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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, 1994
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . to . . . . . . . .
COMMISSION FILE NUMBER 1-5627
ITT CORPORATION
Incorporated in the State of Delaware 13-5158950
(I.R.S. Employer
Identification Number)
1330 Avenue of the Americas
New York, NY 10019-5490
(Principal Executive Office)
Telephone Number: (212) 258-1000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
As of October 27, 1994, there were outstanding 106.7 million shares of common
stock ($1 par value) of the registrant.
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ITT CORPORATION
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION:
ITEM 1 Financial Statements:
Consolidated Income - Third Quarter and Nine Months Ended
September 30, 1994 and 1993 3
Consolidated Balance Sheet -
September 30, 1994 and December 31, 1993 4
Consolidated Cash Flow -
Nine Months Ended September 30, 1994 and 1993 5
Notes to Consolidated Financial Statements 6
Business Segments 8
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations:
Third Quarter and Nine Months Ended September 30,
1994 and 1993 9
PART II OTHER INFORMATION:
ITEM 1 Legal Proceedings 13
ITEM 6 Exhibits and Reports on Form 8-K 13
Signature 14
Exhibit Index 15
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PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
ITEM 1
The following unaudited financial statements, in the opinion of ITT, reflect
all adjustments (which include only normal recurring adjustments) necessary for
a fair presentation of the financial position, the results of operations and
cash flow for the periods presented. For a description of accounting policies,
see notes to financial statements in the 1993 annual report on Form 10-K.
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME*
(In millions except per share)
Nine Months
Third Quarter Ended September 30
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
SALES AND REVENUES
Products and Services $ 2,971 $ 2,536 $ 8,814 $ 7,793
Insurance 2,703 2,630 8,070 7,737
--------- --------- --------- ---------
5,674 5,166 16,884 15,530
--------- --------- --------- ---------
COSTS AND EXPENSES
Products and Services (including selling and
general expenses of $265, $257, $790 and
$768) 2,820 2,400 8,303 7,414
Insurance 2,474 2,435 7,471 7,199
Other 30 66 81 145
--------- --------- --------- ---------
350 265 1,029 772
Interest expense (net of interest income
of $26, $35, $103 and $124) (36) (38) (106) (106)
Miscellaneous expense, net (4) (8) (12) (8)
--------- --------- --------- ---------
310 219 911 658
Income taxes (93) (25) (285) (151)
Minority equity (6) (8) (16) (22)
--------- --------- --------- ---------
Income from Continuing Operations 211 186 610 485
Discontinued Operations, net of tax of
$17, $22, $55 and $121 46 66 118 259
Extraordinary Item, net of tax benefit of $25 - - - (50)
Cumulative Effect of Accounting Changes,
net of tax of $3 - - 6 -
--------- --------- --------- ---------
Net Income $ 257 $ 252 $ 734 $ 694
--------- --------- --------- ---------
- - -------------------------------------------------------------------------------------------------------
Earnings Per Share
Income from Continuing Operations
Primary $ 1.75 $1.49 $4.98 $3.81
Fully Diluted $ 1.64 $1.41 $4.68 $3.62
Discontinued Operations
Primary $ .39 $ .54 $1.00 $2.15
Fully Diluted $ .37 $ .50 $ .93 $1.99
Extraordinary Item
Primary $ - $ - $ - $(.41)
Fully Diluted $ - $ - $ - $(.38)
Cumulative Effect of Accounting Changes
Primary $ - $ - $ .04 $ -
Fully Diluted $ - $ - $ .04 $ -
Net Income Per Share
Primary $ 2.14 $2.03 $6.02 $5.55
Fully Diluted $ 2.01 $1.91 $5.65 $5.23
Cash Dividends Declared Per Common Share $ .495 $ .495 $1.485 $1.485
*All periods presented reflect results of the Finance and Forest Products
segments on a one-line basis as "Discontinued Operations." The 1993 periods
have been restated to include revenues and expenses of Hotels' managed and
partially owned properties.
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ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In millions except for shares)
September 30, December 31,
1994 1993*
--------------- -------------
ASSETS
Cash $ 1,176 $ 1,135
Receivables, net 4,686 5,011
Inventories 1,058 963
Insurance Investments -
Fixed Maturities 27,184 26,870
Other 4,365 3,712
Reinsurance Recoverables 11,632 11,577
Deferred Policy Acquisition Costs 2,407 2,024
Plant, Property and Equipment, net 4,193 3,370
Other Assets 5,845 5,273
----------- ------------
$62,546 $59,935
=========== ============
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities -
Policy liabilities and accruals $43,758 $40,884
Accounts payable and accrued liabilities 3,411 3,361
Other debt 5,250 3,874
ESOP debt 562 603
Other liabilities 3,657 3,563
---------- ----------
56,638 52,285
---------- ----------
Stockholders Equity -
Cumulative preferred stock 657 673
Common stock: Authorized 200,000,000 shares,
$1 par value, Outstanding 108,840,714 and
117,560,877 109 118
Deferred compensation - ESOP (562) (603)
Cumulative translation adjustments (92) (206)
Unrealized (loss) gain on securities, net of tax (990) 80
Retained earnings 6,786 7,588
----------- ------------
5,908 7,650
----------- ------------
$62,546 $59,935
=========== ============
*Restated to reflect the net assets of the Finance segment as "Discontinued
Operations" included in Other Assets.
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Page 5 ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOW
(In millions)
Nine Months Ended
September 30
------------------------
OPERATING ACTIVITIES 1994 1993*
---- -----
Net Income $ 734 $ 694
Discontinued Operations (118) (259)
Extraordinary Item - 50
Cumulative Effect of Accounting Changes (6) -
------- ---------
Income from continuing operations 610 485
Adjustments to Income from Continuing Operations:
Depreciation and amortization 425 373
Provision for doubtful receivables 22 5
Gain on sale of portfolio securities - pretax (78) (144)
Change in receivables, inventories, payables and accrued
liabilities (604) (104)
Accrued and deferred taxes (156) (11)
Increase in liability for policy benefits and unpaid claims 459 377
Increase in deferred policy acquisition costs (364) (258)
Decrease in reinsurance and other related assets 324 173
Other, net 38 (210)
------- ---------
Cash from operating activities 676 686
------- ---------
INVESTING ACTIVITIES
Additions to plant, property and equipment (472) (266)
Acquisitions (971) (20)
Proceeds from divestments 826 780
Purchase of insurance investments (16,181) (20,800)
Sale and maturity of insurance investments 13,954 19,529
Other, net (4) 21
--------- ---------
Cash used for investing activities (2,848) (756)
--------- ---------
FINANCING ACTIVITIES
Short-term debt, net 1,566 (96)
Long-term debt issued 17 332
Long-term debt repaid (359) (325)
Investment life contracts, net 1,841 1,059
Repurchase of common stock (655) (236)
Redemption of subsidiary preferred stock (178) -
Dividends paid (211) (210)
Other, net - 55
--------- ---------
Cash from financing activities 2,021 579
--------- ---------
EXCHANGE RATE EFFECT ON CASH 35 (10)
--------- ---------
Cash from discontinued operations 157 180
--------- ---------
Increase in cash 41 679
Cash - beginning of year 1,135 876
--------- ---------
Cash - end of period $ 1,176 $1,555
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 287 $ 275
--------- ---------
Income taxes (net of refunds) $ 299 $ 353
--------- ---------
*Restated to reflect the Forest Products and Finance segments as "Discontinued
Operations."
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Notes to Consolidated Financial Statements
- - ------------------------------------------
1) Changes in Accounting Principles
Statement of Financial Accounting Standards (SFAS) No. 115
----------------------------------------------------------
During the 1994 first quarter, ITT adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The new standard requires,
among other things, that securities be classified as "held-to-maturity",
"available for sale" or "trading" based on the company's intentions with
respect to the ultimate disposition of the security and its ability to effect
those intentions. The classification determines the appropriate accounting
carrying value (cost basis or fair value) and, in the case of fair value,
whether the adjustment impacts Stockholders Equity directly or is reflected in
the Statement of Income. Investments in equity securities had previously been
recorded at fair value with the corresponding impact included in Stockholders
Equity. Under SFAS No. 115, the Corporation's portfolios are generally
classified as "available for sale" and accordingly, investments are reflected
at fair value with the corresponding impact included as a component of
Stockholders Equity designated "Unrealized gain (loss) on securities, net of
tax". At September 30, 1994, the unrealized loss on securities, net of tax was
$ 990 million and is net of an unrealized gain pertaining to equity securities
of $30 million after tax.
In adopting SFAS No. 115, Emerging Issues Tax Force (EITF) Issue No. 93-18
prescribes specific accounting treatment with respect to mortgage-backed
interest-only investments. EITF 93-18 reached the conclusion that the measure
of impairment of these instruments should be changed from undiscounted cash
flows to fair value. Accordingly, the amortized cost basis of such instruments
that were determined to have other-than-temporary impairment losses at the time
of the initial adoption of SFAS No. 115 have been written down to fair value
and reflected as a cumulative effect of accounting change as of January 1,
1994. The writedown totaled $36 million after tax or $0.29 per fully diluted
share.
Change in the Discount Rate used to determine certain Workers Compensation
--------------------------------------------------------------------------
Liabilities
-----------
During the 1994 first quarter, the Corporation changed its method used to
discount long-term tabular workers compensation liabilities from a statutory
insurance rate to an appropriate market interest rate. The market rate, which
approximates 7%, represents the rate of return the Corporation could receive on
risk-free investments with maturities comparable to those of the liabilities
being discounted. At December 31, 1993, these liabilities were discounted at 3
to 3 1/2% in accordance with statutory insurance guidelines. A $42 million
after tax or $0.33 per fully diluted share benefit was recorded as a cumulative
effect of accounting change in the accompanying Consolidated Statement of
Income.
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Notes to Consolidated Financial Statements (continued)
- - ------------------------------------------------------
2) Discontinued Operations
On September 16, 1994, the Corporation announced plans to seek offers for
the purchase of its Finance business segment, comprised primarily of its ITT
Financial Corporation subsidiary. Proceeds are expected to exceed the
Corporation's investment in this segment. The net assets, results of
operations and cash flows of the Finance segment have been reflected as
"Discontinued Operations" in the accompanying financial statements. The
Consolidated Balance Sheet at December 31, 1993 and the Statements of Income
and Cash Flow for the nine months ended September 30, 1993 have been restated
to conform with the 1994 presentation.
Summarized financial information for the Finance segment is as follows:
Nine Months Ended September 30, Year Ended December 31,
------------------------------- -----------------------
1994 1993 1993
---- ---- ----
Revenues $ 1,063 $ 1,250 $ 1,632
Operating Income 158 305* 357*
Income from Contiuing Operations 106 209* 248*
September 30, December 31,
1994 1993
---- ----
Total Assets $12,803 $11,924
Shareholders Equity 1,287 1,036
*Includes gain on the sale of the unsecured domestic consumer small loan
business of $95 million pretax or $63 million after tax.
In February 1994, the Corporation spun-off ITT Rayonier, the Corporation's
wholly-owned forest products subsidiary, to ITT shareholders through a
distribution of ITT Rayonier shares. ITT Rayonier has been reflected as a
"Discontinued Operation" in the accompanying financial statements. The
Corporation's consolidated equity was reduced by approximately $600 million as
a result of the spin-off. The Consolidated Statements of Income and Cash Flow
for the nine months ended September 30, 1993 have been restated to conform with
the 1994 presentation.
3) Acquisitions
On August 27, 1994, the Corporation, in a partnership with Cablevision
Systems Corporation, entered into an agreement to purchase Madison Square
Garden Corp., which includes the MSG Network, the Knicks basketball club and the
Rangers hockey club for $1.075 billion. The partnership will be managed on a
50/50 basis. It is expected at closing that the Corporation will own
approximately 85% of the venture's equity and that during the first year,
Cablevision will become an equal partner through the contribution of additional
cash or other assets. Closing of the transaction is subject to various
regulatory approvals and is expected to occur in early 1995.
Through September 30, 1994, the Corporation acquired 35% of CIGA Hotels
SpA, a luxury hotel chain for $256 million. This investment is included in
"Other Assets" in the accompanying Consolidated Balance Sheet. In October,
1994, the Corporation successfully tendered for an additional 35% of the company
resulting in a 70% equity interest at a total cost of approximately $515
million.
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BUSINESS SEGMENTS
(In millions)
Sales and Revenues** Income*
------------------------------------ -----------------------------------
Nine Months Nine Months
Third Quarter Ended September 30 Third Quarter Ended September 30
------------- ------------------ ------------- ------------------
1994 1993 1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ---- ---- ----
Financial and Business Services
$2,703 $2,630 $8,070 $7,737 Insurance $229 $195 $599 $538
195 177 568 554 Comm. & Info. Services 51 42 116 111
----- ------ ------ ------- ------- ----- ------ -------
2,898 2,807 8,638 8,291 280 237 715 649
----- ------ ------ ------- ------- ----- ------ -------
Manufactured Products
1,144 770 3,427 2,607 Automotive 62 27 226 113
419 384 1,271 1,177 Defense & Electronics 14 22 46 41
272 252 791 736 Fluid Technology 25 23 63 61
----- ------ ------ ------- ------- ----- ------ -------
1,835 1,406 5,489 4,520 101 72 335 215
----- ------ ------ ------- ------- ----- ------ -------
913 764 2,656 2,246 Hotels 18 18 91 55
----- ------ ------ ------- ------- ----- ------ -------
5,646 4,977 16,783 15,057 Ongoing Segments 399 327 1,141 919
28 189 101 473 Dispositions and Other (19) 4 (31) (2)
Interest, net (36) (38) (106) (106)
Other (40) (82) (109) (175)
Taxes (93) (25) (285) (151)
------- ----- ------ -------
Income from Continuing Operations 211 186 610 485
Discontinued Operations, net of
tax of $17, $22, $55 and $121 46 66 118 259
Extraordinary Item, net of
tax benefit of $25 - - - (50)
Cumulative Effect of
Accounting Changes,
net of tax of $3 - - 6 -
----- ------ ------ ------- ------- ----- ------ -------
$5,674 $5,166 $16,884 $15,530 $257 $252 $734 $694
----- ------ ------ ------- ------- ----- ------ -------
*All periods presented reflect the Finance and Forest Products segments on a
one-line basis as "Discontinued Operations."
**The 1993 periods have been restated to include revenues and expenses of
Hotels' managed and partially owned properties.
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ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Net income for the third quarter of 1994 was $257 million or $2.01 per
fully diluted share ($2.14 per primary share) compared with $252 million or
$1.91 per fully diluted share ($2.03 per primary share) in the 1993 third
quarter. After-tax portfolio gains in the 1994 third quarter totaled $13
million or $0.11 per fully diluted share compared with $23 million or $0.18 per
fully diluted share in the 1993 quarter. Sales and revenues for the third
quarter were $5.7 billion, a 10% increase over the $5.2 billion in the 1993
quarter (both periods exclude ITT Financial which has been treated as a
Discontinued Operation).
Net income for the 1994 nine months was $734 million or $5.65 per fully
diluted share ($6.02 primary) compared with $694 million or $5.23 per fully
diluted share ($5.55 primary) in 1993. The results for the nine months of 1994
included after-tax portfolio gains of $48 million or $0.38 per fully diluted
share compared with $90 million or $0.70 per fully diluted share in 1993.
Sales and revenues for the first nine months were $16.9 billion, compared with
$15.5 billion in 1993, an increase of 9%.
The Corporation announced its intent in September 1994 to sell its Finance
segment, comprised primarily of ITT Financial Corporation. By divesting this
segment, the Corporation believes it will achieve a greater balance between
financial services, manufacturing and hotel and entertainment businesses.
Income from continuing operations contributed by the finance segment totaled
$106 million and $209 million (including last year's gain on the sale of the
unsecured domestic consumer small loan business) for the 1994 and 1993 nine
month periods.
Income from ongoing segments for the third quarter and nine months rose by
$72 million (22%) and $222 million (24%) compared with the respective 1993
periods.
In the Insurance segment, both revenues and operating income rose over the
1993 third quarter reflecting improved underwriting results in several lines
(particularly commercial) of the domestic property and casualty business as
well as strong revenue growth in the Life operations. Excluding operations in
runoff, the worldwide combined ratio improved to 102.6% compared with 105.2% in
the 1993 quarter.
For the nine month period, revenues and operating income improved
significantly compared with 1993 either before or after both portfolio gains
and the effects of excessive catastrophe losses, again due to improved domestic
underwriting results. The combined ratio for the nine months, excluding
operations in runoff, improved to 103.6% from 106.2% in 1993.
Insurance operating costs and expenses were as follows:
Nine Months
Third Quarter Ended September 30
----------------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
Benefits, claims and claim adjustment expenses $1,840 $1,738 $5,286 $5,105
Amortization of deferred policy acquisition costs 368 467 1,169 1,262
Other insurance expenses 266 230 1,016 832
------ ------ ------ ------
$2,474 $2,435 $7,471 $7,199
====== ====== ====== ======
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ITEM 2. (Continued)
Operating income at Communication and Information Services for both the
third quarter and nine months were ahead of 1993 due to increased enrollments
at ITT Educational Services and lower operating costs at ITT World Directories.
Sales and revenues at Communications and Information Services were above 1993
for both the third quarter and nine months due to increased enrollments at ITT
Educational Services.
ITT Automotive operating income more than doubled in the quarter and
doubled in the nine month period reflecting in part the contribution of the
Electrical Systems, Inc. acquisition earlier this year. Excluding this
acquisition, operating income rose 89% in the quarter and 67% in the nine
months reflecting higher sales volume in both North America and Europe, as well
as the continuing benefits from cost reduction programs. Sales improved 49%
for the third quarter and 31% for the nine months compared with the 1993
periods.
Operating income at ITT Defense & Electronics declined in the third
quarter due to the inclusion in 1993 of favorable margin adjustments on the
close out of several contracts in the Defense units. For the nine month periods
operating income increased by $5 million (12%) over the 1993 period due
primarily to increased volume at certain Defense units. Sales at ITT Defense &
Electronics increased over 9% for the quarter and increased 8% for the nine
month period. Order backlog was $2.3 billion at both September 30, 1994 and
1993.
Operating income at Fluid Technology was up 9% for the quarter and 3% for
the nine months, when compared with the prior year, mainly the result of higher
volume and lower operating costs. Sales also improved 8% and 7% for the
respective periods, the result of higher volume.
Hotels' operating income, excluding the gaming division, rose during the
quarter as improved margins were reflected in several regions, including North
America. Gaming losses in the quarter offset the improvement. In the nine
month period, operating income improved 65%, on stronger margins in certain
regions, particularly North America and lower corporate overhead. Sales and
revenues increased 20% in the quarter and 18% in the nine month period.
Dispositions and Other reflects the sales and operating losses of
companies previously divested as well as ITT Community Development. The 1994
quarter and nine months includes a loss on the sale of several non-strategic
Electronics businesses, while the 1993 periods also include ITT Components
Distribution (divested in December, 1993).
Interest expense, net of interest income, was essentially flat in the
third quarter and nine months. "Other" consists of corporate expenses,
minority equity and non-operating income, which decreased in the third quarter,
primarily the result of lower corporate expenses and the inclusion in 1993, of
a $30 million pretax ($20 million after tax) charge to cover costs associated
with the restructuring program at ITT World Headquarters and the headquarters
of the company's businesses.
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ITEM 2. (Continued)
Income taxes increased in the third quarter of 1994 versus 1993 due to an
increase in pretax income from continuing operations and the inclusion of the
one-time benefit of U.S. tax law changes in 1993. The benefit ($22 million)
resulted from the remeasurement of the Corporation's net deferred tax assets at
35%. Income taxes related to Discontinued Operations, Extraordinary Item and
Cumulative Effect of Accounting Changes are reflected within those captions
separately on the income statement. For the nine months, income taxes
increased due to an increase in pretax income and higher foreign income tax
rates and the absence of the benefit of U.S. tax law changes previously
discussed. The Corporation's effective tax rate was 31% in the 1994 nine
months versus 23% in the comparable 1993 period.
Discontinued Operations related solely to the Finance segment in the 1994
quarter and to both Finance and Forest Products in all other periods. While
reported third quarter results in the Finance segment were below those of the
prior year, excluding its California commercial real estate portfolio,
Finance's operating income increased more than 15 percent from the 1993
quarter. The 1993 nine months also included an after-tax gain of $63 million
($0.48 per fully diluted share) on the sale of ITT Financial's domestic
unsecured consumer small loan portfolio. Assets, both funded and managed
receivables, of its core lending operation at September 30, 1994 were 16% above
the levels of one year ago. The Forest Product segment (ITT Rayonier) was
spun-off to shareholders on February 28, 1994. Net income for the nine month
period in 1994 included $12 million ($0.09 per fully diluted share) of earnings
prior to the spin-off compared with $50 million ($0.39 per fully diluted share)
in 1993.
The comparison of net income with 1993 in both the quarter and the nine
months is impacted by several unusual items. While both the 1994 and 1993
quarters included capital gains in the insurance portfolio, results for the
1993 quarter also included: (1) a one-time benefit of $22 million or $0.17 per
fully diluted share representing the effect of 1993 changes in the U.S. tax
law, (2) an after-tax charge of $20 million or $0.15 per fully diluted share
for severance and other costs associated with the Headquarters restructuring
program and (3) $7 million or $0.06 per fully diluted share from the company's
discontinued forest products operations, ITT Rayonier (which was spun off to
shareholders in February 1994). Excluding these items, net income and earnings
per share rose 11% and 15%, respectively, in the 1994 third quarter compared
with the 1993 third quarter.
The 1994 nine month period included two cumulative catch-up adjustments
for accounting changes as fully discussed in the Notes to Consolidated
Financial Statements; (1) a favorable adjustment of $42 million after tax or
$0.33 per fully diluted share for a change in the discount rate used to
determine certain workers' compensation liabilities at the Insurance segment
and (2) a charge of $36 million after tax or $0.29 per fully diluted share for
the adoption of SFAS No. 115 related to accounting for certain investments in
debt and equity securities. Results for the 1993 period included: (1) an
after-tax gain of $63 million or $0.48 per fully diluted share on the sale of
the unsecured domestic consumer small loan business at ITT Financial, (2) an
extraordinary after- tax charge of $50 million, or $0.38 per fully diluted
share representing the loss on the early extinguishment of debt at ITT
Financial, and (3) a $33 million after-tax charge or $0.25 per fully diluted
share, for severance and other costs associated with the Headquarters
restructuring program.
1994 also included $12 million or $0.09 per fully diluted share from ITT
Rayonier compared with $50 million or $0.39 per fully diluted share in 1993.
The 1994 period was unfavorably impacted by $40 million after tax or $0.31 per
fully diluted share for catastrophe losses in excess of expectations at the
Insurance segment related to the California earthquake and winter freezes. The
1993 period was adversely impacted by Winter Storm Josh and the bombing of the
World Trade Center in New York in the first quarter by $41 million or $0.32 per
fully diluted share. Excluding these items, comparable net income and earnings
per share rose 19% and 23%, respectively, in the 1994 nine months compared with
the 1993 nine months.
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ITEM 2. (Continued)
Cash Flow
During the first nine months of 1994, the Corporation generated $676
million of cash from operating activities, down slightly from $686 million in
the same period last year, due primarily to the timing of cash flows, higher
income tax payments reflecting higher taxable income and higher working capital
requirements needed to fund growth. This cash, along with additional
borrowings and collection of the note from the Alcatel N.V. sale, was used to
fund the acquisition of ITT Electrical Systems, Inc., and various hotel
properties in addition to reinvestment in insurance investments and capital
additions. In addition, cash was also used to repurchase common shares as well
as redeem preferred stock of ITT Corporation and its Insurance subsidiary ($833
million in 1994 and $236 million in 1993) and to pay dividends to shareholders
which totaled $211 million and $210 million for the first nine months of 1994
and 1993, respectively.
Cash expenditures for plant, property and equipment, including insurance
activities, were $472 million in the first nine months of 1994 and are
projected to aggregate approximately $800 million for the full year compared
with $486 million in 1993. Depreciation for the first nine months of 1994 was
$373 million compared with $318 million in the corresponding 1993 period.
Accumulated depreciation amounted to 45% of gross plant at September 30, 1994,
compared with the 47% at December 31, 1993.
Debt and Liquidity
Excluding Insurance debt, outstanding debt at September 30, 1994 was $4.4
billion compared with the December 31, 1993 balance of $3.5 billion resulting
in a debt to total capitalization ratio of 42% at September 30, 1994 compared
with 33% at year-end 1993. Insurance debt increased from the December 1993
level of $1.0 billion to $1.5 billion to redeem preferred stock and to fund
growth at the Life operations. Debt was 49% of the total capitalization when
including Insurance debt at September 30, 1994, compared with 38% at year-end
1993. The debt to total capitalization ratios in 1994 have been impacted by
the adoption of SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, which requires investments to be reflected at market value
with the corresponding impact reported as a separate component of Stockholders
Equity. Excluding this impact, debt to total capitalization would be 39%
without Insurance and 45% on a fully consolidated basis at September 30, 1994.
Stockholders equity decreased $1.7 billion, to $5.9 billion from December
31, 1993 due primarily to share repurchases, the spin-off of ITT Rayonier and
the effect of a market value adjustment to the carrying value of the insurance
investment portfolios as required under SFAS No. 115. Dividends and the nine
months net income also impacted stockholders equity. Under its share
repurchase program, the Corporation repurchased approximately 9.1 million
common shares in the first nine months of 1994 at an average price of $82.01
per share for a cash cost, including commissions, of $743 million. An
additional 2.1 million shares were repurchased through October 27 at an average
price of $83.08 per share for a cash cost, including commissions, of $174
million.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of ITT"s Form 10-K Annual Report for the year
ended December 31, 1993, in which ITT reported that Hartford Fire Insurance
Company, a subsidiary of ITT, together with other companies, associations and
organizations involved in the business of property and casualty insurance and
reinsurance, was named as a defendant in a group of lawsuits filed by Attorneys
General of 20 states and by various private parties in the United States
District Court for the Northern District of California. All of the suits,
which were filed in 1988, 1990 and 1991, were based upon allegations that the
defendants violated federal and/or state antitrust laws by reason of their
activities in connection with the development of new standard commercial
general liability policy forms by the Insurance Services Office, an industry
organization. In June 1991, the Ninth Circuit U.S. Court of Appeals reversed
the United States District Court for the Northern District of California which
had granted summary judgment in September 1989 in favor of all defendants,
including ITT Hartford. In June 1993, the Supreme Court reversed the Ninth
Circuit U.S. Court of Appeals, holding that the domestic insurers, including
ITT Hartford, had not lost their McCarran-Ferguson Act exemption from the
antitrust laws generally, as a result of activities alleged in the complaints,
but remanded the case for further proceedings to determine if certain of those
activities came within the "boycott" exception to the McCarran-Ferguson Act
exemption. On October 3, 1994, ITT Hartford announced that it, along with the
other 31 defendants, had settled this lawsuit. The settlement provides for a
payment of $36 million, the majority of which funds will be used to create a
public entity risk institute and national public risk database. It also calls
for changes in control of Insurance Services, Inc., a nationwide organization
which develops standardized policy language and compiles information insurers
use to determine their own insurance rates. The settlement agreement is
subject to approval by the U.S. District Court for the Northern District of
California.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit Index for a list of exhibits filed herewith.
(b) ITT filed a Form 8-K Current Report dated September 27, 1994 reporting
under Item 5, an agreement by a partnership between a subsidiary of ITT
and a subsidiary of Cablevision Systems Corporation to acquire Madison
Square Garden Corporation.
14
Page 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITT Corporation
(Registrant)
By J.F. Danski
- - --------------
J.F. Danski
Senior Vice President and Controller
(Chief Accounting Officer)
October 28, 1994
(Date)
15
Page 15
EXHIBIT INDEX
Exhibit
No. Description Location
--- ----------- --------
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession None
(3) Articles of Incorporation and by-laws None
(4) Instruments defining the rights of security holders, including
indentures None
(10) Material Contracts None
(11) Statement re: computation of per share earnings Filed Herewith
(12) Statements re: computation of ratios Filed Herewith
Calculation of ratio of earnings to total fixed charges
Calculation of ratio of earnings to total fixed charges and
preferred dividend requirements of ITT
(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 None
holders
(23) Consents of experts and counsel None
(24) Power of attorney None
(27) Financial Data Schedule Filed Herewith
(99) Additional exhibits None
1
Page 16 EXHIBIT 11
ITT CORPORATION AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
(In millions except per share)
Nine Months
Ended September 30,
-------------------
1994 1993
---- ----
PRIMARY BASIS -
Net income $ 734 $ 694
ESOP preferred dividends - net of tax (26) (26)
-------- --------
Net income applicable to primary earnings per share $ 708 $ 668
-------- --------
Average common shares outstanding 116 119
Common shares issuable in respect to common stock equivalents 1 1
-------- --------
Average common equivalent shares 117 120
-------- --------
Earnings Per Share
Continuing operations $ 4.98 $ 3.81
Discontinued operations 1.00 2.15
Extraordinary item - (.41)
Cumulative effect of accounting changes .04 -
-------- --------
Net income $ 6.02 $ 5.55
-------- --------
FULLY DILUTED BASIS -
Net income applicable to primary earnings per share $ 708 $ 668
ESOP preferred dividends - net of tax 26 26
If converted ESOP expense adjustment - net of tax benefit (16) (16)
-------- --------
Net income applicable to fully diluted earnings per share $ 718 $ 678
-------- --------
Average common equivalent shares 117 120
Additional common shares issuable assuming full dilution 10 10
-------- --------
Additional common equivalent shares assuming full dilution 127 130
-------- --------
Earnings Per Share
Continuing operations $ 4.68 $ 3.62
Discontinued operations .93 1.99
Extraordinary item - (.38)
Cumulative effect of accounting changes .04 -
-------- --------
Net income $ 5.65 $ 5.23
-------- --------
The Series N convertible preferred stock is considered a common stock
equivalent in 1994 and 1993. With respect to options, it is assumed that the
proceeds to be received upon exercise are used to acquire common stock of the
Corporation. The calculation impact of dilutive securities is determined
quarterly based on the forecast of annual earnings.
1
Page 17
EXHIBIT 12
ITT CORPORATION AND SUBSIDIARIES
CALCULATION OF RATIOS OF EARNINGS TO TOTAL FIXED CHARGES
AND CALCULATION OF EARNINGS TO TOTAL FIXED CHARGES AND
PREFERRED DIVIDEND REQUIREMENTS OF ITT
(In millions)
Nine Months Ended
September 30, 1994
------------------
Earnings:
Income from continuing operations $ 610
Adjustment for distributions in excess of
undistributed equity earnings 11
Income tax expense 285
Minority equity in net income 16
Amortization of interest capitalized 6
-------
928
-------
Fixed Charges:
Interest and other financial charges 252
Interest factor attributable to rentals 67
-------
319
-------
Earnings, as adjusted, from continuing operations $ 1,247
-------
Fixed Charges:
Fixed charges above $ 319
Dividends on preferred stock of insurance subsidiary
included in minority equity 5
Interest capitalized 6
-------
Total fixed charges 330
Dividends on preferred stock of ITT (pre-income tax basis) 36
-------
Total fixed charges and preferred dividend requirements $ 366
-------
Ratios:
Earnings, as adjusted, from continuing operations to total fixed charges 3.78
-------
Earnings, as adjusted, from continuing operations to total fixed charges
and preferred dividend requirements of ITT 3.41
-------
NOTES:
(a) The adjustment for distributions in excess of undistributed equity
earnings represents the adjustment to income for distributions in excess
of undistributed earnings of companies in which at least 20% but less
than 50% equity is owned.
(b) The interest factor attributable to rentals was computed by calculating
the estimated present value of all long-term rental commitments and
applying the approximate weighted average interest rate inherent in the
lease obligations and adding thereto the interest element assumed in
short-term cancelable and contingent rentals excluded from the commitment
data but included in rental expense.
(c) The dividend requirements on preferred stock of ITT have been determined
by adding to the total preferred dividends an allowance for income taxes,
calculated on the effective income tax rate.
CT
1,000,000
9-MOS
DEC-31-1994
SEP-30-1994
62,546
109
0
657
5,142
62,546
16,884
285
610
118
0
6
734
6.02
5.65
5
1,000,000
9-MOS
DEC-31-1994
SEP-30-1994
0
0
0
0
1,058
0
0
0
0
0
0
0
0
0
0
0
0
8,814
7,513
8,303
0
0
106
0
0
0
118
0
0
0
0
0
7
1,000,000
9-MOS
DEC-31-1994
SEP-30-1994
0
0
0
0
0
0
31,549
0
11,632
2,407
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
5,286
1,169
1,016
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
