to higher
volumes resulting from the Goulds Pumps acquisition.
Liquidity and Capital Resources
Divestiture proceeds of $130.8 million and net borrowings of $39
million were used primarily for operating activities of $103.5 million,
capital expenditures of $60.1 million, acquisitions of $7.9 million,
dividend payments of $17.8 million and repurchases of common stock of
$13.5 million.
Cash Flows: Cash used for operating activities in the first
quarter of 1998 was $103.5 million, a decrease of $156.7 million from
the first quarter of 1997. The increase in working capital
requirements in the first quarter of 1998 was largely due to the timing
of the fiscal close of the quarter and the collection of a large single
payment at Automotive, as well as differences in advance payments at
Defense & Electronics. The increase in cash flows from the change in
accrued and deferred taxes in the first quarter of 1998 is mostly due
to differences in the timing of tax payments and receipts of refunds.
The decrease in other, net operating activities was mainly due to
prepayments for insurance and other items, and a larger
reclassification of gains from asset sales, resulting primarily from
the sale of PDC, to proceeds from the sale of assets.
Debt and Credit Facilities: External debt at March 31, 1998 was $2.21
billion, compared with $2.18 billion at December 31,1997. Cash and
cash equivalents were $160.1 million at March 31, 1998, compared to
$192.2 million at year end 1997. The maximum amount of borrowing
available under the Company's revolving credit agreements at March 31,
1998 was $1.5 billion.
Additions to Plant, Property and Equipment: Capital expenditures
during the first quarter of 1998 were $60.1 million, a decrease of
$15.6 million from the first quarter of 1997. Most of the decrease was
at Automotive.
Acquisitions: During the first quarter of 1998, the Company acquired
two small companies - one at Defense & Electronics and one at Fluid
Technology.
9
Divestitures: During the first quarter of 1998, the Company had two
Automotive-related divestitures - PDC and a Plant at Nuevo Laredo,
Mexico, which generated most of the proceeds from the sale of assets of
$130.8 million.
Strategic Review
On March 18, 1998, ITT Industries, Inc. announced that it was putting
much of its automotive unit under strategic review. The strategic
review consists of an examination of all strategic alternatives,
including the possible sale of one or more major lines of business.
The lines of business originally involved in this review were those
involved in the engineering, manufacturing and marketing of automotive
brakes, chassis modules and electrical systems in the U.S. and abroad.
The automotive switch business was also added to this review. The
total 1997 sales of the operations under review were approximately $4.1
billion. Proceeds from any sale would be used to finance share
repurchases, pay down debt, further internal and/or external growth of
core businesses, or some combination of those uses. The Company
expects to announce the status of the strategic review in the summer.
The strategic review does not include the automotive fluid handling,
friction and shock absorber businesses.
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, 1997 and other of its filings with the Securities and
Exchange Commission.
10
Part II.
OTHER INFORMATION
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.
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 /s/ Richard J. Townsend
--------------------------------
Richard J. Townsend
Vice President and Controller
(Principle accounting officer)
May 1, 1998
(Date)
11
EXHIBIT INDEX
Exhibit
No. Description Location
(2) Plan of acquisition, reorganization,
arrangement, liquidation or Succession None
(3) Articles of Incorporation and by-laws None
(4) Instruments defining the rights of
security holders, including Indentures None
(10) Material contracts None
(12) Statements re: computation of ratios
Calculation of ratio of earnings
to total fixed charges Filed Herewith
(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
13
EXHIBIT 12
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CALCULATION OF RATIOS OF EARNINGS TO TOTAL FIXED CHARGES
AND CALCULATION OF EARNINGS TO TOTAL FIXED CHARGES AND
PREFERRED DIVIDEND REQUIREMENTS
(Dollars in millions)
Three Months Ended
March 31, Years Ended December 31,
------------------ ------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------- ------ ----- ----- ----- ----
Earnings:
Income from continuing
operations $ 55.6 $ 44.3 $ 108.1 $ 222.6 $ 20.7 $201.6 $134.8
Add(deduct):
Adjustment for
distributions in excess
of (less than)
undistributed equity
earnings and
losses a) .4 .5 1.3 1.9 .6 -- (2.6)
Income taxes 35.6 28.3 72.7 148.4 50.2 147.5 65.1
Amortization of
interest capitalized .1 .2 .4 .9 2.5 .7 3.9
---- ---- ---- ----- --- ----- -
91.7 73.3 182.5 373.8 74.0 349.8 201.2
----- ---- ----- ----- ---- ----- --
Fixed Charges:
Interest and other
financial charges 39.1 33.3 135.4 169.0 175.2 115.2 154.0
Interest factor
attributable to
rentals b) 9.1 7.7 36.3 30.9 29.0 22.0 24.2
----- ---- ----- ----- ---- ----- --
48.2 41.0 171.7 199.9 204.2 137.2 178.2
----- ---- ----- ----- ---- ----- --
Earnings, as adjusted,
from continuing
Operations $139.8 $114.3 $354.2 $573.7 $278.2 $487.0 $379.4
===== ===== ===== ===== ===== ===== ==
Fixed Charges:
Fixed charges above $ 48.2 $ 41.0 $171.7 $199.9 $204.2 $137.2 $178.2
Interest capitalized -- -- 1.1 1.1 2.9 6.8 8.0
----- ---- ----- ----- ---- ----- --
Total fixed charges 48.2 41.0 172.8 201.0 207.1 144.0 186.2
Dividends on preferred
stock (pre-income tax
basis) c) -- -- -- -- 23.4 47.5 50.0
----- ---- ----- ----- ---- ----- --
Total fixed charges
and preferred
dividend
requirements $ 48.2 $ 41.0 $172.8 $201.0 $230.5 $191.5 $236.2
===== ===== ===== ===== ===== ===== ==
Ratios:
Earnings, as adjusted,
from continuing
Operations to
total fixed charges 2.90 2.79 2.08 2.85 1.34 3.38 2.04
===== ===== ===== ===== ===== ===== ==
Earnings, as adjusted,
from continuing
Operations to
total fixed charges
and Preferred
dividend
requirements 2.90 2.79 2.08 2.85 1.21 2.54 1.61
===== ===== ===== ===== ===== ===== ==
_________
Notes:
a)The adjustment fordistributions in excess of (less than)
undistributed equity earnings and losses represents the
adjustment to income for distributions in excess of (less than)
undistributed earnings and losses of companies in which at least
20% but less than 50% equity is owned.
b)One-third of rental expense is deemed to be representative of
interest factor in rental expense.
c)The dividend requirements on preferred stock have been determined
by adding to the total preferred dividends an allowance for income
taxes, calculated at the effective income tax rate.
13
5
1,000
3-MOS
DEC-31-1998
MAR-31-1998
160,100
0
1,513,100
39,500
791,400
2,567,900
4,397,600
2,491,500
6,263,600
3,523,900
528,600
0
0
118,400
722,200
6,263,600
2,143,500
2,143,500
1,672,200
1,793,200
225,700
1,100
39,100
91,200
35,600
55,600
0
0
0
55,600
.47
.46
