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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from
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COMMISSION FILE NO. 1-5627
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ITT INDUSTRIES, INC.
INCORPORATED IN THE STATE OF INDIANA
13-5158950
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
4 WEST RED OAK LANE, WHITE PLAINS, NY 10604
(PRINCIPAL EXECUTIVE OFFICE)
TELEPHONE NUMBER: (914) 641-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT, ALL OF WHICH ARE
REGISTERED ON THE NEW YORK STOCK EXCHANGE, INC.:
COMMON STOCK, $1 PAR VALUE (ALSO REGISTERED ON PACIFIC STOCK EXCHANGE)
SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK PURCHASE RIGHTS (ALSO
REGISTERED
ON PACIFIC STOCK EXCHANGE)
8 7/8% SENIOR DEBENTURES DUE JUNE 2003
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes..X.. No....
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on January 31, 1997, was approximately $2.9
billion.
As of February 28, 1997, there were outstanding 118,436,579 shares of
Common Stock, $1 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 15, 1997, is incorporated by reference in
Part III of this Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
PART 1 Business of ITT Industries........................................... 1
I 2 Properties........................................................... 10
3 Legal Proceedings.................................................... 10
4 Submission of Matters to a Vote of Security Holders.................. 11
* Executive Officers of ITT Industries................................. 11
PART 5 Market for Common Stock and Related Stockholder Matters.............. 12
II 6 Selected Financial Data.............................................. 13
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 14
8 Financial Statements and Supplementary Data.......................... 19
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 19
PART 10 Directors and Executive Officers of ITT Industries................... 19
III 11 Executive Compensation............................................... 19
12 Security Ownership of Certain Beneficial Owners and Management....... 19
13 Certain Relationships and Related Transactions....................... 19
PART 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 19
IV
Signatures.................................................................. II-1
Exhibit Index............................................................... II-2
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* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
PART I
ITEM 1. BUSINESS OF ITT INDUSTRIES
ITT Industries, Inc. ("ITT Industries"), an Indiana corporation
incorporated on September 5, 1995 as, and originally named, ITT Indiana, Inc.,
is the successor pursuant to a statutory merger of ITT Corporation, a Delaware
corporation ("ITT Delaware"), into ITT Industries effective December 20, 1995.
ITT Delaware, originally incorporated in Maryland in 1920 as International
Telephone and Telegraph Corporation, was reincorporated in Delaware in 1968 and
changed its name to ITT Corporation in 1983. On December 19, 1995, ITT Delaware
made a distribution (the "Distribution") to its stockholders consisting of all
the shares of common stock of ITT Destinations, Inc., a Nevada corporation ("ITT
Destinations"), and all the shares of common stock of ITT Hartford Group, Inc.,
a Delaware corporation ("ITT Hartford"), both of which were wholly-owned
subsidiaries of ITT Delaware. In connection with the Distribution, ITT
Destinations changed its name to ITT Corporation ("ITT Corporation"). Reference
is made to "-- CERTAIN RELATIONSHIPS AMONG ITT INDUSTRIES, ITT CORPORATION and
ITT HARTFORD AFTER THE DISTRIBUTION."
ITT Industries has its World Headquarters at 4 West Red Oak Lane, White
Plains, NY 10604 and has approximately 59,000 employees based in over 40
countries. Unless the context otherwise indicates, references herein to ITT
Industries include its subsidiaries. The telephone number for ITT Industries is
914-641-2000.
ITT Industries, with 1996 sales of approximately $8.7 billion, is a
worldwide enterprise engaged directly and through its subsidiaries in the design
and manufacture of a wide range of engineered products, focused on the three
principal business segments of ITT Automotive, ITT Defense & Electronics and ITT
Fluid Technology. See "BUSINESS SEGMENT INFORMATION" in the "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for information concerning ITT Community
Development Corporation, ITT Semiconductors, other non-core businesses, and
businesses which have been sold.
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The table below shows in percentage terms ITT Industries' consolidated net
sales and operating income attributable to each of its ongoing lines of business
for the last three years:
YEAR ENDED DECEMBER
31,
----------------------
1996 1995 1994
---- ---- ----
NET SALES
ITT Automotive................................................................... 66% 66% 64%
ITT Defense & Electronics........................................................ 19 19 21
ITT Fluid Technology............................................................. 15 15 15
---- ---- ----
100% 100% 100%
===== ===== =====
OPERATING INCOME
ITT Automotive................................................................... 60% 62% 63%
ITT Defense & Electronics........................................................ 20 18 18
ITT Fluid Technology............................................................. 20 20 19
---- ---- ----
100% 100% 100%
===== ===== =====
BUSINESS AND PRODUCTS
ITT Automotive
ITT Automotive, with 1996 sales of approximately $5.5 billion, is one of
the largest independent suppliers of components, systems and modules to vehicle
manufacturers worldwide and also is a supplier of related products to the
aftermarket. Through operations located in Europe, North America and South
America, and joint ventures and licensees throughout the world, ITT Automotive
designs, engineers and manufactures a broad range of automotive components and
systems, and is now introducing modules, under two major worldwide product
groupings -- Brake and Chassis Systems and Body and Electrical Systems.
The Brake and Chassis Systems group, which had 1996 sales of approximately
$3.3 billion, produces anti-lock brake systems ("ABS") and traction control
systems ("TCS"), chassis systems, foundation brake components, fluid handling
products and shock absorbers. Sales of four-wheel ABS and TCS exceeded $1.0
billion in 1996 for the fourth consecutive year. ABS remains the largest product
line of ITT Automotive with 22%, 24% and 27% of total sales in 1996, 1995 and
1994, respectively.
The Body and Electrical Systems group, which had 1996 sales of
approximately $2.2 billion, produces automotive products, such as door and
window assemblies, wiper module assemblies, seat systems, air management
systems, switches and fractional horsepower direct current motors. In 1994, ITT
Automotive strengthened its previously established position as a leading
producer of electric motors and wiper systems through the acquisition from
General Motors of its motors and actuators business unit, now renamed ITT
Automotive Electrical Systems, Inc. ("ESI"). ESI accounted for 19% of ITT
Automotive's sales in 1996.
The following table illustrates the percentage sales by group for the
periods specified:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
Brake and Chassis Systems........................................................... 61% 61% 64%
Body and Electrical Systems......................................................... 39 39 36
---- ---- ----
100% 100% 100%
==== ==== ====
ITT Automotive markets products using various recognizable brand names in
the automotive industry, including Teves(R) and Ate(R) (brake components and
systems), SWF(R) (wiper systems, electric motors and switches) and Koni(R)
(shock absorbers).
ITT Automotive provides modules which are pre-assembled components and
units installed in a particular location of a vehicle. Presently, ITT Automotive
provides corner modules, which contain brake components, knuckles, bearings and
other smaller items, and windshield wiper modules, which contain wiper arms,
blades, linkages, motors, a washer fluid reservoir and a pump motor. ITT
Automotive is also developing new product lines such as complete axle assemblies
and automotive stability management
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systems ("ASMS"). ASMS provides functions such as traction control, anti-lock
braking, electronic brake-force distribution and control of engine torque, and
is designed to provide assistance in braking, starting, steering and achieving
control of the vehicle under various driving conditions. There can be no
assurance as to how extensive ITT Automotive's presence in such product areas
will be.
The principal customers for products of ITT Automotive are the top vehicle
manufacturers worldwide. Of these manufacturers, ITT Automotive's largest
customers are General Motors, Ford, Volkswagen, Chrysler, Mercedes and BMW,
contributing 25.3%, 14.4%, 9.1%, 8.6%, 6.2% and 5.8%, respectively, of ITT
Automotive's 1996 sales. In addition, approximately 7% of ITT Automotive's 1996
net sales, which included brake parts, shocks and struts and windshield wiper
components, were to customers in the aftermarket.
The level of activity of ITT Automotive is generally dependent upon the
condition of major economies throughout the world. Of particular importance are
light vehicle production levels in markets served by ITT Automotive and the
amount of ITT Automotive products included in the vehicles being produced. See
"-- COMPETITION."
ITT Automotive companies have approximately 33,800 employees in 72
facilities located in 18 countries.
ITT Defense & Electronics
ITT Defense & Electronics, with 1996 sales of approximately $1.6 billion,
develops, manufactures and supports high technology electronic systems and
components for worldwide defense and commercial markets with operations in North
America, Europe and Asia. Defense market products include tactical
communications equipment, airborne electronic warfare systems, night vision
devices, radar, space payloads, and operations and maintenance services.
Commercial products and services include interconnect products (such as
connectors, switches and cable assemblies), night vision devices, and space
launch services.
ITT Defense & Electronics concentrates its efforts in those market segments
where management believes it can be a market leader. It is a leading supplier of
products that management believes will be critical to the armed forces in the
21st century, particularly products designated to facilitate communications in
the forward area battlefield, night vision devices that enable soldiers to
conduct night combat operations and airborne electronic warfare systems that
protect aircraft from enemy missiles. In addition, through its global technical
services business, management believes that ITT Defense & Electronics may
benefit from trends to commercialize and outsource military support services.
In the interconnect market ITT Cannon maintains a position as one of the
world's largest connector companies based on revenue and is a leading supplier
to the military/aerospace and industrial sectors. Its products include
electronic connectors, switches, test accessories and cable assemblies for
information systems, industrial, military/aerospace, and transportation
applications.
In tactical communications ITT Defense & Electronics manufactures products,
including voice and data systems, that facilitate communications in the forward
area battlefield. ITT Aerospace/Communications Division produces the Single
Channel Ground and Airborne Radio System ("SINCGARS") and has a contract to
produce the Near Term Digital Radio ("NTDR"), which will have data transmission
capacity twenty times greater than SINCGARS. In addition, ITT Defense &
Electronics produces sophisticated sounding and imaging instruments such as
those used by the National Oceanographic and Atmospheric Agency in remote
sensing/navigation space payloads to track hurricanes, tornadoes and other
weather patterns.
In operations and maintenance services ITT Federal Services Corporation
provides military base operations support, equipment and facility maintenance,
and training services for government sites around the world.
ITT Night Vision provides United States and allied soldiers with the
capability to conduct night combat operations with the production of advanced
goggles for airborne and ground applications. ITT Night Vision was awarded 100%
of the United States Army's Generation III night vision production needs through
1998. ITT Night Vision also produces a commercial line of night vision products
for law
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enforcement and marine applications. Radar, produced by ITT Gilfillan, includes
ship and air defense radar and air traffic control systems.
ITT Avionics produces airborne electronic warfare systems such as the
Airborne Self-Protection Jammer ("ASPJ") to help protect aircraft from
radar-guided self-propelled weapons. ITT Avionics was selected by the U.S. Army
to develop the next-generation fully integrated airborne electronic warfare
system for rotary wing aircraft called Suite of Integrated Radio Frequency
Countermeasures ("SIRFC"). ITT Avionics, teamed with Lockheed Martin Sanders,
was also awarded the development contract for the United States Integrated
Defensive Countermeasures ("IDECM") program for fixed wing aircraft such as the
F/A-18 E/F fighter fleet.
The following table illustrates the percentage sales by product line for
the periods specified:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
---- ---- ----
Interconnect...................................................................... 33% 33% 30%
Tactical Communications/Space Payloads............................................ 27 28 28
Operations and Maintenance Services............................................... 19 18 16
Night Vision/Radar................................................................ 12 10 16
Airborne Electronic Warfare....................................................... 6 9 7
Other............................................................................. 3 2 3
--- --- ---
100% 100% 100%
=== === ===
ITT Defense & Electronics sells its products to a wide variety of
governmental and non-governmental entities located throughout the world.
Approximately 64% of 1996 net sales of ITT Defense & Electronics was to
governmental entities, of which approximately 86% was to the United States
Government (principally in defense programs).
A substantial portion of the work of ITT Defense & Electronics is performed
in the United States under prime contracts and subcontracts, some of which by
statute are subject to profit limitations and all of which are subject to
termination by the United States Government. Apart from the United States
Government, no other governmental or commercial customer accounted for more than
3% of 1996 net sales for ITT Defense & Electronics.
Sales to non-governmental entities have remained at approximately one-third
of total sales from 1994 through 1996. Certain products sold by ITT Defense &
Electronics have particular commercial application, including night vision
products and those products already sold to the commercial sector, such as
connectors and switches. In addition, ITT Defense & Electronics has entered into
a partnership with California Commercial Spaceport, Inc. to form Spaceport
Systems International ("SSI"). It is currently planned that SSI will build and
operate a commercial satellite launch facility at Vandenberg Air Force Base in
California to launch commercial and government satellite payloads into low polar
earth orbits.
Order backlog for ITT Defense & Electronics in 1996 reached $2.3 billion,
compared with $2.0 billion for 1995 and $2.1 billion for 1994.
The level of activity in ITT Defense & Electronics is affected by different
factors in its two major businesses. At Defense, significant factors are overall
defense budgets and the portion of those defense budgets devoted to products and
services of the type provided by ITT Defense & Electronics. At Electronics, a
significant factor is the overall condition of the economies in the markets
served. See "-- COMPETITION."
ITT Defense & Electronics companies have approximately 14,300 employees in
71 facilities in 14 countries.
ITT Fluid Technology
ITT Fluid Technology, with 1996 sales of approximately $1.3 billion, is a
worldwide enterprise engaged in the design, development, production and sale of
products, systems and services used to move, handle, transfer, control and
contain fluids. With sales to more than 120 countries, ITT
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Fluid Technology is a leading supplier of pumps, valves, heat exchangers,
mixers, instruments and controls for the management of fluids.
The majority of ITT Fluid Technology's sales are in North America and
Western Europe. Principal markets are water and wastewater treatment, industrial
and process, and construction. Industrial and process market activity includes
strong market positions in chemical processing and in selected segments of the
oil and gas and mining markets. Construction market activity includes heating,
ventilation and air conditioning ("HVAC") segments of the residential and
non-residential construction market and in construction dewatering. ITT Fluid
Technology also has significant niche positions in leisure marine, aerospace,
and pharmaceutical and biotechnology markets and in markets for fire protection
and whirlpool bath pumps.
Sales are made directly and through independent distributors and
representatives. ITT Fluid Technology is structured in five divisions, each of
which is briefly described below. No single customer accounted for more than 2%
of 1996 net sales for ITT Fluid Technology.
ITT Flygt, with 1996 sales of approximately $626 million, is a pioneer in
submersible technology and is the world leader in submersible pumping and mixing
products. About half of Flygt's worldwide sales come from municipal wastewater
treatment markets. Other sales are to construction, mining, and industrial
markets.
Fluid Handling, with 1996 sales of approximately $250 million, offers a
range of dry-mount pumps and heat exchangers, and a wide variety of control and
accessory products for liquid based heating and cooling systems. The division
holds market leadership positions in a number of product/market sectors under
long established brand names such as Bell & Gossett,(R) McDonnell & Miller,(R)
and ITT Standard(R).
Industrial Products, with 1996 sales of approximately $218 million, offers
a broad line of pumps and valves for industrial, process and heavy duty
commercial application world-wide. Brand names include A-C(R) Pump, Marlow(R),
Richter(TM), Fabri-Valve(R), Pure-Flo(R), and others.
Controls & Instruments, with 1996 sales of approximately $133 million,
offers flow measurement instruments and systems, specialty valves, temperature
and pressure switches, and other control products to niche markets including
aerospace, and certain segments of the energy sector. Brand names include
Barton(R), Neo-Dyn(R) and Conoflow(R).
Marine & Specialty Products, with 1996 sales of approximately $73 million,
is a leading market participant, with pumps and associated products for the
leisure marine and pool and whirlpool bath markets, and has a growing presence
in certain industrial niches with a wide range of specialty pumps and
accessories. Brand names include Jabsco(R) and Marlow(R).
The following table illustrates the percentage sales by division for the
periods specified:
YEAR ENDED
DECEMBER 31,
-----------------------
1996 1995 1994
--- --- ---
Flygt............................................................................. 48% 48% 46%
Fluid Handling.................................................................... 19 18 *
Industrial Products............................................................... 17 16 *
Controls & Instruments............................................................ 10 12 *
Marine & Specialty Products....................................................... 6 6 *
--- --- ---
100% 100% 100%
=== === ===
- ---------------
* Breakdown not available. Prior to 1996 these units were organized in two
divisions.
Management of ITT Industries believes that ITT Fluid Technology has a solid
technology base and proven expertise in applying its products to meet customer
needs and that the continuing development of new products will enable ITT Fluid
Technology to maintain and build market leadership positions in served markets.
The level of activity in ITT Fluid Technology is dependent upon the
condition of the economies in the markets served and, in the case of municipal
markets, the ability of municipalities to fund projects for products and
services of the type provided by ITT Fluid Technology. See "-- COMPETITION."
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ITT Fluid Technology companies have approximately 8,100 employees in 40
facilities located in 18 countries, with sales in over 120 countries.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "BUSINESS SEGMENT INFORMATION" in the "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for further details with respect to business
segments.
GEOGRAPHIC MARKETS
Approximately one-half of ITT Industries' sales are to customers outside
the United States. The geographic sales mix of ITT Industries is illustrated (in
percentage terms) by the following table for the periods specified:
1996 1995 1994
---- ---- ----
United States................................................................. 47% 48% 50%
Canada and Mexico............................................................. 6 6 6
--- --- ---
Total North America....................................................... 53 54 56
Europe........................................................................ 41 40 39
Asia/Pacific and Other........................................................ 6 6 5
--- --- ---
100% 100% 100%
=== === ===
The geographic sales base of ITT Automotive is predominantly in Europe and
North America. In 1996, approximately 47% of sales of ITT Automotive were to
customers in the United States and Canada and 48% of sales were to customers in
Western Europe. Management of ITT Industries sees growth opportunities in South
America, Mexico and Asia, particularly in China. In addition to its wholly-owned
facilities, ITT Automotive also is involved in other joint venture and licensing
arrangements throughout the world as a means of serving its international
customer base.
The geographic sales base of ITT Defense & Electronics is predominantly the
United States, which accounted for approximately 72% of 1996 sales. Management
of ITT Defense & Electronics is attempting to increase its international
business and sees growth opportunities in the Asia/Pacific region, Europe and
the Middle East. ITT Cannon has a 90% joint venture in China and a wholly-owned
subsidiary in Japan to supply connectors and switches for, in large part,
consumer electronics products in those markets.
The geographic sales base of ITT Fluid Technology is broad. In 1996, under
one-half of the sales of ITT Fluid Technology was derived from the United States
while 34% was derived from Western Europe. The geographic sales mix differs
among products and among divisions of ITT Fluid Technology. Management of ITT
Industries sees growth opportunities in Eastern Europe and Central Asia,
Africa/Middle East, Latin America and the Asia/Pacific region. In China, ITT
Fluid Technology has manufacturing and distribution facilities to produce and
sell submersible pumps for the sewage handling and mining markets. It also has
joint venture sales and manufacturing and other operations in Eastern Europe,
Latin America, Africa/Middle East and other locations in the Asia/Pacific
region.
See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further geographical
information and information with respect to export sales.
COMPETITION
Substantially all of ITT Industries' operations are in highly competitive
businesses, although the nature of the competition varies across all business
segments. A number of large companies engaged in the manufacture and sale of
similar lines of products and the provision of similar services are included in
the competition, as are many small enterprises with only a few products or
services. Technological innovation, price, quality and reliability are primary
factors in markets served by the various segments of ITT Industries' businesses.
ITT Automotive
Competition is intense in the global automotive industry. This competitive
environment has resulted in increased pressure to reduce prices and, therefore,
costs. Since purchased items represent a major
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portion of the total costs of vehicle manufacturers, vehicle manufacturers are
expected to continue to pressure suppliers such as ITT Automotive to provide
cost reductions through a variety of means. Suppliers such as ITT Automotive are
also likely to continue to experience competitive pricing pressures as vehicle
manufacturers adopt manufacturing strategies such as the use of worldwide common
platforms for the manufacture of automobiles.
ITT Defense & Electronics
ITT Defense & Electronics competes in two business sectors. In Defense,
government defense budgets, particularly in the United States, generally have
leveled off after years of significant declines. Business consolidations
continue to change the competitive environment. ITT Defense & Electronics has
adjusted to these changes by focusing on the defense electronics and services
markets, by making process improvements and through capacity rationalization. In
Electronics, primarily interconnects, competitive pressures continue on a global
basis. In most of the markets served by ITT Defense & Electronics competition is
based primarily upon price, quality, technological expertise, cycle time and
service.
ITT Fluid Technology
The ITT Fluid Technology business is affected by strong competition,
changing economic conditions, significant industry overcapacity that leads to
intense pricing pressures, public bidding in some markets and weather conditions
as they affect construction activity. Management of ITT Fluid Technology
responds to competitive pressures by utilizing strong distribution networks,
strong brand names, broad product lines focused on market niches, a global
customer base, a continuous stream of new products developed from a strong
technology base, a focus on quality and customer service, and through continuous
cost improvement programs.
EXPOSURE TO CURRENCY FLUCTUATIONS
ITT Industries' companies conduct operations worldwide. ITT Industries is,
therefore, exposed to the effects of fluctuations in relative currency values.
Although ITT Industries' companies engage where appropriate in various hedging
strategies with respect to their foreign currency exposure, it is not possible
to hedge all such exposure. Accordingly, the operating results of ITT Industries
may be impacted by fluctuations in relative currency values.
CYCLICALITY
Many of the markets in which ITT Industries' businesses operate are
cyclical and can be affected by general economic conditions in those markets.
For example, a large percentage of the ITT Industries' 1996 net sales was
derived from sales to automobile manufacturers. The automobile industry is
highly cyclical, although cycles in the major markets of North America and
Europe are not necessarily concurrent. A decline in the demand for new
automobiles and industry production levels could have an adverse effect on ITT
Industries. ITT Industries also manufactures and sells products used in other
historically cyclical industries, such as the construction, mining and minerals
and aerospace industries, and thus could be adversely affected by negative
cycles affecting those and other industries.
GOVERNMENTAL REGULATION AND RELATED MATTERS
A number of ITT Industries' businesses are subject to governmental
regulation by law or through contractual arrangements. ITT Industries'
businesses in the defense segment perform work under contracts with the United
States Department of Defense and similar agencies in certain other countries.
These contracts are subject to security and facility clearances under applicable
governmental regulations, including regulations requiring background
investigations for high-level security clearances for ITT Industries' executive
officers. Most of such contracts are subject to termination by the respective
governmental parties on various grounds, although such terminations rarely
occur.
ENVIRONMENTAL MATTERS
ITT Industries is subject to stringent environmental laws and regulations
concerning air emissions, water discharges and waste disposal. Such
environmental laws and regulations include the Federal Clean
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Air Act, the Clean Water Act, the Resource, Conservation and Recovery Act and
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund"). Environmental requirements are significant factors
affecting all operations. Management believes that ITT Industries' companies
closely monitor all of their respective environmental responsibilities, together
with trends in environmental laws. ITT Industries has established an internal
program to assess compliance with applicable environmental requirements for all
of its facilities, both domestic and overseas. The program is designed to
identify problems in a timely manner, correct deficiencies and prevent future
noncompliance. Over the past 15 years ITT Industries has conducted regular,
thorough audits of its major operating facilities. As a result, management of
ITT Industries believes that ITT Industries' companies are in substantial
compliance with current environmental requirements. Management does not believe,
based on current circumstances, that it will incur compliance costs pursuant to
such requirements that will have a material adverse effect on ITT Industries'
financial position, results of operations or cash flows.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- ENVIRONMENTAL MATTERS" and "LEGAL PROCEEDINGS".
RAW MATERIALS
All the businesses of ITT Industries require various raw materials (e.g.,
metals and plastics), the availability and prices of which may fluctuate.
Although some of these costs may be recovered through increased prices to
customers, the operating results of ITT Industries are exposed to fluctuations.
ITT Industries' companies attempt to control such costs through various
purchasing programs and otherwise. In recent years, the businesses of ITT
Industries have not experienced any significant difficulties in obtaining an
adequate supply of raw materials necessary for the manufacturing process.
RESEARCH, DEVELOPMENT AND ENGINEERING
The businesses of ITT Industries require substantial commitment of
resources to research, development and engineering activities which are
conducted in laboratory and engineering facilities at most of its major
manufacturing subsidiaries. Because ITT Industries believes that continued
leadership in technology is essential to its future, most ITT Industries' funds
dedicated to research and development are applied to areas of high technology,
such as aerospace, automotive braking and electrical systems, and applications
involving electronic components.
For a further discussion of the research, development and engineering
expenditures of ITT Industries, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL
RESOURCES".
INTELLECTUAL PROPERTY
While ITT Industries owns and controls a number of patents, trade secrets,
confidential information, trademarks, trade names, copyrights and other
intellectual property rights which, in the aggregate, are of material importance
to its business, management of ITT Industries believes that its business, as a
whole, is not materially dependent upon any one intellectual property or related
group of such properties. ITT Industries is licensed to use certain patents,
technology and other intellectual property rights owned and controlled by
others, and, similarly, other companies are licensed to use certain patents,
technology and other intellectual property rights owned and controlled by ITT
Industries.
Patents, patent applications and license agreements will expire or
terminate over time by operation of law, in accordance with their terms or
otherwise. The expiration or termination of such patents, patent applications
and license agreements is not expected by the management of ITT Industries to
have a material adverse effect on ITT Industries' financial position, results of
operations or cash flows.
ITT Industries has obtained the exclusive right and license from ITT
Corporation to use the "ITT" name, mark and logo with respect to the businesses
that ITT Industries operated on the date of Distribution and in the operation of
any businesses closely related thereto, as well as the non-exclusive right to
use the "ITT" name, mark and logo in the operation of any new business it
operates so long as such new business is not included in ITT Corporation's or
ITT Hartford's businesses on the date of Distribution or businesses closely
related thereto. These rights and licenses are perpetual, subject to the
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maintenance of certain quality standards and other terms of the operative
license agreement and are considered by ITT Industries' management to be of
material importance to ITT Industries.
EMPLOYEES
As of December 31, 1996, ITT Industries and its subsidiaries employed an
aggregate of approximately 59,000 people. Of this number, approximately 26,000
are employees in the United States, of whom approximately 40% are represented by
labor unions. Generally, labor relations have been maintained in a normal and
satisfactory manner.
DISCONTINUED OPERATIONS
Effective December 19, 1995, ITT Delaware made a distribution to its
shareholders of its former subsidiary ITT Destinations which conducted its
hospitality, entertainment and information services businesses and its former
subsidiary ITT Hartford which conducted its insurance businesses. Both ITT
Destinations, renamed ITT Corporation, and ITT Hartford have been reflected as
"Discontinued Operations".
In 1994, ITT Delaware announced plans to seek offers for the purchase of
its former subsidiary (ITT Financial Corporation, "ITT Financial") which
conducted its commercial and consumer finance, related insurance and other
financial services businesses, including a mortgage banking operation. ITT
Financial merged into ITT Delaware effective May 1, 1995, and indebtedness of
ITT Financial was assumed by ITT Delaware and subsequently by ITT Industries.
ITT Financial has been reflected as a "Discontinued Operation" in the financial
statements of ITT Industries.
In 1994, ITT Delaware completed the distribution to its shareholders of all
the outstanding common shares of its former forest products subsidiary (formerly
ITT Rayonier Incorporated, "Rayonier"). The former subsidiary has been reflected
as a "Discontinued Operation" in the "CONSOLIDATED INCOME STATEMENTS." See
"NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS" contained herein.
CERTAIN RELATIONSHIPS AMONG ITT INDUSTRIES, ITT CORPORATION AND ITT HARTFORD
AFTER THE DISTRIBUTION
ITT Delaware, ITT Corporation and ITT Hartford entered into a Distribution
Agreement (the "Distribution Agreement") providing for, among other things,
certain corporate transactions required to effect the Distribution and other
arrangements among ITT Industries, ITT Corporation and ITT Hartford subsequent
to the Distribution.
The Distribution Agreement provides for, among other things, assumptions of
liabilities and cross-indemnities designed to allocate generally the financial
responsibility for the liabilities arising out of or in connection with (i) the
automotive, defense & electronics, and fluid technology businesses to ITT
Industries and its subsidiaries, (ii) the hospitality, entertainment and
information services businesses to ITT Corporation and its subsidiaries and
(iii) the insurance businesses to ITT Hartford and its subsidiaries. The
Distribution Agreement also provides for the allocation generally of the
financial responsibility for the liabilities arising out of or in connection
with former and present businesses not described in the immediately preceding
sentence to or among ITT Industries, ITT Corporation and ITT Hartford. The
Distribution Agreement provides that neither ITT Industries, ITT Corporation or
ITT Hartford will take any action that would jeopardize the intended tax
consequences of the Distribution.
ITT Industries, ITT Corporation and ITT Hartford have also entered into
agreements in connection with the Distribution relating to intellectual
property, tax and employee benefit matters.
A number of members of the Board of Directors of ITT Industries also serve
on the Board of Directors of ITT Corporation and ITT Hartford.
9
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ITEM 2. PROPERTIES
ITT Industries, whose principal executive offices are in leased premises
located in White Plains, NY, considers the many offices, plants, warehouses and
other properties that it owns or leases to be in good condition. These
properties are located in several states in the United States, as well as in
numerous countries throughout the world. ITT Industries believes the properties
to be adequate for the needs of its businesses.
ITEM 3. LEGAL PROCEEDINGS
ITT Industries and its subsidiaries are responsible, in whole or in part,
or are alleged so to be responsible for environmental investigation and
remediation at approximately 70 sites in North America and Europe. Of those
sites, ITT Industries has received notice that it is considered a Potentially
Responsible Party ("PRP") at approximately 60 sites by the United States
Environmental Protection Agency ("EPA") and/or a similar state agency under
CERCLA or its state equivalent. In many of these proceedings, ITT Industries'
liability is considered de minimis. At approximately 20 of these sites, formerly
operated by subsidiaries of the Company, liability and/or defense costs are to
be divided equally among ITT Industries, ITT Corporation and ITT Hartford
pursuant to the Distribution Agreement. The remaining cases are generally
actions either brought by private parties relating to sites formerly owned or
operated by subsidiaries of the Company seeking to recoup incurred costs or
shift environmental liability to ITT Industries pursuant to contractual
language, or situations discovered by ITT Industries through its internal
environmental assessment program.
ITT Industries is involved in an environmental proceeding in California
relating to the San Fernando Valley aquifer. ITT Industries is one of numerous
PRPs who are alleged by the EPA to have contributed to the contamination of the
aquifer. ITT Industries and other allegedly responsible parties have completed
an allocation among the PRPs to fund the clean-up required by the EPA. However,
confirmation of the allocation award was challenged by Lockheed Martin
Corporation, and the parties are awaiting a final ruling. Lockheed Martin filed
a cost recovery suit regarding this matter in the Federal District Court for the
Southern District of California naming ITT Industries and two other entities.
Lockheed Martin's suit was dismissed on technical grounds with leave to refile.
ITT Industries has filed a suit against its insurers in the California Superior
Court, Los Angeles County, ITT Corporation, et al. v. Pacific Indemnity
Corporation et al. for recovery of costs it has incurred in connection with this
and other environmental matters. ITT Industries already has negotiated
settlements with certain defendant insurance companies, is engaged in
negotiations with others, and is prepared to pursue its legal remedies where
reasonable negotiations are not productive.
ITT Delaware and its former subsidiaries, Rayonier and Southern Wood
Piedmont Company ("SWP"), are named defendants in a lawsuit filed in 1991 in the
U.S. District Court for the Southern District of Georgia, Ernest L. Jordan, Sr.
et. al. v. Southern Wood Piedmont Company, et al., in which plaintiffs allege
property damage and personal injury based on alleged exposure to toxic chemicals
used by SWP in its former wood preserving operations, sought certification as a
class action and asked for compensatory and punitive damages in the amount of
$700 million. The Court disposed of plaintiffs' claim of class action, and
plaintiffs amended their complaint by adding over 100 individual residents.
Plaintiffs subsequently amended their complaint to eliminate any reference to
specific monetary damages. Three other suits arising out of former wood
preserving operations of SWP also included ITT Delaware among the named
defendants. One of these cases has been dismissed. In another of such cases a
directed verdict in favor of defendants was affirmed. Motions for summary
judgment are being submitted in the remaining cases. Under an agreement entered
into by ITT Delaware and Rayonier in connection with the distribution of
Rayonier stock to ITT Delaware's shareholders in February 1994, ITT Delaware is
entitled to be indemnified by Rayonier for any expenses or losses incurred by
ITT Delaware in connection with the aforementioned suits, as well as in any
other legal proceedings arising out of Rayonier or SWP operations. ITT
Industries continues to have the benefit of such agreement after the
Distribution. In connection with the Distribution, ITT Industries, ITT
Corporation and ITT Hartford agreed that certain liabilities, including those
related to Rayonier, would be shared equally among the three companies.
Management does not believe that any of the remaining matters discussed in this
paragraph will result in a material adverse effect on ITT Industries' financial
position, results of operations or cash flows.
10
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While there can be no assurance as to the ultimate outcome of any
litigation involving ITT Industries, management does not believe any pending
legal proceeding will result in a judgment or settlement that will have, after
taking into account ITT Industries' existing provisions for such liabilities, a
material adverse effect on ITT Industries' financial position, results of
operations or cash flows.
Reference is made to "BUSINESS OF ITT INDUSTRIES -- CERTAIN RELATIONSHIPS
AMONG ITT INDUSTRIES, ITT CORPORATION AND ITT HARTFORD AFTER THE DISTRIBUTION"
for information concerning the allocation of certain liabilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders of ITT Industries during
the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF ITT INDUSTRIES
The following information is provided as to the executive officers of ITT
Industries:
DATE OF
AGE AT YEAR OF ELECTION
FEBRUARY 1, INITIAL ELECTION TO PRESENT
NAME 1997 POSITION AS AN OFFICER POSITION
- --------------------------------------------- --------------------------------------- ---------------- ----------
Ralph D. Allen.................... 55 Vice President, Director of 1981 12/19/95
Investor Relations
Travis Engen...................... 52 Chairman, President and Chief Executive 1987 12/19/95
and Director
Donald E. Foley................... 45 Vice President and Treasurer 1996 5/21/96
Louis J. Giuliano................. 50 Senior Vice President 1988 12/19/95
Martin Kamber..................... 48 Senior Vice President, Director of 1995 12/19/95
Corporate Development
Heidi Kunz........................ 42 Senior Vice President and Chief 1995 12/19/95
Financial Officer
Richard J. Labrecque.............. 58 Senior Vice President 1985 3/1/96
Vincent A. Maffeo................. 46 Senior Vice President and General 1995 12/19/95
Counsel
Thomas R. Martin.................. 43 Vice President, Director of Corporate 1996 9/10/96
Relations
Richard W. Powers................. 55 Vice President, Director of Taxes 1991 12/19/95
James P. Smith, Jr................ 54 Senior Vice President, Director of 1995 12/19/95
Human Resources
Richard J. Townsend............... 46 Vice President and Controller 1997 3/11/97
Each of the above-named officers was elected to his or her present position
to serve at the pleasure of the Board of Directors. Mr. Engen has an employment
agreement with ITT Industries providing, among other things, for his employment
as Chairman and Chief Executive through December 31, 1999.
Throughout the past five years, all of the above-named officers have held
executive positions with ITT Industries or with its predecessor, ITT Delaware,
bearing at least substantially the same responsibilities as those borne in their
present offices, except that (i) Mr. Engen, prior to his election as Chairman,
President and Chief Executive, was Executive Vice President of ITT Delaware
(1991); (ii) Mr. Foley, prior to his election as Vice President and Treasurer,
was Assistant Treasurer of International Paper Company; (iii) Mr. Kamber, prior
to his election as Senior Vice President, Director of Corporate Development, was
Vice President, Corporate Development, of ITT Automotive, Inc. (1993) and
Executive Assistant to the President, Chief Operating Officer and Executive Vice
President of ITT Delaware; (iv) Ms. Kunz, prior to her election as Senior Vice
President and Chief Financial Officer, was Vice President (1994) and Treasurer
(1993) of General Motors Corporation and, prior to that, Assistant Treasurer of
General Motors Corporation; (v) Mr. Labrecque, prior to his election as Senior
Vice President, was Vice President of ITT Delaware; (vi) Mr. Maffeo, prior to
his election as Senior Vice President and General Counsel, was Vice President
and General Counsel of ITT Automotive, Inc. (1992) and, prior to that, was Vice
President and General Counsel of ITT Defense, Inc.; (vii) Mr. Martin, prior to
his election as Vice President, Director of Corporate Relations, was Vice
President of Corporate Communications of Federal Express Corp. (1995) and, prior
to that, was Managing Director of Public Relations of Federal Express Corp.
(viii) Mr. Powers, prior to his election as Vice President, Director of Taxes,
was Vice President of ITT Delaware; (ix) Mr. Smith, prior to his election as
Senior Vice President, was Executive Vice President of ITT
11
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Sheraton Corporation (1993) and Senior Vice President of ITT Sheraton
Corporation; and (x) Mr. Townsend, prior to his election as Vice President and
Controller, was Assistant Corporate Controller of IBM Corporation (1995) and,
prior to that, held various other management positions in the IBM organization.
PART II
ITEM 5. MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
COMMON STOCK -- MARKET PRICES AND DIVIDENDS
1996 1995
----------------- --------------------
HIGH LOW HIGH LOW
------ ------ ------- -------
IN DOLLARS
Three Months Ended
March 31............................................... $27.75 $22.25 $104.00* $ 86.63*
June 30................................................ 28.63 24.75 119.50* 99.63*
September 30........................................... 26.00 21.50 128.50* 112.00*
December 31............................................ 25.75 22.75 127.50** 117.00**
24.00*** 21.25***
- ---------------
* ITT Delaware.
** ITT Delaware through December 19.
*** ITT Industries from December 20.
On December 19, 1995, ITT Delaware made the Distribution to its
shareholders consisting of all outstanding shares of its subsidiaries ITT
Destinations (renamed ITT Corporation, a Nevada corporation) and ITT Hartford.
The above table reflects the range of market prices of Common Stock of (i) ITT
Delaware as reported in the consolidated transaction reporting system of the New
York Stock Exchange, the principal market in which this security was traded
(under the trading symbol "ITT") prior to the Distribution on December 19, 1995,
and (ii) ITT Industries as reported in the consolidated transaction reporting
system of the New York Stock Exchange, the principal market in which this
security is traded (under the trading symbol "IIN"), from December 20, 1995
through December 31, 1996. During the period from January 1, 1997 through
February 28, 1997, the high and low reported market prices of ITT Industries
Common Stock were $26.38 and $23.88, respectively.
ITT Delaware declared dividends of $.495 per common share in each of the
first and second quarters of 1995. No cash dividends were declared in the third
and fourth quarters of 1995. ITT Industries declared dividends of $.15 per
common share in each of the four quarters of 1996 and in the first quarter of
1997.
The payment and level of future cash dividends by ITT Industries will be
subject to the discretion of the Board of Directors of ITT Industries, and
dividend decisions will be based on, and affected by, a number of factors,
including the operating results and financial requirements of ITT Industries.
Although management of ITT Industries presently contemplates that for the
foreseeable future dividends will be paid at the present dividend rate, there
can be no assurance that such dividends will be paid.
There were 56,958 holders of record of ITT Industries Common Stock on
February 28, 1997.
ITT Industries Common Stock is listed on the following exchanges:
Frankfurt, London, Midwest, New York, Pacific, and Paris.
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ITEM 6. SELECTED FINANCIAL DATA
IN MILLIONS, EXCEPT PER SHARE
1996 1995 1994 1993 1992 1991
-------- -------- --------- --------- --------- ---------
RESULTS AND POSITION
Net sales.......................................... $8,718.1 $8,884.2 $ 7,757.7 $ 6,621.2 $ 6,845.0 $ 6,429.7
Operating income................................... 508.4 446.2 417.7 229.5 19.0 157.8
Income from continuing operations(a)............... 222.6 20.7 201.6 134.8 655.0 231.0
Income from continuing operations, as
adjusted(b)...................................... 222.6 185.0 201.6 134.8 33.0 231.0
Net income (loss).................................. 222.6 707.9 1,021.8 912.8 (884.8) 748.6
Expenditures on plant additions.................... 406.3 449.6 407.0 336.7 350.5 348.0
Depreciation and amortization...................... 433.0 423.2 373.0 323.0 315.0 295.2
Total assets....................................... 5,491.2 5,879.2 11,035.2 12,980.9 12,559.7 13,283.1
Total assets, excluding discontinued operations
................................................. 5,491.2 5,879.2 5,577.0 5,063.0 5,746.0 4,589.0
Long-term debt..................................... 583.2 961.2 1,712.5 1,993.9 2,272.0 2,323.4
Total debt......................................... 1,418.8 1,606.7 2,640.6 2,970.5 2,792.2 2,717.6
Cash dividends declared per common share........... .60 .99 1.98 1.98 1.84 1.72
EARNINGS (LOSS) PER SHARE(c)
Income from continuing operations
Primary.......................................... $ 1.85 $ .03 $ 1.46 $ .83 $ 5.34 $ 1.58
Fully diluted.................................... $ 1.85 $ .09 $ 1.46 $ .88 $ 4.77 $ 1.58
Net income (loss)
Primary.......................................... $ 1.85 $ 6.16 $ 8.57 $ 7.32 $ (7.93) $ 5.84
Fully diluted.................................... $ 1.85 $ 5.93 $ 8.02 $ 6.90 $ (6.90) $ 5.49
SIGNIFICANT RATIOS FOR 1996 AND 1995(d)
Ratios prior to 1995 are not considered relevant
to ITT Industries.
Return on total capital............................ 14.6% 12.3%
Return on shareholders' equity..................... 31.2% 31.1%
Debt to total capitalization....................... 64.0% 71.9%
Book value per share............................... $ 6.75 $ 5.35
- ---------------
(a) The 1995 income from continuing operations included a charge of $164.3,
after tax, for losses from the planned disposal of certain non-core
operations. Included in 1992 income was a gain of $622.0, after tax, from
the sale of an equity interest in Alcatel N.V.
(b) Income from continuing operations excluding the items in note (a) above.
(c) The reported net loss in 1992 causes the calculation of the fully diluted
loss per share in 1992 to be anti-dilutive. In such a case, generally
accepted accounting principles suggest the fully diluted loss per share to
be the same as the primary loss per share; however, the Company has
presented the actual calculated amount in order that all calculations and
comparisons with previously reported and future amounts be on a consistent
basis. In 1993 and 1995, a similar situation exists in regard to the impact
of the ESOP on income from continuing operations per share.
(d) Excluding the 1995 item in note (a) above, together with discontinued
operations, extraordinary items, and the effect of the ESOP on debt and
equity.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On December 19, 1995, ITT Corporation, a Delaware corporation ("ITT
Delaware"), made a distribution (the "Distribution") to its shareholders
consisting of all the shares of common stock of ITT Destinations, Inc., a Nevada
corporation which held ITT Delaware's interests in hospitality, entertainment,
and information services businesses ("ITT Destinations") and all the shares of
common stock of ITT Hartford Group, Inc., which held ITT Delaware's interests in
insurance businesses ("ITT Hartford"). Effective December 20, 1995, pursuant to
a statutory merger, ITT Delaware merged into ITT Industries, Inc., an Indiana
corporation ("ITT Industries"), with ITT Industries as the surviving corporation
(the "Company") and, ITT Destinations then changed its name to ITT Corporation.
In this discussion and analysis of the financial condition and results of
operations of ITT Industries, ITT Corporation and ITT Hartford, their respective
subsidiaries, affiliated companies and other assets and liabilities that were
transferred to those companies, shall be collectively referred to as
"Discontinued Operations."
RESULTS OF OPERATIONS
In 1996, net sales were $8.7 billion, which was 1.9% less than the $8.9
billion of 1995, due mainly to lower sales from companies held for disposition.
Among the three principal business segments, Automotive sales decreased 1.5%,
Defense & Electronics increased .8%, and Fluid Technology increased 4.3%. Sales
in 1995 were up 14.5% over 1994, with increases of 19.4% at Automotive, 4.0% at
Defense & Electronics, and 11.0% at Fluid Technology.
Costs, expenses, and earnings as a percentage of net sales were as follows:
1996 1995 1994
----- ----- -----
Cost of sales................................................................... 79.7% 80.5% 79.8%
Research, development, and engineering expenses................................. 6.1% 5.8% 5.4%
Selling, general, and administrative expenses................................... 8.5% 8.6% 9.2%
Operating income................................................................ 5.8% 5.0% 5.4%
Income from continuing operations, as adjusted.................................. 2.6% 2.1% 2.8%
Cost of sales as a percentage of net sales in 1996 was 79.7% compared to
80.5% in 1995. This decrease in cost of sales reflects cost reductions at
Automotive for ABS systems and lower costs, due to manufacturing improvements
and improved cost structure, at Defense & Electronics. Cost of sales as a
percentage of sales increased to 80.5% in 1995 from 79.8% in 1994, due to higher
material costs in the Fluid Technology and Defense and Electronics businesses.
The Company's expenditures for research, development, and engineering
totaled $535.2 million in 1996, $513.9 million in 1995, and $417.4 million in
1994, approximately 50% of which was pursuant to customer contracts in each
year. ITT Industries' research and development expenditure levels, excluding
those pursuant to customer contracts, are expected to remain at approximately 3%
of sales for the foreseeable future, although there can be no assurance that
such level of expenditures will occur. Research, development, and engineering
expenditures have funded numerous product developments, such as anti-lock brake
and wiper systems, electronic countermeasures, and tactical radio communications
technology, which have resulted in increased market share and significant
contract awards.
In 1996, gross margin increased 3.3% at the three principal business
segments and decreased 53.1% at the companies held for disposition, for a total
company increase of 1.6% over 1995. Within the three principal business
segments, Automotive increased 3.2%, Defense & Electronics increased 4.3% and
Fluid Technology increased 2.5%. Gross margin in 1995 of 13.7% had declined from
the 1994 level of 14.8%.
Selling expenses were $430.0 million in 1996, compared to $427.5 million in
1995, an increase of .6%. However, within this total, increases of 5.3% at
Automotive and 6.1% at Fluid Technology were offset by decreases of 2.7% at
Defense & Electronics and 33.0% at the companies held for disposition. Selling
expenses in total were 4.9% of sales in 1996 and 4.8% in 1995. Selling expenses
as a percentage of net sales were .4% lower in 1995 from the 5.2% reported in
1994.
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Administrative and general expenses as a percentage of sales were 3.6% in
1996, a decrease of .2% from the 3.8% in 1995. This decrease is due to the lower
headquarters expenses of ITT Industries as an independent entity in 1996
compared to its apportioned share of headquarters expenses of ITT Delaware in
1995. Administrative and general expenses decreased to 3.8% in 1995 from 4.0% in
1994 due to overall cost control efforts.
Other operating income (expenses) includes gains and losses from foreign
exchange transactions, restructuring and other charges. In 1996, other operating
income of $13.3 million consisted of $5.8 million from foreign exchange gains
and $7.5 million from gains on sales of assets partially offset by restructuring
costs, compared with a loss of $1.5 million in 1995 and a loss of $16.6 million
in 1994.
Income from continuing operations of ITT Industries in 1996 was $222.6
million or $1.85 per fully diluted share compared with $185.0 million or $1.57
per fully diluted share in 1995 (adjusted to eliminate charges associated with
the planned disposal of certain non-core units). Income from continuing
operations similarly adjusted in 1994 amounted to $219.3 million or $1.76 per
fully diluted share. After deducting one-time charges for costs and losses
associated with the planned disposal of certain operations, reported income from
continuing operations in 1995 was $20.7 million, or $.09 per fully diluted
share, compared with $201.6 million, or $1.46 per fully diluted share, in 1994.
These charges, which after tax amounted to $164.3 million in 1995, are
principally related to ITT Community Development Corporation (a business unit
that develops real estate), ITT Semiconductors (a business unit that
manufactures semiconductor devices), and certain minor Automotive product lines.
Operating income in 1996 was $508.4 million, an increase of 13.9% over the
$446.2 million reported in the prior year. Operating income from ITT Industries'
three principal business segments was $560.5 million in 1996, up slightly over
the $553.0 million reported in 1995. The increase in operating income is
attributable to improvements in Defense & Electronics and Fluid Technology
offset by a slight decrease in the Automotive segment. Operating income in 1995
improved 6.8% over the $417.7 million reported in 1994, due to successful cost
control efforts, the smooth integration of acquisitions and strong product
sales. After tax income from Discontinued Operations totaled $994.2 million
(including $403.4 million reflecting the gain on the sale of ITT Financial) and
$831.4 million for 1995 and 1994, respectively, and represents the results of
ITT Hartford, ITT Corporation, ITT Financial and, in 1994, ITT Rayonier,
partially offset by charges, in 1995, related to the Distribution. These
charges, net of tax, included $39.0 million related to the restructuring of the
Company's headquarters (including ITT Sheraton and Caesars World headquarters),
and $109.2 million related to the Distribution (including legal and advisory
fees, taxes, and other costs). Net income was $222.6 million in 1996 compared to
$707.9 million or $5.93 per fully diluted share in 1995 (which also reflects an
extraordinary charge of $307.0 million for the early retirement of debt prior to
the Distribution) and $1.0 billion or $8.02 per fully diluted share in 1994.
Interest expense decreased to $169.0 million in 1996 from $175.2 million in
1995, partially reflecting a reduction in debt levels, and a restructuring of
the debt portfolio. Interest income decreased to $32.7 million in 1996, from
$40.0 million in 1995, generally as a result of maintaining lower cash balances
by using available cash to reduce debt. Interest expense, net of interest
income, increased to $135.2 million in 1995 from $47.7 million in 1994,
reflecting the absence of $32.0 million of interest income on a note receivable
related to the sale of Alcatel N.V. which was collected in 1994, higher
borrowings in connection with the acquisition of Electrical Systems, Inc.
("ESI") in March 1994, and allocations of total corporate interest expense in
connection with the Distribution.
Miscellaneous expense, net, of $1.1 million in 1996, was due primarily to
the losses from equity investments. In 1995 and 1994, miscellaneous expense,
net, includes a provision for the expected loss on the disposal of ITT
Semiconductors, portions of ITT Community Development Corporation, and certain
other non-core business units of ITT Industries.
The effective income tax rate was 40.0% in 1996, compared with 39.6% in
1995, excluding the charges and the related tax benefit for the disposition of
non-strategic assets (including these charges and the related tax benefit, the
effective income tax rate for 1995 was 70.8%). Income tax expense, excluding
$71.2 million of tax benefit on charges related to the disposition of
non-strategic assets, increased by $27.0 million, to $148.4 million in 1996, due
to the higher pretax earnings. The effective income tax rate in 1994 was 42.3%.
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Business Segments -- Sales and operating income before corporate expenses
(principally the service charges from affiliated companies) for each of ITT
Industries' three major business segments were as follows ($ in millions):
AUTOMOTIVE
----------------------------------
1996 1995 1994
-------- -------- --------
Sales.................................................................. $5,492.6 $5,574.8 $4,667.5
Operating income....................................................... $ 337.1 $ 343.6 $ 336.5
Automotive's sales decreased 1.5% in 1996, primarily due to original
equipment manufacturer ("OEM") pricing pressures and unfavorable foreign
exchange translation, partially offset by a slight increase in Western European
vehicle production. Sales increased 19.4% in 1995, reflecting in part, the full
year impact of the March 1994 acquisition of ESI. Excluding this acquisition,
sales improved 14.7% driven by increasing dollar content of ITT Industries
product per vehicle manufactured, foreign exchange translation, and a slight
increase in European vehicle production. Sales to two customers (General Motors
Corporation and Ford Motor Corporation) accounted for approximately 40%, 42%,
and 44% of 1996, 1995, and 1994 sales, respectively.
Operating income declined 1.9% in 1996 as a result of lower sales prices,
the costs associated with the launch of the ABS MK 20 line of products, the
effects of the General Motors Corporation strikes, restructuring costs
(primarily to relocate some production facilities to lower cost locations), and
an increase in selling, general, and administrative expenses. Operating income
improved 2.1% in 1995 as a result of increased sales volume and continued cost
reductions, while margins declined due to lower sales prices, the costs
associated with the launch of a new ABS MK 20 line of products, and increases in
engineering expense due to systems and module product development.
DEFENSE & ELECTRONICS
----------------------------------
1996 1995 1994
-------- -------- --------
Sales.................................................................. $1,571.6 $1,559.3 $1,498.9
Operating income....................................................... $ 110.2 $ 96.6 $ 95.8
Defense & Electronics' sales increased less than one percent over 1995, but
order input was at a ten-year high in the Defense business. Defense &
Electronics' operating income in 1996 was up 14.1% over 1995 because of strong
improvements in profitability at both the Defense and Electronics businesses.
The profitability improvement at the Defense operations is due to continued
manufacturing improvements, while the Electronics business benefited from the
consolidation of production facilities, improved cost structure, and the launch
of new commercial products. Sales increased 4.0% in 1995 over 1994 due
principally to improved sales of ITT Cannon connector products in mobile
communications and information systems. However, Defense & Electronics'
operating income in 1995 was up marginally over 1994 because strong improvements
in profitability of connectors were largely offset by the absence in 1995 of
one-time favorable adjustments on completed contracts in 1994. Defense &
Electronics' order backlog was $2.3 billion at December 31, 1996 compared with
$2.0 billion at year-end 1995 and $2.1 billion at year-end 1994. Export sales in
the Defense business increased by 15.0% over 1995 and now account for 14.7% of
Defense segment sales. In 1995, export sales increased by 45% over 1994.
Approximately 64%, 65%, and 66% of 1996, 1995, and 1994 sales, respectively,
were to governmental entities, of which approximately 86%, 90%, and 90%,
respectively, were to the U.S. government.
FLUID TECHNOLOGY
----------------------------------
1996 1995 1994
-------- -------- --------
Sales.................................................................. $1,301.3 $1,248.0 $1,124.5
Operating income....................................................... $ 113.2 $ 112.8 $ 99.2
Fluid Technology's 1996 sales increase of 4.3% over 1995 was driven by
global business development activities. Sales outside the U.S., Canada, and
Western Europe grew at a rate of 27.7% over the previous year and now account
for 14.2% of Fluid Technology's sales. Fluid Technology also continued to focus
on several growth segments in its industry including pharmaceutical &
biotechnology and aerospace controls. Weak market conditions in France and
Germany and the sale of the ITT General Controls product line partially offset
higher sales volume at the other units. Operating income in 1996 was relatively
flat due to growth in emerging markets and cost control actions partially offset
by the loss of operating income due to the sale of the ITT General Controls
product line, and an increase in selling,
16
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general, and administrative expenses. In 1995, sales and operating income
increased at all units, most significantly at ITT Flygt due to higher volume and
favorable foreign exchange. New product initiatives, global business development
activities, and improvements in the mining, pharmaceutical, pulp and paper, and
chemical industries contributed to the strong performance in 1995. Operating
income for 1995 increased by 13.7% over the prior year. Operating margins
outpaced sales growth due to reengineering and cost improvement programs, volume
leverage, and operating improvement at certain underperforming operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash from continuing operating activities was $596.7 million in 1996
compared with $619.0 million in 1995. This change reflects timing differences
with respect to tax payments and receipts and working capital requirements.
In 1996, cash of $200.4 million was generated from the sale of land and
other assets, including a portion of ITT Community Development Corporation and
the ITT General Controls product line. In 1995, the Company realized $12.7
billion of proceeds from the sale of assets at ITT Financial. Proceeds were used
mainly to repay $11.6 billion of indebtedness.
Many of ITT Industries' businesses require substantial investment in plant
and tooling in order to produce their products. Historically, ITT Industries'
businesses have generated sufficient operating cash flow to fund such
investments. Spending on plant additions totaled $406.3 million in 1996,
compared with $449.6 million in 1995 and $407.0 million in 1994. Approximately
63% of the 1996 total was incurred at Automotive for anti-lock braking systems,
including the latest variation of low cost ABS technology, foundation brakes and
brake actuation technology, electrical systems and motors, and facilities in
developing countries, including the Czech Republic and Hungary. At December 31,
1996, contractual commitments have been made for capital expenditures totalling
$199.0 million. Total spending on plant additions in future periods is expected
to approximate 1996 levels. In addition, certain facilities and equipment are
utilized by ITT Industries' businesses through operating leases. Rental expenses
for operating leases in 1996 were $92.8 million. As of December 31, 1996,
minimum rental commitments under operating leases were $108.8 million for 1997,
$95.5 million for 1998, and a total of $209.3 million from 1999 through 2001 and
are expected to be funded through the operating cash flows of ITT Industries.
ITT Industries increased investments in joint ventures in China by $16.7
million in 1996. The Company's acquisition spending in 1995 totaled $15.5
million for a small acquisition at Automotive, and $418.0 million in 1994,
consisting of Automotive's purchase of ESI from General Motors Corporation and
Fluid Technology's acquisition of Richter Chemie-Technik.
ITT Industries' 1997 cash flows after gross plant additions are expected to
be sufficient to cover working capital needs, interest, taxes, and dividends to
shareholders. In 1996, working capital cash requirements increased due primarily
to the reduction of unusually high accounts payable from the prior year and the
build-up of reserve inventory in anticipation of a possible strike (that did not
occur) at one of the Automotive production facilities. Efficiencies in the use
of working capital resulted in a minimal increase in cash requirements in 1995
and 1994 despite substantial sales growth.
External borrowings by ITT Industries were $1.4 billion at December 31,
1996 compared with $1.6 billion at December 31, 1995, and $2.6 billion at
December 31, 1994. The 1994 amount includes $562.1 million of ESOP debt, which
was repaid in 1995, and also reflects allocations of corporate debt between ITT
Industries and Discontinued Operations. Cash and cash equivalents totaled $121.9
million at December 31, 1996 compared with $94.2 million at year-end 1995 and
$322.1 million at year-end 1994.
Shareholders' equity increased $172.5 million in 1996, due primarily to
growth in retained earnings. Excluding the dividend of the Discontinued
Operations, shareholders' equity increased $625.6 million in 1995, due to growth
in retained earnings.
In 1995, the Company terminated the ESOP portion of the ITT Investment and
Savings Plan for Salaried Employees and the trustee of the ESOP completed the
sale of 5.3 million unallocated shares of ITT common stock in the ESOP. The
sales proceeds were used to repay the debt associated with the
17
19
ESOP, which totaled $541.0 million. In addition, proceeds from the sale of ITT
Financial assets were used to repay outstanding borrowings.
In 1995, the Company completed a tender offer for an aggregate $4.1 billion
of its debt securities, with $3.4 billion of the aggregate principal amount of
the securities having been tendered. The premium paid for the securities
tendered resulted in an after tax loss of $307.0 million ($472.3 million
pretax).
The Company uses derivative financial instruments selectively as part of
its financing and risk management strategies. Interest rate risk relative to the
Company's debt portfolio is managed through interest rate swap agreements. The
multinational operations of ITT Industries also create exposure to foreign
currency fluctuation. Foreign currency risk relative to ITT Industries' net
investment in a foreign country, foreign denominated debt, or a specific foreign
denominated transaction, is managed in part through currency swaps and forward
exchange contracts. Foreign currency transaction gains or losses were not
significant in the periods discussed above.
The notional amounts of derivative contracts represent the basis upon which
pay and receive amounts are to be calculated and therefore are not reflective of
credit risk. Credit risk is limited to the amounts calculated to be due or owed
by ITT Industries on such contracts. ITT Industries expects to continue to use
interest rate and currency swaps to reduce its costs of borrowing in the future.
Forward contracts are also used to protect revenues and inventories against
adverse currency fluctuations.
INCOME TAXES
As a global company, ITT Industries provides and pays taxes in numerous
jurisdictions, some of which impose income taxes in excess of equivalent U.S.
domestic rates. Credit for non-U.S. income taxes paid are generally available
against U.S. taxation when earnings are remitted, or deemed to be remitted. In
all years other than 1996, credits for income taxes paid in foreign
jurisdictions were fully utilizable in the United States in the consolidated tax
return of the Company, including Discontinued Operations. After the
Distribution, the full utilization of foreign tax credits was not achievable,
and, to the extent foreign tax credits were not used to reduce the Company's
U.S. tax obligation, a higher effective income tax rate was incurred.
Tax burdens and benefits that relate to periods on or before the
Distribution are shared in accordance with a tax allocation agreement between
the Company, ITT Hartford, and ITT Corporation.
ENVIRONMENTAL MATTERS
ITT Industries is subject to stringent environmental laws and regulations
that affect its operating facilities and impose liability for the clean-up of
past discharges of hazardous substances. In the United States, these laws
include the Federal Clean Water Act, the Clean Air Act, the Resource
Conservation and Recovery Act, and the Comprehensive Environmental Response,
Compensation and Liability Act. The management of ITT Industries believes that
ITT Industries is in substantial compliance with these and all other applicable
environmental requirements. Environmental compliance costs are accounted for
primarily as normal operating expenses. The management of ITT Industries does
not believe that such environmental compliance costs will have a material
adverse effect on ITT Industries' financial position, results of operations, or
cash flows.
In estimating the costs of environmental investigation and remediation, ITT
Industries considers, among other things, regulatory standards, its prior
experience in remediating contaminated sites, and the professional judgment of
environmental experts. It is difficult to estimate the total costs of
investigation and remediation due to various factors, including incomplete
information regarding particular sites and other potentially responsible
parties, uncertainty regarding the extent of contamination and ITT Industries'
share, if any, of liability for such problems, the selection of alternative
remedies, and changes in clean-up standards. When it is possible to create
reasonable estimates of liability with respect to environmental matters, ITT
Industries establishes reserves in accordance with generally accepted accounting
principles. Insurance recoveries are recorded as a reduction of environmental
charges when fixed and determinable and are included in the "Other assets"
caption on the balance sheet. Although the outcome of ITT Industries' various
remediation efforts presently cannot be predicted with a high level of
certainty,
18
20
management does not expect that these matters will have a material adverse
effect on ITT Industries' financial position, results of operations, or cash
flows.
EFFECT OF INFLATION
The rate of inflation has not had a material effect on the revenues or
operating results of ITT Industries during the three most recent fiscal years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ITT INDUSTRIES
The information called for by Item 10 with respect to directors is
incorporated herein by reference to the definitive proxy statement involving the
election of directors filed or to be filed by ITT Industries with the Securities
and Exchange Commission pursuant to Regulation 14A within 120 days after the end
of the fiscal year covered by this Form 10-K.
The information called for by Item 10 with respect to executive officers is
set forth above in Part I under the caption "Executive Officers of ITT
Industries."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. See Index to Consolidated Financial Statements and Schedule
appearing on page F-1 for a list of the financial statements and schedule
filed as a part of this report.
2. See Exhibit Index appearing on pages II-2, II-3 and II-4 for a list
of the exhibits filed or incorporated herein as a part of this report.
(b) There were no reports on Form 8-K filed by ITT Industries during the
last quarter of the period covered by this report.
19
21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
PAGE
----
Report of Management.................................................................. F-2
Report of Independent Public Accountants.............................................. F-3
Consolidated Income Statements for the three years ended December 31, 1996............ F-4
Consolidated Balance Sheets as of December 31, 1996 and 1995.......................... F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1996..... F-6
Consolidated Statements of Retained Earnings, Capital Stock, and Capital Surplus for
the three years ended December 31, 1996............................................. F-7
Notes to Consolidated Financial Statements............................................ F-8
Business Segment Information.......................................................... F-22
Geographical Information.............................................................. F-23
Quarterly Results for 1996 and 1995................................................... F-23
Export Sales.......................................................................... F-24
Valuation and Qualifying Accounts..................................................... S-1
F-1
22
REPORT OF MANAGEMENT
The management of ITT Industries, Inc. is responsible for the preparation
and integrity of the information contained in the consolidated financial
statements and other sections of the Annual Report. The consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and, where necessary, include amounts that are based on management's
informed judgments and estimates. Other information in the Annual Report is
consistent with the consolidated financial statements.
ITT Industries' consolidated financial statements are audited by Arthur
Andersen LLP, independent public accountants, whose appointment is ratified by
the shareholders. Management has made ITT Industries' financial records and
related data available to Arthur Andersen LLP, and believes that the
representations made to the independent public accountants are valid and
complete.
ITT Industries' system of internal controls is a major element in
management's responsibility to assure that the consolidated financial statements
present fairly the Company's financial condition. The system includes both
accounting controls and the internal auditing program, which are designed to
provide reasonable assurance that the Company's assets are safeguarded, that
transactions are properly recorded and executed in accordance with management's
authorization, and that fraudulent financial reporting is prevented or detected.
ITT Industries' internal controls provide for the careful selection and
training of personnel and for appropriate divisions of responsibility. The
controls are documented in written codes of conduct, policies, and procedures
that are communicated to ITT Industries' employees. Management continually
monitors the system of internal controls for compliance. In addition, based upon
management's assessment of risk, operational, financial, and special reviews are
performed by contracted auditors to periodically test the effectiveness of
selected controls. The independent public accountants also evaluate internal
controls and perform tests of procedures and accounting records to enable them
to express their opinion on ITT Industries' consolidated financial statements.
They also make recommendations for improving internal controls, policies, and
practices. Management takes appropriate action in response to each
recommendation.
The Audit Committee of the Board of Directors, composed of non-employee
directors, meets periodically with management and with the independent public
accountants and contracted auditors to evaluate the effectiveness of the work
performed by them in discharging their respective responsibilities.
F-2
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ITT Industries, Inc.:
We have audited the consolidated financial statements of ITT Industries,
Inc. (an Indiana corporation) and subsidiaries as of December 31, 1996 and 1995,
and for each of the three years in the period ended December 31, 1996, as
described in the accompanying Index to Consolidated Financial Statements and
Schedule. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ITT
Industries, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in the accompanying notes to consolidated financial
statements, effective January 1, 1994, the Company changed its methods of
accounting for certain investments in debt and equity securities, workers'
compensation liabilities, and marketing and start-up costs.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
January 28, 1997
F-3
24
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
IN MILLIONS, EXCEPT PER SHARE
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
Net sales........................................................................ $8,718.1 $8,884.2 $7,757.7
Cost of sales.................................................................... 6,948.4 7,155.0 6,189.7
Research, development, and engineering expenses.................................. 535.2 513.9 417.4
-------- -------- --------
Gross margin..................................................................... 1,234.5 1,215.3 1,150.6
Selling, general, and administrative expenses.................................... 739.4 767.6 716.3
Other operating (income) expenses................................................ (13.3) 1.5 16.6
-------- -------- --------
Operating income................................................................. 508.4 446.2 417.7
Interest expense................................................................. (169.0) (175.2) (115.2)
Interest income.................................................................. 32.7 40.0 67.5
Miscellaneous expense, net....................................................... (1.1) (240.1) (20.9)
-------- -------- --------
Income from continuing operations before income tax expense...................... 371.0 70.9 349.1
Income tax expense............................................................... (148.4) (50.2) (147.5)
-------- -------- --------
Income from continuing operations................................................ 222.6 20.7 201.6
Discontinued operations:
Operating income, net of tax of $297.2 and $328.0.............................. -- 590.8 831.4
Gain on sale of ITT Financial operations, net of tax of $263.9................. -- 403.4 --
Extraordinary items, net of tax benefit of $165.3................................ -- (307.0) --
Cumulative effect of accounting changes, net of tax benefit of $8.0.............. -- -- (11.2)
-------- -------- --------
Net income....................................................................... $ 222.6 $ 707.9 $1,021.8
======== ======== ========
EARNINGS (LOSS) PER SHARE
Income from continuing operations
Primary........................................................................ $ 1.85 $ .03 $ 1.46
Fully diluted.................................................................. $ 1.85 $ .09 $ 1.46
Discontinued operations
Primary........................................................................ -- 8.87 7.21
Fully diluted.................................................................. -- 8.45 6.65
Extraordinary items
Primary........................................................................ -- (2.74) --
Fully diluted.................................................................. -- (2.61) --
Cumulative effect of accounting changes
Primary........................................................................ -- -- (.10)
Fully diluted.................................................................. -- -- (.09)
Net income
Primary........................................................................ $ 1.85 $ 6.16 $ 8.57
Fully diluted.................................................................. $ 1.85 $ 5.93 $ 8.02
AVERAGE COMMON EQUIVALENT SHARES -- PRIMARY...................................... 120.4 112.1 115.2
AVERAGE COMMON EQUIVALENT SHARES -- FULLY DILUTED................................ 120.4 117.7 124.9
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-4
25
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
IN MILLIONS, EXCEPT FOR SHARES AND PER SHARE
DECEMBER 31,
---------------------
1996 1995
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents.................................................................. $ 121.9 $ 94.2
Receivables, net........................................................................... 1,189.8 1,256.7
Inventories, net........................................................................... 856.9 908.4
Other current assets....................................................................... 120.5 242.8
-------- --------
Total current assets..................................................................... 2,289.1 2,502.1
Plant, property, and equipment, net.......................................................... 2,166.7 2,235.8
Deferred U.S. income taxes................................................................... 205.1 217.7
Goodwill, net................................................................................ 349.8 362.9
Other assets................................................................................. 480.5 560.7
-------- --------
$5,491.2 $5,879.2
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................................... $ 731.8 $ 781.0
Accrued expenses........................................................................... 874.2 1,072.5
Accrued taxes.............................................................................. 96.8 161.9
Notes payable and current maturities of long-term debt..................................... 835.6 645.5
-------- --------
Total current liabilities................................................................ 2,538.4 2,660.9
Pension liability............................................................................ 780.3 806.1
Postretirement health and life............................................................... 346.4 327.6
Long-term debt............................................................................... 583.2 961.2
Deferred foreign, state and local income taxes............................................... 109.5 121.1
Other liabilities............................................................................ 334.2 375.6
-------- --------
4,692.0 5,252.5
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 118,436,579 shares and 117,068,833 shares.................................... 118.4 117.1
Capital surplus............................................................................ 418.2 398.5
Cumulative translation adjustments......................................................... 111.2 111.1
Retained earnings.......................................................................... 151.4 --
-------- --------
799.2 626.7
-------- --------
$5,491.2 $5,879.2
======== ========
The accompanying notes to consolidated financial statements
are an integral part of the above balance sheets.
F-5
26
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
------- --------- --------
OPERATING ACTIVITIES
Net income...................................................................... $ 222.6 $ 707.9 $1,021.8
Discontinued operations:
Operating income.............................................................. -- (590.8) (831.4)
Gain on sale of ITT Financial operations...................................... -- (403.4) --
Extraordinary items............................................................. -- 307.0 --
Cumulative effect of accounting changes......................................... -- -- 11.2
------- --------- ---------
Income from continuing operations............................................. 222.6 20.7 201.6
Adjustments to income from continuing operations:
Depreciation.................................................................. 399.4 390.3 343.5
Amortization.................................................................. 33.6 32.9 29.5
Reserves for divestments -- pretax............................................ -- 244.9 --
Change in receivables, inventories, accounts payable, and accrued expenses.... (136.5) (6.0) (18.0)
Change in accrued and deferred taxes.......................................... 78.1 30.6 87.0
Other, net.................................................................... (.5) (94.4) (6.6)
------- --------- ---------
Cash from continuing operations................................................. 596.7 619.0 637.0
Cash from (used for) discontinued operations.................................... (123.8) (411.0) 1,152.0
------- --------- ---------
Cash from operating activities................................................ 472.9 208.0 1,789.0
------- --------- ---------
INVESTING ACTIVITIES
Additions to plant, property, and equipment..................................... (406.3) (449.6) (407.0)
Acquisitions.................................................................... -- (15.5) (418.0)
Proceeds from sale of assets.................................................... 200.4 12,675.5 853.0
Other, net...................................................................... (16.7) (2.3) (15.0)
------- --------- ---------
Cash from (used for) investing activities..................................... (222.6) 12,208.1 13.0
------- --------- ---------
FINANCING ACTIVITIES
Short-term debt, net............................................................ (111.4) (803.0) (66.0)
Long-term debt issued........................................................... 1.1 250.0 --
Long-term debt repaid........................................................... (66.5) (342.0) (381.0)
Repayment of ITT Financial obligations.......................................... -- (11,640.0) --
Repurchase of common stock...................................................... (11.4) (35.2) (1,016.0)
Dividends paid.................................................................. (53.4) (193.3) (280.4)
Other, net...................................................................... 31.1 96.8 (3.9)
------- --------- ---------
Cash used for financing activities............................................ (210.5) (12,666.7) (1,747.3)
------- --------- ---------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS.............................. (12.1) 22.7 28.0
------- --------- ---------
Increase (decrease) in cash and cash equivalents................................ 27.7 (227.9) 82.7
Cash and cash equivalents -- beginning of year.................................. 94.2 322.1 239.4
------- --------- ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR........................................ $ 121.9 $ 94.2 $ 322.1
======= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest...................................................................... $ 158.7 $ 147.0 $ 112.0
======= ========= =========
Income taxes.................................................................. $ 37.1 $ 314.0 $ 243.0
======= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-6
27
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS,
CAPITAL STOCK, AND CAPITAL SURPLUS
IN MILLIONS, EXCEPT FOR SHARES AND PER SHARE
RETAINED EARNINGS
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
------ --------- ---------
Balance -- Beginning of Year.................................................... $ -- $ 6,749.3 $ 7,588.0
Net income.................................................................... 222.6 707.9 1,021.8
Dividends declared --
Cumulative preferred stock, net of tax benefit.............................. -- (14.6) (35.5)
Common stock -- $.60, $.99, and $1.98 per share............................. (71.2) (104.6) (227.6)
Common stock of ITT Hartford and ITT Corporation(a)......................... -- (7,338.0) --
Common stock of ITT Rayonier................................................ -- -- (621.0)
Repurchases of common stock................................................... -- -- (976.4)
------ --------- ---------
Balance -- End of Year.......................................................... $151.4 $ -- $ 6,749.3
====== ========= =========
CUMULATIVE
PREFERRED STOCK COMMON STOCK
---------------------- ------------------------ CAPITAL
SHARES AMOUNT SHARES AMOUNT SURPLUS
---------- ------- ------------ ------- -------
Balance -- December 31, 1993........................ 9,581,329 $ 673.2 117,560,877 $ 117.6 $ --
Redemption of ESOP Series preferred stock......... (179,555) (13.4) -- -- --
Stock conversions................................. (99,345) (4.8) 116,428 .1 4.7
Stock incentive plans............................. -- -- 283,463 .3 18.0
Repurchases....................................... -- -- (12,288,516) (12.3) (22.7)
--------- ------- ----------- ------- -------
Balance -- December 31, 1994........................ 9,302,429 655.0 105,672,252 105.7 --
Redemption of ESOP Series preferred stock......... (120,652) (9.0) -- -- (10.2)
Conversion of ESOP Series preferred stock......... (8,636,231) (644.2) 9,660,766 9.7 634.5
Stock conversions................................. (522,647) (1.8) 661,671 .7 1.1
Stock redemption.................................. (22,899) -- -- -- (1.9)
Stock incentive plans............................. -- -- 1,451,346 1.4 123.9
Repurchases....................................... -- -- (377,202) (.4) (34.8)
Distribution of ITT Hartford and ITT
Corporation(a).................................. -- -- -- -- (314.1)
--------- ------- ----------- ------- -------
Balance -- December 31, 1995........................ -- -- 117,068,833 117.1 398.5
Stock incentive plans............................. -- -- 1,889,878 1.8 31.7
Repurchases....................................... -- -- (522,132) (.5) (12.0)
--------- ------- ----------- ------- -------
Balance -- December 31, 1996........................ -- $ -- 118,436,579 $ 118.4 $ 418.2
========= ======= =========== ======= =======
- ---------------
(a) Dividend of ITT Hartford and ITT Corporation was applied against retained
earnings to the extent available and then against capital surplus.
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-7
28
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
1. DISTRIBUTION OF ITT CORPORATION AND ITT HARTFORD
On December 19, 1995, ITT Corporation, a Delaware corporation ("ITT
Delaware") made a distribution (the "Distribution") to its shareholders
consisting of all the shares of common stock of ITT Destinations, Inc., a Nevada
corporation which held ITT Delaware's interests in the hospitality,
entertainment, and information services businesses ("ITT Destinations") and all
the shares of common stock of ITT Hartford Group, Inc., a Delaware corporation
and a wholly-owned subsidiary which held ITT Delaware's interests in the
insurance businesses ("ITT Hartford"). Effective December 20, 1995, pursuant to
a statutory merger, ITT Delaware merged into ITT Industries, Inc. an Indiana
Corporation ("ITT Industries"), with ITT Industries as the surviving corporation
(the "Company"), and ITT Destinations then changed its name to ITT Corporation.
For purposes of these consolidated financial statements, all references to ITT
Corporation and ITT Hartford include those companies, their subsidiaries,
affiliated companies and other assets and liabilities that were transferred to
those companies.
In the accompanying consolidated financial statements for all periods
presented, ITT Corporation, ITT Hartford, and other previously discontinued
operations of the Company are reported as Discontinued Operations.
2. ACCOUNTING POLICIES
Consolidation Principles: The consolidated financial statements are
prepared in accordance with generally accepted accounting principles and include
the accounts of all majority-owned subsidiaries. All significant intercompany
transactions have been eliminated.
Revenue Recognition: The Company recognizes sales as products are shipped
to customers. Sales from long-term contracts are recognized on the percentage of
completion method, generally based on the ratio of units delivered to total
units. Expected losses on long-term contracts are recognized currently.
Research and Development: Significant costs are incurred each year in
connection with research, development, and engineering programs that are
expected to contribute to future earnings. Such costs are charged to income as
incurred except to the extent recoverable under existing contracts.
Approximately 50% was expended pursuant to customer contracts for each of the
three years ended December 31, 1996.
Cash and Cash Equivalents: The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Inventories: Inventories are generally valued at the lower of cost
(first-in, first-out) or market. A full absorption procedure is employed using
standard cost techniques. The standards are customarily reviewed and adjusted
annually. Potential losses from obsolete and slow-moving inventories are
provided for in the current period.
Plant, Property, and Equipment: Plant, property, and equipment, including
capitalized interest applicable to major project expenditures, are recorded at
cost. The Company normally claims the maximum depreciation deduction allowable
for tax purposes. In general, for financial reporting purposes, depreciation is
provided on a straight-line basis over the useful economic lives of the assets
involved as follows: buildings and improvements -- 5 to 40 years, machinery and
equipment -- 2 to 10 years and other -- 5 to 40 years. Gains or losses on sale
or retirement of assets are included in income. Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability is assessed using
undiscounted cash flows. Based upon the Company's review, no impairment has
occurred as of December 31, 1996.
Goodwill: The excess of cost over the fair value of net assets acquired is
amortized on a straight-line basis over 40 years. Accumulated amortization was
$43.2 and $32.0 at December 31, 1996 and 1995, respectively. The Company
continually reviews goodwill to assess recoverability from future
F-8
29
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
operations using undiscounted cash flows. Based upon the Company's review, no
impairment has occurred as of December 31, 1996.
Foreign Currency Translation: Balance sheet accounts are translated at the
exchange rate in effect at each year-end and income accounts are translated at
the average rates of exchange prevailing during the year. The national
currencies of the foreign companies are generally the functional currencies.
Gains (losses) from foreign currency transactions are reported currently in
other operating expenses and were $5.8, $(4.5), and $3.7 in 1996, 1995, and
1994, respectively.
Derivative Financial Instruments: The Company uses a variety of derivative
financial instruments, including interest rate swaps and foreign currency
forward contracts and/or swaps as a means of hedging exposure to interest rate
and foreign currency risks. The Company and its subsidiaries do not utilize
these instruments for speculative purposes.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net payments are generally
recognized as an adjustment to income. Should the swap be terminated, unrealized
gains or losses are generally deferred and amortized over the shorter of the
remaining original term of the hedging instrument or the remaining life of the
underlying debt instrument.
Foreign exchange contracts and foreign currency swaps are accounted for as
hedges to the extent they are designated as, and are effective as, hedges of
firm foreign currency commitments. Other such foreign exchange contracts and
swaps are marked to market on a current basis.
Environmental Remediation Costs: Accruals for environmental matters are
recorded on a site by site basis when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated, based on
current law and existing technologies. The Company's estimated liability is
reduced to reflect the anticipated participation of other potentially
responsible parties in those instances where it is probable that such parties
are legally responsible and financially capable of paying their respective
shares of the relevant costs. These accruals are adjusted periodically as
assessment and remediation efforts progress or as additional technical or legal
information becomes available. Actual costs to be incurred at identified sites
in future periods may vary from the estimates, given inherent uncertainties in
evaluating environmental exposures. Accruals for environmental liabilities are
generally included in the balance sheet as "Other liabilities" at undiscounted
amounts and exclude claims for recoveries from insurance or other third parties.
Accruals for insurance or other third party recoveries are recorded as "Other
assets" when it is probable that a claim will be realized.
Earnings Per Share: Fully diluted earnings per share is based on the
weighted average of common stock and common stock equivalents which include
stock options. The proceeds received upon exercise of the options will be used
to acquire common stock of the Company. Fully diluted earnings per share, in
1995 and 1994, also reflects the conversion of convertible preferred stock,
including the ESOP Series. Net income applicable to fully diluted earnings per
share consists of reported net income or loss adjusted, in 1995 and 1994, for
the amount, net of tax, that the Company would have to pay, in excess of common
stock dividends, to extinguish the related ESOP debt.
Primary earnings per share is based on the weighted average of common stock
and common stock equivalents. Net income applicable to primary earnings per
share consists of reported net income adjusted, in 1995 and 1994, for dividend
requirements on preferred stock not considered common stock equivalents, net of
the related tax benefits. The ESOP was terminated in 1995 and all ESOP series
preferred stock was converted to shares of the Company's common stock (see
"EMPLOYEE BENEFIT PLANS").
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from these estimates.
F-9
30
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
Reclassifications: Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform with the current year
presentation.
3. CHANGES IN ACCOUNTING PRINCIPLES
In 1994, the Company made several accounting changes, all of which were
included in cumulative effect of accounting changes and related solely to
Discontinued Operations. During the first quarter of 1994, the Company adopted
Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities". Under SFAS 115, the
Company's portfolios were classified as "available for sale" and accordingly,
investments were reflected at fair value with the corresponding impact included
as a component of shareholders' equity.
The amortized cost basis of mortgage-backed interest-only investments that
were determined to have other-than-temporary impairment losses at the time of
initial adoption of SFAS 115 was written down to fair value. The writedown
totaled $36.5 after tax or $.29 per fully diluted share.
Also in the first quarter of 1994, the Company changed its method used to
discount long-term tabular workers' compensation liabilities from a statutory
interest rate to an appropriate market interest rate. A benefit of $42.2 after
tax or $.33 per fully diluted share was recorded.
During the fourth quarter of 1994, the Company changed its method of
accounting to expense certain marketing and start-up costs at ITT Educational
Services, which had previously been deferred and amortized. A charge of $16.9
after tax or $.13 per fully diluted share was recorded.
The Company's cash flows were not impacted by these changes in accounting
principles.
4. RECEIVABLES
Receivables consist of the following:
DECEMBER 31,
---------------------
1996 1995
-------- --------
Trade................................................................................ $1,194.3 $1,254.0
Accrued for completed work........................................................... 32.5 42.0
Less -- reserves..................................................................... (37.0) (39.3)
-------- --------
$1,189.8 $1,256.7
======== ========
5. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
---------------------
1996 1995
-------- --------
Finished goods....................................................................... $ 401.6 $ 417.1
Work in process...................................................................... 434.7 421.1
Raw materials........................................................................ 301.2 333.4
Less -- reserves..................................................................... (81.6) (85.3)
-- progress payments............................................................. (199.0) (177.9)
-------- --------
$ 856.9 $ 908.4
======== ========
6. OTHER CURRENT ASSETS
At December 31, 1996, other current assets consist primarily of advance
payments on contracts and prepaid expenses. At December 31, 1995, other current
assets consist mainly of tax refund claims, advance payments on contracts, and
other prepaid expenses.
F-10
31
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
7. PLANT, PROPERTY, AND EQUIPMENT
Plant, property, and equipment consist of the following:
DECEMBER 31,
-----------------------
1996 1995
--------- ---------
Land and improvements.............................................................. $ 101.7 $ 116.2
Buildings and improvements......................................................... 807.7 887.3
Machinery and equipment............................................................ 3,448.7 3,423.7
Construction work in progress...................................................... 264.5 296.8
Other.............................................................................. 469.2 331.4
---------- ----------
5,091.8 5,055.4
Less -- accumulated depreciation and amortization.................................. (2,925.1) (2,819.6)
---------- ----------
$ 2,166.7 $ 2,235.8
========== ==========
8. OTHER ASSETS
At December 31, 1996, other assets consist primarily of prepaid pension and
employee benefit plan costs, equity investments, and expected recoveries from
third parties in relation to environmental and other claims. At December 31,
1995, other assets consist mainly of prepaid pension and employee benefit plan
costs, equity investments, tax refund claims, and expected recoveries from third
parties in relation to environmental and other claims.
9. INCOME TAX
Income tax data from continuing operations is as follows:
1996 1995 1994
------ ------ -------
Pretax income
U.S........................................................................ $141.2 $(81.5) $ 186.2
Foreign.................................................................... 229.8 152.4 162.9
------ ------ -------
$371.0 $ 70.9 $ 349.1
====== ====== =======
Provision (benefit) for income tax
Current
U.S. Federal............................................................... $ 55.8 $ 9.3 $ 170.4
State and local............................................................ 5.4 7.9 2.9
Foreign.................................................................... 88.9 37.5 83.7
------ ------ -------
150.1 54.7 257.0
------ ------ -------
Deferred
U.S. Federal............................................................... (2.1) (28.0) (98.0)
State and local............................................................ (.3) .1 (.7)
Foreign and other.......................................................... .7 23.4 (10.8)
------ ------ -------
(1.7) (4.5) (109.5)
------ ------ -------
Total income tax expense..................................................... $148.4 $ 50.2 $ 147.5
====== ====== =======
F-11
32
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
A reconciliation of the tax provision at the U.S. statutory rate to the
effective income tax expense rate as reported is as follows:
1996 1995 1994
---- ---- ----
Tax provision at U.S. statutory rate............................................... 35.0% 35.0% 35.0%
Foreign tax rate differential...................................................... 2.5 3.5 4.0
Taxes on repatriation of foreign earnings.......................................... 3.1 26.5 2.7
State income taxes, net of Federal benefit......................................... .9 7.3 .4
Other.............................................................................. (1.5) (1.5) .2
---- ---- ----
Effective income tax expense rate.................................................. 40.0% 70.8% 42.3%
==== ==== ====
Deferred income taxes are established for all temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and for tax purposes. The December 31, 1996 and 1995 balance sheets include net
U.S. Federal deferred tax assets of $205.1 and $217.7, respectively, and net
foreign and other deferred tax liabilities of $(109.5) and $(121.1),
respectively.
Deferred tax assets (liabilities), for which no valuation allowances have
been provided, include the following:
DECEMBER 31,
-------------------------------------------
1996 1995
------------------- -------------------
U.S. FOREIGN U.S. FOREIGN
FEDERAL & OTHER FEDERAL & OTHER
------- ------- ------- -------
Employee benefits.............................................. $120.9 $ 31.4 $119.4 $ 29.9
Accelerated depreciation....................................... (41.7) (153.7) (42.2) (172.1)
Reserves....................................................... 87.0 16.3 120.4 40.2
Long-term contracts............................................ 14.9 -- 11.1 --
Uniform capitalization......................................... 12.6 -- 15.5 --
Other.......................................................... 11.4 (3.5) (6.5) (19.1)
------ ------- ------ -------
$205.1 $(109.5) $217.7 $(121.1)
====== ======= ====== =======
No provision was made for U.S. taxes payable on accumulated undistributed
foreign earnings of approximately $549.4 since these amounts are permanently
reinvested.
As of December 31, 1996, the company has approximately $7.2 of foreign tax
credit carryforwards available to reduce future tax liabilities. These credits
will expire December 31, 2001.
Shareholders' equity at December 31, 1996 and 1995 reflects tax benefits
related to the exercise of stock options of approximately $5.7 and $22.5,
respectively.
10. DEBT
Debt consists of the following:
DECEMBER 31,
---------------------
1996 1995
-------- --------
Commercial paper..................................................................... $ -- $ 295.0
Bank loans and other short-term...................................................... 488.1 171.9
Long-term............................................................................ 930.7 1,139.8
-------- --------
1,418.8 1,606.7
Less -- current maturities........................................................... (835.6) (645.5)
-------- --------
$ 583.2 $ 961.2
======== ========
The weighted average interest rate for bank loans and other short-term
borrowings was 3.69% and 5.39% at December 31, 1996 and 1995, respectively. The
weighted average interest rate for commercial paper was 5.76% at December 31,
1995. The fair value of the Company's commercial paper and bank
F-12
33
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
loans and other short-term loans approximates carrying value. The estimated fair
value of long-term debt at December 31, 1996 and 1995 was $989.9 and $1.2
billion, respectively, based on discounted cash flows using the Company's
incremental borrowing rates for similar arrangements. The Company maintains a
revolving credit agreement which expires in November, 2000, with sixty-one
domestic and foreign banks providing aggregate commitments of $1.5 billion.
These commitments, which were unused at December 31, 1996, were made to ITT
Industries and certain of its subsidiaries and are intended to assure their
working capital needs and for general corporate purposes. The interest rate for
borrowings under these agreements is generally based on the London Interbank
Offered Rate (LIBOR), plus a spread dependent on the Company's debt rating. The
provisions of these agreements require the Company to maintain certain financial
ratios and restrict indebtedness. Commitment fees on these revolving credit
agreements range from .060% to .150% of the total commitment, based on the
Company's current debt ratings.
Long-term debt maturities and interest rate percentages as of December 31,
1996 were:
BELOW 6.0- 7.0- 8.0- 9.0- OVER
6.0 6.99 7.99 8.99 9.99 10.0 TOTAL
----- ------ ------ ------ ----- ------ --------
1997................................. $6.5 $ 16.5 $157.1 $ 28.1 $26.1 $109.4 $ 343.7
1998................................. 1.4 26.4 .2 36.0 -- -- 64.0
1999................................. 1.2 15.8 -- .1 -- 29.9 47.0
2000................................. .7 -- -- .1 -- -- .8
2001................................. .1 58.6 -- 13.4 18.5 -- 90.6
Thereafter........................... .7 75.6 286.5 41.3 31.9 -- 436.0
----- ------ ------ ------ ----- ------ --------
Total -- 1996........................ $10.6 $192.9 $443.8 $119.0 $76.5 $139.3 $ 982.1
===== ====== ====== ====== ===== ====== ========
Total -- 1995........................ $64.9 $209.5 $476.6 $220.8 $81.8 $156.8 $1,210.4
===== ====== ====== ====== ===== ====== ========
The above balances as of December 31, 1996 and 1995 include amortizable
debt discounts of $51.4 and $70.6, respectively. Assets pledged to secure
indebtedness (including mortgage loans) amount to approximately $15.7 as of
December 31, 1996.
11. EARLY EXTINGUISHMENT OF DEBT
In 1995, the Company announced the completion of a tender offer for an
aggregate of $4.1 billion of its debt securities, with $3.4 billion, or 82% of
the aggregate principal amount, having been tendered. The tender offer was
financed with the proceeds of commercial paper borrowings of approximately $3.7
billion. The tender offer resulted in the Company paying a tender premium of
$307.0 after tax ($472.3 pretax) or $2.61 per fully diluted share in the third
quarter of 1995. This charge was recorded as an extraordinary loss on the early
extinguishment of debt.
12. CAPITAL STOCK
ITT Industries has authority to issue an aggregate of 250,000,000 shares of
capital stock, of which 200,000,000 have been designated as "Common Stock"
having a par value of $1 per share and 50,000,000 have been designated as
"Preferred Stock" not having any par or stated value. Of the shares of Preferred
Stock, 300,000 shares have initially been designated as "Series A Participating
Cumulative Preferred Stock" (the "Series A Stock"). Such Series A Stock is
issuable pursuant to the provisions of a Rights Agreement dated as of November
1, 1995 between ITT Industries and The Bank of New York, as Rights Agent (the
"Rights Agreement"). Capitalized terms herein not otherwise defined are as
defined in the Rights Agreement.
The rights issued pursuant to the Rights Agreement (the "Rights") are
currently attached to, and trade with, the Common Stock. The Rights Agreement
provides, among other things, that if any person acquires more than 15% of the
outstanding Common Stock, the Rights will entitle the holders other than the
Acquiring Person (or its Affiliates or Associates) to purchase Series A Stock at
a significant discount
F-13
34
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
to its market value. Rights beneficially owned by the Acquiring Person,
including one of its Affiliates or Associates, become null and void and
nontransferable. Rights generally are exercisable at any time after the
Distribution Date and at or prior to the earlier of the 10th anniversary of the
date of the Rights Agreement or the Redemption Date. The Company may, subject to
certain exceptions, redeem the Rights as provided for in the Rights Agreement.
Each 1/1,000th of a share of Series A Stock would be entitled to vote and
participate in dividends and certain other distributions on an equivalent basis
with one share of Common Stock.
During 1996, an independent agent purchased 522,132 shares of Common Stock
at then market prices to satisfy stock option exercises. In 1995, the Company
repurchased 377,202 common shares for $35.2. During 1994, the Company
repurchased 12,288,516 common shares for $1.0 billion. The excess over par value
was charged to capital surplus to the extent available and then to retained
earnings. The 1995 and 1994 common shares were repurchased under a systematic
stock repurchase program implemented in 1994.
At December 31, 1994, there were 8,756,883 shares of ESOP series preferred
stock outstanding with a stated value of $653.2. In 1995, the Company terminated
the ESOP portion of the Company's Investment and Savings Plan and the trustee of
the ESOP converted the preferred stock held by the trustee to 9,660,766 shares
of the Company's common stock.
At December 31, 1994, there were 545,546 Series N preferred shares
outstanding which were redeemed in 1995.
As of December 31, 1996, 26,711,429 shares of Common Stock were held in
treasury.
13. FOREIGN CURRENCY
Translation adjustments recorded as a separate component of shareholders'
equity were:
DECEMBER 31,
------------------------------
1996 1995 1994
------ ------- -------
Balance -- Beginning of year................................................ $111.1 $(112.7) $(205.9)
Translation of foreign currency financial statements...................... (11.7) 30.8 110.1
Hedges of net foreign investments......................................... 11.8 (1.0) (16.9)
Distribution of ITT Corporation and ITT Hartford.......................... -- 194.0 --
------ ------- -------
Balance -- End of year...................................................... $111.2 $ 111.1 $(112.7)
====== ======= =======
14. LEASES AND RENTALS
As of December 31, 1996, minimum rental commitments under operating leases
were $108.8, $95.5, $82.5, $67.1, and $59.7 for 1997 through 2001, respectively.
For the remaining years, such commitments amounted to $94.7, aggregating total
minimum lease payments of $508.3.
Rental expenses under operating leases were $92.8, $86.9, and $73.8 for
1996, 1995, and 1994, respectively.
15. MISCELLANEOUS EXPENSE
Miscellaneous expense includes the following:
1996 1995 1994
------ ------- -------
Provision for loss on disposition of businesses............................. $ -- $(235.5) $ (17.7)
Other expense............................................................... (1.1) (4.6) (3.2)
------ ------- -------
$ (1.1) $(240.1) $ (20.9)
====== ======= =======
F-14
35
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
16. EMPLOYEE BENEFIT PLANS
Pension Plans: The Company and its subsidiaries sponsor numerous pension
plans. The Company funds employee pension benefits, except in some countries
outside the U.S. where funding is not required. The plans' assets are comprised
of a broad range of domestic and foreign securities, fixed income investments,
and real estate.
Total pension expense for 1996, 1995, and 1994 was:
1996 1995 1994
------- ------- -------
Defined Benefit Plans
Service cost............................................................. $ 68.4 $ 68.0 $ 78.2
Interest cost............................................................ 239.1 239.7 218.4
Return on assets
Actual................................................................. (387.2) (425.7) (44.2)
Deferred............................................................... 176.8 222.9 (150.9)
Net amortization......................................................... 27.3 5.4 20.5
------ ------- -------
Net periodic pension cost................................................ 124.4 110.3 122.0
Other.................................................................... 3.9 4.0 3.8
------ ------- -------
Total pension expense...................................................... $ 128.3 $ 114.3 $ 125.8
====== ======= =======
U.S. pension expense included in the net periodic pension cost in the table
above was $58.4, $42.7, and $60.0 for 1996, 1995, and 1994, respectively.
The following table sets forth the funded status of the Company's pension
plans, amounts recognized in the Company's balance sheets, and the principal
weighted average assumptions inherent in their determination:
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- --------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- ------- -------- -------
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $2,190.7 $ 799.8 $2,152.7 $ 829.0
======== ======= ======== =======
Accumulated benefit obligation............................ $2,303.1 $ 826.8 $2,265.6 $ 858.8
======== ======= ======== =======
Projected benefit obligation................................ $2,462.7 $ 851.0 $2,424.4 $ 936.5
Plan assets at fair value................................... 2,441.8 183.3 2,242.9 193.2
-------- ------- -------- -------
Projected benefit obligation in excess
of plan assets............................................ (20.9) (667.7) (181.5) (743.3)
Unrecognized net (gain)/loss................................ 132.9 (58.7) 321.1 (8.6)
Unrecognized net (asset)/obligation......................... (17.2) 24.6 (26.1) 31.2
-------- ------- -------- -------
Pension asset (liability) recognized in the balance sheet
(net)..................................................... $ 94.8 $(701.8) $ 113.5 $(720.7)
======== ======= ======== =======
Discount rate............................................... 7.75% 7.29% 7.50% 7.66%
Rate of return on invested assets........................... 9.75% 9.33% 9.75% 9.22%
Salary increase assumption.................................. 5.00% 2.91% 5.00% 4.23%
For substantially all domestic plans, assets exceed accumulated benefits,
and for the larger foreign plans, accumulated benefits exceed the related
assets.
Savings Plans: The Company sponsors numerous savings plans which allow
employees to contribute a portion of their pretax and/or after-tax income in
accordance with specified guidelines. Several of the plans require the Company
to match a percentage of the employee contributions up to certain limits.
Matching contributions charged to income amounted to $16.7, $14.7, and $14.0 for
the years ended 1996, 1995, and 1994, respectively.
The ITT Investment and Savings Plan for Salaried Employees (the "Plan")
included an Employee Stock Ownership Plan ("ESOP") feature. In connection with
the Distribution, the Company terminated
F-15
36
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
the ESOP portion of the Plan. As a result of the termination, in 1995, the
trustee of the ESOP converted the preferred stock held by the trustee to Company
common stock. The trustee then completed the sale of 5.3 million shares into the
open market. The sales proceeds were used to repay the debt associated with the
ESOP and the remainder was allocated pro rata to participants in the Plan. The
Company changed the name of the Plan to the ITT Industries Investment and
Savings Plan for Salaried Employees and transferred the balances related to
employees of ITT Corporation and ITT Hartford to plans created by those
companies.
Postretirement Health and Life: The Company and its subsidiaries provide
health care and life insurance benefits for certain eligible retired employees.
The Company has prefunded a portion of the health care and life insurance
obligations through trust funds where such prefunding can be accomplished on a
tax effective basis. The plan's assets are comprised of a broad range of
domestic and foreign securities, fixed income investments, and real estate.
Postretirement health care and life insurance benefits expense was comprised of
the following in 1996, 1995, and 1994:
1996 1995 1994
------ ------ ------
Service cost.................................................................. $ 10.4 $ 8.3 $ 8.5
Interest cost................................................................. 34.9 31.9 29.5
Return on assets
Actual...................................................................... (19.8) (29.7) 2.7
Deferred.................................................................... 5.7 17.9 (13.7)
Net amortization.............................................................. (4.7) (6.1) (4.3)
----- ----- -----
Net postretirement benefit expense.......................................... 26.5 22.3 22.7
Gains from curtailments....................................................... (5.3) -- --
----- ----- -----
Net expense................................................................... $ 21.2 $ 22.3 $ 22.7
===== ===== =====
The following table sets forth the funded status of the postretirement
benefit plans other than pensions, amounts recognized in the Company's balance
sheet, and the principal weighted average assumptions inherent in their
determination:
DECEMBER 31,
-------------------
1996 1995
------- -------
Accumulated postretirement benefit obligation......................................... $ 480.7 $ 440.3
Plan assets at fair value............................................................. 163.0 150.2
------- -------
Accumulated postretirement benefit obligation in excess of plan assets................ (317.7) (290.1)
Unrecognized net (gain)/loss.......................................................... 5.8 (1.0)
Unrecognized past service liability................................................... (34.5) (36.5)
------- -------
Liability recognized in the balance sheet............................................. $(346.4) $(327.6)
======= =======
Discount rate......................................................................... 7.75% 7.50%
Rate of return on invested assets..................................................... 9.75% 9.75%
Ultimate health care trend rate....................................................... 6.00% 6.00%
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 9.3% for 1996, decreasing ratably to 6.0% in
the year 2001. Increasing the table of health care trend rates by one percent
per year would have the effect of increasing the accumulated postretirement
benefit obligation by $46.6 and the annual expense by $5.5. To the extent that
the actual experience differs from the inherent assumptions, the effect will be
amortized over the average future service of the covered active employees.
F-16
37
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
17. DISCONTINUED OPERATIONS
Summarized income statement data for ITT Corporation and ITT Hartford is as
follows (data for 1995 reflects earnings through December 19, 1995, and for
1994, reflects earnings for the full year):
ITT CORPORATION
1995 1994
--------- ---------
Revenues........................................................................... $ 6,154.7 $ 4,760.3
Operating income................................................................... 602.0 292.6
Income before cumulative effect of accounting changes.............................. 154.8 74.1
ITT HARTFORD
1995 1994
--------- ---------
Revenues........................................................................... $11,726.7 $11,102.2
Operating income................................................................... 692.7 852.3
Income before cumulative effect of accounting changes.............................. 535.2 632.0
Company interest expense was allocated to Discontinued Operations based
upon the amount of debt to be repaid with the proceeds from those operations or
refinanced by those operations. In addition, results of Discontinued Operations
included $109.2 of legal and advisory fees, taxes, and other costs related to
the Distribution and $39.0 after tax of severance and other costs related to the
restructuring of the Company's headquarters operations in connection with the
Distribution.
As a result of the Distribution, the Discontinued Operations were not
included in the consolidated Federal income tax return of ITT Industries after
December 19, 1995. The allocation of the tax burdens and benefits, which
occurred on or prior to December 19, 1995, were determined in accordance with a
tax allocation agreement between the Company, ITT Hartford, and ITT Corporation.
In 1995, gross proceeds totalling $12.7 billion were realized from the sale
of the businesses comprising ITT Financial. Proceeds from these transactions
were used primarily to repay ITT Financial debt. The Company recognized an after
tax gain of $403.4 ($667.3 pretax) or $3.44 per fully diluted share in the
second quarter of 1995, including a provision for the remaining asset sales and
closedown costs of ITT Financial.
Summarized income statement data is as follows:
1995 1994
------ --------
Revenues.............................................................................. $476.3 $1,451.8
Operating income...................................................................... 79.8 162.5
Income before cumulative effect of accounting changes................................. 49.0 113.6
Gain on sale, net of tax.............................................................. 403.4 --
On February 28, 1994, all of the shares of common stock of ITT Rayonier,
ITT Delaware's wholly-owned Forest Products subsidiary (approximately 29.6
million shares) were distributed to holders of Company common stock and holders
of Company cumulative preferred stock, $2.25 Convertible Series N, on the basis
of one share of Rayonier common stock for every four shares of Company common
stock held and one share of Rayonier common stock for every 3.1595 shares of
Company Series N held. Sales and income from Rayonier operations totaled $147.0
and $11.7, respectively, for the two months ended February 28, 1994.
18. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses a variety of derivative financial instruments, including
interest rate swaps and foreign currency forward contracts and/or swaps as a
means of hedging exposure to interest rate and foreign currency risks.
F-17
38
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
The Company's credit risk associated with these interest rate and foreign
exchange contracts is generally limited to the unrealized gain on those
contracts with a positive fair value, reduced by the effects of master netting
agreements, should any counterparty fail to perform as contracted. The
counterparties to the Company's derivative contracts consist of a number of
major international financial institutions. The Company continually monitors its
positions with, and the credit quality of, these financial institutions and does
not expect non-performance by any counterparty.
Financing Strategies and Interest Rate Risk Management: ITT Industries
maintains a global debt portfolio to fund its operations. The Company and its
subsidiaries use interest rate swaps and cross currency interest rate swaps in
order to effectively manage the Company's debt portfolio and related financing
costs.
At December 31, 1996, the Company held interest rate swaps with notional
principal values totaling 410 million Deutsche marks. These swaps, with original
maturities ranging from 1998 to 2000, require the Company to pay fixed rates
averaging approximately 6.8% and receive floating rates based on German LIBOR,
which averaged approximately 3.2% and 4.1% at December 31, 1996 and 1995,
respectively. Certain of these swaps, with notional principal values totaling
260 million Deutsche marks, have been recorded at fair value as they are no
longer effective as hedges. These swaps will be terminated in 1997.
The cross currency interest rate swaps, with notional values totalling
approximately $506 and maturities ranging from one year to twenty-five years,
effectively convert specific long-term U.S. dollar denominated fixed rate
borrowings with an average interest rate of approximately 8.9% to equivalent
Deutsche mark denominated variable rate debt (based on German LIBOR) with an
average interest rate of approximately 6.2% on December 31, 1996.
Foreign Currency Risk Management: ITT Industries has significant foreign
operations and conducts business in various foreign currencies. ITT Industries
and its subsidiaries may periodically hedge net investments in currencies other
than their own functional currency, and contractual non-functional currency cash
flows and obligations, including intercompany financings. ITT Industries
regularly monitors its foreign currency exposures and ensures that hedge
contract amounts do not exceed the amounts of the underlying exposures.
At December 31, 1996, ITT Industries held foreign currency forward and swap
contracts with notional amounts totalling approximately $1.2 billion to hedge
foreign currency exposures. Approximately $.9 billion of these contracts
represent cross currency contracts to sell one foreign currency for another
foreign currency. The Company's most significant foreign currency exposures are
in Belgian francs and German marks. These contracts all have maturities prior to
July 31, 1998, with the majority of the contracts maturing within one year.
Fair Value of Derivative Financial Instruments: The fair values of the
Company's derivative financial instruments are as follows:
(PAYABLE)/RECEIVABLE
-------------------------------------------
DEC. 31, 1996 DEC. 31, 1995
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
Interest rate swaps................................................ $(13.3) $(22.4) $ -- $(22.3)
Cross currency interest rate swaps................................. $ 11.0 $ 13.5 $ -- $ --
Currency swaps/forwards............................................ $(12.0) $(15.2) $(30.8) $(41.3)
====== ====== ====== ======
The following method and assumptions were used to estimate the fair value
of these derivative financial instruments:
Currency and Interest Rate Swap Agreements: The fair value of currency and
interest rate swap agreements is estimated based on quotes from the market
makers of these instruments and represents
F-18
39
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
the estimated amounts that the Company would expect to receive or pay to
terminate the agreements at the reporting date.
Foreign Exchange Contracts: The fair value associated with the foreign
currency contracts has been estimated by valuing the net position of the
contracts using the applicable spot rates and forward rates as of the reporting
date.
19. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in various legal actions
including those related to government contracts and environmental matters. Some
of these actions include claims for substantial amounts. Reserves have been
established where the outcome is probable and can be reasonably estimated. While
the ultimate result of these legal actions and related claims cannot be
determined, the Company does not expect that they will have a material adverse
effect on its consolidated financial position, results of operations, or cash
flows.
In the ordinary course of business, and similar to other industrial
companies, ITT Industries is subject to extensive and changing federal, state,
local, and foreign environmental laws and regulations. As of December 31, 1996,
ITT Industries or its subsidiaries are responsible, or are alleged to be
responsible for environmental investigation and remediation at sites in North
America and Europe. ITT Industries has received notice that it is considered a
potentially responsible party ("PRP") at a number of those sites by the United
States Environmental Protection Agency ("EPA") and/or a similar state agency
under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"or "Superfund") or its state equivalent. In many of these proceedings,
ITT Industries' liability is considered de minimis. In Glendale, California, ITT
Industries is involved in an EPA administrative proceeding relating to the San
Fernando Valley aquifer. ITT Industries is one of numerous PRP's who is alleged
by the EPA to have contributed to the contamination of the aquifer. Currently,
ITT Industries is involved in an allocation among the PRP's to fund the clean-up
required by the EPA. ITT Industries has filed a suit against its insurers for
recovery of the costs it has incurred in connection with this and other
environmental matters.
The Company has accrued for environmental remediation costs associated with
identified sites consistent with the policy set forth in the "Accounting
Policies". In management's opinion, the total amounts accrued and related
receivables are appropriate based on existing facts and circumstances. It is
difficult to estimate the total costs of investigation and remediation due to
various factors, including incomplete information regarding particular sites and
other potentially responsible parties, uncertainty regarding the extent of
contamination and ITT Industries' share, if any, of liability for such problems,
the selection of alternative remedies, and changes in clean-up standards. In the
event that future remediation expenditures are in excess of amounts accrued,
management does not anticipate that they will have a material adverse effect on
the consolidated financial position, results of operations, or liquidity of the
Company.
20. STOCK INCENTIVE PLANS
The Company's stock option incentive plans provide for the awarding of
options on common shares to employees, exercisable over ten-year periods.
Certain options become exercisable upon the attainment of specified market price
appreciation of the Company's common shares or at nine years after the date of
grant. Other options become exercisable upon the earlier of the attainment of
specified market price appreciation of the Company's common shares or over a
three-year period commencing with the date of grant. The remaining options
become exercisable over a three-year period commencing with the date of the
grant. The exercise price per share is the fair market value on the date each
option is granted. During 1996, the Company made shares available for the
exercise of stock options from shares held by the Company in treasury and from
purchasing shares in the open market. Management's current intention is to make
shares available for the exercise of stock options by purchasing shares in the
open market.
F-19
40
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
A summary of the status of the Company's stock option incentive plans as of
December 31, 1996, 1995, and 1994, and changes during the years then ended is
presented below (shares in thousands):
1996 1995 1994
------------------------- ------------------------- -------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------- ---------------- ------- ----------------
Outstanding at beginning of
year........................... 11,619 $15.76 5,588 $ 73.60 3,514 $71.60
Granted.......................... 2,114 25.32 2,148 108.07 2,212 84.14
Exercised........................ (1,879) 15.08 (1,478) 66.47 (260) 49.66
Canceled or expired.............. (90) 24.11 (4,087) 88.59 (182) 68.25
ITT Corporation and ITT Hartford
spin-off adjustment............ -- -- 9,448 -- -- --
Rayonier spin-off adjustment..... -- -- -- -- 304 --
------- ------ ------- ------- ------- ------
Outstanding at end of year....... 11,764 $17.53 11,619 $ 15.76 5,588 $73.60
======= ====== ======= ======= ======= ======
Options exercisable at
year-end....................... 7,817 $15.14 6,942 $ 13.85 1,914 $54.14
======= ====== ======= ======= ======= ======
Weighted-average fair value of
options granted during the
year........................... $ 6.87 $ 30.01 $ 25.13
======= ======= =======
The Company accounts for these plans pursuant to Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined based on the fair value at the grant dates consistent with SFAS
123, "Accounting for Stock-Based Compensation," the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
1996 1995
------ ------
Net income
As reported........................................................................... $222.6 $707.9
Pro forma............................................................................. 214.8 705.1
Primary earnings per share
As reported........................................................................... $ 1.85 $ 6.16
Pro forma............................................................................. 1.78 6.14
Fully diluted earnings per share
As reported........................................................................... $ 1.85 $ 5.93
Pro forma............................................................................. 1.78 5.91
Because the method of accounting prescribed by SFAS 123 is not required to
be applied to options granted prior to January 1, 1995, the resulting pro forma
effect may not be representative of that expected in future years.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model and the following weighted-average
assumptions for grants in 1996, 1995, and 1994: dividend yield of 2.40%;
expected volatility of 23%; expected life of six years; and risk-free interest
rate of 6.15%, 6.46%, and 7.40%, respectively.
In December 1995, in conjunction with the Distribution, those individuals
who became employees of ITT Hartford and ITT Corporation were offered substitute
awards in the respective stock of their new employer, and any stock awards or
options held by them in respect of ITT Industries are reflected as canceled in
the table above. For the remaining holders of unexercised options, including
employees of ITT Industries, retirees, and certain other former employees of the
Company, the number of shares subject to options was increased and the option
exercise price was decreased immediately following the Distribution to preserve,
as closely as possible, the economic value of the options that existed prior to
Distribution.
In March 1994, the number and exercise price of all options then
outstanding were similarly adjusted to recognize the effect of the Rayonier
spin-off.
F-20
41
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
The following table summarizes information about the Company's stock
options at December 31, 1996 (shares in thousands):
OPTIONS OUTSTANDING
------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ---------------------------
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------- ------ ---------------- ---------------- ------ ----------------
$ 7.91- 9.89 1,716 4.2 years.... $ 8.76 1,716 $ 8.76
12.80-17.91 5,042 7.3 years.... 15.71 4,473 15.70
20.32-28.38 5,006 8.7 years.... 22.36 1,628 20.32
---------
--
------
11,764 ............. 7,817
=========== ======
As of December 31, 1996, 2,964,000 shares were available for future grants.
Effective January 1, 1997, option shares available for future grants increased
to 5,142,000 as a result of the allotment formula established in the 1994
Incentive Stock Plan. The incentive stock plans also provide for awarding
restricted stock subject to a restriction period in which the stock cannot be
sold, exchanged, or pledged. During 1996, pursuant to the ITT Industries, Inc.
1996 Restricted Stock Plan for Non-Employee Directors, the Company awarded
10,396 restricted shares with five-year restriction periods, in lieu of the
annual retainer for such directors.
F-21
42
BUSINESS SEGMENT INFORMATION
IN MILLIONS
NET SALES OPERATING INCOME
---------------------------------- ----------------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
Automotive......................... $5,492.6 $5,574.8 $4,667.5 $ 337.1 $ 343.6 $ 336.5
Defense & Electronics.............. 1,571.6 1,559.3 1,498.9 110.2 96.6 95.8
Fluid Technology................... 1,301.3 1,248.0 1,124.5 113.2 112.8 99.2
Dispositions and other............. 352.6 502.1 466.8 1.5 (9.3) (34.4)
-------- -------- -------- -------- -------- --------
Total segments................... 8,718.1 8,884.2 7,757.7 562.0 543.7 497.1
Other.............................. -- -- -- (53.6) (97.5) (79.4)
-------- -------- -------- -------- -------- --------
$8,718.1 $8,884.2 $7,757.7 $ 508.4 $ 446.2 $ 417.7
======== ======== ======== ======== ======== ========
IDENTIFIABLE ASSETS GROSS PLANT ADDITIONS DEPRECIATION
------------------------------- ------------------------ ------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
-------- -------- --------- ------ ------ ------ ------ ------ ------
Automotive................. $2,857.7 $2,901.9 $ 2,732.5 $256.7 $275.9 $272.1 $240.8 $237.2 $204.6
Defense & Electronics...... 797.1 817.7 783.5 60.1 69.3 54.5 64.9 62.4 56.9
Fluid Technology........... 779.9 807.0 727.8 45.1 46.9 43.4 40.7 40.0 37.9
Dispositions and other .... 512.7 600.4 678.4 44.1 58.5 48.7 50.9 49.6 43.8
-------- -------- --------- ------ ------ ------ ------ ------ ------
Total segments........... 4,947.4 5,127.0 4,922.2 406.0 450.6 418.7 397.3 389.2 343.2
Net Assets of Discontinued
Operations............... -- -- 5,458.0 -- -- -- -- -- --
Other...................... 543.8 752.2 655.0 3.4 3.1 .2 2.1 1.1 .3
-------- -------- --------- ------ ------ ------ ------ ------ ------
$5,491.2 $5,879.2 $11,035.2 $409.4 $453.7 $418.9 $399.4 $390.3 $343.5
======== ======== ========= ====== ====== ====== ====== ====== ======
Automotive: ITT Automotive is one of the largest independent suppliers of
systems and components to vehicle manufacturers worldwide and also supplies
related products to the aftermarket. Through operations located in Europe, North
America, and South America, and joint ventures and licensees in Asia, ITT
Automotive designs, engineers, and manufactures a broad range of automotive
systems and components under two major worldwide product groupings.
The Brake and Chassis Systems group produces anti-lock brake systems
("ABS") and traction control systems ("TCS"), chassis systems, foundation brake
components, fluid handling products, and Koni(R) shock absorbers.
The Body and Electrical Systems group produces automotive products, such as
door and window assemblies, wiper module assemblies, seat systems, air
management systems, switches, and fractional horsepower DC motors.
Sales to two customers (General Motors Corporation and Ford Motor
Corporation) accounted for approximately 40%, 42%, and 44% of 1996, 1995, and
1994 sales, respectively.
Defense & Electronics: ITT Defense & Electronics companies develop,
manufacture, and support high technology electronic systems and components for
defense and commercial markets on a worldwide basis, with operations in North
America, Europe, and Asia. Defense market products include tactical
communications equipment, electronic warfare systems, night vision devices,
radar, space payloads, and operations and maintenance services. Commercial
products include interconnect products (such as connectors, switches, and cable
assemblies) and night vision devices.
Companies in the electronics sector of this segment operate in several
European countries, Japan, and North America and produce a wide variety of
electronic connectors, switches, and components which are used in industrial,
professional, and telecommunications equipment as well as in consumer appliances
and automobiles. Approximately 64%, 65%, and 66% of 1996, 1995, and 1994 sales,
respectively, were to governmental entities, of which approximately 86%, 90%,
and 90%, respectively, were to the U.S. government.
Fluid Technology: ITT Fluid Technology is a worldwide enterprise engaged
in the design, development, production, and sale of products, systems and
services used to move, handle, transfer, control, and contain fluids of all
kinds. ITT Fluid Technology is a leading supplier of pumps, valves, heat
F-22
43
exchangers, mixers, instruments, and controls for management of fluids, with
sales in more than 100 countries.
The majority of ITT Fluid Technology's sales are in North America and
Western Europe. Principal markets are water and wastewater treatment, industrial
and process, and construction.
"Dispositions and other" include the operating results of units other than
"Discontinued Operations," including ITT Community Development Corporation, ITT
Semiconductors, other non-core businesses, and businesses which have been sold.
"Other" in the Operating Income table primarily includes service charges from
affiliated companies and other corporate charges. "Other" in the Identifiable
Assets table consists primarily of corporate assets. Intercompany sales, which
are priced on an arm's-length basis and eliminated in consolidation, are not
material.
GEOGRAPHICAL INFORMATION (BY COUNTRY OF ORIGIN) -- TOTAL SEGMENTS
IN MILLIONS
NET SALES OPERATING INCOME IDENTIFIABLE ASSETS
------------------------------ ------------------------ ------------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
-------- -------- -------- ------ ------ ------ -------- -------- --------
U.S............................. $4,388.7 $4,497.4 $4,064.6 $270.6 $254.6 $223.9 $2,401.3 $2,457.3 $2,463.1
Western Europe.................. 3,818.0 3,832.1 3,204.6 234.1 260.6 223.7 2,207.1 2,354.9 2,167.9
Canada and Other................ 511.4 554.7 488.5 57.3 28.5 49.5 339.0 314.8 291.2
-------- -------- -------- ------ ------ ------ -------- -------- --------
Total Segments.................. $8,718.1 $8,884.2 $7,757.7 $562.0 $543.7 $497.1 $4,947.4 $5,127.0 $4,922.2
======== ======== ======== ====== ====== ====== ======== ======== ========
QUARTERLY RESULTS FOR 1996 AND 1995
IN MILLIONS, EXCEPT PER SHARE; (UNAUDITED)
THREE MONTHS ENDED
-----------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
-------- -------- -------- -------- --------
1996
Net sales................................................ $2,200.9 $2,241.2 $2,044.8 $2,231.2 $8,718.1
Cost of sales(a)......................................... 1,907.8 1,907.9 1,755.2 1,912.7 7,483.6
Net income............................................... 40.0 67.7 43.7 71.2 222.6
Net income per share --
-- Primary(b).......................................... $ .33 $ .56 $ .36 $ .59 $ 1.85
-- Fully diluted(b).................................... $ .33 $ .56 $ .36 $ .59 $ 1.85
1995
Net sales................................................ $2,247.7 $2,337.3 $2,047.9 $2,251.3 $8,884.2
Cost of sales(a)......................................... 1,942.3 2,012.2 1,775.9 1,938.5 7,668.9
Income (loss) from continuing operations................. 44.8 46.3 (54.2) (16.2) 20.7
Net income (loss)........................................ 228.4 611.6 (174.5) 42.4 707.9
Earnings per share --
Income (loss) from continuing operations
-- Primary(b)........................................ $ .34 $ .35 $ (.47) $ (.14) $ .03
-- Fully diluted..................................... $ .34 $ .35 $ (.46) $ (.14) $ .09
Net income (loss)
-- Primary(b)........................................ $ 2.05 $ 5.61 $ (1.52) $ .34 $ 6.16
-- Fully diluted..................................... $ 1.91 $ 5.17 $ (1.49) $ .34 $ 5.93
- ---------------
(a) Includes research, development, and engineering expenses.
(b) Quarterly and full year earnings per share amounts were calculated
independently based on the average common equivalent shares applicable to
each period. Because of the issuance of common stock upon the exercise of
stock options in 1996, and the conversion of ESOP Series preferred stock to
common stock in 1995, the sum of the four quarters does not equal the
calculation for the full year for either 1996 or 1995.
F-23
44
EXPORT SALES
IN MILLIONS
In serving its global markets, ITT Industries generates significant export
sales, which benefit local economies. Sales of products (including intercompany)
manufactured in various countries for shipment to other countries consisted of
the following:
MANUFACTURING SALES
LOCATION DESTINATION 1996 1995 1994
----------------------------------- ----------------------------------- -------- -------- --------
United States Canada $ 265.6 $ 345.7 $ 312.3
Western Europe 64.0 65.1 44.9
Other 169.0 123.0 82.3
-------- -------- --------
498.6 533.8 439.5
-------- -------- --------
Canada United States 93.2 192.2 171.8
Other 10.8 9.3 10.1
-------- -------- --------
104.0 201.5 181.9
-------- -------- --------
Western Europe United States 94.1 120.7 97.6
Western Europe 1,105.5 1,051.1 837.9
Other 269.5 248.7 178.5
-------- -------- --------
1,469.1 1,420.5 1,114.0
-------- -------- --------
Other 43.3 24.6 13.0
-------- -------- --------
$2,115.0 $2,180.4 $1,748.4
======== ======== ========
F-24
45
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
ADDITIONS (DEDUCTIONS)
-----------------------------------------------------------------
CHARGED TO WRITE-OFFS/
BALANCE COSTS AND TRANSLATION PAYMENTS BALANCE
JANUARY 1 EXPENSES ADJUSTMENT OTHER DECEMBER 31
--------- ----------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1996
Trade Receivables -- Allowance for doubtful
accounts......................................... $ 39.3 $ 3.7 $ (.8) $ (5.2) $ 37.0
Accumulated depreciation of plant, property, and
equipment........................................ 2,819.6 399.4 (99.4) (194.5)(a) 2,925.1
YEAR ENDED DECEMBER 31, 1995
Trade Receivables -- Allowance for doubtful
accounts......................................... $ 36.8 $ 2.2 $ 2.3 $ (2.0) $ 39.3
Accumulated depreciation of plant, property, and
equipment........................................ 2,515.7 390.3 78.5 (164.9)(a) 2,819.6
YEAR ENDED DECEMBER 31, 1994
Trade Receivables -- Allowance for doubtful
accounts......................................... $ 33.0 $ 4.3 $ 1.0 $ (1.5) $ 36.8
Accumulated depreciation of plant, property, and
equipment........................................ 2,186.0 343.5 144.0 (157.8)(a) 2,515.7
- ---------------
(a) Principally retirements as well as companies sold during the year.
S-1
46
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, AND BY THE UNDERSIGNED IN THE
CAPACITY INDICATED.
ITT INDUSTRIES, INC.
By RICHARD J. TOWNSEND
---------------------------------------
RICHARD J. TOWNSEND
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
March 26, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------- ---------------
Chairman, President and Chief March 26, 1997
TRAVIS ENGEN Executive and Director
- -------------------------
TRAVIS ENGEN
(PRINCIPAL EXECUTIVE
OFFICER)
Senior Vice President and Chief March 26, 1997
HEIDI KUNZ Financial Officer
- -------------------------
HEIDI KUNZ
(PRINCIPAL FINANCIAL
OFFICER)
SIGNATURE TITLE DATE SIGNATURE TITLE DATE
- ---------------------- ---------------- --------------- ---------------------- ---------------- ---------------
RAND V. ARASKOG Director March 26, 1997 S. PARKER GILBERT Director March 26, 1997
- ---------------------- ----------------------
RAND V. ARASKOG S. PARKER GILBERT
ROBERT A. BURNETT Director March 26, 1997 EDWARD C. MEYER Director March 26, 1997
- ---------------------- ----------------------
ROBERT A. BURNETT EDWARD C. MEYER
CURTIS J. CRAWFORD Director March 26, 1997 SIDNEY TAUREL Director March 26, 1997
- ---------------------- ----------------------
CURTIS J. CRAWFORD SIDNEY TAUREL
II-1
47
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
3
(a) ITT Industries, Inc.'s Articles of
Incorporation....................... Incorporated by reference to Exhibit
3.1 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(b) Agreement and Plan of Merger dated
November 1, 1995.................... Incorporated by reference to Exhibit A
to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(c) Form of Rights Agreement between ITT
Indiana, Inc. and The Bank of New
York, as Rights Agent............... Incorporated by reference to Exhibit 1
to ITT Industries' Form 8-A dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(d) Articles of Amendment Setting Forth
the Designations, Voting Powers,
Preferences and Relative,
Participating, Optional and Other
Special Rights and Qualifications,
Limitations or Restrictions of
Series A Participating Cumulative
Preferred Stock..................... Incorporated by reference to Exhibit
4.5 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(e) ITT Industries, Inc.'s By-laws........ Incorporated by reference to Exhibit
3.2 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
4 Instruments defining the rights of security
holders, including indentures............... Not required to be filed. The
Registrant hereby agrees to file with
the Commission a copy of any
instrument defining the rights of
holders of long-term debt of the
Registrant and its consolidated
subsidiaries upon request of the
Commission.
9 Voting Trust Agreement...................... None.
10 Material contracts
(a) ITT Industries 1997 Long-Term
Incentive Plan...................... Incorporated by reference to Appendix
II to ITT Industries' Proxy Statement
dated March 26, 1997 (CIK No.
216228, File No. 1-5627).
(b) ITT Industries 1997 Annual Incentive
Plan for Executive Officers......... Incorporated by reference to Appendix
I to ITT Industries' Proxy Statement
dated March 26, 1997 (CIK No.
216228, File No. 1-5627).
(c) Incentive Bonus Plan.................. Incorporated by reference to ITT
Delaware's Form SE dated March 29,
1989 relating to ITT Delaware's Form
10-K for the fiscal year ended
December 31, 1988 (CIK No. 216228,
File No. 1-5627).
II-2
48
EXHIBIT
NUMBER DESCRIPTION LOCATION
(d) Form of Travis Engen's employment
agreement........................... Incorporated by reference to Exhibit
10.16 to ITT Industries' Form 8-B
dated December 20, 1995 (CIK No.
216228, File No. 1-5627).
(e) First Amendment to Employment
Agreement between ITT Industries and
Travis Engen........................ Filed herewith.
(f) Form of group life insurance plan for
non-employee members of the Board of
Directors........................... Incorporated by reference to exhibits
to ITT Delaware's Form 10-K for the
fiscal year ended December 31, 1983
(CIK No. 216228, File No. 1-5627).
(g) ITT Industries, Inc. 1986 Incentive
Stock
Plan................................ Incorporated by reference to ITT
Delaware's Registration Statement on
Form S-8 (Registration No. 33-5412)
(CIK No. 216228, File No. 1-5627).
(h) Form of indemnification agreement with
directors........................... Filed herewith.
(i) ITT Industries, Inc. Senior Executive
Severance Pay Plan.................. Incorporated by reference to Exhibit
10.15 to ITT Industries' Form 8-B
dated December 20, 1995 (CIK No.
216228, File No. 1-5627).
(j) ITT Industries Special Senior
Executive Severance Pay Plan........ Filed herewith.
(k) 1994 ITT Industries, Inc. Incentive
Stock Plan.......................... Incorporated by reference to Appendix
A to ITT Delaware's Proxy Statement
dated March 28, 1994 (CIK No.
216228, File No. 1-5627).
(l) ITT Industries, Inc. 1996 Restricted
Stock Plan for Non-Employee
Directors, as amended............... Filed herewith.
(m) Distribution Agreement among ITT
Corporation, ITT Destinations, Inc.
and ITT Hartford Group, Inc......... Incorporated by reference to Exhibit
10.1 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(n) Intellectual Property License
Agreement between and among ITT
Corporation, ITT Destinations, Inc.
and ITT Hartford Group, Inc......... Incorporated by reference to Exhibit
10.2 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(o) Tax Allocation Agreement among ITT
Corporation, ITT Destinations, Inc.
and ITT Hartford Group, Inc......... Incorporated by reference to Exhibit
10.3 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
II-3
49
EXHIBIT
NUMBER DESCRIPTION LOCATION
(p) Employee Benefit Services and
Liability Agreement among ITT
Corporation, ITT Destinations, Inc.
and ITT Hartford Group, Inc......... Incorporated by reference to Exhibit
10.7 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(q) Five-year Competitive Advance and
Revolving Credit Facility Agreement
dated as of November 10, 1995....... Incorporated by reference to Exhibit
10.9 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
11 Statement re computation of per share
earnings.................................. Filed herewith.
12 Statement re computation of ratios.......... Filed herewith.
13 Annual report to security holders, Form 10-Q
or quarterly report to security holders... Not required to be filed.
16 Letter re change in certifying accountant... None.
18 Letter re change in accounting principles... None.
21 Subsidiaries of the Registrant.............. Filed herewith.
22 Published report regarding matters submitted
to vote of security holders............... Not required to be filed.
23 Consent of Arthur Andersen LLP.............. Filed herewith.
24 Power of attorney........................... None.
27 Financial data schedule..................... Filed herewith.
99 Additional exhibits......................... None.
II-4
1
EXHIBIT 10(E)
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
DATED AS OF DECEMBER 5, 1995
BETWEEN ITT INDUSTRIES, INC. AND
D. TRAVIS ENGEN
WHEREAS, ITT Industries, Inc., an Indiana corporation ("Industries"),
entered into an employment agreement with D. Travis Engen dated as of December
5, 1995 (the "Agreement"); and,
WHEREAS, Industries and you desire to amend the Agreement in certain
respects;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein set forth and for other consideration herein described, the
parties hereto agree as follows:
1. Paragraph 4 of the Agreement shall be amended by changing the paragraph
heading to "Termination" and by adding the following at the end thereof:
Following an Acceleration Event (as defined herein), no act or omission on
your part shall be considered "willful" for purposes of this Paragraph 4 unless
it is done or omitted in bad faith or without reasonable belief that the action
or omission was in the best interests of Industries.
Following an Acceleration Event, you shall have the right to terminate your
employment for Good Reason (as defined herein). For purposes hereof:
(A) "Good Reason" shall mean:
(i) without your express written consent and excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by Industries or its affiliates promptly
after receipt of notice thereof given by you, (A) a failure to pay or
reduction in your annual base salary (as described in Paragraph 3(a)
hereof) or any bonus or incentive compensation opportunities or any
reduction in any material compensation or benefits arrangement provided
to you or in which you participate, (B) your assignment to any duties
inconsistent in any respect with your position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by paragraph (1) hereof, (C) any other
action by Industries or any of its affiliates which results in a
diminution in your position, authority, duties or responsibilities, or
(D) any failure by Industries to comply with any of the provisions of
paragraph 3(b) hereof;
(ii) without your express written consent, Industries requiring
your work location to be other than within twenty-five (25) miles of
White Plains, New York;
(iii) any failure by Industries to obtain an express written
assumption of this Agreement by any successor to Industries. For
purposes hereof, a determination by you that you have "Good Reason"
hereunder shall be final and binding on the parties hereto absent a
showing of bad faith on your part.
(B) An "Acceleration Event" shall occur if (i) a report on Schedule
13D shall be filed with the Securities and Exchange Commission pursuant to
Section 13(d) of the Securities Exchange Act of 1934 (the "Act") disclosing
that any person (within the meaning of Section 13(d) of the Act), other
than Industries or a subsidiary of Industries or any employee benefit plan
sponsored by Industries or a subsidiary of Industries, is the beneficial
owner directly or indirectly of twenty percent or more of the outstanding
Common Stock, $1 par value, of Industries (the "Stock"); (ii) any person
(within the meaning of Section 13(d) of the Act), other than Industries or
a subsidiary of Industries, or any employee benefit plan sponsored by
Industries or a subsidiary of Industries, shall purchase shares pursuant to
a tender offer or exchange offer to acquire any Stock of Industries (or
securities convertible into Stock) for cash, securities or any other
consideration, provided that after consummation of the offer, the person in
question is the beneficial owner (as such term is defined in Rule 13d-3
under the Act), directly or indirectly, of fifteen percent or more of the
outstanding Stock of Industries (calculated as provided in paragraph (d) of
Rule 13d-3 under the Act in the case of
2
rights to acquire Stock); (iii) the stockholders of Industries shall
approve (A) any consolidation or merger of Industries in which Industries
is not the continuing or surviving corporation or pursuant to which shares
of Stock of Industries would be converted into cash, securities or other
property, other than a merger of Industries in which holders of Stock of
Industries immediately prior to the merger have the same proportionate
ownership of common stock of the surviving corporation immediately after
the merger as immediately before, or (B) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all or
substantially all the assets of Industries, or (iv) there shall have been a
change in a majority of the members of the Board of Directors of Industries
within a 12-month period unless the election or nomination for election by
Industries' stockholders of each new director during such 12-month period
was approved by the vote of two-thirds of the directors then still in
office who were directors at the beginning of such 12-month period.
(C) Following an Acceleration Event, the term "Industries" as used in
this Agreement shall also include any successor company to Industries, any
successor to any affiliate of Industries, and any affiliate of any such
successor company.
If you are terminated by Industries within two years after an Acceleration
Event, the only basis upon which the Severance Benefits shall not be provided to
you is upon a termination of employment for cause.
2. Paragraph 5 (f) is amended to provide as follows:
(f) Termination Allowance Under A Severance Plan or Policy. If you would
otherwise ordinarily receive a termination allowance under an Industries'
severance plan or termination allowance policy, including, without limitation,
the ITT Industries, Inc. Senior Executive Severance Pay Plan, a copy of which is
attached hereto as Exhibit I, were you deemed to be covered under and eligible
for such Plan, exceeding the amount of base salary remaining under this
Agreement at the time of notice by Industries of its intent to terminate your
full-time employment, Industries will pay you a termination allowance, in
accordance with the terms of the Industries' severance plan or termination
allowance policy, in lieu of salary continuation under this Agreement. In no
case will both termination allowance and amounts under this Agreement (whether
lump sum or salary continuation) be paid.
3. A new Paragraph 5A is added to the Agreement to read as follows:
5A. Termination After An Acceleration Event
Notwithstanding Paragraph 5 hereof, if within two years following an
Acceleration Event, your employment with Industries is involuntarily terminated
other than for cause or is terminated by you for Good Reason, then Industries
will pay you the following severance benefits ("Severance Benefits"):
Severance Pay -- The sum of (x) three times your highest annual base salary
rate (as provided in Paragraph 3(a) hereof) (whether or not deferred) at any
time during the three year period immediately preceding your termination of
employment, and (y) three times the highest bonus paid or awarded (whether or
not deferred) to you in respect of the three years preceding an Acceleration
Event.
Benefits and Perquisites
-- Continued health and life insurance benefits and perquisites (including,
without limitation, any Industries provided automobile and any tax or financial
advisory services) for a three year period following your termination of
employment at the same cost to you, and at the same coverage levels, provided to
you (and your eligible dependents) immediately prior to your termination of
employment.
-- Payment of a lump sum amount ("Pension Lump Sum Amount") equal to the
difference between (i) the total lump sum value of your pension benefit under
the ITT Industries Salaried Retirement Plan, Industries' Excess Pension Plan IA
and Industries' Excess Pension Plan IB ("Pension Plans") as of your termination
of employment and (ii) the total lump sum value of your pension benefit under
the Pension Plans after crediting you with an additional three years of age and
three years of eligibility and benefit service to you and applying the annual
base salary and highest bonus determined above under "Severance Pay" with
respect to each of the additional three years of service so credited for
purposes of determining Final Average Compensation under the Pension Plans. The
above total lump sum values shall
3
be determined in the manner provided in such Excess Pension Plans of Industries
for determination of lump sum benefits upon the occurrence of an Acceleration
Event, as defined in said Plans.
-- Crediting of an additional three years of age and three years of
eligibility service for purposes of Industries' retiree health and retiree life
insurance benefits.
-- Payment of a lump sum amount ("Savings Plan Lump Sum Amount") equal to
three times the following amount: the annual base salary rate determined above
under "Severance Pay" times the highest rate of Company Contributions (not to
exceed 3 1/2%) with respect to you under the ITT Industries Investment and
Savings Plan for Salaried Employees and/or the ITT Industries Excess Savings
Plan (including matching contributions and floor contributions) at any time
during the three year period immediately preceding your termination of
employment.
With respect to the provision of benefits and perquisites during the above
described three year period, if, for any reason at any time Industries is unable
to treat you as being eligible for ongoing participation in any Industries
employee benefit plans or perquisites in existence immediately prior to your
termination of employment of and if, as a result thereof, you do not receive a
benefit or perquisite or receive a reduced benefit or perquisite, Industries
shall provide such benefits or perquisites by (i) direct payment to you of the
amounts you would have received from such benefit plan or perquisite you
continued to be eligible or (ii) at Industries' option, making available
equivalent benefits or perquisites from other sources.
Severance Pay shall be paid in cash, in a non-discounted lump sum within
five business days after the date your employment terminates. The Pension Lump
Sum Amount and the Savings Plan Lump Sum Amount shall be paid in cash within
thirty calendar days after the date your employment terminates.
In cases where Severance Benefits are provided under this Agreement, pay in
lieu of any unused current year vacation entitlement will be paid to you in a
lump sum, in cash within five business days after the date your employment
terminates.
If, upon the termination of your employment after an Acceleration Event,
you would otherwise ordinarily receive, under an Industries' severance plan or
termination allowance policy, including, without limitation, the ITT Industries,
Inc. Senior Executive Severance Pay Plan and the ITT Industries, Inc. Special
Senior Executive Severance Pay Plan, a copy of which is attached hereto as
Exhibit II, were you deemed to be covered under and eligible for either of such
Plans, (i) severance pay, salary continuation pay, termination pay or similar
pay or allowance ("Plan Severance Pay") exceeding the Severance Pay hereunder
and/or (ii) employee benefits, perquisites or outplacement services ("Plan
Severance Benefits") exceeding the corresponding other Severance Benefits,
Industries will pay you or provide to you the Plan Severance Pay and/or the Plan
Severance Benefits in lieu of, respectively, the Severance Pay hereunder or the
corresponding other Severance Benefits. In no case will both Plan Severance Pay
and the Severance Pay hereunder be paid or will both Plan Severance Benefits and
the corresponding other Severance Benefits be provided.
Upon the termination your employment after an Acceleration Event, you may
elect, in your sole discretion, to receive the base salary and incentive bonus
and other compensation and benefits pursuant to Paragraph 5 hereof ("Paragraph 5
Benefit") in lieu of the Severance Benefits and in lieu of any Plan Severance
Pay and/or Plan Severance Benefits, whichever is otherwise payable under the
preceding paragraph. In no case will both the Paragraph 5 Benefit and the
Severance Benefits or the Plan Severance Pay and/or Plan Severance Benefits,
whichever is otherwise payable under the preceding paragraph, be paid.
4. Paragraph 13 of the Agreement shall be amended by adding the following
at the end thereof:
Industries shall pay all legal fees, costs of litigation, prejudgment
interest, and other expenses which are incurred in good faith by you as a result
of Industries' refusal to provide any of the Severance Benefits to which you
become entitled under this Agreement, or as a result of Industries' (or any
third party's) contesting the validity, enforceability, or interpretation of
this Agreement, or as a result of any conflict
4
between you and Industries pertaining to this Agreement. Industries shall pay
such fees and expenses from its general assets.
5. A new Paragraph 14 is added to the Agreement, to read as follows:
14. Excise Tax
In the event that it shall be determined that any payment or distribution
by Industries to you or for your benefit (whether paid or payable or distributed
or distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
paragraph 14, such payments or distributions being referred to herein as
"Payments") would give rise to your liability for the excise tax imposed by
Section 4999 of the Internal Revenue Code, as amended (the "Code"), or that any
interest or penalties are incurred by you with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then you shall be entitled to
receive an additional payment (the "Gross-Up Payment") in an amount such that
after your payment of all Federal, state and local taxes (including any interest
or penalties imposed with respect to such taxes), including, without limitation,
any income and employment taxes (and any interest and penalties imposed with
respect to such taxes) and Excise Tax imposed upon the Gross-Up Payment, you
retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Payments. For this purpose, you shall be deemed to be in the highest
marginal rate of Federal, state and local taxes. This payment shall be made as
soon as possible following the date of your termination of employment, but in no
event later than thirty calendar days of such date.
In the event the Gross-Up Payment shall fail to make you whole on an
after-tax basis, the Gross-Up Payment shall be recalculated ("Recalculated
Gross-Up Payment"), using your actual effective tax rate, once it is known for
the calendar year in which the Gross-Up Payment is made, and Industries shall
reimburse you for the full amount of any amount by which the Recalculated
Gross-Up Payment exceeds the Gross-Up Payment ("Additional Gross-Up Payment").
The Gross-Up Payment and any Additional Gross-Up Payment shall be paid out
of the general assets of Industries.
In the event the Internal Revenue Service subsequently adjusts the excise
tax computation herein described, Industries shall reimburse you for the full
amount necessary to make you whole on an after-tax basis (less any amounts
received by you that you would not have received had the computations initially
been computed as subsequently adjusted), including the value of any underpaid
excise tax, and any related interest and/or penalties due to the Internal
Revenue Service.
6. A new Paragraph 15 is added to the Agreement, to read as follows:
15. Miscellaneous
Severance Benefits under this Agreement are paid entirely by Industries
from its general assets.
In the event of your death while any amount is still payable to you
hereunder had you continued to live, all such amounts shall be paid in
accordance with this Agreement to your designated heirs or, in the absence of
such designation, to your estate.
7. Except as hereinabove amended by this First Amendment, the Agreement is
hereby ratified and confirmed and the Agreement shall continue in full force and
effect.
5
IN WITNESS WHEREOF, the parties have executed this First Amendment to the
Agreement, and this First Amendment shall be effective, as of the 11th day of
March, 1997.
D. TRAVIS ENGEN
--------------------------------------
D. Travis Engen
ITT INDUSTRIES, INC.
By: JAMES P. SMITH
--------------------------------------------------------
James P. Smith
Senior Vice President -- Director,
Human Resources
1
EXHIBIT 10(h)
DIRECTOR'S INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made as of , 19 between ITT Industries, Inc., an
Indiana corporation (the "Corporation"), and (the "Indemnitee").
WITNESSETH THAT:
WHEREAS, it is in the Corporation's best interest to attract and retain
capable directors;
WHEREAS, both the Corporation and the Indemnitee recognize the increased
risk of litigation and other claims being asserted against directors of public
corporations in today's environment;
WHEREAS, it is now and has always been the policy of the Corporation to
indemnify the members of its Board of Directors so as to provide them with the
maximum possible protection available in accordance with applicable law;
WHEREAS, Article 4 of the Corporation's By-laws and applicable law
expressly recognize that the right of indemnification provided therein shall not
be exclusive of any other rights to which any indemnified person may otherwise
be entitled; and
WHEREAS, the Corporation's By-laws, its Articles of Incorporation and
applicable law permit contracts between the Corporation and the members of its
Board of Directors covering indemnification;
NOW THEREFORE, the parties hereto agree as follows:
1. Indemnity. In consideration of the Indemnitee's agreement to
serve or continue to serve as a Director of the Corporation, or, at the
request of the Corporation, as a director, officer, employee, fiduciary or
agent of another corporation, partnership, joint venture, trust or other
enterprise (including, without limitation, any employee benefit plan) (a
"Designated Director"), for so long as he or she is duly elected and
continues to serve in accordance with the Corporation's By-laws, the
Corporation hereby agrees to hold the Indemnitee harmless and to indemnify
the Indemnitee to the fullest extent permitted by applicable law from and
against any and all expenses, liabilities or losses asserted against or
incurred by the Indemnitee in his or her capacity as a Director of the
Corporation or a Designated Director or arising out of his or her status in
either such capacity.
2. Maintenance of Insurance. (a) Subject only to the provisions of
Section 2(b) hereof, the Corporation hereby agrees that, so long as the
Indemnitee shall continue to serve as a Director of the Corporation, and
thereafter so long as the Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether
civil, criminal or investigative, by reason of the fact that the Indemnitee
was a Director of the Corporation, the Corporation will provide insurance
coverage comparable to that presently provided under the Corporation's
Directors' and Officers' Liability Insurance policies (the "insurance
policies") in effect at the date hereof. (b) However, the Corporation shall
not be required to maintain all or any of such insurance policies or
comparable insurance coverage if, in the business judgment of the Board of
Directors of the Corporation, (i) the premium cost for such insurance is
substantially disproportionate to the amount of coverage, or (ii) the
coverage provided by such insurance is so limited by exclusions that there
is insufficient benefit from such insurance or (iii) such insurance is
otherwise not reasonably available.
3. Additional Indemnity. Subject only to the exclusions set forth in
Section 4 hereof, the Corporation hereby further agrees to hold harmless
and indemnify the Indemnitee:
(1) to the fullest extent provided under Article 4 of the
Corporation's By-laws as in effect at the date hereof; and
(2) in the event the Corporation does not maintain in effect the
insurance coverage provided under Section 2 hereof, to the full extent
of the coverage which would otherwise have been provided for the benefit
of the indemnitee pursuant to the insurance policies in effect at the
date hereof.
2
4. Limitations on Additional Indemnity. No indemnity pursuant to
Section 3 hereof shall be paid by the Corporation:
(1) except to the extent the aggregate of losses to be indemnified
thereunder exceed the amount of such losses for which the Indemnitee is
indemnified or insured pursuant to either Section 1 or 2 hereof;
(2) in respect of remuneration paid to, or indemnification of, the
Indemnitee, if it shall be determined by a final judgment or other final
adjudication that such remuneration or indemnification was or is
prohibited by applicable law;
(3) for any transaction from which the Indemnitee derived an
improper personal benefit;
(4) for any breach of the Indemnitee's duty to act in good faith
and in a manner he or she reasonably believed to be in or not opposed to
the best interest of the Corporation; or
(5) in respect of acts or omissions which involve intentional
misconduct or a knowing violation of law by the Indemnitee.
5. Continuation of Indemnity. All agreements and obligations of the
Corporation contained herein shall continue during the period the
Indemnitee is a Director of the Corporation and shall continue thereafter
so long as the Indemnitee shall be subject to any possible claim or
threatened, pending or completed action, suit or proceeding, whether civil,
criminal or investigative, by reason of the fact that the Indemnitee was a
Director of the Corporation or a Designated Director.
6. Notification and Defense of Claim. Promptly after receipt by the
Indemnitee of notice of the commencement of any action, suit or proceeding,
the Indemnitee shall, if a claim in respect thereof is to be made against
the Corporation under this Agreement, notify the Corporation of the
commencement thereof; but an omission so to notify the Corporation will not
relieve it from any liability which it may have to the Indemnitee otherwise
than under this Agreement, including without limitation, its liability
under the Corporation's Articles of Incorporation and By-laws. With respect
to any such action, suit or proceeding:
(1) the Corporation shall be entitled to participate therein at its
own expense;
(2) except as otherwise provided below, to the extent that it may
wish, the Corporation jointly with any other indemnifying party shall be
entitled to assume the defense thereof, with counsel satisfactory to the
Indemnitee. After notice from the Corporation to the Indemnitee of its
election so to assume the defense thereof, the Corporation will not be
liable to the Indemnitee under this Agreement for any legal or other
expenses subsequently incurred by the Indemnitee in connection with the
defense thereof other than reasonable costs of investigation or as
otherwise provided below. The Indemnitee shall have the right to employ
its counsel in such action, suit or proceeding but the fees and expenses
of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the
indemnitee unless (i) the employment of counsel by the Indemnitee has
been authorized by the Corporation, (ii) the Indemnitee shall have
reasonably concluded that there may be a conflict of interest between
the Corporation and the Indemnitee in the conduct of the defense of such
action, or (iii) the Corporation shall not in fact have employed counsel
to assume the defense of such action, in each of which cases the fees
and expenses of counsel shall be at the expense of the Corporation. The
Corporation shall not be entitled to assume the defense of any action,
suit or proceeding brought by or on behalf of the Corporation or as to
which the Indemnitee shall have made the conclusion provided for in (ii)
above; and
(3) the Corporation shall not be liable to indemnify the Indemnitee
under this Agreement for any amounts paid in settlement of any action or
claim effected without its written consent. The Corporation shall not
settle any action or claim in any manner that would impose any penalty
or limitation on the Indemnitee without the Indemnitee's written
consent. Neither the Corporation nor the Indemnitee will unreasonably
withhold their consent to any proposed settlement.
7. Advancement and Repayment of Expenses. Expenses incurred in
connection with any action, suit or proceeding involving the Indemnitee and
in respect of which a claim is made against
2
3
the Corporation under this Agreement shall be paid promptly by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon written request of the Indemnitee. The Indemnitee agrees
that the Indemnitee will reimburse the Corporation for all reasonable
expenses advanced, paid or incurred by the Corporation on behalf of the
Indemnitee in respect of a claim against the Corporation under this
Agreement in the event and only to the extent that it shall be ultimately
determined that the Indemnitee is not entitled to be indemnified by the
Corporation for such expenses under the provisions of applicable law, the
Corporation's Articles of Incorporation, the Corporation's By-laws, this
Agreement or otherwise. The Corporation's obligations to advance expenses
under this Section 7 shall not be subject to any conditions or requirements
not contained in this Section.
8. Enforcement. If a claim under this Agreement is not paid in full
by the Corporation within ninety days after a written request has been
received by the Corporation, the Indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the
claim and, if successful in whole or in part, the Indemnitee shall also be
entitled to be reimbursed for all expenses actually and reasonably incurred
by the Indemnitee in connection with the prosecution of such claim.
9. Severability. If any provision of this Agreement shall be held to
be or shall, in fact, be invalid, inoperative or unenforceable as applied
to any particular case or in any particular jurisdiction, for any reason,
such circumstances shall not have the effect of rendering the provision in
question invalid, inoperative or unenforceable in any other distinguishable
case or jurisdiction, or of rendering any other provision or provisions
herein contained invalid, inoperative or unenforceable to any extent
whatsoever. The invalidity, inoperability or unenforceability of any one or
more phrases, sentences, clauses or Sections contained in this Agreement
shall not affect any other remaining part of this Agreement.
10. Governing Law; Binding Effect; Amendment or Termination. (a)
This Agreement shall be governed by and interpreted in accordance with the
laws of the State of Indiana.
(b) This Agreement shall be binding upon the Indemnitee and upon the
Corporation and its successors and assigns, and shall inure to the benefit
of the Indemnitee and his or her heirs, personal representatives, executors
and administrators, and to the benefit of the Corporation and its
successors and assigns.
(c) No amendment, modification, termination or cancellation of this
Agreement shall be effective unless in writing signed by both parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
ITT INDUSTRIES, INC.
By
--------------------------------------
Senior Vice President
and General Counsel
--------------------------------------
Indemnitee
3
1
EXHIBIT 10(J)
ITT INDUSTRIES
SPECIAL SENIOR EXECUTIVE SEVERANCE PAY PLAN
1. PURPOSE
The purpose of this ITT Industries Special Senior Executive Severance Pay
Plan ("Plan") is to assist in occupational transition by providing Severance
Benefits, as defined herein, for employees covered by this Plan whose employment
is terminated under conditions set forth in this Plan within two years after an
Acceleration Event, as defined herein.
2. COVERED EMPLOYEES
Covered employees under this Plan ("Special Severance Executives") are
full-time, regular salaried employees of ITT Industries, Inc. ("ITT Industries")
and of any subsidiary company ("ITT Industries Subsidiary") (collectively or
individually as the context requires "Company") in Bands A and B at any time
within the two year period immediately preceding an Acceleration Event and such
other employees of the Company who shall be designated as covered employees
thereunder by the Compensation and Personnel Committee of ITT Industries' Board
of Directors.
"Bands A and B" shall have the meaning given such terms under the executive
classification system of the ITT Industries Human Resources Department as in
effect immediately preceding an Acceleration Event. After the occurrence of an
Acceleration Event, the terms "ITT Industries", "ITT Industries Subsidiary" and
"Company" as used herein shall also include, respectively and as the context
requires, any successor company to ITT Industries or any successor company to
any ITT Industries Subsidiary and any affiliate of any such successor company.
3. DEFINITIONS
An "Acceleration Event" shall occur if (i) a report on Schedule 13D shall
be filed with the Securities and Exchange Commission pursuant to Section 13(d)
of the Securities Exchange Act of 1934 (the "Act") disclosing that any person
(within the meaning of Section 13(d) of the Act), other than ITT Industries or a
subsidiary of ITT Industries or any employee benefit plan sponsored by ITT
Industries or a subsidiary of ITT Industries, is the beneficial owner directly
or indirectly of twenty percent or more of the outstanding Common Stock, $1 par
value, of ITT Industries (the "Stock"); (ii) any person (within the meaning of
Section 13(d) of the Act), other than ITT Industries or a subsidiary of ITT
Industries, or any employee benefit plan sponsored by ITT Industries or a
subsidiary of ITT Industries, shall purchase shares pursuant to a tender offer
or exchange offer to acquire any Stock of ITT Industries (or securities
convertible into Stock) for cash, securities or any other consideration,
provided that after consummation of the offer, the person in question is the
beneficial owner (as such term is defined in Rule 13d-3 under the Act), directly
or indirectly, of fifteen percent or more of the outstanding Stock of ITT
Industries (calculated as provided in paragraph (d) of Rule 13d-3 under the Act
in the case of rights to acquire Stock); (iii) the stockholders of ITT
Industries shall approve (A) any consolidation or merger of ITT Industries in
which ITT Industries is not the continuing or surviving corporation or pursuant
to which shares of Stock of ITT Industries would be converted into cash,
securities or other property, other than a merger of ITT Industries in which
holders of Stock of ITT Industries immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger as immediately before, or (B) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all the assets of ITT Industries, or (iv) there shall have been
a change in a majority of the members of the Board of Directors of ITT
Industries within a 12-month period unless the election or nomination for
election by ITT Industries' stockholders of each new director during such
12-month period was approved by the vote of two-thirds of the directors then
still in office who were directors at the beginning of such 12-month period.
"Cause" shall mean action by the Special Severance Executive involving
willful malfeasance or gross negligence or the Special Severance Executive's
failure to act involving material nonfeasance that would tend to have a
materially adverse effect on the Company. No act or omission on the part of the
Special
2
Severance Executive shall be considered "willful" unless it is done or omitted
in bad faith or without reasonable belief that the action or omission was in the
best interests of the Company.
"Good Reason" shall mean (i) without the Special Severance Executive's
express written consent and excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company or its affiliates promptly after receipt of notice
thereof given by the Special Severance Executive, (A) a reduction in the Special
Severance Executive's annual base salary (whether or not deferred) or annual
bonus (as measured by the highest bonus paid or awarded, whether or not
deferred, in respect of the three calendar years preceding an Acceleration
Event, including, among the bonuses taken into account for this purpose, any
bonus paid or awarded by reason of an Acceleration Event, without regard to
whether such bonus is paid, whether or not deferred, during such three year
period or after an Acceleration Event) or any reduction in any material
compensation or benefits arrangement, (B) the assignment to the Special
Severance Executive of any duties inconsistent in any respect with the Special
Severance Executive's position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities, or (C) any other action by
the Company or its affiliates which results in a diminution in such position,
authority, duties or responsibilities; (ii) without the Special Severance
Executive's express written consent, the Company's requiring the Special
Severance Executive's work location to be other than within twenty-five (25)
miles of the location where such Special Severance Executive was principally
working immediately prior to the Acceleration Event; or (iii) any failure by the
Company to obtain the express written assumption of this Plan from any successor
to the Company.
4. SEVERANCE BENEFITS UPON TERMINATION OF EMPLOYMENT
If, within two years after an Acceleration Event, the Company terminates
the employment of a Special Severance Executive other than for Cause or if the
Special Severance Executive terminates his or her employment for Good Reason, he
or she shall receive the severance benefits set forth in Section 5 hereof
("Severance Benefits"). For purposes hereof, a determination by a Special
Severance Executive that he or she has "Good Reason" hereunder shall be final
and binding on the parties hereto absent a showing of bad faith on the Special
Severance Executive's part.
5. SEVERANCE BENEFITS
Severance Benefits for Special Severance Executives in Band A:
Severance Pay -- The sum of (x) three times the highest annual base salary
rate paid (whether or not deferred) to the Special Severance Executive at any
time during the three year period immediately preceding the Special Severance
Executive's termination of employment, and (y) three times the highest bonus
paid or awarded (whether or not deferred) to the Special Severance Executive in
respect of the three years preceding an Acceleration Event, including, among the
bonuses taken into account for this purpose, any bonus paid or awarded by reason
of an Acceleration Event, without regard to whether such bonus is paid (whether
or not deferred) during such three year period or after an Acceleration Event.
Benefits and Perquisites
-- Continued health and life insurance benefits and perquisites (including,
without limitation, any Company provided automobile and any tax or financial
advisory services) for a three year period following the Special Severance
Executive's termination of employment at the same cost to the Special Severance
Executive, and at the same coverage levels, as provided to the Special Severance
Executive (and the Special Severance Executive's eligible dependents)
immediately prior to his or her termination of employment.
-- Payment of a lump sum amount ("Pension Lump Sum Amount") equal to the
difference between (i) the total lump sum value of the Special Severance
Executive's pension benefit under the ITT Industries Salaried Retirement Plan
and, as applicable, Excess Pension Plan IA, Excess Pension Plan IB and/or Excess
Pension Plan II of the Company (or corresponding pension arrangements outside
the United States) ("Pension Plans") as of the Special Severance Executive's
termination of employment and (ii) the total lump sum value of the Special
Severance Executive's pension benefit under the Pension Plans after crediting an
additional three years of age and three years of eligibility and benefit service
to
3
the Special Severance Executive and applying the highest annual base salary rate
and highest bonus determined above under "Severance Pay" with respect to each of
the additional three years of service so credited for purposes of determining
Final Average Compensation under the Pension Plans. The above total lump sum
values shall be determined in the manner provided in the Excess Pension Plans of
the Company for determination of lump sum benefits upon the occurrence of an
Acceleration Event, as defined in said Plans. This provision shall apply to any
Special Severance Executive having a pension benefit under any of the Pension
Plans as of the Special Severance Executive's termination of employment.
-- Crediting of an additional three years of age and three years of
eligibility service for purposes of the Company's retiree health and retiree
life insurance benefits. This provision shall apply to any Special Severance
Executives covered under such benefits any time during the three year period
immediately preceding the Special Severance Executive's termination of
employment.
-- Payment of a lump sum amount ("Savings Plan Lump Sum Amount") equal to
three times the following amount: the highest annual base salary rate determined
above under "Severance Pay" times the highest percentage rate of Company
Contributions (not to exceed 3 1/2%) with respect to the Special Severance
Executive under the ITT Industries Investment and Savings Plan for Salaried
Employees and/or the ITT Industries Excess Savings Plan (or corresponding
savings plan arrangements outside the United States) ("Savings Plans")
(including matching contributions and floor contributions) at any time during
the three year period immediately preceding the Special Severance Executive's
termination of employment. This provision shall apply to any Special Severance
Executive who is a member of any of the Savings Plans at any time during such
three year period.
Outplacement -- Outplacement services for one year.
Severance Benefits for Special Severance Executives in Band B:
Severance Pay -- The sum of (x) two times the highest annual base salary
rate paid (whether or not deferred) to the Special Severance Executive at any
time during the three year period immediately preceding the Special Severance
Executive's termination of employment and (y) two times the highest bonus paid
or awarded (whether or not deferred) to the Special Severance Executive in
respect of the three years preceding an Acceleration Event, including, among the
bonuses taken into account for this purpose, any bonus paid or awarded by reason
of an Acceleration Event, without regard to whether such bonus is paid (whether
or not deferred) during such three year period or after an Acceleration Event.
Benefits and Perquisites
-- Continued health and life insurance benefits and perquisites (including,
without limitation, any Company provided automobile and any tax or financial
advisory services) for a two year period following the Special Severance
Executive's termination of employment at the same cost to the Special Severance
Executive, and at the same coverage levels, as provided to the Special Severance
Executive (and the Special Severance Executive's eligible dependents)
immediately prior to his or her termination of employment.
-- Payment of a lump sum amount ("Pension Lump Sum Amount") equal to the
difference between (i) the total lump sum value of the Special Severance
Executive's pension benefit under the ITT Industries Salaried Retirement Plan
and, as applicable, Excess Pension Plan IA, Excess Pension Plan IB and/or Excess
Pension Plan II of the Company (or corresponding pension arrangements outside
the United States) ("Pension Plans") as of the Special Severance Executive's
termination of employment and (ii) the total lump sum value of the Special
Severance Executive's pension benefit under the Pension Plans after crediting an
additional two years of age and two years of eligibility and benefit service to
the Special Severance Executive and applying the highest annual base salary rate
and highest bonus determined above under "Severance Pay" with respect to each of
the additional two years of service so credited for purposes of determining
Final Average Compensation under the Pension Plans. The above total lump sum
values shall be determined in the manner provided in the Excess Pension Plans of
the Company for determination of lump sum benefits upon the occurrence of an
Acceleration Event, as defined in said Plans. This provision shall apply to any
Special Severance Executive having a pension
4
benefit under any of the Pension Plans as of the Special Severance Executive's
termination of employment.
-- Crediting of an additional two years of age and two years of eligibility
service for purposes of the Company's retiree health and retiree life insurance
benefits. This provison shall apply to any Special Severance Executives covered
under such benefits any time during the three year period immediately preceding
the Special Severance Executive's termination of employment.
-- Payment of a lump sum amount ("Savings Plan Lump Sum Amount") equal to
two times the following amount: the highest annual base salary rate determined
above under "Severance Pay" times the highest percentage rate of Company
Contributions (not to exceed 3 1/2%) with respect to the Special Severance
Executive under the ITT Industries Investment and Savings Plan for Salaried
Employees and/or the ITT Industries Excess Savings Plan (or corresponding
savings plan arrangements outside the United States) ("Savings Plans")
(including matching contributions and floor contributions) at any time during
the three year period immediately preceding the Special Severance Executive's
termination of employment. This provision shall apply to any Special Severance
Executive who is a member of any of the Savings Plans at any time during such
three year period.
Outplacement -- Outplacement services for one year.
With respect to the provision of benefits and perquisites during the above
described respective three and two year periods, if, for any reason at any time
the Company is unable to treat the Special Severance Executive as being eligible
for ongoing participation in any Company employee benefit plans or perquisites
in existence immediately prior to the termination of employment of the Special
Severance Executive, and if, as a result thereof, the Special Severance
Executive does not receive a benefit or perquisite or receives a reduced benefit
or perquisite, the Company shall provide such benefits or perquisites by (i)
direct payment to the Special Severance Executive of the amounts the Special
Severance Executive would have received from such benefit plan or perquisite had
the Special Severance Executive continued to be eligible or (ii) at the
Company's option, making available equivalent benefits or perquisites from other
sources.
6. FORM OF PAYMENT OF SEVERANCE PAY AND LUMP SUM PAYMENTS
Severance Pay shall be paid in cash, in a non-discounted lump sum within
five business days after the date the employment of the Special Severance
Executive terminates. The Pension Lump Sum Amount and the Savings Plan Lump Sum
Amount shall be paid in cash within thirty calendar days after the date the
employment of the Special Severance Executive terminates.
7. TERMINATION OF EMPLOYMENT FOR CAUSE
The only basis upon which the Severance Benefits shall not be provided to a
Special Severance Executive terminated by the Company within two years after an
Acceleration Event is upon a termination of employment for Cause, as defined
herein.
8. ADMINISTRATION OF PLAN
This Plan shall be administered by ITT Industries, who shall have the
exclusive right to interpret this Plan, adopt any rules and regulations for
carrying out this Plan as may be appropriate and decide any and all matters
arising under this Plan, including but not limited to the right to determine
appeals. Subject to applicable Federal and state law, all interpretations and
decisions by ITT Industries shall be final, conclusive and binding on all
parties affected thereby.
Notwithstanding the preceding paragraph, following an Acceleration Event,
any controversy or claim arising out of or relating to this Plan, or the breach
thereof, shall be settled by arbitration administered by the American
Arbitration Association under its Commercial Arbitration Rules and the entire
cost thereof shall be borne by the Company. Judgment on the award rendered by
the arbitrator(s) may be entered in any court having jurisdiction thereof. The
Company shall pay all legal fees, costs of litigation, prejudgment interest, and
other expenses which are incurred in good faith by the Special Severance
Executive as a result of the Company's refusal to provide any of the Severance
Benefits to which the Special Severance
5
Executive becomes entitled under this Plan, or as a result of the Company's (or
any third party's) contesting the validity, enforceability, or interpretation of
this Plan, or as a result of any conflict between the Special Severance
Executive and the Company pertaining to this Plan. The Company shall pay such
fees and expenses from the general assets of the Company.
9. TERMINATION OR AMENDMENT
ITT Industries may terminate or amend this Plan ("Plan Change") at any time
except, that following an Acceleration Event, no Plan Change that would
adversely affect any Special Severance Executive may be made without the prior
written consent of such Special Severance Executive affected thereby.
10. OFFSET
Any Severance Benefits provided to a Special Severance Executive under this
Plan shall be offset by reducing (x) any Severance Pay hereunder by any
severance pay, salary continuation pay, termination pay or similar pay or
allowance and (y) any other Severance Benefits hereunder by corresponding
employee benefits, perquisites or outplacement services, which the Special
Severance Executive receives or is entitled to receive, (i) under the ITT
Industries, Inc. Senior Executive Severance Pay Plan; (ii) pursuant to any other
Company policy, practice, program or arrangement; (iii) pursuant to any Company
employment agreement or other agreement with the Company; or (iv) by virtue of
any law, custom or practice excluding, however, any unemployment compensation in
the United States, unless the Special Severance Executive voluntarily expressly
waives (which the Special Severance Executive shall have the exclusive right to
do) in writing any such respective entitlement.
11. EXCISE TAX
In the event that it shall be determined that any payment or distribution
by the Company to or for the benefit of the Special Severance Executive (whether
paid or payable or distributed or distributable pursuant to the terms of this
Plan or otherwise, but determined without regard to any additional payments
required under this paragraph 11, such payments or distributions being referred
to herein as "Payments") would give rise to liability of the Special Severance
Executive for the excise tax imposed by Section 4999 of the Internal Revenue
Code, as amended (the "Code"), or that any interest or penalties are incurred by
the Special Severance Executive with respect to such excise tax (such excise
tax, together with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then the Special Severance Executive shall be
entitled to receive an additional payment (the "Gross-Up Payment") in an amount
such that after payment by the Special Severance Executive of all Federal, state
and local taxes (including any interest or penalties imposed with respect to
such taxes), including, without limitation, any income and employment taxes (and
any interest and penalties imposed with respect to such taxes) and Excise Tax
imposed upon the Gross-Up Payment, the Special Severance Executive retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments. For this purpose, the Special Severance Executive shall be deemed to
be in the highest marginal rate of Federal, state and local taxes. This payment
shall be made as soon as possible following the date of the Special Severance
Executive's termination of employment, but in no event later than thirty
calendar days of such date.
In the event the Gross-Up Payment shall fail to make the Special Severance
Executive whole on an after-tax basis, the Gross-Up Payment shall be
recalculated ("Recalculated Gross-Up Payment"), using the Special Severance
Executive's actual effective tax rate, once it is known for the calendar year in
which the Gross-Up Payment is made, and the Company shall reimburse the Special
Severance Executive for the full amount of any amount by which the Recalculated
Gross-Up Payment exceeds the Gross-Up Payment ("Additional Gross-Up Payment") .
The Gross-Up Payment and any Additional Gross-Up Payment shall be paid out
of the general assets of the Company.
In the event the Internal Revenue Service subsequently adjusts the excise
tax computation herein described, the Company shall reimburse the Special
Severance Executive for the full amount necessary to make the Special Severance
Executive whole on an after-tax basis (less any amounts received by the Special
Severance Executive that the Special Severance Executive would not have received
had the
6
computations initially been computed as subsequently adjusted), including the
value of any underpaid excise tax, and any related interest and/or penalties due
to the Internal Revenue Service.
12. MISCELLANEOUS
The Special Severance Executive shall not be entitled to any notice of
termination or pay in lieu thereof.
In cases where Severance Benefits are provided under this Plan, pay in lieu
of any unused current year vacation entitlement will be paid to the Special
Severance Executive in a lump sum, in cash within five business days after the
date the employment of the Special Severance Executive terminates.
Severance Benefits under this Plan are paid entirely by the Company from
its general assets.
This Plan is not a contract of employment, does not guarantee the Special
Severance Executive employment for any specified period and does not limit the
right of the Company to terminate the employment of the Special Severance
Executive at any time.
If a Special Severance Executive should die while any amount is still
payable to the Special Severance Executive hereunder had the Special Severance
Executive continued to live, all such amounts shall be paid in accordance with
this Plan to the Special Severance Executive's designated heirs or, in the
absence of such designation, to the Special Severance Executive's estate.
The numbered section headings contained in this Plan are included solely
for convenience of reference and shall not in any way affect the meaning of any
provision of this Plan.
If, for any reason, any one or more of the provisions or part of a
provision contained in this Plan shall be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision or part of a provision of this Plan not
held so invalid, illegal or unenforceable, and each other provision or part of a
provision shall to the full extent consistent with law remain in full force and
effect.
13. ADOPTION DATE
This Plan was adopted by ITT Industries on March 11, 1997 ("Adoption Date")
and does not apply to any termination of employment which occurred or which was
communicated to the Special Severance Executive prior to the Adoption Date.
1
EXHIBIT 10(l)
ITT INDUSTRIES, INC. 1996 RESTRICTED STOCK PLAN
FOR NON-EMPLOYEE DIRECTORS
ARTICLE I -- PLAN ADMINISTRATION AND ELIGIBILITY
1.1 PURPOSE
The purpose of the ITT Industries 1996 Restricted Stock Plan for
Non-Employee Directors (the "Plan") is to attract and retain persons of ability
as directors of ITT Industries, Inc. (the "Company") and to provide them with a
closer identity with the interests of the Company's stockholders by paying the
Annual Retainer in common stock of the Company.
1.2 ADMINISTRATION
The Plan shall be administered by the Compensation and Personnel Committee
of the Board of Directors (hereinafter referred to as the "Committee"). The
Committee shall have the responsibility of interpreting the Plan and
establishing and amending such rules and regulations necessary or appropriate
for the administration of the Plan. All interpretations of the Plan or any
Restricted Stock awards issued under it shall be final and binding upon all
persons having an interest in the Plan. No member of the Committee shall be
liable for any action or determination taken or made in good faith with respect
to this Plan or any award granted hereunder.
1.3 ELIGIBILITY
Directors of the Company who are not employees of the Company or any of its
subsidiaries shall be eligible to participate in the Plan.
1.4 STOCK SUBJECT TO THE PLAN
(a) The maximum number of shares which may be granted under the Plan shall
be 100,000 shares of common stock of the Company (the "Stock").
(b) If any Restricted Stock is forfeited by a Director in accordance with
the provisions of Section 2.2(c), such shares of Restricted Stock shall be
restored to the total number of shares available for grant pursuant to the Plan.
(c) Upon the grant of a Restricted Stock award the Company may distribute
newly issued shares or treasury shares.
ARTICLE II -- RESTRICTED STOCK
2.1 RESTRICTED STOCK AWARDS
Restricted Stock awards shall be made automatically on the date of the
Annual Meeting of Stockholders, to each Director elected at the meeting or
continuing in office following the meeting. The award shall equal the number of
whole shares arrived at by dividing the Annual Retainer that is in effect for
the calendar year within which the award date falls, by the Fair Market Value of
the Company's common stock. Fractional shares shall be paid in cash.
(a) "Annual Retainer" shall mean the amount that is payable to a Director
for service on the Board of Directors during the calendar year. Annual Retainer
shall not include fees paid for attendance at any Board or Committee meeting.
(b) "Fair Market Value" shall mean the average of the high and low prices
per share of the Company's common stock on the date of the Annual Meeting, as
reported by the New York Stock Exchange Composite Tape.
2
2.2 TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS
(a) Written Agreement -- Each Restricted Stock award shall be evidenced by
a written agreement delivered to the Director in such form as the Committee
shall prescribe. Such agreement shall include the restrictions described under
Section 2.2(c) and any other restrictions and conditions on the shares as the
Committee deems appropriate.
(b) Shares held in Escrow -- The Restricted Stock subject to such award
shall be registered in the name of the Director and held in escrow by the
Committee until the restrictions on such shares lapse as described below.
(c) Restrictions -- Restricted Stock granted to a Director may not be sold,
assigned, transferred, pledged or otherwise disposed of, except by will or the
laws of descent and distribution, prior to the earliest of the following dates:
(1) The fifth anniversary of the date of grant.
(2) Retirement from the Board at age 72.
(3) "Change in Control" of the Company. A "Change in Control" shall be
deemed to have occurred if:
(i) a report on Schedule 13D shall be filed with the Securities and
Exchange Commission pursuant to Section 13(d) of the Securities Exchange
Act of 1934 (the "Act") disclosing that any person (within the meaning
of Section 13(d) of the Act), other than the Company or a subsidiary of
the Company or any employee benefit plan sponsored by the Company or a
subsidiary of the Company, is the beneficial owner directly or
indirectly of twenty percent or more of the outstanding Stock of the
Company;
(ii) any person (within the meaning of Section 13(d) of the Act),
other than the Company or a subsidiary of the Company or any employee
benefit plan sponsored by the Company or a subsidiary of the Company,
shall purchase shares pursuant to a tender offer or exchange offer to
acquire any Stock of the Company (or securities convertible into Stock)
for cash, securities or any other consideration, provided that after
consummation of the offer, the person in question is the beneficial
owner (as such term is defined in Rule 13d-3 under the Act), directly or
indirectly, of fifteen percent or more of the outstanding Stock of the
Company (calculated as provided in paragraph (d) of Rule 13d-3 under the
Act in the case of rights to acquire Stock);
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Stock
of the Company would be converted into cash, securities or other
property, other than a merger of the Company in which holders of Stock
of the Company immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger as immediately before, or (B) any sale,
lease, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all the assets of the
Company; or
(iv) there shall have been a change in a majority of the members of
the Board within a 12-month period unless the election or nomination for
election by the Company's stockholders of each new director during such
12-month period was approved by the vote of two-thirds of the directors
then still in office who were directors at the beginning of such
12-month period.
(4) Death of the Director.
(5) Disability of the Director.
(6) Termination of service from the Board on account of (i) a physical
or mental condition that, in the opinion of a qualified physician, is
expected to impede the director's ability to fulfill his or her principal
duties for a period of at least three months; (ii) the relocation of the
Director's principal place of business to a location that increases the
time required for such Director to travel to the Company's headquarters by
more than 50%; (iii) the acceptance by the Director of a position (other
than an honorary position) in the government of the United States, any
State or any municipality or
3
any subdivision thereof or any organization performing any
quasi-governmental function; or (iv) any circumstances which, in the
opinion of outside counsel to the Company, would (or could reasonably be
expected to) conflict with applicable law or any written policy of the
Company.
(d) Dividends and Voting Rights -- The Director shall, subject to Section
2.2(c), possess all incidents of ownership of the shares of Restricted Stock
including the right to receive dividends with respect to such shares and to vote
such shares.
(e) The Company shall deliver to the Director, or the beneficiary of such
Director, if applicable, all of the shares of Stock that were awarded to the
Director as Restricted Stock, within 30 days following the lapse of restrictions
as described under Section 2.2(c). If the Director discontinues serving on the
Board prior to the date upon which restrictions lapse as described under Section
2.2(c), such Director's Restricted Stock will be forfeited by the Director and
transferred to and reacquired by the Company at no cost to the Company.
ARTICLE III -- GENERAL PROVISIONS
3.1 AUTHORITY
Appropriate officers of the Company designated by the Committee are
authorized to execute Restricted Stock agreements, and amendments thereto, in
the name of the Company, as directed from time to time by the Committee.
3.2 ADJUSTMENTS IN THE EVENT OF CHANGE IN COMMON STOCK OF THE COMPANY
In the event of any reorganization, merger, recapitalization,
consolidation, liquidation, stock dividend, stock split, reclassification,
combination of shares, rights offering, split-up, or extraordinary dividend
(including a spin-off) or divestiture, or any other change in the corporate
structure or shares, the number and kind of shares which thereafter may be
granted under the Plan and the number of shares of Restricted Stock awarded
pursuant to Section 2.1 with respect to which all restrictions have not lapsed,
shall be appropriately adjusted consistent with such change in such manner as
the Board in its discretion may deem equitable to prevent substantial dilution
or enlargement of the rights granted to, or available for, Directors
participating in the Plan. Any fractional shares resulting from such adjustments
shall be eliminated.
3.3 RIGHTS OF DIRECTORS
The Plan shall not be deemed to create any obligation on the part of the
Board to nominate any Director for reelection by the Company's stockholders or
to retain any Director at any particular rate of compensation. The Company shall
not be obligated to issue Stock pursuant to an award of Restricted Stock for
which the restrictions hereunder have lapsed if such issuance would constitute a
violation of any applicable law. Except as provided herein, no Director shall
have any rights as a stockholder with respect to any shares of Restricted Stock
awarded to him.
3.4 BENEFICIARY
A Director may file with the Committee a written designation of a
beneficiary on such form as may be prescribed by the Committee and may, from
time to time, amend or revoke such designation. In the event of the death of a
Director, his beneficiary shall have the right to receive the shares of
Restricted Stock awarded pursuant to the Plan. If no designated beneficiary
survives the Director, the executor or administrator of the Director's estate
shall be deemed to be the Director's beneficiary.
3.5 LAWS AND REGULATIONS
The Committee shall have the right to condition any issuance of shares to
any Director hereunder on such Director's undertaking in writing to comply with
such restrictions on the subsequent disposition of such shares as the Committee
shall deem necessary or advisable as a result of any applicable law or
regulation. The Committee may postpone the delivery of Stock following the lapse
of restrictions with respect to awards of Restricted Stock for such time as the
Committee in its discretion may deem
4
necessary, in order to permit the Company with reasonable diligence (i) to
effect or maintain registration of the Plan, or the shares issuable upon the
lapse of certain restrictions respecting awards of Restricted Stock, under the
Securities Act of 1933 or the securities laws of any applicable jurisdiction, or
(ii) to determine that such shares and the Plan are exempt from such
registration; the Company shall not be obligated by virtue of any Restricted
Stock agreement or any provision of the Plan to recognize the lapse of certain
restrictions respecting awards of Restricted Stock or issue shares in violation
of said Act or of the law of the government having jurisdiction thereof.
3.6 AMENDMENT, SUSPENSION AND DISCONTINUANCE OF THE PLAN
The Board may from time to time amend, suspend or discontinue the Plan,
provided that the Board may not, without the approval of the holders of a
majority of the outstanding shares entitled to vote, take any action which would
cause the Plan to no longer comply with Rule 16b-3 under the Act, or any
successor rule or other regulatory requirement.
No amendment, suspension or discontinuance of the Plan shall impair a
Director's right under a Restricted Stock award previously granted to him
without his consent.
3.7 GOVERNING LAW
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of New York.
3.8 EFFECTIVE DATE AND DURATION OF THE PLAN
This Plan shall be effective upon the Distribution Date (as defined in the
Proxy Statement of ITT Corporation dated August 30, 1995) subject to the
approval of the Plan by the stockholders of ITT Corporation, and shall terminate
on December 31, 2005, provided that grants of Restricted Stock made prior to the
termination of the Plan may vest following such termination in accordance with
their terms.
1
EXHIBIT 11
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT PER SHARE DATA)
1996 1995 1994
------ ------ --------
Primary Basis --
Net income........................................................................ $222.6 $707.9 $1,021.8
ESOP preferred dividends -- net of tax............................................ -- (17.2) (34.1)
Dividend requirement on other preferred stock..................................... -- (.6) (1.2)
Preferred dividends on common stock equivalents................................... -- .6 1.2
------ ------ ------
Net income applicable to primary earnings per share............................... $222.6 $690.7 $ 987.7
====== ====== ======
Average common shares outstanding................................................. 117.9 110.6 114.0
Common shares issuable in respect to common stock equivalents..................... 2.5 1.5 1.2
------ ------ ------
Average common equivalent shares.................................................. 120.4 112.1 115.2
====== ====== ======
Earnings Per Share
Continuing operations............................................................. $ 1.85 $ .03 $ 1.46
Discontinued operations........................................................... -- 8.87 7.21
Extraordinary item................................................................ -- (2.74) --
Cumulative effect of accounting changes........................................... -- -- (.10)
------ ------ ------
Net income........................................................................ $ 1.85 $ 6.16 $ 8.57
====== ====== ======
Fully Diluted Basis --
Net income applicable to primary earnings per share............................... $222.6 $690.7 $ 987.7
ESOP preferred dividends -- net of tax............................................ -- 17.2 34.1
If converted ESOP expense adjustment -- net of tax benefit........................ -- (9.9) (20.0)
------ ------ ------
Net income applicable to fully diluted earnings per share......................... $222.6 $698.0 $1,001.8
====== ====== ======
Average common equivalent shares.................................................. 120.4 112.1 115.2
Additional common shares issuable assuming full dilution.......................... -- 5.6 9.7
------ ------ ------
Average common equivalent shares assuming full dilution........................... 120.4 117.7 124.9
====== ====== ======
Earnings Per Share
Continuing operations............................................................. $ 1.85 $ .09 $ 1.46
Discontinued operations........................................................... -- 8.45 6.65
Extraordinary item................................................................ -- (2.61) --
Cumulative effect of accounting changes........................................... -- -- (.09)
------ ------ ------
Net income........................................................................ $ 1.85 $ 5.93 $ 8.02
====== ====== ======
In 1995 and 1994, the Series N convertible preferred stock was considered a
common stock equivalent. With respect to options, it is assumed that the
proceeds received upon exercise are used to acquire common stock of the
Corporation. The dilutive nature of securities is determined quarterly based on
the forecast of annual earnings.
1
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
(IN MILLIONS)
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ --------
Earnings:
Income from continuing operations............................. $222.6 $ 20.7 $201.6 $134.8 $ 655.0
Add (deduct):
Adjustment for distributions in excess of (less than)
undistributed equity earnings and losses(a)............... 1.9 .6 -- (2.6) (30.8)
Income taxes................................................ 148.4 50.2 147.5 65.1 311.3
Amortization of interest capitalized........................ .9 2.5 .7 3.9 2.7
------ ------ ------ ------ --------
373.8 74.0 349.8 201.2 938.2
------ ------ ------ ------ --------
Fixed Charges:
Interest and other financial charges.......................... 169.0 175.2 115.2 154.0 180.0
Interest factor attributable to rentals(b).................... 30.9 29.0 22.0 24.2 24.8
------ ------ ------ ------ --------
199.9 204.2 137.2 178.2 204.8
------ ------ ------ ------ --------
Earnings, as adjusted, from continuing operations............... $573.7 $278.2 $487.0 $379.4 $1,143.0
====== ====== ====== ====== ========
Fixed Charges:
Fixed charges above........................................... $199.9 $204.2 $137.2 $178.2 $ 204.8
Interest capitalized.......................................... 1.1 2.9 6.8 8.0 11.6
------ ------ ------ ------ --------
Total fixed charges......................................... 201.0 207.1 144.0 186.2 216.4
Dividends on preferred stock (pre-income tax basis)(c).......... -- 23.4 47.5 50.0 63.0
------ ------ ------ ------ --------
Total fixed charges and preferred dividend requirements..... $201.0 $230.5 $191.5 $236.2 $ 279.4
====== ====== ====== ====== ========
Ratios:
Earnings, as adjusted, from continuing operations to total
fixed charges............................................... 2.85 1.34 3.38 2.04 5.28
====== ====== ====== ====== ========
Earnings, as adjusted, from continuing operations to total
fixed charges and preferred dividend requirements........... 2.85 1.21 2.54 1.61 4.09
====== ====== ====== ====== ========
- ---------------
Notes:
a) The adjustment for distributions 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.
1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
WHOLLY-OWNED DIRECT OR
INDIRECT SUBSIDIARIES
PERCENTAGE -------------------------------
JURISDICTION OF VOTING OPERATING OPERATING IN
IN WHICH SECURITIES IN THE FOREIGN
NAME ORGANIZED PARENT OWNED UNITED STATES COUNTRIES
- ------------------------------------------- --------------- ---------------- --------------- -------------- ---------------
ITT Industries, Inc. ("ITT Industries").... Indiana -- -- 68 67
International Standard Electric
Corporation ("ISEC")................... Delaware ITT Industries 100 1 51
ITT Delaware Investments, Inc.
("Delaware")......................... Delaware ISEC 100 -- 3
ITT Industries Europe GmbH
("Europe")........................... Germany 50% Delaware 100 -- --
50% ISEC
ITT Automotive Czech Republic........ Czech Republic Europe 100 -- --
ITT Automotive Hungary Kft........... Hungary Europe 100 -- --
ITT Composants et Instruments
S.A. .............................. France Europe 100 -- 1
ITT Flygt AB......................... Sweden Europe 100 -- 15
ITT Gesellschaft fur Beteiligungen
mbH ("ITTG")....................... Germany Europe 99.5 -- 22
ITT Automotive Europe GmbH ("ITT
AUTO")........................... Germany ITTG 100 -- 6
ITT Reiss International GmbH..... Germany ITT AUTO 100 -- --
ITT
Industriebeteiligungsgesellschaft
mbH.............................. Germany ITTG 100 -- 3
ITT Richter Chemie-Technik Gmbh.... Germany ITTG 100 -- 3
ITT Industries (China) Investment
Company, Limited..................... China ISEC 100 1 1
ITT Industries Limited ("ITTUK")....... England ISEC 100 -- 3
ITT Automotive (UK).................. England ITTUK 100 -- --
ITT Defence Ltd...................... England ITTUK 100 -- --
ITT Datacommunications Ltd........... England ITTUK 100 -- --
ITT Automotive Enterprises, Inc.......... Delaware ITT Industries 100 3 2
ITT Automotive, Inc.*.................... Delaware ITT Industries 100 2 2
ITT Canada Limited ("Canada")............ Canada ITT Industries 100 -- 1
ITT Industries of Canada Limited....... Canada Canada 100 -- --
ITT Defense & Electronics**.............. ITT Industries 100 -- --
ITT Federal Services Corporation......... Delaware ITT Industries 100 11 2
ITT Schadow Inc. ........................ Minnesota ITT Industries 100 -- 1
ITT Fluid Technology***.................. ITT Industries 100 -- --
ITT Fluid Technology International....... Delaware ITT Industries 100 -- 3
ITT Flygt Corporation.................... Delaware ITT Industries 100 -- 2
ITT Manufacturing Enterprises, Inc.
("ITTME").............................. Delaware ITT Industries 100 -- 2
ITTG................................. Germany ITTME .5 -- --
ITT Resource Development Corporation
("ITTRDC")............................. Delaware ITT Industries 100 27 --
Carbon Industries, Inc................. West Virginia ITTRDC 100 14 --
ITT Community Development
Corporation.......................... Delaware ITTRDC 100 11 --
Computer Equipment & Leasing
Corporation............................ Wisconsin ITT Industries 100 -- --
Gilcron Corporation...................... Delaware ITT Industries 100 -- --
Palm Coast Utility Corporation........... Florida ITT Industries 100 -- --
- ---------------
See notes on following page.
2
EXHIBIT 21
CONTINUED
- ---------------
Note: The names of some consolidated wholly-owned subsidiaries of ITT Industries
carrying on the same lines of business as other subsidiaries named above
have been omitted, the number of such omitted subsidiaries operating in
the United States and in foreign countries being shown. Also omitted from
the list are the names of other subsidiaries since, if considered in the
aggregate as a single subsidiary, they would not constitute a significant
subsidiary.
* Businesses under ITT Automotive:
Aimco Industries Inc.
Alfred Teves Technologies
Allwork Manufacturing Company
Baylock Manufacturing Company
Hisan, Inc.
ITT AES Enterprises, Inc.
ITT Automotive Electrical Systems, Inc.
ITT Hancock Industries
ITT Higbie Manufacturing Co.
Korea Advanced Brake System
P.E.A. Industrial S.A. de C.V.
Rochester Form Machine
** Businesses under ITT Defense & Electronics:
Avcron Incorporated
Cannon Electric Italiana S.P.A.
Electrix Corporation
Gilcron Corporation
ITT Aerospace/Communications Division
ITT Arctic Services, Inc.
ITT Avionics Division
ITT Cannon Division
ITT Cannon International, Inc.
ITT Cannon Mexico, Inc.
ITT DCD Saudi Arabia, Inc.
ITT Defense & Electronics Division
ITT Federal Services Corporation
ITT Gallium Arsenide Tech Center Division
ITT Gilfillan Division
ITT Gilfillan Inc.
ITT Night Vision Division
ITT Pomona Division
ITT Semiconductors Division
ITT Schadow Inc.
Sealectro International, Inc.
*** Businesses under ITT Fluid Technology:
ITT Aerospace Controls Division
ITT Controls and Instruments Division
ITT Fluid Technology Division
ITT Fluid Technology International
ITT Fluid Transfer Division
ITT FTC Manufacturing Division
ITT Grindex Pump Division
Flygt Holdings Pty Limited
ITT Flygt Corporation
1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ITT Industries, Inc.:
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statements on (i) Form S-3 (File No. 33-45756) and (ii) Form S-8
(File Nos. 33-5412, 33-6004, 33-53771, 333-1109 and 333-04611).
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 26, 1997
5
1,000
YEAR
DEC-31-1996
JAN-01-1996
DEC-31-1996
121,900
0
1,226,800
37,000
856,900
2,289,100
5,091,800
2,925,100
5,491,200
2,538,400
583,200
0
0
118,400
680,800
5,491,200
8,718,100
8,718,100
6,948,400
7,483,600
726,100
3,700
169,000
371,000
148,400
222,600
0
0
0
222,600
1.85
1.85
