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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 MARCH 31, 2002
[ ] 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 April 30, 2002, there were outstanding 90,749,220 shares of common
stock ($1 par value per share) of the registrant.
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ITT INDUSTRIES, INC.
TABLE OF CONTENTS
PAGE
----
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Condensed Income Statements -- Three Months 2
Ended March 31, 2002 and 2001...............................
Consolidated Condensed Balance Sheets -- March 31, 2002 and 3
December 31, 2001...........................................
Consolidated Condensed Statements of Cash Flows -- Three 4
Months Ended March 31, 2002 and 2001........................
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, 2002 and 2001.................. 10
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K............................ 13
Signature................................................... 13
Exhibit Index............................................... 14
1
PART I.
FINANCIAL INFORMATION
ITEM 1. 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 to
the current period presentation. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2001 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,
-------------------
2002 2001
-------- --------
Sales and revenues.......................................... $1,185.8 $1,186.0
-------- --------
Costs of sales and revenues................................. 784.9 771.7
Selling, general, and administrative expenses............... 173.3 195.8
Research, development, and engineering expenses............. 112.0 107.1
-------- --------
Total costs and expenses.................................... 1,070.2 1,074.6
-------- --------
Operating income............................................ 115.6 111.4
Interest expense, net....................................... (11.9) (20.6)
Miscellaneous income (expense), net......................... 1.4 0.1
-------- --------
Income before income taxes.................................. 105.1 90.9
Income tax expense.......................................... (33.6) (31.8)
-------- --------
Net income.................................................. $ 71.5 $ 59.1
======== ========
EARNINGS PER SHARE:
Net income
Basic..................................................... $ 0.80 $ 0.67
Diluted................................................... $ 0.77 $ 0.65
Cash dividends declared per common share.................... $ 0.15 $ 0.15
PRO FORMA RESULTS:
Reported net income....................................... $ 71.5 $ 59.1
Add back goodwill amortization, net of tax................ -- 8.5
-------- --------
Adjusted net income....................................... $ 71.5 $ 67.6
======== ========
Adjusted basic earnings per share......................... $ 0.80 $ 0.77
Adjusted diluted earnings per share....................... $ 0.77 $ 0.75
Average Common Shares -- Basic.............................. 89.6 87.9
Average Common Shares -- Diluted............................ 92.4 90.4
- ---------------
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,
2002 2001
----------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 150.7 $ 121.3
Receivables, net.......................................... 824.3 741.7
Inventories, net.......................................... 531.2 528.9
Other current assets...................................... 75.4 66.9
-------- --------
Total current assets.............................. 1,581.6 1,458.8
Plant, property, and equipment, net....................... 770.7 791.0
Deferred income taxes..................................... 308.0 310.9
Goodwill, net............................................. 1,419.8 1,410.0
Other intangible assets, net.............................. 54.1 47.9
Other assets.............................................. 470.1 489.8
-------- --------
Total assets...................................... $4,604.3 $4,508.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 427.8 $ 400.5
Accrued expenses.......................................... 716.8 727.9
Accrued taxes............................................. 254.1 251.2
Notes payable and current maturities of long-term debt.... 501.8 517.0
-------- --------
Total current liabilities......................... 1,900.5 1,896.6
Pension benefits............................................ 226.5 199.0
Postretirement benefits other than pensions................. 197.3 195.9
Long-term debt.............................................. 447.1 456.4
Other liabilities........................................... 373.3 384.7
-------- --------
Total liabilities................................. 3,144.7 3,132.6
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: 90,376,319 shares and 88,786,701
shares................................................ 90.4 88.8
Retained earnings......................................... 1,624.4 1,514.0
Accumulated other comprehensive (loss):
Unrealized (loss) on investment securities............. (1.2) (1.6)
Minimum pension liability.............................. (34.9) (19.2)
Cumulative translation adjustments..................... (219.1) (206.2)
-------- --------
Total shareholders' equity........................ 1,459.6 1,375.8
-------- --------
Total liabilities and shareholders' equity........ $4,604.3 $4,508.4
======== ========
- ---------------
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,
------------------
2002 2001
------- -------
OPERATING ACTIVITIES
Net income.................................................. $ 71.5 $ 59.1
Adjustments to Net Income:
Depreciation and amortization............................. 40.6 55.0
Payments for restructuring................................ (12.2) (2.3)
Change in receivables, inventories, accounts payable, and
accrued expenses....................................... (90.4) (43.9)
Change in accrued and deferred taxes...................... 23.0 (14.9)
Change in other current and non-current assets............ 1.3 13.1
Change in non-current liabilities......................... (1.4) 10.9
Other, net................................................ 3.9 3.0
------ ------
Net cash -- operating activities.......................... 36.3 80.0
------ ------
INVESTING ACTIVITIES
Additions to plant, property, and equipment................. (20.8) (28.6)
Proceeds from sale of assets................................ 6.0 0.6
Acquisitions................................................ (19.3) (14.0)
Other, net.................................................. -- 1.2
------ ------
Net cash -- investing activities.......................... (34.1) (40.8)
------ ------
FINANCING ACTIVITIES
Short-term debt, net........................................ (14.1) 30.7
Long-term debt repaid....................................... (0.7) (0.1)
Long-term debt issued....................................... 0.3 --
Repurchase of common stock.................................. -- (53.3)
Proceeds from issuance of common stock...................... 34.5 28.5
Dividends paid.............................................. (13.3) (13.2)
Other, net.................................................. -- 0.5
------ ------
Net cash -- financing activities.......................... 6.7 (6.9)
------ ------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS.......... (0.3) (3.3)
NET CASH -- DISCONTINUED OPERATIONS......................... 20.8 (9.3)
------ ------
Net change in cash and cash equivalents..................... 29.4 19.7
Cash and cash equivalents -- beginning of period............ 121.3 88.7
------ ------
CASH AND CASH EQUIVALENTS -- END OF PERIOD.................. $150.7 $108.4
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................. $ 8.6 $ 20.4
====== ======
Income taxes.............................................. $ 10.0 $ 44.2
====== ======
- ---------------
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,
2002 2001
--------- ------------
Trade....................................................... $804.6 $734.1
Other....................................................... 41.6 29.3
Allowance for doubtful accounts............................. (21.9) (21.7)
------ ------
$824.3 $741.7
====== ======
2) INVENTORIES
Net inventories consist of the following:
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
Finished goods.............................................. $166.7 $169.0
Work in process............................................. 194.4 191.7
Raw materials............................................... 292.0 302.4
Progress payments........................................... (55.5) (67.4)
Reserves.................................................... (66.4) (66.8)
------ ------
$531.2 $528.9
====== ======
3) PLANT, PROPERTY, AND EQUIPMENT
Net plant, property, and equipment consist of the following:
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
Land and improvements....................................... $ 56.2 $ 55.3
Buildings and improvements.................................. 368.6 366.1
Machinery and equipment..................................... 1,346.4 1,340.2
Furniture, fixtures and office equipment.................... 223.9 214.3
Construction work in progress............................... 90.7 92.9
Other....................................................... 35.3 32.7
--------- ---------
2,121.1 2,101.5
Accumulated depreciation and amortization................... (1,350.4) (1,310.5)
--------- ---------
$ 770.7 $ 791.0
========= =========
5
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)
4) COMPREHENSIVE INCOME
PRETAX TAX
INCOME (EXPENSE) NET-OF-TAX
(EXPENSE) BENEFIT AMOUNT
--------- --------- ----------
Three Months Ended March 31, 2002
Net income.................................................. $ 71.5
Other comprehensive income (loss):
Foreign currency translation adjustments.................. $(12.9) $ -- (12.9)
Minimum pension liability................................. (23.7) 8.0 (15.7)
Unrealized gain on investment securities.................. 0.4 -- 0.4
------ ---- ------
Other comprehensive income (loss)...................... $(36.2) $8.0 (28.2)
Comprehensive income........................................ $ 43.3
======
PRETAX TAX
INCOME (EXPENSE) NET-OF-TAX
(EXPENSE) BENEFIT AMOUNT
--------- --------- ----------
Three Months Ended March 31, 2001
Net income.................................................. $ 59.1
Other comprehensive income (loss):
Foreign currency translation adjustments.................. $(38.7) $ -- (38.7)
Minimum pension liability................................. (9.6) 3.3 (6.3)
Unrealized (loss) on investment securities................ (0.4) -- (0.4)
------ ---- ------
Other comprehensive income (loss)...................... $(48.7) $3.3 (45.4)
Comprehensive income........................................ $ 13.7
======
5) EARNINGS PER SHARE
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings per share for the three months ended March 31, 2002
and 2001:
THREE MONTHS
ENDED MARCH 31,
---------------
2002 2001
----- -----
Weighted average shares of common stock outstanding used in
the computation of basic earnings per share............... 89.6 87.9
Common stock equivalents.................................... 2.8 2.5
---- ----
Shares used in the computation of diluted earnings per
share..................................................... 92.4 90.4
---- ----
The amounts of outstanding antidilutive common stock options excluded from
the computation of diluted earnings per share for the three months ended March
31, 2002 and 2001 were 0.0 and 1.6, respectively.
6
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)
6) RESTRUCTURING
DEFENSE MOTION CORPORATE,
FLUID ELECTRONICS & & FLOW ELECTRONIC ELIMINATIONS
TECHNOLOGY SERVICES CONTROL COMPONENTS AND OTHER TOTAL
---------- ------------- ------- ---------- ------------ ------
Balance December 31, 2001..... $11.5 $1.0 $ 7.1 $28.7 $ 3.6 $ 51.9
Payments...................... (4.0) -- (0.7) (6.9) (0.6) (12.2)
----- ---- ----- ----- ----- ------
Balance March 31, 2002........ $ 7.5 $1.0 $ 6.4 $21.8 $ 3.0 $ 39.7
===== ==== ===== ===== ===== ======
At December 31, 2001, the accrual balance for restructuring activities was
$51.9. Cash payments of $12.2 were recorded in the first three months of 2002
decreasing the accrual balance at March 31, 2002 to $39.7, which includes $29.7
for severance and $10.0 for facility carrying costs and other. As of December
31, 2001, remaining actions under restructuring activities announced in 2001
were to close five facilities, discontinue 21 products and reduce headcount by
2,200. During the first three months of 2002, the Company reduced head count by
332 persons. All of the actions contemplated under the 2001 plans will be
completed in 2002. Some severance run-off payments will occur in 2003; and
closed facility expenditures will continue to be incurred in 2002 through 2006.
7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended, was adopted by
the Company on January 1, 2001. The nature of the Company's business activities
necessarily involves the management of various financial and market risks,
including those related to changes in interest rates, currency exchange rates,
and commodity prices. As discussed more completely in Notes 1 and 16 of the 2001
Annual Report on Form 10-K, the Company uses derivative financial instruments to
mitigate or eliminate certain of those risks. The only significant derivatives
that the Company had on January 1, 2001, were the interest rate swaps (the
"Swaps") discussed in Note 16 of the 2001 Annual Report on Form 10-K. The
adoption of SFAS No. 133 required the Company to record the total fair value of
the Swaps in the financial statements, which caused an increase to other assets
and long-term debt of $39.7, bringing the carrying value of the Swaps to $42.5.
At March 31, 2002 and December 31, 2001, the values of the Swaps were $40.7 and
$46.2, including $7.9 and $3.7 of accrued interest, respectively. The adoption
of SFAS No. 133 did not have a material impact on the results of operations or
cash flows of the Company.
A reconciliation of current period changes contained in the accumulated
other comprehensive loss component of shareholders' equity is not provided, as
there was no transition adjustment recorded within other comprehensive loss as
of January 1, 2001 and no material activity to report for the first three months
of 2002 and 2001, respectively. Additional disclosures required by SFAS No. 133,
as amended, are presented below.
HEDGES OF FUTURE CASH FLOWS
At March 31, 2002 the Company had no foreign currency cash flow hedges. At
December 31, 2001, the Company had one foreign currency cash flow hedge that had
appreciations of less than $0.1 during 2001. There were no changes in forecasted
transactions during 2001 regarding their probability of occurring, which would
require amounts to be reclassified to earnings.
The notional amount of the foreign currency forward contract utilized to
hedge cash flow exposures was $1.1 at December 31, 2001. The applicable fair
value of this contract at December 31, 2001 was $1.1. There were no ineffective
portions of changes in fair values of cash flow hedge positions reported in
earnings for the
7
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)
three months ended March 31, 2002 and 2001, respectively, and no amounts were
excluded from the measure of effectiveness reported in earnings during these
periods.
HEDGES OF RECOGNIZED ASSETS, LIABILITIES AND FIRM COMMITMENTS
At March 31, 2002 and December 31, 2001, the Company had foreign currency
forward contracts with notional amounts of $30.6 and $50.3, respectively, to
hedge the value of recognized assets, liabilities and firm commitments. The fair
value of the 2002 and 2001 contracts were net short positions of $15.2 and $11.5
at March 31, 2002 and December 31, 2001, respectively. The ineffective portion
of changes in fair values of such hedge positions reported in operating income
during the first three months of 2002 and 2001 were $0.0 and $0.2, respectively.
There were no amounts excluded from the measure of effectiveness.
8) GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS No. 141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS
No. 142"). SFAS No. 141 eliminates the pooling of interests method of accounting
for all business combinations initiated after June 30, 2001 and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. The Company adopted SFAS No. 141 as of July
1, 2001.
As of January 1, 2002, the Company adopted SFAS No. 142 which addresses the
financial accounting and reporting standards for the acquisition of intangible
assets outside of a business combination and for goodwill and other intangible
assets subsequent to their acquisition. This accounting standard requires that
goodwill and indefinite-lived intangible assets be tested for impairment on an
annual basis, or more frequently if circumstances warrant, and that they no
longer be amortized. The provisions of the standard also require the completion
of a transitional impairment test in the year of adoption, with any impairments
identified treated as a cumulative effect of a change in accounting principle.
In connection with the adoption of SFAS No. 142, the Company completed a
transitional goodwill impairment test and determined that no impairment exists.
In accordance with SFAS No. 142, goodwill associated with acquisitions
consummated after June 30, 2001 is not amortized and the amortization of
goodwill from business combinations consummated before June 30, 2001 ceased on
January 1, 2002. A reconciliation of previously reported net income and earnings
per share to the amounts adjusted for the exclusion of goodwill amortization is
reflected on the face of the consolidated condensed income statements included
herein.
Changes in the carrying amount of goodwill for the quarter ended March 31,
2002, by operating segment, are as follows:
DEFENSE MOTION
FLUID ELECTRONICS & & FLOW ELECTRONIC
TECHNOLOGY SERVICES CONTROL COMPONENTS TOTAL
---------- ------------- ------- ---------- --------
Balance as of December 31, 2001......... $627.2 $303.0 $173.6 $306.2 $1,410.0
Goodwill acquired during the period..... 12.7 -- -- -- 12.7
Other, including foreign currency
translation........................... (2.6) -- (0.3) -- (2.9)
------ ------ ------ ------ --------
Balance as of March 31, 2002............ $637.3 $303.0 $173.3 $306.2 $1,419.8
8
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)
Information regarding the Company's other intangible assets follows:
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
Amortized intangibles --
Patents................................................... $34.3 $34.2
Accumulated amortization.................................. (5.2) (5.1)
Other amortizable intangibles............................. 5.0 5.0
Accumulated amortization.................................. (0.3) --
Unamortized intangibles --
Trademarks................................................ 8.0 8.0
Pension related........................................... 12.3 5.8
Total Intangibles........................................... 59.6 53.0
Total accumulated amortization.............................. (5.5) (5.1)
----- -----
Net intangibles........................................... $54.1 $47.9
Amortization expense related to intangible assets for the three months
ended March 31, 2002 was $0.4. Estimated amortization expense for each of the
five succeeding years is $1.6 per year.
9) BUSINESS SEGMENT INFORMATION
Unaudited sales and revenues, operating income and total assets of the
Company's business segments for the three months ended March 31, 2002 and 2001
were as follows:
DEFENSE MOTION & CORPORATE,
THREE MONTHS ENDED FLUID ELECTRONICS & FLOW ELECTRONIC ELIMINATIONS &
MARCH 31, 2002 TECHNOLOGY SERVICES CONTROL COMPONENTS OTHER TOTAL
- ------------------ ---------- ------------- -------- ---------- -------------- --------
Sales and revenues....... $ 444.2 $368.7 $236.0 $137.7 $ (0.8) $1,185.8
Operating income
(expense).............. 53.7 31.6 27.9 17.0 (14.6) 115.6
Total Assets............. 1,626.3 838.8 647.9 700.2 791.2 4,604.3
THREE MONTHS ENDED
MARCH 31, 2001
- -------------------------
Sales and revenues....... $ 451.2 $303.0 $236.5 $196.5 $ (1.2) $1,186.0
Operating income
(expense):
Before goodwill
amortization........ 52.5 24.6 31.5 26.5 (13.7) 121.4
Goodwill amortization
expense............. (4.7) (2.1) (1.2) (2.0) -- (10.0)
Total operating income
(expense).............. 47.8 22.5 30.3 24.5 (13.7) 111.4
Total Assets............. 1,643.8 841.2 687.3 750.4 679.3 4,602.0
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2001
Sales and revenues for the first quarter of 2002 were $1,185.8 million,
even with the same period sales for 2001. Contributions from Defense Electronics
& Services' contracts won over the past eighteen months were primarily offset by
general softness in the markets of Electronic Components. Net income for the
first quarter of 2002 was $71.5 million, or $0.77 per diluted share. Net income
for the first quarter of 2001 was $59.1 and included $8.5 million of after-tax
goodwill amortization expense. Excluding goodwill amortization, net income
increased $3.9 million, or $0.02 per diluted share. The increase in net income
was primarily due to a decrease in interest expense partially offset by reduced
operating income.
Operating income for the first quarter of 2002 was $115.6 million compared
to $111.4 million for the first quarter of 2001 ($121.4 million excluding
goodwill amortization). Excluding goodwill amortization expense, operating
income declined $5.8 million or 4.8%. Segment operating margin, excluding the
impact of goodwill amortization, for the first quarter of 2002 of 11.0% was 0.4%
lower than the margin for the same period in 2001. The decrease in operating
income is primarily due to a change in segment mix, with increased contribution
from Defense Electronics & Services and lower contribution from Electronic
Components.
Interest expense for the first quarter of 2002 of $11.9 million (net of
interest income of $1.4 million) decreased $8.7 million from the comparable
prior year period primarily due to lower average interest rates and reduced debt
levels.
The effective income tax rate for the first quarter of 2002 was 32%
compared to 35% for the first quarter of 2001. The decrease in the effective tax
rate is due to the adoption of SFAS 142, which eliminated goodwill amortization
expense, and several initiatives taken in 2001 to reduce the structural tax
rate.
The Fluid Technology segment's sales and revenues declined $7.0 million, or
1.5%, in the first quarter of 2002 compared to the first quarter of 2001.
Softness in the industrial and building trades markets and the negative impact
of foreign currency translation were partially offset by growth in the water and
wastewater markets, and the incremental contribution from acquisitions.
Operating income, excluding goodwill amortization expense, for the first quarter
of 2002 was up $1.2 million, or 2.3%, due to continued process improvements and
cost reduction initiatives.
The Defense Electronics & Services segment's sales and revenues for the
first quarter of 2002 increased $65.7 million, or 21.7%, from the comparable
prior year period. The increase was primarily due to contracts won during the
past eighteen months, the more rapid transition to production of a key
electronic warfare program, and increased communication shipments. Operating
income, before goodwill amortization expense, for the first quarter of 2002 was
up $7.0 million, or 28.5%, due to increased volume and a higher percentage of
international sales, which are at a higher margin.
The Motion & Flow Control segment's sales for the first quarter of 2002
were even compared to the same period of 2001, reflecting gains in the
automotive fluid systems business offset by volume declines at Aerospace and
softness in the segment's European markets. Operating income, excluding goodwill
amortization expense, was down $3.6 million, or 11.4%, from the same period in
2001 due to volume declines at Aerospace Controls and weakness in the segment's
European markets.
The Electronic Components segment's sales and revenues for the first
quarter of 2002 decreased $58.8 million, or 29.9%, compared to the same period
of 2001. The decline reflects general market softness, predominately in the
communications markets. Contributions from acquisitions partially offset the
declines in revenues. Operating income, before goodwill amortization expense,
for the first quarter of 2002 was down $9.5 million, or 35.8%, from the
comparable period in the prior year reflecting decreases in volume partially
offset by the benefits from cost control measures and contributions from new
products.
Corporate expenses increased in the first quarter of 2002 primarily due to
professional fees associated with various tax planning initiatives and the
negative impact of foreign exchange.
10
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows: Cash from operating activities in the first three months of
2002 was $36.3 million, a decrease of $43.7 million from the same period of
2001. The decrease is primarily attributable to the early collection of
receivable balances in the fourth quarter of 2001, lower advanced payments
received at Defense Electronics & Services during the first quarter of 2002, and
the liquidation of several assets during the first quarter of 2001. Higher
restructuring payments also contributed to the decrease. Lower tax payments
partially offset these items.
Status of Restructuring Activities: During the fourth quarter of 2001, the
Company recorded restructuring charges of $97.7 million to close facilities,
discontinue products and reduce headcount. As of March 31, 2002, the Company has
five facilities and 21 planned products to discontinue related to these charges.
The Company has reduced workforce by 1,532 or approximately 45% of the planned
aggregate reduction of approximately 3,400 persons as of March 31, 2002.
As of March 31, 2002 restructuring actions announced in 1998 and 1999 were
substantially complete.
Additions to Plant, Property and Equipment: Capital expenditures during
the first three months of 2002 were $20.8 million, a decrease of $7.8 million
from the first three months of 2001. The decrease reflects the Company's efforts
to bring capital expenditures in line with depreciation.
Divestitures: During the first three months of 2002, the Company sold its
interest in a defense-related joint venture for approximately $6 million. In the
first quarter of 2001, the Company generated $0.6 million of cash proceeds from
the sale of plant, property and equipment across all of our businesses.
Financing Activities: Debt at March 31, 2002 was $948.9 million, compared
to $973.4 million at December 31, 2001. Cash and cash equivalents were $150.7
million at March 31, 2002, compared to $121.3 million at December 31, 2001. The
maximum amount of borrowing available under the Company's revolving credit
agreement, which provides back-up for the Company's commercial paper program, at
March 31, 2002, was $1.0 billion. Borrowing through commercial paper and under
the revolving credit agreement may not exceed $1.0 billion in the aggregate
outstanding at any time. The Company received proceeds of $34.5 million from
exercised stock options in the first three months of 2002. The Company has
reinstituted a policy of repurchasing at least a portion of shares issued
through stock option exercises, which will begin in the second quarter of 2002.
STATUS OF FLUID HANDLING SYSTEMS STRATEGIC REVIEW
After the quarter close, the Company completed the strategic review of its
automotive Fluid Handling Systems (FHS) business, a review that had been
previously announced and initiated in October 2001. FHS is a profitable market
leader that supplies specialty tubing and connections for use in automobiles and
light trucks. This business has a portfolio of innovative, proprietary products,
a global presence and a new, strong management team. Based on a comprehensive
review of alternatives, and with the support of a team of internal and outside
advisors, the Company has determined that continuing to own and operate FHS is
the best option for shareholder value creation.
ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142") which addresses the financial
accounting and reporting standards for the acquisition of intangible assets
outside of a business combination and for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment only approach. In
connection with the adoption of SFAS No. 142, the Company completed a
transitional goodwill impairment test that compared the fair value of each
reporting unit to its carrying value and determined that no impairment exists.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). The standard requires that legal
obligations associated with the retirement of tangible long-lived assets be
recorded at fair value when incurred and is effective for the Company on January
1, 2003. The
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Company is currently reviewing the provisions of SFAS No. 143 to determine the
standard's impact upon adoption.
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), effective January 1, 2002. SFAS
No. 144 outlines accounting and financial reporting guidelines for the sale or
disposal of long-lived assets and discontinued operations. The adoption of the
pronouncement did not have a material impact on the Company's results of
operations or financial position.
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 general
economic and worldwide political conditions, foreign currency exchange rates,
competition and other factors all as more thoroughly 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, 2001 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
EXHIBITS AND REPORTS ON FORM 8-K
ITEM 6.
(a) See the Exhibit Index for a list of exhibits filed herewith.
(b) ITT Industries filed a Form 8-K Current Report dated March 26, 2002, to
report the selection of Deloitte & Touche LLP as independent auditors in place
of Arthur Andersen LLP.
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/ EDWARD W. WILLIAMS
------------------------------------
Edward W. Williams
Senior Vice President and Corporate
Controller
(Principal accounting officer)
May 14, 2002
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION LOCATION
- ------- ----------- --------
(2) Plan of acquisition, reorganization, arrangement, None
liquidation or succession...................................
(3) Articles of Incorporation and by-laws....................... None
(4) Instruments defining the rights of security holders, None
including Indentures........................................
(10) Material contracts.......................................... None
(11) Statement re computation of per share earnings.............. See
Consolidated
Condensed
Income
Statements
and Note 5 of
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 None
security holders............................................
(23) Consents of experts and counsel............................. None
(24) Power of attorney........................................... None
(99) Additional Exhibits......................................... None
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