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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K/A
AMENDMENT NO. 1
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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
---------- ----------
COMMISSION FILE NO. 1-5672
------------------
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
------------------
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)
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes.... No....
X
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on June 30, 2004 was approximately $7.7
billion.
As of February 28, 2005, there were outstanding 92,281,113 shares of Common
Stock, $1 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of 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 10, 2005, are incorporated by
reference in Part III of this Form 10-K.
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EXPLANATORY NOTE
ITT Industries, Inc. filed its Annual Report on Form 10-K for the year
ended December 31, 2004 on March 11, 2005. The conformed signature of Deloitte &
Touche LLP, the independent registered public accounting firm, was inadvertently
omitted from its report on the consolidated financial statements and financial
statement schedule, and its report on management's report of the effectiveness
of internal control over financial reporting.
ITT Industries, Inc. is filing this amendment to its Annual Report on Form
10-K for the year ended December 31, 2004 to include this information.
1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedule herein.
ITEM 9B. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
ITT Industries, Inc.
White Plains, New York
We have audited management's assessment, included in the accompanying
Management Report on Internal Control Over Financial Reporting, that ITT
Industries, Inc. and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2004, based on the criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. As described in the
Management Report on Internal Control Over Financial Reporting, management
excluded from their assessment the internal control over financial reporting at
WEDECO AG Water Technology ("WEDECO") and Remote Sensing Systems ("RSS"), which
were acquired on January 19, 2004 and August 13, 2004 respectively, and whose
combined financial statements reflect total assets and revenues constituting
17.7 percent and 4.8 percent, respectively, of the related consolidated
financial statement amounts as of and for the year ended December 31, 2004.
Accordingly, our audit did not include the internal control over financial
reporting at WEDECO and RSS. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
Internal Control -- Integrated Framework issued
2
by the Committee of Sponsoring Organizations of the Treadway Commission. Also in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of the Company as of December 31, 2004, and the related consolidated
statements of income, comprehensive income, cash flows, and changes in
shareholders' equity for the year then ended and the financial statement
schedule listed on page S-1, and our report dated March 11, 2005 expressed an
unqualified opinion on those financial statements and financial statement
schedule.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
March 11, 2005
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Documents filed as a part of this report:
1. See Index to Consolidated Financial Statements appearing on page
F-1 for a list of the financial statements filed as a part of this report.
2. See Exhibit Index appearing on page II-2 for a list of the exhibits
filed herein as part of this report. Please note that not all exhibits
filed or incorporated by reference to the Annual Report on Form 10-K filed
on March 11, 2005, were refiled as part of this report.
3
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm..... F-2
Consolidated Income Statements for the years ended December
31, 2004, 2003 and 2002................................... F-3
Consolidated Statements of Comprehensive Income for the
years ended December 31, 2004, 2003 and 2002.............. F-4
Consolidated Balance Sheets as of December 31, 2004 and
2003...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002.......................... F-6
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2004, 2003 and 2002...... F-7
Notes to Consolidated Financial Statements.................. F-8
Business Segment Information................................ F-38
Geographical Information.................................... F-39
Sales and Revenues by Product Category...................... F-39
Quarterly Results for 2004 and 2003......................... F-41
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
ITT Industries, Inc.
White Plains, New York
We have audited the accompanying consolidated balance sheets of ITT
Industries, Inc. and subsidiaries (the "Company") as of December 31, 2004 and
2003, and the related consolidated statements of income, comprehensive income,
cash flows and changes in shareholders' equity for each of the three years in
the period ended December 31, 2004. Our audits also included the financial
statement schedule listed on page S-1. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 11, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
March 11, 2005
F-2
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Year ended December 31,
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
(in millions, except per share amounts)
Sales and revenues................................ $6,764.1 $5,610.8 $4,962.7
-------- -------- --------
Costs of sales and revenues....................... 4,466.4 3,672.0 3,195.8
Selling, general and administrative expenses...... 991.1 817.2 712.7
Research, development and engineering expenses.... 634.0 558.3 518.0
Restructuring and asset impairment charges
(reversals)..................................... 37.7 30.1 (3.5)
-------- -------- --------
Total costs and expenses.......................... 6,129.2 5,077.6 4,423.0
-------- -------- --------
Operating income.................................. 634.9 533.2 539.7
Interest income................................... 22.5 53.3 24.1
Interest expense.................................. 50.4 43.2 56.5
Gain on sale of investments....................... 20.8 -- --
Miscellaneous expense (income).................... 17.8 7.9 (3.6)
-------- -------- --------
Income from continuing operations before income
taxes........................................... 610.0 535.4 510.9
Income tax expense................................ 172.5 141.4 129.6
-------- -------- --------
Income from continuing operations................. 437.5 394.0 381.3
Discontinued operations:
(Loss) income from discontinued operations,
including tax benefit of $2.9, $2.4 and
$0.7......................................... (5.2) 9.9 (1.4)
-------- -------- --------
Net income........................................ $ 432.3 $ 403.9 $ 379.9
======== ======== ========
EARNINGS PER SHARE
Income from continuing operations:
Basic........................................ $ 4.74 $ 4.27 $ 4.19
Diluted...................................... $ 4.63 $ 4.18 $ 4.07
Discontinued operations:
Basic........................................ $ (0.06) $ 0.11 $ (0.02)
Diluted...................................... $ (0.05) $ 0.11 $ (0.01)
Net income:
Basic........................................ $ 4.68 $ 4.38 $ 4.17
Diluted...................................... $ 4.58 $ 4.29 $ 4.06
AVERAGE COMMON SHARES -- BASIC.................... 92.3 92.1 91.0
AVERAGE COMMON SHARES -- DILUTED.................. 94.4 94.1 93.6
-------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-3
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31, 2004
---------------------------------
(in millions)
PRETAX TAX
INCOME (EXPENSE) AFTER-TAX
(EXPENSE) BENEFIT AMOUNT
--------- --------- ---------
Net income.................................................. $432.3
Other comprehensive income (loss):
Foreign currency translation:
Adjustments arising during period...................... $101.5 $ -- 101.5
Minimum pension liability................................. 119.6 (37.8) 81.8
------ ------ ------
Other comprehensive income (loss).................... $221.1 $(37.8) 183.3
------ ------ ------
Comprehensive income........................................ $615.6
======
Year ended December 31, 2003
---------------------------------
(in millions)
Pretax Tax
Income (Expense) After-Tax
(Expense) Benefit Amount
--------- --------- ---------
Net income.................................................. $403.9
Other comprehensive income (loss):
Foreign currency translation:
Adjustments arising during period...................... $188.3 $ -- 188.3
Unrealized gain (loss) on investment securities and cash
flow hedges............................................ 1.7 (0.6) 1.1
Minimum pension liability................................. 282.6 (100.1) 182.5
------ ------- ------
Other comprehensive income (loss).................... $472.6 $(100.7) 371.9
------ ------- ------
Comprehensive income........................................ $775.8
======
Year ended December 31, 2002
---------------------------------
(in millions)
Pretax Tax
Income (Expense) After-Tax
(Expense) Benefit Amount
--------- --------- ---------
Net income................................................. $ 379.9
Other comprehensive income (loss):
Foreign currency translation:
Adjustments arising during period..................... $ 99.0 $ -- 99.0
Unrealized (loss) gain on investment securities and cash
flow hedges........................................... (0.1) -- (0.1)
Minimum pension liability................................ (1,172.2) 406.7 (765.5)
--------- ------ -------
Other comprehensive (loss) income................... $(1,073.3) $406.7 (666.6)
--------- ------ -------
Comprehensive loss......................................... $(286.7)
=======
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-4
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------
2004 2003
------------- -------------
(In millions, except share and
per share amounts)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 262.9 $ 414.2
Receivables, net.......................................... 1,174.3 971.5
Inventories, net.......................................... 708.4 575.8
Current assets of discontinued operations................. 7.3 8.3
Deferred income taxes..................................... 107.2 68.2
Other current assets...................................... 69.1 68.9
-------- --------
Total current assets................................... 2,329.2 2,106.9
-------- --------
Plant, property and equipment, net.......................... 980.9 892.0
Deferred income taxes....................................... 212.1 373.2
Goodwill, net............................................... 2,514.1 1,629.1
Other intangible assets, net................................ 240.3 74.8
Other assets................................................ 1,000.1 861.6
-------- --------
Total non-current assets.................................. 4,947.5 3,830.7
-------- --------
TOTAL ASSETS.............................................. $7,276.7 $5,937.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 719.8 $ 633.1
Accrued expenses.......................................... 717.2 652.7
Accrued taxes............................................. 277.4 253.5
Notes payable and current maturities of long-term debt.... 729.2 141.5
Current liabilities of discontinued operations............ -- 1.1
Other current liabilities................................. 2.2 4.6
-------- --------
Total current liabilities.............................. 2,445.8 1,686.5
-------- --------
Pension benefits............................................ 1,079.7 1,187.7
Postretirement benefits other than pensions................. 298.8 216.2
Long-term debt.............................................. 542.8 460.9
Other liabilities........................................... 566.6 538.6
-------- --------
Total non-current liabilities.......................... 2,487.9 2,403.4
-------- --------
TOTAL LIABILITIES...................................... 4,933.7 4,089.9
Shareholders' Equity:
Common stock: Authorized -- 200,000,000 shares, $1 par
value per share outstanding -- 92,289,113 shares and
92,271,319 shares...................................... 92.3 92.3
Retained earnings......................................... 2,589.1 2,277.1
Accumulated other comprehensive loss:
Unrealized loss on investment securities and cash flow
hedges................................................ (0.6) (0.6)
Minimum pension liability.............................. (520.4) (602.2)
Cumulative translation adjustments..................... 182.6 81.1
-------- --------
Total accumulated other comprehensive loss............. (338.4) (521.7)
-------- --------
Total shareholders' equity............................. 2,343.0 1,847.7
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $7,276.7 $5,937.6
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-5
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------
2004 2003 2002
--------- ------- -------
(in millions)
OPERATING ACTIVITIES
Net income.................................................. $ 432.3 $ 403.9 $ 379.9
Loss (income) from discontinued operations.................. 5.2 (9.9) 1.4
--------- ------- -------
Income from continuing operations........................... 437.5 394.0 381.3
Adjustments to income from continuing operations:
Depreciation and amortization............................. 198.6 186.9 170.5
Restructuring and asset impairments....................... 37.7 30.1 (3.5)
Payments for restructuring.................................. (33.6) (24.6) (32.1)
Change in receivables, inventories, accounts payable, and
accrued expenses.......................................... (85.2) (0.5) 33.1
Change in accrued and deferred taxes........................ 102.4 168.0 126.0
Change in other current and non-current assets.............. (59.9) (202.7) (56.8)
Change in other non-current liabilities..................... (55.2) 25.1 (33.4)
Other, net.................................................. (13.7) 3.4 9.8
--------- ------- -------
Net Cash -- operating activities.......................... 528.6 579.7 594.9
--------- ------- -------
INVESTING ACTIVITIES
Additions to plant, property and equipment.................. (165.1) (153.3) (152.7)
Acquisitions, net of cash acquired.......................... (1,010.0) (46.2) (159.2)
Proceeds from sale of assets and businesses................. 7.4 17.0 11.6
Sale of investments......................................... 24.9 43.5 --
Other, net.................................................. 0.2 (2.0) (3.2)
--------- ------- -------
Net Cash -- investing activities.......................... (1,142.6) (141.0) (303.5)
--------- ------- -------
FINANCING ACTIVITIES
Short-term debt, net........................................ 554.2 (144.1) (235.8)
Long-term debt repaid....................................... (68.7) (42.7) (3.3)
Long-term debt issued....................................... 120.3 0.3 0.7
Repurchase of common stock.................................. (159.6) (69.7) (32.3)
Proceeds from issuance of common stock...................... 76.8 45.3 93.3
Dividends paid.............................................. (61.8) (58.0) (54.3)
Other, net.................................................. (0.2) -- --
--------- ------- -------
Net Cash -- financing activities.......................... 461.0 (268.9) (231.7)
--------- ------- -------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS.......... 17.6 35.4 5.3
NET CASH -- DISCONTINUED OPERATIONS......................... (15.9) 6.8 15.9
--------- ------- -------
Net change in cash and cash equivalents..................... (151.3) 212.0 80.9
Cash and cash equivalents -- beginning of year.............. 414.2 202.2 121.3
--------- ------- -------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $ 262.9 $ 414.2 $ 202.2
========= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.................................................. $ 45.2 $ 43.9 $ 51.5
Income taxes (net of refunds received).................... $ 70.1 $ (26.6) $ 22.4
--------- ------- -------
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-6
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Shares Outstanding Dollars
------------------ ------------------------------
YEAR ENDED DECEMBER 31, 2004 2003 2002 2004 2003 2002
----------------------- ---- ---- ---- -------- -------- --------
(In millions, except per share amounts)
COMMON STOCK
Beginning balance........................... 92.3 91.8 88.8 $ 92.3 $ 91.8 $ 88.8
Stock incentive plans..................... 2.0 1.5 3.7 2.0 1.5 3.7
Repurchases............................... (2.0) (1.0) (0.7) (2.0) (1.0) (0.7)
---- ---- ---- -------- -------- --------
Ending balance............................ 92.3 92.3 91.8 $ 92.3 $ 92.3 $ 91.8
---- ---- ---- -------- -------- --------
RETAINED EARNINGS
Beginning balance........................... $2,277.1 $1,939.1 $1,514.0
Net income................................ 432.3 403.9 379.9
Cash dividend declared on common stock --
$.68, $.64 and $.60.................... (62.8) (59.0) (54.8)
Issuances (repurchases)................... (57.5) (6.9) 100.0
-------- -------- --------
Ending balance............................ $2,589.1 $2,277.1 $1,939.1
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Minimum Pension Liability:
Beginning balance...................... $ (602.2) $ (784.7) $ (19.2)
Recognition of minimum pension
liability............................ 81.8 182.5 (765.5)
-------- -------- --------
Ending balance......................... $ (520.4) $ (602.2) $ (784.7)
-------- -------- --------
Unrealized Loss on Investment Securities
and Cash Flow Hedges:
Beginning balance...................... $ (0.6) $ (1.7) $ (1.6)
Unrealized gain (loss)................. -- 1.1 (0.1)
-------- -------- --------
Ending balance......................... $ (0.6) $ (0.6) $ (1.7)
-------- -------- --------
Cumulative Translation Adjustments:
Beginning balance...................... $ 81.1 $ (107.2) $ (206.2)
Translation of foreign currency
financial statements................. 101.5 188.3 99.0
-------- -------- --------
Ending balance......................... $ 182.6 $ 81.1 $ (107.2)
-------- -------- --------
Total accumulated other comprehensive
loss................................... $ (338.4) $ (521.7) $ (893.6)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY.................. $2,343.0 $1,847.7 $1,137.3
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-7
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION PRINCIPLES:
The consolidated financial statements include the accounts of ITT
Industries, Inc. and all majority owned subsidiaries (the "Company"). The
Company consolidates companies in which it owns more than 50% of the voting
shares. The results of companies acquired or disposed of during the fiscal year
are included in the consolidated financial statements from the effective date of
acquisition or up to the date of disposal. All intercompany transactions have
been eliminated. See Note 23, "Business Segment Information," for a description
of the Company's segments.
SALES AND REVENUE RECOGNITION:
The Company recognizes revenues as services are rendered and when title
transfers for products, subject to any special terms and conditions of specific
contracts. Our Defense Electronics & Services segment generally recognizes sales
and anticipated profits under long-term fixed-price contracts based on the units
of delivery or the completion of scheduled performance milestones. Estimated
contract profits are recorded into earnings in proportion to recorded sales.
During the performance of such contracts, estimated final contract prices and
costs are periodically reviewed and revisions are made as required. The effect
of these revisions to estimates is included in earnings in the period in which
the revisions are made. Sales under cost-reimbursement contracts are recorded as
costs are incurred and include estimated earned fees or profits calculated on
the basis of the relationship between costs incurred and total estimated costs.
For time-and-material contracts, revenue is recognized to the extent of billable
rates times hours incurred plus material and other reimbursable costs incurred.
Anticipated losses on contracts are recorded when first identified by the
Company. Revenue arising from the claims process is not recognized either as
income or as an offset against a potential loss until it can be reliably
estimated and realization is probable.
RESEARCH, DEVELOPMENT AND ENGINEERING:
Significant costs are incurred each year in connection with research,
development, and engineering ("RD&E") 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 75.4%, 78.5% and
78.2% of total RD&E costs were expended pursuant to customer contracts for each
of the three years ended December 31, 2004, 2003 and 2002, respectively.
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:
Most inventories are valued at the lower of cost (first-in, first-out or
"FIFO") or market. A full absorption policy is employed using standard cost
techniques that are periodically reviewed and adjusted when required. Potential
losses from obsolete and slow-moving inventories are recorded when identified.
Domestic inventories valued under the last-in, first-out ("LIFO") method
represent 10.7% and 11.7% of total 2004 and 2003 inventories, respectively.
There would not have been a material difference in the value of inventories if
the FIFO method had been used by the Company to value all inventories.
LONG-LIVED ASSET IMPAIRMENT LOSSES:
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets may be
impaired and the undiscounted net cash flows estimated to be generated by those
assets are less than their carrying amounts. When the undiscounted net cash
flows are less than the carrying amount, losses are recorded for the difference
between the discounted net cash flows of the assets and the carrying amount.
Certain losses recognized in 2003 were recorded in restructuring and asset
impairments. See Note 4, "Restructuring and
F-8
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Asset Impairment Charges," for further discussions on these losses.
PLANT, PROPERTY AND EQUIPMENT:
Plant, property and equipment, including capitalized interest applicable to
major project expenditures, are recorded at cost. For financial reporting
purposes, depreciation is provided on a straight-line basis over the economic
useful lives of the assets involved as follows: buildings and
improvements -- five to 40 years, machinery and equipment -- two to 10 years,
furniture and office equipment -- three to seven years, and other -- five to 40
years. Gains or losses on sale or retirement of assets are included in selling,
general and administrative expenses.
GOODWILL AND OTHER INTANGIBLE ASSETS:
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill, the
excess of cost over the fair value of net assets acquired, and indefinite-lived
intangible assets are tested for impairment on an annual basis, or more
frequently if circumstances warrant.
INVESTMENTS:
Investments for which the Company does not have the ability to exercise
significant influence and for which there is not a readily determinable market
value are accounted for under the cost method of accounting. The Company
periodically evaluates the carrying value of its investments accounted for under
the cost method of accounting. Such investments were recorded at the lower of
cost or estimated net realizable value as of year-end. For investments in which
the Company owns or controls 20% or more of the voting shares, or over which it
exerts significant influence over operating and financial policies, the equity
method is used. The Company's share of net income or losses of equity
investments is included in miscellaneous (income) expense in the Consolidated
Income Statements and was not material in any period presented. Investments are
included in other assets in the Consolidated Balance Sheets.
FOREIGN CURRENCY TRANSLATION:
Balance sheet accounts are translated at the exchange rate in effect at
each year-end; income accounts are translated at the average rates of exchange
prevailing during the year. Gains and losses on foreign currency translations
are reflected in the cumulative translation adjustments component of
shareholders' equity. The national currencies of the foreign companies are
generally the functional currencies. Net (losses)/gains from foreign currency
transactions are reported currently in selling, general and administrative
expenses and were $(0.9), $4.1 and $0.2 in 2004, 2003, and 2002, 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. Changes
in the spot rate of instruments designated as hedges of the net investment in a
foreign subsidiary are reflected in the cumulative translation adjustments
component of shareholders' equity. The Company and its subsidiaries are
end-users and do not utilize these instruments for speculative purposes. The
Company has rigorous standards regarding the financial stability and credit
standing of its major counterparties.
Additionally, all derivative instruments are recorded on the balance sheet
at fair value as derivative assets or derivative liabilities. Subject to certain
specific qualifying conditions in SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), a derivative instrument
may be designated either as a hedge of the fair value of an asset or liability
(fair value hedge), or as a hedge of the variability of cash flows of an asset
or liability or forecasted transaction (cash flow hedge). For a derivative
instrument qualifying as a fair value hedge, fair value gains or losses on the
derivative instrument are reported in net income, together with offsetting fair
value gains or losses on the hedged item that are attributable to the risk being
hedged. For a derivative instrument qualifying as a cash flow hedge, fair
F-9
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value gains or losses associated with the risk being hedged are reported in
other comprehensive income and released to net income in the period(s) in which
the effect on net income of the hedged item is recorded. Fair value gains and
losses on a derivative instrument not qualifying as a hedge are reported in net
income.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net payments are
recognized as an adjustment to interest. If the swaps were terminated,
unrealized gains or losses would be deferred and amortized over the shorter of
the remaining original term of the hedging instrument or the remaining life of
the underlying debt instrument. Such gains or losses would be reflected in net
interest expense.
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
other liabilities in the Consolidated Balance Sheets at undiscounted amounts and
exclude claims for recoveries from insurance companies or other third parties.
Recoveries from insurance companies or other third parties are included in other
assets when it is probable that a claim will be realized.
STOCK-BASED EMPLOYEE COMPENSATION:
At December 31, 2004, the Company has one stock-based employee compensation
plan that is issuing new options and restricted shares. The Company also has one
stock-based employee compensation plan and two stock-based non-employee
director's compensation plans that have options and restricted shares
outstanding; however no new awards will be granted under these plans. These
plans are described more fully in Note 20, "Shareholders' Equity." The Company
accounts for these plans under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Had compensation cost for these plans been determined based on
the fair value recognition provisions of SFAS No. 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:
2004 2003 2002
------ ------ ------
Net income
As reported......................... $432.3 $403.9 $379.9
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for awards not reflected in net
income -- net of tax............... (22.1) (6.0) (21.4)
------ ------ ------
Pro forma net income............... $410.2 $397.9 $358.5
Basic earnings per share
As reported........................ $ 4.68 $ 4.38 $ 4.17
Pro forma.......................... 4.44 4.32 3.94
Diluted earnings per share
As reported........................ $ 4.58 $ 4.29 $ 4.06
Pro forma.......................... 4.35 4.23 3.83
------ ------ ------
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 2004, 2003 and 2002: dividend yield of 1.39%, 1.57%
and 1.65%, respectively; expected volatility of 25.77%, 28.72% and 28.30%,
respectively; expected life of six years; and risk-free interest rates of 3.71%,
3.37% and 4.78%, respectively.
The value of stock-based compensation that was recognized in selling,
general and administrative expenses within the Consolidated Income Statements
during the periods ended December 31, 2004, 2003 and 2002 were $1.6, $0.7, and
$0.6, respectively.
F-10
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE:
Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted average
number of common shares outstanding and potentially dilutive common shares,
which include stock options.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Estimates are revised as additional information
becomes available. Actual results could differ from those estimates.
RECLASSIFICATIONS:
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the current year presentation.
NOTE 2
CHANGES IN ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123R") which is a
revision of SFAS No. 123, "Accounting for Stock-Based Compensation." This
statement eliminates the option of using the intrinsic value method of
accounting for employee stock options (historically utilized by the Company),
which generally resulted in the recognition of no compensation cost. The
provisions of the SFAS No. 123R require the recognition of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of the awards as determined by option pricing models. The calculated
compensation cost is recognized over the period that the employee is required to
provide services per the conditions of the award. SFAS No. 123R is effective for
the Company July 1, 2005. The adoption of this statement will not have a
material impact on the Company's financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised December 2003)
"Employers' Disclosures About Pensions and Other Post Retirement Benefits"
("SFAS No. 132"). This revised pronouncement retains the disclosure requirements
of SFAS No. 132. Additionally, the pronouncement requires additional disclosures
regarding the types of plan assets, investment strategy, measurement dates, plan
obligations, cash flows and components of net periodic benefit cost recognized
during interim periods for defined benefit pension plans and other defined
benefit post retirement plans. The Company adopted this pronouncement effective
December 31, 2003. Adoption did not have a material impact on the financial
statements of the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). The standard requires that legal
obligations associated with the retirement of tangible long-lived assets be
recorded at fair value when incurred. The Company adopted SFAS No. 143 effective
January 1, 2003. The adoption of the pronouncement did not have a material
impact on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured at its fair value in the period it is
incurred and applies prospectively to such activities that are initiated after
December 31, 2002. The adoption of this standard did not have a material effect
on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS No. 148"). SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also requires prominent
disclosures in both annual and interim financial state-
F-11
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ments about the method of accounting for stock-based employee compensation and
the effect of the method on reported results. The Company adopted the disclosure
requirements of SFAS No. 148 effective December 2002 and continues to account
for its plans under the intrinsic value recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issues to Employees."
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). SFAS No. 149 clarifies the circumstances under which a
contract with an initial net investment meets the characteristics of a
derivative as discussed in SFAS No. 133. In addition, SFAS No. 149 clarifies
when a derivative contains a financing component that warrants special reporting
in the statement of cash flows. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of this statement did not have a material
effect on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 requires certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity to be classified as liabilities. The provisions of SFAS No. 150 were
effective for financial instruments entered into or modified after May 31, 2003
and to all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. The Company did not
have any financial instruments that met the provisions of SFAS No. 150;
therefore, the adoption of this statement did not have a material effect on the
Company's financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an
amendment of ARB No. 43,Chapter 4"("SFAS No. 151") This statement clarifies the
criteria of "abnormal amounts" of freight, handling costs, and spoilage that are
required to be expensed as current period charges rather than deferred in
inventory. In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for the Company July 1,
2005. The Company is currently in the process of determining the impact of this
statement on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the
recognition of liabilities for guarantees that are issued or modified subsequent
to December 31, 2002. The liabilities should reflect the fair value, at
inception, of the guarantors' obligations to stand ready to perform, in the
event that the specified triggering events or conditions occur. This
interpretation also requires disclosure of accounting policies and methodologies
with respect to warranty accruals, as well as a reconciliation of the change in
these accruals for the reporting period. Refer to Note 22, "Guarantees,
Indemnities and Warranties," for additional information. The adoption of this
interpretation did not have a material effect on the Company's financial
statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership among
their owners and other parties involved. The provisions of FIN 46 were
applicable to all variable interest entities created after January 31, 2003 and
variable interest entities in which an enterprise obtains an interest in after
that date. For variable interest entities created before January 31, 2003, the
provisions were effective December 31, 2003. The Company did not create or
obtain any variable interest entities during 2003.
F-12
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company elected early adoption of the provisions of FIN 46 related to
variable interest entities created prior to January 31, 2003 as of July 1, 2003.
The adoption of this interpretation did not have a material effect on the
Company's financial statements. In December 2003, the FASB issued a revision to
FIN 46; however, it had no impact on the Company's adoption.
In January 2004, FASB Staff Position ("FSP") No. 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" ("FSP No. 106-1") was issued. Subsequently, FSP
No. 106-2 was issued, which amends FSP No. 106-1 and discusses the recognition
of the effects for the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the "Medicare Modernization Act") in the accounting for
postretirement health care plans under SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and in providing disclosures
related to the plan required by SFAS No. 132. The Company adopted this
pronouncement effective July 1, 2004, but was unable to conclude whether
benefits of its plans are actuarially equivalent based on the proposed
regulations released in August 2004. Currently, the Company is analyzing the
effect of the Medicare Modernization Act on the Company's plans based on the
final regulations issued at the end of January 2005 and has not taken any action
at this time to reflect the Medicare changes. In addition, it was assumed that
the adoption of this pronouncement did not affect demographic factors used to
determine plan assets and obligations at December 31, 2004, the Company's
measurement date. See Note 19, "Employee Benefit Plans," for discussion of
postretirement benefits.
In December 2004, the FASB issued FSP 109-1, "Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004 ("FSP
109-1")." The American Jobs Creation Act of 2004 (the "AJCA") provides for a tax
relief for U.S. domestic manufacturers. FSP 109-1 states that tax benefit should
be recorded in the year in which it can be taken in the Company's tax return
rather than reflecting a deferred tax asset in the period the AJCA was enacted.
FSP 109-1 was effective upon issuance. Adoption of FSP 109-1 did not have a
material effect on the Company's financial statements.
In December 2004, the FASB issued FSP 109-2, "Accounting Disclosures
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004 ("FSP 109-2"). The Foreign Earnings Repatriation
Provision Within the Act (the "Provision") provides a special limited-time
dividends received deduction on the repatriation of certain foreign earnings to
a U.S. taxpayer. FSP 109-2 states that a company should recognize the income tax
effect related to the Provision when it decides on a plan for reinvestment or
repatriation of foreign earnings. At this time, the Company does not expect to
elect to apply this provision of the AJCA.
NOTE 3
ACQUISITIONS
2004 ACQUISITIONS
On August 13, 2004, the Company purchased all of the Remote Sensing Systems
business ("RSS") for $736.9 in cash. The RSS business is a leading supplier of
high resolution satellite imaging systems and information services. Management
believes that the acquisition of RSS will enhance the Company's competitive
position in the space payload and service product offering industry and create a
full spectrum provider with the latest visible and infrared satellite imaging
technology in the remote sensing market.
The excess of the purchase price of RSS over the fair value of net assets
acquired of $597.6 was recorded as goodwill and is deductible for tax purposes.
The entire goodwill balance is reflected in the Defense Electronics & Services
segment.
The Company has preliminarily assigned values to the assets and liabilities
of RSS; however, the allocation is subject to further refinement.
The following table summarizes the fair value of assets acquired and
liabilities assumed at the date of acquisition. The purchase price
F-13
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allocations were based on preliminary data and changes are expected as
evaluations of items, such as employee benefit obligations, are finalized and
additional data becomes available.
AT AUGUST 13, 2004
------------------
Current assets........................................ $ 97.5
Plant, property and equipment......................... 64.0
Goodwill.............................................. 597.6
Intangibles........................................... 124.9
Other assets.......................................... 24.4
------
Total assets acquired................................. 908.4
------
Current liabilities................................... 63.7
Deferred liabilities.................................. 107.8
------
Total liabilities..................................... 171.5
------
Net assets acquired................................... $736.9
======
The $124.9 of intangible assets is comprised of $120.0 of customer
relationships (amortized over 16 years), $3.4 of maintenance contracts
(amortized over 15 years) and $1.5 of product software (amortized over 12
years).
The Company also spent $273.1 on additional 2004 acquisitions that it does
not believe are material individually or in the aggregrate to its results of
operations or financial condition. These acquisitions include:
- WEDECO AG Water Technology ("WEDECO"), the world's largest manufacturer of UV
disinfection and ozone oxidation systems, which are alternatives to chlorine
treatment.
- Allen Osborne Associates, Inc. ("AOA"), a leader in the development of global
positioning system receivers for both portable and fixed sites.
- Shanghai Hengtong Purified Water Development Co. Ltd. and Shanghai Hengtong
Water Treatment Engineering Co. Ltd. ("Hengtong"), a Shanghai-based producer
of reverse-osmosis, membrane and other water treatment systems for the power,
pharmaceutical, chemical and manufacturing markets in China.
- Cleghorn Waring and Co. (Pumps) Limited, a distributor of pumps and marine
products.
The excess of the purchase price over the fair value of net assets acquired
in these transactions of $247.0 was recorded as goodwill, of which $240.1, $3.5
and $3.4 are reflected in the Fluid Technology, Defense Electronics & Services
and Motion & Flow Control segments, respectively. Additionally, the purchase
price allocations for the 2004 acquisitions were based on preliminary data and
changes are expected as evaluations are finalized and additional information
becomes available.
Intangibles assets relating to the acquisitions of WEDECO and AOA, totaled
$56.2. This amount includes $25.4 of proprietary technology and other (amortized
over 15 years), $18.8 of customer relationships (amortized over 10 years), and
$12.0 of indefinite-lived tradenames.
The Company also finalized purchase price allocations related to the 2003
acquisitions, which resulted in an increase in goodwill of $1.5.
PRO FORMA RESULTS
The following unaudited pro forma financial information presents the
combined results of operations of the Company and RSS as if RSS was acquired on
January 1, 2004 and 2003. The pro forma results presented below for 2004 combine
the results of the Company for 2004 and the historical results of RSS from
January 1, 2004 to August 12, 2004, respectively. The pro forma results
presented for the 2003 combine the results of the Company for 2003 and the
historical results of RSS for the comparable period. The unaudited pro forma
financial information is not intended to represent or be indicative of the
Company's consolidated results of operations that would have been reported had
RSS been acquired as of the beginning of the periods presented and should not be
taken as indicative of the Company's future consolidated results of operations.
Pro forma adjustments are tax effected at the Company's effective tax rate in
each of the periods presented.
2004 2003
-------- --------
Sales and Revenues........................ $7,075.6 $6,035.5
-------- --------
Net Income................................ $ 436.0 $ 418.8
-------- --------
Diluted earnings per share................ $ 4.62 $ 4.45
-------- --------
F-14
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2003 ACQUISITIONS
During 2003, the Company spent $46.2 primarily for the acquisition of two
entities, one in the Electronic Components segment and one in the Fluid
Technology segment. The excess of the purchase price over the fair values of net
assets acquired of $30.5 was recorded as goodwill, of which $5.6 was tax
deductible. The Electronic Components segment was assigned $24.0 of the goodwill
balance and the Fluid Technology and Motion & Flow Control segments were
assigned $5.4 and $1.1, respectively. All of the acquisitions were accounted for
as purchases and, accordingly, the results of operations of each acquired
company are included in the Consolidated Income Statement from the date of
acquisition. The Company does not believe the acquisitions are material
individually or in the aggregate to its results of operation or financial
condition; however, the larger of the acquisitions were as follows:
- The VEAM/TEC Division of the Northrop Grumman Corporation, a designer and
manufacturer of cylindrical, filter and fiber optic connectors for the
military/aerospace, industrial, transit, entertainment and nuclear markets.
- Uniservice Wellpoint Srl., a manufacturer of high quality diesel and electric
powered, vacuum primed centrifugal pumps, along with spear or well point
dewatering systems for the rental market and sale.
Additionally, in 2003, the Company finalized purchase price allocations
related to the 2002 acquisitions, which resulted in a decrease in goodwill of
$5.1.
2002 ACQUISITIONS
During 2002, the Company spent $159.2 primarily for the acquisition of nine
entities. Eight of the entities were additions to the Fluid Technology segment
and one was within the Defense Electronics & Services segment. The Company does
not believe the acquisitions are material individually or in the aggregate to
its results of operations or financial condition; however, the larger of the
acquisitions were as follows:
- Flowtronex PSI Inc. ("Flowtronex"), a manufacturer of modular pumping systems
for golf courses and other turf irrigation, sports fields, municipal and
commercial properties.
- PCI Membranes, a provider of membrane filtration and chlorine disinfection
systems for water treatment and industrial water reuse.
- The Biopharm Manufacturing Division of Martin Petersen Company, Inc., a
leading manufacturer of process systems for the biopharmaceutical industry.
The Company recognized $117.2 of goodwill from these acquisitions, of which
approximately $69.0 was tax deductible. The Fluid Technology segment was
assigned $116.6 of goodwill and the Defense Electronics & Services segment was
assigned the remaining $0.6.
In addition, in 2002, the Company finalized purchase price allocations
associated with a 2001 acquisition which reduced goodwill by $9.2.
NOTE 4
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
2004 RESTRUCTURING ACTIVITIES
During the fourth quarter of 2004, the Company recognized a $12.4 charge,
primarily for the planned severance of 727 employees. The actions by segment are
as follows:
- The Fluid Technology segment recorded $9.3 for the planned termination of 80
employees, including 20 factory workers and 60 office workers. Other costs
totaling $0.3 were also recognized during the quarter.
- The Motion & Flow Control segment recognized $1.8 for the planned termination
of 43 employees, including 14 factory workers, 25 office workers and four
management employees. The segment also recorded $0.1 for outplacement.
- The Electronic Components segment recorded $0.9 for the planned termination of
604 employees. The terminations include 17 office workers and 587 factory
workers.
In addition to the restructuring actions announced during the fourth
quarter, the Motion & Flow Control segment recognized $0.5 of severance and
employee benefit costs related to actions announced during the first quarter of
2003 and $0.1 of outplacement related to actions announced in 2002. Electronic
Compo-
F-15
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nents recognized an additional $0.5 of severance related to actions announced
during the first quarter of 2004 and an additional $0.1 of moving costs related
to actions announced in the third quarter of 2004.
During the third quarter of 2004, the Company recognized a $5.5 charge,
primarily for the planned severance of 71 employees and movement of production.
The actions by segment are as follows:
- The Fluid Technology segment recorded $3.3 for the planned termination of 36
employees, including nine factory workers, 23 office workers and four
management employees. Other costs totaling $0.2 were also recognized during
the quarter.
- The Motion & Flow Control segment recognized $0.5 for the planned termination
of 30 employees, including 23 factory workers and seven office workers. The
segment also recorded $0.6 for relocation and moving costs.
- The Electronic Components segment recorded $0.2 for the planned termination of
five employees. The terminations include four office workers and one
management employee. The segment also recorded a $0.7 charge primarily for
costs associated with moving two product lines from Weinstadt, Germany to
Shenzhen, China and one product line from Santa Ana, CA to Nogales, Mexico.
In addition to the restructuring actions announced during the third
quarter, the Motion & Flow Control segment recognized $0.1 of severance and
employee benefit costs related to actions announced during the first quarter of
2003.
During the second quarter of 2004, the Company recognized a $13.6 charge,
primarily for the planned severance of 418 employees and the recognition of
lease cancellation fees. The actions by segment are as follows:
- The Electronic Components segment recorded $4.5 of the charge for the
recognition of lease cancellation costs. Severance of $0.9 was recorded for
the planned reduction of 328 employees. The terminations include 273 factory
workers, 52 office workers and three management employees. The segment also
recorded a $1.1 charge for the disposal of machinery and equipment.
- The Fluid Technology segment recorded $2.4 for the planned termination of 45
employees, including eight factory workers and 37 office workers. Lease
commitments totaling $0.7 were recognized related to the closure of two
facilities (one in Sweden and one in Florida). Asset write-offs and other
costs totaling $0.2 and $0.1, respectively, were also recognized during the
quarter.
- The Motion & Flow Control segment recognized $2.1 for the planned termination
of 44 employees, including seven factory workers, 32 office workers and five
management employees.
- Corporate headquarters recorded $1.6 for the severance of one management
employee.
In addition to the restructuring actions announced during the second
quarter, the Motion & Flow Control segment recognized $0.3 of severance and
employee benefit costs related to actions announced during the first quarter of
2003 and the Electronic Components segment recognized $0.3 of severance and
employee benefit costs related to actions announced during the first quarter of
2004 and $0.1 of outplacement related to actions announced in 2003.
During the first quarter of 2004, the Company recognized a $5.3 charge,
primarily for the planned severance of 103 employees. The actions by segment are
as follows:
- The Fluid Technology segment recorded $2.7 for the planned termination of 50
employees, including 15 factory workers and 35 office workers. Asset
write-offs and other costs totaling $0.4 and $0.1, respectively, were also
recognized during the quarter.
- The Electronic Components segment recorded $1.7 of the charge primarily for
the planned reduction of 35 employees, including 23 factory workers, 11 office
workers and one management employee.
- The Motion & Flow Control segment recognized $0.2 for the planned termination
of 16 employees, including three factory workers and 13 office workers.
F-16
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Corporate headquarters recorded $0.2 for the planned severance of one office
worker and one management employee.
2003 RESTRUCTURING ACTIVITIES
During the fourth quarter of 2003 the Company announced actions to reduce
operating costs primarily through the reduction of headcount. The new $15.3
restructuring charge primarily reflects the planned severance of 296 employees.
The actions by segment are as follows:
- The Electronic Components segment recorded $1.4 of the charge for the planned
termination of 127 employees, including 113 factory workers, ten office
workers and four management employees.
- The Fluid Technology segment recognized $12.4 of the charge for the planned
severance of 134 employees, including 39 factory workers, 90 office workers
and five management employees. Lease and other costs represent $0.3 of the
charge. The segment also recorded a $0.2 charge associated with the disposal
of machinery and equipment.
- The Defense Electronics & Services segment recorded a $1.0 charge for the
planned severance of 35 employees, including seven factory workers, 19 office
workers and nine management employees.
In addition to the new restructuring actions announced during the fourth
quarter, the Motion & Flow Control segment recognized $0.5 of severance and
employee benefit costs related to actions announced during the first quarter and
the Electronic Components segment recognized $0.2 of outplacement related to
actions announced earlier in 2003.
During the third quarter of 2003 the Company announced actions to reduce
operating costs primarily through the reduction of headcount. The $2.6
restructuring charge primarily reflects the planned severance of 71 employees.
The actions by segment are as follows:
- The Electronic Components segment recorded $1.2 of the charge for the planned
termination of 39 employees, including 15 factory workers and 24 office
workers. The segment also recorded a $0.1 charge associated with the disposal
of machinery and equipment.
- The Fluid Technology segment recognized a $0.5 charge for the planned
severance of 13 factory workers and 14 office workers. Lease and other costs
represent $0.4 of the charge.
- The Motion & Flow Control segment recorded a $0.4 charge for the planned
severance of one management employee and four office workers.
In addition to the restructuring actions announced during the third
quarter, the Motion & Flow Control segment recognized $0.2 of severance and
employee benefit costs related to actions announced during the first quarter.
During the second quarter of 2003 the Company continued its program to
reduce structural costs and increase profitability. Restructuring actions
totaling $4.4 were announced during the period. The charge primarily reflected
the planned severance of 143 employees and the cancellation of an operating
lease. The actions by segment are as follows:
- The Electronic Components segment comprises $2.4 of the charge and the actions
taken at this segment include the planned termination of five management
employees, 19 factory workers and 67 office workers.
- The Motion & Flow Control segment recognized $1.0 for the planned severance of
50 employees, including six management employees, 31 factory workers and 13
office workers. Lease termination fees of $0.7 and asset disposal costs of
$0.1 were also reflected in the charge.
- At Corporate Headquarters, a charge of $0.2 was recorded for the planned
termination of one management employee and one office worker.
In addition to the restructuring actions announced during the second
quarter, the Motion & Flow Control segment recognized $1.2 of severance and
employee benefit costs related to actions announced during the first quarter.
During the first quarter of 2003 the Company recorded an $8.9 restructuring
charge primarily for the planned severance of 461 persons. Severance of $8.2
represents the majority
F-17
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the charge. The actions by segment are as follows:
- The Electronic Components segment recorded $6.7 of the charge for the planned
termination of 222 persons, comprised of 98 office workers, 116 factory
workers and eight management employees. Idle facility costs of $0.3 and asset
disposal costs of $0.4 were also reflected in the charge. The actions were
prompted by management's projections of continued weakness in certain
businesses.
- Corporate Headquarters recorded $1.1 of the charge for the consolidation of
administrative tasks, including the planned termination of two management
employees.
- The Motion & Flow Control segment recorded $0.4 of the charge for the planned
termination of 237 employees, comprised of 21 office workers and 216 factory
workers. The charge relates to the closure of a manufacturing facility in
Arkansas. The actions will be completed during 2003 and 2004 and the total
estimated charge of approximately $2.6 will be recognized ratably over the
restructuring period as the terminations become effective. Management deemed
the restructuring actions necessary to address the anticipated loss of certain
platforms during the second half of 2003.
Also during 2003, the Company recorded a $1.4 asset impairment charge
primarily for a technology license that will not be utilized based on
management's projections of future market conditions. The applicable assets were
written down to their fair values based on management's comparison of projected
future discounted cash flows generated by each asset to the applicable asset's
carrying value. These impairments were unrelated to the Company's restructuring
activities.
2002 RESTRUCTURING ACTIVITIES
Restructuring charges for the year ended December 31, 2002 are detailed in
the following table:
CASH
RESTRUCTURING
-------------
Electronic Components......................... $0.6
Fluid Technology.............................. 6.0
Motion & Flow Control......................... 3.0
----
Total 2002 charges............................ $9.6
====
During the fourth quarter of 2002, the Company recorded a $9.6
restructuring charge primarily for the closure of two facilities and the planned
severance of 292 persons. Severance of $8.5 represents a majority of the charge
and lease payments and other costs represent the remainder. The actions
primarily occurred in the Fluid Technology and the Motion & Flow Control
segments.
The actions within the Fluid Technology segment represent a reduction of
its cost structure that management deemed necessary in response to continued
weakness within certain of the segment's markets. Planned measures include the
closure of the Fairfield, NJ facility and the termination of 147 persons,
comprised of 78 office workers, 65 factory workers and four management
employees.
The restructuring plan within the Motion & Flow Control segment was driven
by the anticipated loss of certain platforms in the automotive fluid handling
systems business during 2003 and the resulting excess capacity. Planned actions
include the closure of the Rochester, NY facility, the consolidation of
manufacturing and administrative processes, and the termination of 140
employees, comprised of 40 office workers, 97 factory workers and three
management employees.
The actions within the Electronic Components segment represent cost control
actions and include the termination of five employees, comprised of three office
workers and two management employees.
2001 RESTRUCTURING ACTIVITIES
On December 14, 2001, the Company announced a restructuring program to
reduce structural costs and improve profitability
F-18
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
whereby the Company recorded a charge of $82.9 related to the closure of five
facilities, the discontinuance of 21 products (10 in the Switch product group
and 11 in the Connectors group), the severance of 3,386 persons and other asset
impairments. The cash portion of the charge of $60.6 primarily relates to
severance and lease termination costs. The non-cash portion of the charge of
$22.3 primarily relates to machinery and equipment that became impaired as a
result of the announced plans.
Also in the fourth quarter of 2001, the Company recorded asset impairments
amounting to $14.4 for machinery and equipment and a cost based investment.
These assets were written down to their fair values based on management's
projections of the individual future cash flows to be generated by each of the
assets. These assets were reviewed for impairment in the fourth quarter of 2001,
because at that time business events indicated that the carrying amounts of the
assets may not be recovered. Management deemed the market decline experienced in
2001 for certain products to be other than temporary and recognized that there
exists significant pricing pressure in the Electronic Components segment that is
expected to continue.
The following table displays a rollforward of the cash restructuring
accruals:
DEFENSE MOTION CORPORATE
FLUID ELECTRONICS & FLOW ELECTRONIC AND
YEAR ENDED DECEMBER 31, TECHNOLOGY & SERVICES CONTROL COMPONENTS OTHER TOTAL
----------------------- ---------- ----------- ------- ---------- --------- ------
Balance January 1, 2002........... $11.5 $ 1.0 $ 7.1 $ 28.7 $ 3.6 $ 51.9
Payments and other related to
prior charges................... (9.2) -- (4.1) (15.6) (2.3) (31.2)
Reversals of prior charges........ (1.5) (1.0) (1.5) (8.7) (0.4) (13.1)
2002 charge....................... 6.0 -- 3.0 0.6 -- 9.6
Payments related to the 2002
charge.......................... (0.3) -- -- (0.6) -- (0.9)
----- ----- ----- ------ ----- ------
Balance December 31, 2002......... $ 6.5 $ -- $ 4.5 $ 4.4 $ 0.9 $ 16.3
Payments and other related to
prior charges................... (5.3) -- (3.3) (2.1) (0.8) (11.5)
Reversals of prior charges........ -- -- (0.1) (0.9) -- (1.0)
2003 charges...................... 13.6 1.0 4.4 12.2 1.3 32.5
Reversal of 2003 charges.......... -- -- -- (3.4) -- (3.4)
Payments and other related to the
2003 charges.................... (3.5) (0.2) (1.8) (6.7) (0.6) (12.8)
----- ----- ----- ------ ----- ------
Balance December 31, 2003......... $11.3 $ 0.8 $ 3.7 $ 3.5 $ 0.8 $ 20.1
Additional charges for prior year
plans........................... -- -- 1.0 0.1 -- 1.1
Payments and other related to
prior charges................... (9.9) (0.7) (3.5) (2.2) (0.6) (16.9)
Reversals of prior charges........ (0.4) -- -- (0.5) -- (0.9)
2004 charges...................... 19.1 -- 5.3 9.8 1.8 36.0
Reversal of 2004 charges.......... -- -- (0.1) -- (0.1) (0.2)
Payments and other related to the
2004 charges.................... (9.0) -- (2.2) (4.5) (0.8) (16.5)
----- ----- ----- ------ ----- ------
Balance December 31, 2004......... $11.1 $ 0.1 $ 4.2 $ 6.2 $ 1.1 $ 22.7
===== ===== ===== ====== ===== ======
During the third and fourth quarters of 2004, a total of $0.2 of
restructuring accruals related to 2004 restructuring actions were reversed into
income.
During the second quarter of 2004, $0.1 and $0.2 of restructuring accruals
related to 2003 and 2002 restructuring actions, respectively, were reversed into
income. The reversals related to the 2003 actions primarily reflect lower than
anticipated severance costs on completed actions at the Electronic Components
segment. The reversals related to the 2002 actions represent lower than
anticipated severance costs on completed actions at the Fluid Technology
segment.
F-19
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the first quarter of 2004, $0.2 and $0.4 of restructuring accruals
related to 2003 and 2001 restructuring actions, respectively, were reversed into
income. The reversals related to the 2003 actions primarily reflect lower than
anticipated severance costs on completed actions due to favorable employee
attrition at the Electronic Components segment. The reversals associated with
the 2001 actions represent lower than anticipated closed facility costs.
During 2003, $3.4, $0.1 and $0.9 of restructuring accruals related to 2003,
2002 and 2001 programs, respectively, were reversed into income as a result of
quarterly reviews of the Company's remaining restructuring actions. The
reversals primarily reflected lower than anticipated severance costs on
completed actions and favorable employee attrition at the Electronic Components
segment. Additionally, certain actions were not completed as they were no longer
deemed feasible. The Company also reversed other non-cash charges totaling $0.2.
During the third and fourth quarters of 2002, $13.1 of restructuring
accruals were reversed into income as a result of quarterly reviews of the
Company's remaining restructuring actions. The reversals applicable to 2001
planned restructuring actions totaled $11.8 and primarily reflect less than
anticipated severance costs on completed actions at each of the segments, the
decision not to transfer five product lines (from Santa Ana, California;
Weinstadt, Germany; Dole, France, and Basingstoke, UK, to Shenzhen and Tianjin,
China), as supply chain issues eliminated the financial viability of the
transfers, and the decision to continue partial operations at one of the
Electronic Components' facilities. In addition, management determined that one
facility within the Fluid Technology segment would remain operational as a
suitable outsource supplier could not be identified. The remaining $1.3 of
restructuring reversals represents accruals under earlier restructuring plans
that management determined will not be incurred.
At December 31, 2003, the accrual balance for restructuring activities was
$20.1. Cash payments of $33.6 and additional cash charges of $37.1 were recorded
in 2004. Also, management reviewed the Company's remaining restructuring actions
and determined that certain 2004, 2003, 2002 and 2001 actions totaling $1.1
would be completed for less than planned. Accordingly, restructuring accruals
totaling $1.1 were reversed into income during 2004. The accrual balance
increased by $0.2 due to the effect of foreign currency translation. The accrual
balance at December 31, 2004 is $22.7, which includes $16.6 for severance and
$6.1 for facility carrying costs and other.
As of December 31, 2003, remaining actions under restructuring activities
announced in 2003, 2002 and 2001 were to close one facility and reduce headcount
by 208. During 2004, the Company closed three facilities, reduced headcount by
833 persons related to all plans and experienced employee attrition, leaving a
balance of 685 planned reductions. Actions announced during the fourth quarter
of 2004 will be substantially completed by the second quarter of 2005. Actions
announced during the second quarter of 2004 will be substantially completed by
the end of the first quarter of 2005. Actions announced during the first and
third quarters of 2004 are substantially completed. Actions announced during
2003 were substantially completed in 2004. All of the actions contemplated under
the 2002 and 2001 plans were substantially completed in 2003.
NOTE 5
DISCONTINUED OPERATIONS
In September of 1998, the Company completed the sales of its automotive
Electrical Systems business to Valeo SA for approximately $1,700 and its Brake
and Chassis unit to Continental AG of Germany for approximately $1,930. These
dispositions were treated as discontinued operations. In 1998, the Company
received notifications of claims from the buyers of the automotive businesses
requesting post-closing adjustments to the purchase prices under the provisions
of the sales agreements. In 1999, those claims were submitted to arbitration. In
2001 and early in 2002, both claims were favorably resolved.
At December 31, 2004, the Company had automotive discontinued operations
accruals of $188.7 that are primarily related to taxes ($154.1), product recalls
($7.8), environmental obligations ($14.2) and employee benefits
F-20
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($12.6). In 2004, the Company made immaterial payments of its automotive
discontinued operations liabilities. The Company expects that it will settle
$154.1 of tax obligations in 2005.
NS&S -- DISCONTINUED OPERATIONS
In the 4th quarter of 2004, the Company decided to sell its Network Systems
& Services (NS&S) business. NS&S produces robust structured cabling and
intelligent high-speed network solutions. After a comprehensive review of the
Company's expected future profitability, and market participation the Company
believed that NS&S would provide greater value for an organization whose primary
focus is the networking market.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Longed-Lived Assets," ("SFAS 144") requires the
Company to classify the assets and liabilities of the disposal group as held for
sale and the results of operations of the component classified as discontinued
operations.
NOTE 6
SALES AND REVENUES AND COSTS OF SALES AND REVENUES
Sales and revenues and costs of sales and revenues consist of the
following:
For the years ended
December 31,
------------------------------
2004 2003 2002
-------- -------- --------
Product sales.................. $5,545.0 $4,732.4 $4,254.5
Service revenues............... 1,219.1 878.4 708.2
-------- -------- --------
Total sales and revenues....... $6,764.1 $5,610.8 $4,962.7
======== ======== ========
Costs of product sales......... $3,599.4 $3,068.5 $2,749.7
Costs of service revenues...... 867.0 603.5 446.1
-------- -------- --------
Total costs of sales and
revenues...................... $4,466.4 $3,672.0 $3,195.8
======== ======== ========
The Defense Electronics & Services segment comprises $1,103.9, $792.2 and
$627.8 of total service revenues for the years ended December 31, 2004, 2003 and
2002, respectively, and $760.1, $525.0 and $374.0 of total costs of service
revenues, respectively, during the same period. The Fluid Technology segment
comprises the majority of the remaining balances of service revenues and costs
of service revenues.
NOTE 7
INCOME TAXES
Income tax data from continuing operations is as follows:
For the years ended
December 31,
------------------------
2004 2003 2002
------ ------ ------
United States and foreign components
of income from continuing
operations before income taxes
U.S. .............................. $335.2 $281.0 $309.8
Foreign............................ 274.8 254.4 201.1
------ ------ ------
$610.0 $535.4 $510.9
====== ====== ======
Provision (benefit) for income tax
Current
U.S. federal....................... $ 23.8 $(50.6) $(47.6)
State and local.................... 2.6 3.7 0.9
Foreign............................ 84.5 90.3 45.0
------ ------ ------
110.9 43.4 (1.7)
------ ------ ------
Deferred
U.S. federal....................... 59.4 117.2 104.0
State and local.................... (1.4) (2.7) --
Foreign............................ 3.6 (16.5) 27.3
------ ------ ------
61.6 98.0 131.3
------ ------ ------
Total income tax expense............ $172.5 $141.4 $129.6
====== ====== ======
A reconciliation of the tax provision at the U.S. statutory rate to the
effective income tax expense rate as reported is as follows:
For the years ended
December 31,
---------------------
2004 2003 2002
----- ----- -----
Tax provision at U.S. statutory rate..... 35.0% 35.0% 35.0%
Foreign tax rate differential............ (2.4) (2.9) 0.4
Effect of repatriation of foreign
earnings................................ (2.1) (4.3) (1.6)
Research credit.......................... (0.5) (0.6) --
Tax examinations......................... -- 1.3 --
Export sales............................. (1.9) (2.6) (0.9)
Capital loss carryback................... -- -- (6.0)
Other.................................... 0.2 0.5 (1.6)
---- ---- ----
Effective income tax expense rate........ 28.3% 26.4% 25.3%
==== ==== ====
Deferred income taxes are established for temporary differences between the
amount of assets and liabilities recognized for financial reporting purposes and
for tax reporting purposes and carryforwards.
F-21
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) include the following:
December 31,
-----------------------------------------------
2004 2003
---------------------- ----------------------
DEFERRED DEFERRED DEFERRED DEFERRED
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Employee benefits.... $180.6 $ -- $239.5 $ --
Accelerated
depreciation........ -- (68.7) -- (60.1)
Accruals............. 151.6 -- 179.1 --
Uniform
capitalization...... 5.7 -- 6.3 --
Partnership
investment.......... -- (59.5) -- (59.5)
Loss carryforwards... 35.0 -- 25.1 --
Foreign tax credit... 52.1 -- 46.2 --
State credit
carryforwards....... 4.4 -- 3.0 --
Intangibles/Other.... -- (41.3) -- (4.0)
------ ------- ------ -------
Subtotal............. 429.4 (169.5) 499.2 (123.6)
Valuation
allowance........... (43.9) -- (40.7) --
------ ------- ------ -------
$385.5 $(169.5) $458.5 $(123.6)
====== ======= ====== =======
The Company's deferred taxes in the Consolidated Balance Sheets consist of
the following:
December 31,
-----------------
2004 2003
------- -------
Current assets........................ $ 107.2 $ 68.2
Non-current assets.................... 212.1 373.2
Other current liabilities............. (2.2) (4.6)
Other liabilities..................... (101.1) (101.9)
------- -------
$ 216.0 $ 334.9
======= =======
No provision was made for U.S. taxes payable on accumulated undistributed
foreign earnings of certain subsidiaries amounting to approximately $669.6,
because these amounts are permanently reinvested. While the amount of federal
income taxes, if such earnings are distributed in the future, cannot now be
determined, such taxes may be reduced by tax credits and other deductions.
As of December 31, 2004, the Company had approximately $52.1 of foreign tax
credit carryforwards. The credit carryforwards will expire as follows: $33.9 on
December 31, 2010, $12.1 on December 31, 2011 and $6.1 on December 31, 2013. The
Company had approximately $2.0 of general business credit carryforwards which
will expire on December 31, 2020 and $2.9 which will expire on December 31,
2021. The Company had net operating losses from some U.S. subsidiaries in the
amount of $66.8, which will begin to expire on December 31, 2019. The Company
had net operating losses from some foreign subsidiaries in the amount of $38.2,
which have no expiration.
As of December 31, 2004, a valuation allowance of approximately $43.9
exists for deferred income tax benefits related to certain U.S. subsidiary loss
carryforwards and certain foreign tax credits that may not be realized. During
2004, the valuation allowance increased by $3.2.
Shareholders' equity at December 31, 2004 and 2003 reflects tax benefits
related to the stock options exercised in 2004 and 2003 of approximately $26.4
and $18.1, respectively.
The Company expects to settle $154.1 in tax obligations that relate to the
reorganization and disposition of its automotive businesses in 1998, as part of
the current IRS examination of the Company's federal consolidated tax returns
for the years ended December 31, 1998 through December 31, 2000. As of December
31, 2004, the Company believes the accrual for income taxes payable is
sufficient to cover potential liabilities arising from these examinations.
In addition, the Company has contingent tax obligations in other
jurisdictions related to the 1998 dispositions and reorganizations of
approximately $85.0. The Company has determined that payment of this amount is
unlikely.
On October 22, 2004, the AJCA was signed into law and includes a deduction
of 85% of certain foreign earnings that are repatriated, as defined in the AJCA.
Under the AJCA, the Company may elect to apply this provision to qualifying
earnings repatriations occurring in its 2004 or 2005 taxable year. At this time,
the Company has made a determination that it does not expect to elect to apply
the provision to any distributions occurring in either of these taxable years.
NOTE 8
EARNINGS PER SHARE
A reconciliation of the data used in the calculation of basic and diluted
earnings per
F-22
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share computations for income from continuing operations is as follows:
For the years ended
December 31,
-------------------------
2004 2003 2002
------ ------ ------
Basic Earnings Per Share
Income from continuing operations
available to common
shareholders.................... $437.5 $394.0 $381.3
Average common shares
outstanding..................... 92.3 92.1 91.0
------ ------ ------
Basic earnings per share........... $ 4.74 $ 4.27 $ 4.19
====== ====== ======
Diluted Earnings Per Share
Income from continuing operations
available to common
shareholders.................... $437.5 $394.0 $381.3
Average common shares
outstanding..................... 92.3 92.1 91.0
Add: Impact of stock options...... 2.1(1) 2.0(2) 2.6(3)
------ ------ ------
Average common shares outstanding
on a diluted basis.............. 94.4 94.1 93.6
------ ------ ------
Diluted earnings per share......... $ 4.63 $ 4.18 $ 4.07
====== ====== ======
------------
(1) Options to purchase 127,500 shares of common stock at an average price of
$83.02 per share were outstanding at December 31, 2004 but were not included
in the computation of diluted EPS, because the options' exercise prices were
greater than the annual average market price of the common shares. These
options expire in 2014.
(2) Options to purchase 78,940 shares of common stock at an average price of
$65.37 per share were outstanding at December 31, 2003 but were not included
in the computation of diluted EPS, because the options' exercise prices were
greater than the annual average market price of the common shares. These
options expire in 2012 and 2013.
(3) Options to purchase 49,240 shares of common stock at an average price of
$65.60 per share were outstanding at December 31, 2002 but were not included
in the computation of diluted EPS, because the options' exercise prices were
greater than the annual average market price of the common shares. These
options expire in 2012.
NOTE 9
RECEIVABLES, NET
Receivables consist of the following:
December 31,
-----------------
2004 2003
-------- ------
Trade...................................... $1,124.4 $932.8
Other...................................... 84.6 67.4
Less -- allowance for doubtful accounts and
cash discounts............................ (34.7) (28.7)
-------- ------
$1,174.3 $971.5
======== ======
NOTE 10
INVENTORIES, NET
Inventories consist of the following:
December 31,
---------------
2004 2003
------ ------
Finished goods............................... $187.9 $157.0
Work in process.............................. 294.6 182.3
Raw materials................................ 324.9 312.6
Less -- progress payments.................... (99.0) (76.1)
------ ------
$708.4 $575.8
====== ======
NOTE 11
OTHER CURRENT ASSETS
At December 31, 2004 and 2003, other current assets consist primarily of
advance payments on contracts, prepaid expenses and capitalized tooling costs.
NOTE 12
PLANT, PROPERTY AND EQUIPMENT, NET
Plant, property and equipment consist of the following:
December 31,
---------------------
2004 2003
--------- ---------
Land and improvements........... $ 65.3 $ 60.5
Buildings and improvements...... 527.1 465.0
Machinery and equipment......... 1,757.4 1,613.4
Furniture, fixtures and office
equipment..................... 246.3 247.9
Construction work in progress... 69.7 68.2
Other........................... 58.7 45.1
--------- ---------
2,724.5 2,500.1
Less -- accumulated depreciation
and amortization.............. (1,743.6) (1,608.1)
--------- ---------
$ 980.9 $ 892.0
========= =========
NOTE 13
GOODWILL AND OTHER INTANGIBLE ASSETS
As of January 1, 2002, the Company adopted SFAS No. 142 which addresses the
financial accounting and reporting standards for the acquisition of intangible
assets outside of a business combination and for goodwill and other intangible
assets subsequent to their acquisition. This accounting standard requires that
goodwill and indefinite-lived intangible assets be tested for impairment on an
annual basis, or more frequently if circumstances warrant. The provisions of the
standard also require the completion of a transitional impairment test in the
year of adoption, with any impairments identified treated as a cumulative effect
of a change in accounting principle. In connection with the adoption of SFAS No.
142, the Com-
F-23
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pany completed a transitional and initial goodwill impairment test at its 12
identified reporting units and determined that no impairment exists. Both tests
were conducted in the first quarter of 2002. The Company also conducted its
annual impairment tests in the first quarters of 2004 and 2003 (as of the
beginning of the year) and determined that no impairment exists.
Changes in the carrying amount of goodwill for the years ended December 31,
2004 and 2003 by operating segment are as follows:
DEFENSE MOTION
FLUID ELECTRONICS & FLOW ELECTRONIC CORPORATE
YEAR ENDED DECEMBER 31, TECHNOLOGY & SERVICES CONTROL COMPONENTS AND OTHER TOTAL
----------------------- ---------- ----------- ------- ---------- --------- --------
Balance as of December 31,
2002.................... $ 769.9 $303.7 $176.1 $295.8 $5.0 $1,550.5
Goodwill acquired during
the period.............. 5.4 -- 1.1 24.0 -- 30.5
Other, including foreign
currency translation.... 34.1 -- 4.4 9.6 -- 48.1
-------- ------ ------ ------ ---- --------
Balance as of December 31,
2003.................... 809.4 303.7 181.6 329.4 5.0 1,629.1
Goodwill acquired during
the period.............. 240.1 601.1 3.4 -- -- 844.6
Other, including foreign
currency translation.... 31.4 -- 2.3 6.7 -- 40.4
-------- ------ ------ ------ ---- --------
Balance as of December 31,
2004.................... $1,080.9 $904.8 $187.3 $336.1 $5.0 $2,514.1
======== ====== ====== ====== ==== ========
Information regarding the Company's other intangible assets follows:
December 31,
--------------
2004 2003
------ -----
Finite-lived intangibles --
Customer Relationships.............. $138.8 $ --
Proprietary Technology.............. 21.4 --
Patents and other................... 44.1 34.1
Accumulated amortization............ (18.8) (8.4)
Indefinite-lived intangibles --
Brands and trademarks............... 29.7 17.7
Pension related..................... 25.1 31.4
------ -----
Net intangibles..................... $240.3 $74.8
====== =====
During the first quarter of 2004, the Company completed the acquisition of
WEDECO. The acquisition of WEDECO resulted in the recognition of $238.3 of
goodwill, $12.0 of intangibles for tradenames, $21.4 of proprietary technology,
$18.8 of customer relationships and $2.7 of patents and other. During the third
quarter of 2004, the Company completed the acquisition of RSS. This acquisition
preliminarily resulted in the recognition of $597.6 of goodwill, $120.0 of
intangible assets related to customer relationships and $4.9 of other intangible
assets.
Amortization expense related to intangible assets for the years ended
December 31, 2004, 2003 and 2002 was $10.4, $2.7 and $0.9, respectively.
Estimated amortization expense for each of the five succeeding years is as
follows:
2005 2006 2007 2008 2009
----- ----- ----- ----- -----
$23.0 $23.2 $21.1 $18.3 $16.6
Customer relationships, proprietary technology and patents and other are
amortized over weighted average lives of 15 years, 15 years and 25 years,
respectively.
NOTE 14
OTHER ASSETS
At December 31, 2004 and 2003, other assets primarily consist of prepaid
pension expense, employee benefit plan costs, investments in unconsolidated
companies, assets held in trusts and other receivables. Assets held in trusts
are restricted for specified reasons, primarily environmental remediation costs
and employee benefits and totaled $17.1 and $29.4 at December 31, 2004 and 2003,
respectively.
F-24
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments in unconsolidated companies consist of the following:
December 31,
-------------
2004 2003
----- -----
Investments accounted for under the
equity method:
Motion & Flow Control 50% ownership
of HiSAN joint venture............. $ 8.6 $ 9.0
Fluid Technology 40% ownership in Sam
McCoy, Malaysia.................... 3.3 3.2
Fluid Technology other investments... 4.2 3.1
Investments accounted for under the
cost method:
Defense Electronics & Services
investment in Mesh Networks........ -- 11.4
Other................................ -- 1.1
----- -----
$16.1 $27.8
===== =====
In December 2004, the Company sold its interest in Mesh Networks, a
technology company in the wireless telecommunications market for $31.2,
including $24.9 received in cash and $6.3 placed in escrow.
During 2003 the Company sold substantially all of its interest in
DigitalGlobe Inc., a developmental stage company that launched a satellite
capable of collecting high-resolution digital imagery, for $43.5.
The Company recorded sales to unconsolidated affiliates during 2004, 2003
and 2002 totaling $24.1, $21.0 and $24.2, respectively. In addition, the Company
provided services to unconsolidated affiliate companies in 2004, 2003 and 2002
and received $0.6, $0.5 and $0.5, respectively, in exchange for these services.
For all investments in unconsolidated companies, the Company's exposure is
limited to the amount of the investment. All investments accounted for under the
cost method represent voting right interests of less than 20%.
The HiSAN joint venture is a brake and fuel line supplier to Asian
transplant OEM's in the United States. Annual sales of HiSAN are approximately
$152.
NOTE 15
LEASES AND RENTALS
The Company leases certain offices, manufacturing buildings, land,
machinery, automobiles, aircraft, computers and other equipment. Such leases
expire at various dates and may include renewals and escalations. The Company
often pays maintenance, insurance and tax expense related to leased assets.
Rental expenses under operating leases were $82.7, $66.6 and $60.1 for 2004,
2003 and 2002, respectively. Future minimum operating lease payments under
long-term operating leases as of December 31, 2004 are shown below.
2005.......................................... $ 88.7
2006.......................................... 72.6
2007.......................................... 62.0
2008.......................................... 47.5
2009.......................................... 40.3
2010 and thereafter........................... 194.0
------
Total minimum lease payments.................. $505.1
======
NOTE 16
DEBT
Debt consists of the following:
December 31,
---------------
2004 2003
------ ------
Commercial paper..................... $696.3 $120.0
Short-term loans..................... 19.8 18.6
Current maturities of long-term
debt............................... 13.1 2.9
------ ------
Notes payable and current maturities
of long-term debt.................. $729.2 $141.5
====== ======
INTEREST
LONG-TERM DEBT MATURITY RATE 2004 2003
-------------- ---------- -------- ------ ------
Notes and
debentures:........ 2/1/2008 8.875% $ 13.2 $ 13.2
5/1/2011 6.500% 31.7 31.7
7/1/2011 7.500% 37.4 37.4
12/15/2014 4.700% 119.7 --
2/15/2021 9.750% -- 19.1
4/15/2021 9.500% -- 13.6
11/15/2025 7.400% 250.0 250.0
8/25/2048 (1) 18.1 18.1
Other................ 2005 - 2014 (2) 23.3 25.1
Interest rate swaps......................... 81.6 77.6
------ ------
Subtotal notes and debentures............... 575.0 485.8
Less - unamortized discount................. (19.1) (22.0)
------ ------
Long-term debt.............................. 555.9 463.8
Less - current maturities................... (13.1) (2.9)
------ ------
Net long-term debt.......................... $542.8 $460.9
====== ======
---------------
(1) The interest rate for the note/debenture was 2.27% and 1.02% at December 31,
2004 and 2003, respectively.
F-25
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) The weighted average interest rate was 4.72% and 5.12% at December 31, 2004
and 2003, respectively.
Principal payments required on long-term debt for the next five years are:
2005 2006 2007 2008 2009
---- ----- ----- ----- -----
$13.1.. $10.2 $11.1 $23.1 $11.0
===== ===== ===== ===== =====
The weighted average interest rate for short-term borrowings was 2.31% and
1.53% at December 31, 2004 and 2003, respectively. The fair value of the
Company's short-term loans approximates carrying value. The fair value of the
Company's long-term debt is estimated based on comparable corporate debt with
similar remaining maturities. As of December 31, 2004, the fair value of
long-term debt was $555.7, compared to the fair value of $484.0 at December 31,
2003. The year-over-year increase in fair value primarily reflects the impact of
the increase in long-term debt levels related to 2004 acquisitions.
In March 2004, the Company entered into a revolving credit agreement which
expires in March 2005, with five domestic and foreign banks providing aggregate
commitments of $400.0. In November 2000, the Company entered into a revolving
credit agreement, which expires in November 2005, with 20 domestic and foreign
banks providing aggregate commitments of $1.0 billion for total aggregate
commitments of $1.4 billion. The interest rate for borrowings under these
agreements is generally based on the London Interbank Offered Rate ("LIBOR"),
plus a spread, which reflects the Company's debt rating. The provisions of these
agreements require that the Company maintain an interest coverage ratio, as
defined, of 3.75 times. At December 31, 2004, the Company's coverage ratio was
well in excess of the minimum requirement. Additionally, borrowing through
commercial paper under the revolving credit agreement may not exceed $1.4
billion in the aggregate outstanding at any time. The commitment fee on the
revolving credit agreements is .125% of the total commitment, based on the
Company's current debt ratings. The revolving credit agreements serve as backup
for the commercial paper program and are not otherwise restricted.
In December 2004, the Company recorded a $120.0 obligation associated with
a ten year agreement involving the sale and the subsequent leasing back of
certain properties. Under the terms of the agreement, the Company is required to
make annual payments of principal and interest. At the end of the agreement, the
Company has the option to repurchase the applicable properties for a nominal
fee. This transaction is reflected as debt.
The book value of assets pledged as collateral amounted to $67.6 as of
December 31, 2004.
NOTE 17
CASH FLOW INFORMATION
The change in receivables, inventories, payables and accrued expenses
listed on the Consolidated Statements of Cash Flows for the twelve months ended
December 31, 2004, 2003 and 2002 consist of the following:
TWELVE MONTHS ENDED
DECEMBER 31, 2004 2003 2002
------------------- ------ ------ -----
Change in accounts
receivable................. $(21.8) $(61.6) $(1.0)
Change in inventories........ (80.3) 31.0 (3.2)
Change in accounts payable
and accrued expenses....... 16.9 30.1 37.3
------ ------ -----
Change in receivables,
inventories, accounts
payable and accrued
expenses................... $(85.2) $ (0.5) $33.1
====== ====== =====
NOTE 18
FINANCIAL INSTRUMENTS
The Company uses a variety of derivative financial instruments, including
interest rate swaps, foreign currency forward contracts and/or swaps, and on a
limited basis, commodity collar contracts, as a means of hedging exposure to
interest rate, foreign currency and commodity price risks.
The Company's credit risk associated with these derivative contracts is
generally limited to the unrealized gain on those contracts with a positive fair
market 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, interna-
F-26
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tional financial institutions. The Company continually monitors the credit
quality of these financial institutions and does not expect non-performance by
any counterparty.
FINANCING STRATEGIES AND INTEREST RATE RISK MANAGEMENT:
The Company maintains a multi-currency debt portfolio to fund its
operations. The Company at times uses interest rate swaps to manage the
Company's debt portfolio, the related financing costs and interest rate
structure.
At December 31, 2004 and 2003, the Company had interest rate swaps
outstanding with notional values totaling $335.8 in both periods. The carrying
value of the swaps at December 31, 2004 and 2003 were $84.9 and $81.6,
respectively, including $3.3 and $4.0 of accrued interest, respectively. The
swaps were designed to manage the interest rate exposure associated with certain
long-term debt. The swaps mature at various dates through 2025 and effectively
convert much of the long-term debt, mentioned in Note 16 "Debt" above, from
fixed to variable rate borrowings. The variable interest rates are based on
three-month LIBOR rates plus a spread, which reflects the Company's debt rating,
and the coupon of the underlying long-term obligations. The weighted average
variable and fixed interest rates were 2.64% and 7.40% at December 31, 2004.
There were no ineffective portions of the interest rate swaps and no amounts
were excluded from the assessment of effectiveness.
FOREIGN CURRENCY RISK MANAGEMENT:
The Company has significant foreign operations and conducts business in
various foreign currencies. The Company may periodically hedge net investments
in currencies other than its own functional currency and non-functional currency
cash flows and obligations, including intercompany financings. Changes in the
spot rate of debt instruments designated as hedges of the net investment in a
foreign subsidiary are reflected in the cumulative translation adjustment
component of shareholders' equity. The Company regularly monitors its foreign
currency exposures and ensures that hedge contract amounts do not exceed the
amounts of the underlying exposures.
At December 31, 2004 the Company had one foreign currency cash flow hedge
outstanding that had no change in value during 2004. At December 31, 2003 the
Company had no foreign currency cash flow hedges outstanding. There were no
changes in the forecasted transactions during 2004 regarding their probability
of occurring that would require amounts to be reclassified to earnings.
The notional amount of the foreign currency forward contract utilized to
hedge cash flow exposures was $0.1 at December 31, 2004. The applicable fair
value of this contract at December 31, 2004 was approximately zero. There were
no ineffective portions of changes in fair values of cash flow hedge positions
reported in earnings for the twelve months ended December 31, 2004, 2003 and
2002, and no amounts were excluded from the measure of effectiveness reported in
earnings during these periods.
At December 31, 2004 and 2003, the Company had foreign currency forward
contracts with notional amounts of $93.3 and $81.1, respectively, to hedge the
value of recognized assets, liabilities and firm commitments. The fair values of
the contracts were $(0.4) and $0.2 at December 31, 2004 and 2003, respectively.
The ineffective portion of changes in fair values of such hedge positions
reported in operating income during 2004, 2003 and 2002 amounted to $(0.4),
$(0.3) and $(0.1), respectively. There were no amounts excluded from the measure
of effectiveness.
The fair values associated with the foreign currency contracts have been
valued using the net position of the contracts and the applicable spot rates and
forward rates as of the reporting date.
NOTE 19
EMPLOYEE BENEFIT PLANS
PENSION PLANS:
The Company sponsors numerous defined benefit pension plans. The Company
funds employee pension benefits, except in some countries outside the U.S. where
funding is not required. In addition to Company sponsored
F-27
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pension plans, certain employees of the Company participate in multi-employer
pension plans sponsored by local or national unions. The Company's contribution
to such plans amounted to $1.2, $0.7 and $0.4 for the years ended 2004, 2003 and
2002, respectively.
POSTRETIREMENT HEALTH AND LIFE INSURANCE PLANS:
The Company provides health care and life insurance benefits for certain
eligible retired employees. The Company has pre-funded a portion of the health
care and life insurance obligations, where such pre-funding can be accomplished
on a tax effective basis.
INVESTMENT AND SAVINGS PLANS:
The Company sponsors numerous defined contribution 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 $31.2, $27.2 and
$25.3 for the years ended 2004, 2003 and 2002, respectively.
Changes in the benefit obligations, changes in plan assets, the
weighted-average assumptions and the components of net periodic benefit cost for
the years ended 2004 and 2003 were as follows:
PENSION OTHER BENEFITS
--------------------- -------------------
2004 2003 2004 2003
-------- -------- ------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year................... $4,330.7 $4,058.7 $ 645.6 $ 588.1
Service cost.............................................. 87.9 73.3 6.5 6.7
Interest cost............................................. 267.9 256.5 39.2 38.7
Amendments made during the year/other..................... 3.6 7.4 -- --
Actuarial (gain) loss..................................... 188.5 139.0 44.1 55.1
Benefits paid............................................. (292.1) (264.0) (44.0) (43.0)
Liabilities assumed through acquisition/other............. 264.3 -- 82.8 --
Effect of currency translation............................ 34.7 59.8 -- --
-------- -------- ------- -------
Benefit obligation at end of year......................... $4,885.5 $4,330.7 $ 774.2 $ 645.6
======== ======== ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............ $3,470.3 $2,734.8 $ 211.5 $ 177.8
Actual return on plan assets.............................. 542.0 746.8 32.3 41.2
Assets assumed through acquisition/other.................. 237.9 -- -- --
Employer contributions.................................... 129.1 210.7 -- --
Employee contributions.................................... 2.6 1.7 -- --
Benefits paid............................................. (266.6) (246.0) (8.5) (7.5)
Effect of currency translation............................ 15.3 22.3 -- --
-------- -------- ------- -------
Fair value of plan assets at end of year.................. $4,130.6 $3,470.3 $ 235.3 $ 211.5
======== ======== ======= =======
Funded status............................................. $ (754.9) $ (860.4) $(538.9) $(434.1)
Unrecognized net transition asset......................... 0.1 0.3 -- --
Unrecognized net actuarial (gain) loss.................... 1,116.6 1,164.0 241.1 222.7
Unrecognized prior service cost........................... 23.7 29.4 (1.0) (4.8)
-------- -------- ------- -------
Net accrued benefit cost recognized in the balance
sheet................................................... $ 385.5 $ 333.3 $(298.8) $(216.2)
======== ======== ======= =======
F-28
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts recognized in the Consolidated Balance Sheets consist of:
PENSION BENEFITS OTHER BENEFITS
--------------------- -----------------
2004 2003 2004 2003
--------- --------- ------- -------
Prepaid benefit
cost................ $ 640.2 $ 569.9 $ -- $ --
Accrued benefit
cost................ (1,079.7) (1,187.6) (298.8) (216.2)
Intangible assets.... 25.1 31.4 -- --
Accumulated other
comprehensive
income.............. 799.9 919.6 -- --
--------- --------- ------- -------
Net amount
recognized.......... $ 385.5 $ 333.3 $(298.8) $(216.2)
========= ========= ======= =======
In 2004, the Company recorded a total after tax increase of $81.8 to its
shareholders' equity which reflects a decrease in the minimum pension liability.
Information for pension plans with an accumulated benefit obligation in excess
of plan assets:
DECEMBER
-------------------
2004 2003
-------- --------
Projected benefit obligation....... $4,762.9 $4,263.5
Accumulated benefit obligation..... $4,463.7 $4,013.4
Fair Value of plan assets.......... $3,993.6 $3,372.0
ACCUMULATED BENEFIT OBLIGATION:
The accumulated benefit obligation for all defined benefit plans was
$4,586.3 and $4,104.3 at December 31, 2004 and 2003, respectively.
TABLE OF ASSUMPTIONS:
Weighted-average assumptions used to determine benefit obligations at
December 31:
PENSION
BENEFITS OTHER BENEFITS
------------- ---------------
2004 2003 2004 2003
----- ----- ------ ------
Discount Rate........ 5.94% 6.18% 5.75% 6.25%
Rate of future
compensation
increase........... 4.41% 4.42% 4.50% 4.50%
Weighted-average assumptions used to determine net periodic benefit cost
for the years ended December 31:
PENSION BENEFITS OTHER BENEFITS
--------------------- ---------------------
2004 2003 2002 2004 2003 2002
----- ----- ----- ----- ----- -----
Discount Rate........ 6.18% 6.44% 7.14% 6.25% 6.50% 7.25%
Expected return on
plan assets........ 8.89% 8.86% 9.61% 9.00% 9.00% 9.75%
Rate of future
compensation
increase........... 4.42% 4.88% 4.89% 4.50% 5.00% 5.00%
Management develops each assumption using relevant Company experience in
conjunction with market related data for each individual country in which such
plans exist. All assumptions are reviewed periodically with third party
actuarial consultants and adjusted as necessary.
PENSION OTHER BENEFITS
--------------------------- ------------------------
2004 2003 2002 2004 2003 2002
------- ------- ------- ------ ------ ------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost........................................... $ 87.9 $ 73.3 $ 61.9 $ 6.5 $ 6.7 $ 4.9
Interest cost.......................................... 267.9 256.5 251.2 39.2 38.7 37.7
Expected return on plan assets......................... (344.2) (327.0) (335.0) (18.6) (15.6) (19.8)
Amortization of transitional asset..................... 0.1 0.3 0.3 -- -- --
Amortization of net actuarial (gain) loss.............. 43.3 23.5 3.2 11.4 15.7 8.4
Amortization of prior service cost..................... 7.1 6.4 8.0 (3.8) (3.8) (5.2)
------- ------- ------- ------ ------ ------
Net periodic benefit cost.............................. $ 62.1 $ 33.0 $ (10.4) $ 34.7 $ 41.7 $ 26.0
------- ------- ------- ------ ------ ------
Effect of curtailments/settlements..................... 3.3 2.4 -- -- -- --
------- ------- ------- ------ ------ ------
Total benefit expense.................................. $ 65.4 $ 35.4 $ (10.4) $ 34.7 $ 41.7 $ 26.0
======= ======= ======= ====== ====== ======
F-29
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PLAN ASSETS:
The pension and welfare benefit plans' assets are comprised of a broad
range of domestic and foreign securities, fixed income investments, hedge funds
and in cash and cash equivalents. The assets of the domestic pension U.S. Master
Trust which covers all of the domestic pension plans and the various welfare
benefit plan trusts had the following asset allocations as of December 31:
PENSION PLAN OTHER BENEFITS
ASSETS AT PLAN ASSETS AT
DECEMBER 31, DECEMBER 31,
--------------- ---------------
ASSET CATEGORY 2004 2003 2004 2003
-------------- ------ ------ ------ ------
Equity securities.... 66.2% 68.5% 72.1% 65.1%
Fixed income
securities......... 16.4% 21.6% 14.3% 19.0%
Hedge funds.......... 9.9% 9.7% 6.9% 7.0%
Cash and other....... 7.5% 0.2% 6.7% 8.9%
------ ------ ------ ------
Total.............. 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
The strategic asset allocation target for the Company's domestic pension
funds apportions 70% to equity investments and 30% to fixed income instruments.
The investment in the Company's stock within the U.S. Master Trust approximates
1% in 2004 and 2003.
CONTRIBUTIONS:
The Company currently anticipates making contributions to its pension plans
in a range of $120.0 to $140.0, during 2005, of which $102.4 was made in the
first quarter of 2005, to the U.S. Master Trust.
CASH FLOWS:
ESTIMATED FUTURE BENEFIT PAYMENTS
The following benefit payments covering domestic pension and other benefit
plans have been projected based on benefits earned to date and the expectation
that certain future service will be earned by currently active employees:
PENSION OTHER
BENEFITS BENEFITS
-------- --------
2005.............................. $ 268.0 $ 52.9
2006.............................. 271.9 55.1
2007.............................. 277.8 56.9
2008.............................. 284.2 58.6
2009.............................. 292.9 60.0
2010 - 2014....................... 1,584.1 324.2
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 8.0% for 2004. The assumed rate is 10.0% for
2005, decreasing ratably to 5.0% in 2010. Increasing the health care trend rates
by one percent per year would have the effect of increasing the benefit
obligation by $39.9 and the aggregate service and interest cost components by
$3.1. A decrease of one percent in the health care trend rate would reduce the
benefit obligation by $40.4 and the aggregate service and interest cost
components by $2.6. To the extent that actual experience differs from the
inherent assumptions, the effect will be amortized over the average future
service of the covered active employees.
The determination of the assumptions shown in the table above and the
discussion of health care trend rates is based on the provisions of the
applicable accounting pronouncements, the review of various indexes, discussion
with our actuaries and the review of competitive surveys in the geographic areas
where the plans are sited. Changes in these assumptions would affect the
financial condition and results of operations of the Company.
On December 8, 2003, the Medicare Modernization Act was signed into law.
The Medicare Modernization Act introduces a prescription drug benefit under
Medicare (Medicare Part D) that provides several options for Medicare eligible
participants and employers, including a federal subsidy to companies that elect
to provide a retiree prescription drug benefit which is at least actuarially
equivalent to Medicare Part D. The Medicare Modernization Act provides for a two
year transitional period to allow for, among other items, the possibility that
companies may amend existing plans. There are significant uncertainties
regarding the eventual regulations required to implement the Medicare
Modernization Act as well as the Medicare
F-30
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Modernization Act's overall effect on plan participant's coverage choices and
the related impact on their health care costs. As such, the effects of the
Medicare Modernization Act are not reflected in the accumulated postretirement
benefit obligation as of December 31, 2004, or in the 2004 net periodic
postretirement benefit cost. The Company is currently evaluating the provisions
of the Medicare Modernization Act and its potential impact to our postretirement
medical plans which we believe will ultimately reduce our accumulated
postretirement benefit obligation and other postretirement benefit costs.
OTHER MATTERS:
As a result of the acquisition of RSS in August, 2004, the Company assumed
$260.0 in liabilities related to the pension benefits accrued by the acquired
employees under the Kodak Retirement Income Plan. These benefits were merged
into and became part of the ITT Industries domestic salaried pension plan. Under
the terms of the purchase and sale agreement, the Kodak plan made a preliminary
transfer of assets to the U.S. Master Trust, effective as of the closing date,
in the amount of $279.5 subject to adjustment in order to comply with IRS
regulations relative to the transfer of assets from one pension plan to another.
The Company and its actuaries believe that the ultimate transfer amount allowed
under such regulations will be approximately $235.0. Accordingly, the Company
has reflected a payable of $44.5 in the accounts of the pension plan and the
amounts shown in the table of assets above have been presented net of the amount
that is expected to be refunded to the Kodak trust fund.
NOTE 20
SHAREHOLDERS' EQUITY
CAPITAL STOCK:
The Company has authority to issue an aggregate of 250,000,000 shares of
capital stock, of which 200,000,000 shares have been designated as "Common
Stock" having a par value of $1 per share and 50,000,000 shares 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 the Company 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 to its market value. Rights beneficially owned by the
Acquiring Person, including any of its Affiliates or Associates, become null and
void and non-transferable. 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. Under certain circumstances specified in
the Rights Agreement, the Rights become nonredeemable for a period of time and
the Rights Agreement may not be amended during such period.
As of December 31, 2004 and 2003, 52,853,895 and 52,876,689 shares of
Common Stock were held in treasury, respectively.
The Company included $35.6, $93.1 and $100.0 of Capital Surplus in Retained
Earnings at December 31, 2004, 2003 and 2002, respectively.
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, except
in certain instances of
F-31
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
death, retirement or disability. Certain options become exercisable upon the
earlier of 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 exercise price per share is the fair
market value on the date each option is granted. The Company makes shares
available for the exercise of stock options by purchasing shares in the open
market or by issuing shares from treasury.
A summary of the status of the Company's stock option incentive plans as of
December 31, 2004, 2003 and 2002, and changes during the years then ended is
presented below (shares in thousands):
2004 2003 2002
------------------------- ------------------------- -------------------------
WEIGHTED-AVERAGE Weighted-Average Weighted-Average
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
Outstanding at beginning of
year....................... 8,173 $42.64 7,887 $35.59 9,426 $29.21
Granted...................... 1,952 75.49 1,964 61.72 2,114 51.06
Exercised.................... (1,998) 38.20 (1,501) 29.97 (3,628) 27.93
Canceled or expired.......... (133) 38.65 (177) 47.42 (25) 48.33
------ ------ ------ ------ ------ ------
Outstanding at end of year... 7,994 $51.84 8,173 $42.64 7,887 $35.59
====== ====== ====== ====== ====== ======
Options exercisable at
year-end................... 6,059 $44.30 6,255 $36.75 7,834 $35.39
====== ====== ====== ====== ====== ======
Weighted-average fair value
of options granted during
the year................... $20.94 $17.67 $15.77
====== ====== ======
The following table summarizes information about the Company's stock
options at December 31, 2004 (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
--------------- ------ ---------------- ---------------- ------ ----------------
$20.32 - 28.38.......... 517 1.5 years $24.50 517 $24.50
30.31 - 39.56.......... 2,765 4.8 years 35.60 2,765 35.60
42.74 - 45.64.......... 59 6.2 years 42.96 59 42.96
50.65 - 58.57.......... 1,220 7.0 years 50.75 1,218 50.75
61.77 - 69.11.......... 1,502 8.0 years 61.97 1,494 61.94
74.92 - 79.10.......... 1,804 9.1 years 74.97 6 74.92
81.82 - 84.00.......... 127 9.5 years 83.02 -- --
----- -----
7,994 6,059
----- -----
The 2003 Equity Incentive Plan was established in May of 2003. This plan
provides for the grant of stock options, stock appreciation rights, restricted
stock and restricted stock units. The number of shares initially available for
awards under this plan was 6,100,000. As of December 31, 2004, 4,105,057 net
shares were available for future grants. During 2004 and 2003, the Company
awarded 6,194 and 9,489 restricted shares with five-year restriction periods
respectively in payment of the annual retainer for non-employee directors.
During 2004, the Company awarded 13,100 restricted shares to employees with a
weighted average restriction period of 2.4 years.
The 2003 Equity Incentive Plan replaces the 2002 ITT Industries Stock
Option Plan for Non-Employee Directors, the ITT Industries 1996 Restricted Stock
Plan for Non-Employee Directors and the 1994 ITT Industries Incentive Stock Plan
on a prospective basis. All awards granted under these prior plans will continue
to vest and
F-32
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be exercisable in accordance with their original terms; however, no future
grants will be made from these prior plans.
The 1994 incentive stock plan provides for awarding restricted stock
subject to a restriction period in which the stock cannot be sold, exchanged or
pledged. There were no restricted shares awarded in 2004 or 2003, and 10,000
restricted shares were awarded in 2002, under this plan.
Pursuant to the ITT Industries 1996 Restricted Stock Plan for Non-Employee
Directors, the Company did not grant awards in 2004 and 2003. In 2002, 6,098
restricted shares with five-year restriction periods were awarded in payment of
the annual retainer for such directors. Restrictions may lapse earlier depending
on certain circumstances.
NOTE 21
COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are from time to time involved in legal
proceedings that are incidental to the operation of their businesses. Some of
these proceedings allege damages against the Company relating to environmental
liabilities, employment and pension matters, government contract issues and
commercial or contractual disputes, sometimes related to acquisitions or
divestitures. The Company will continue to vigorously defend itself against all
claims. Accruals have been established where the outcome of the matter is
probable and can be reasonably estimated. Although the ultimate outcome of any
legal matter cannot be predicted with certainty, based on present information
including the Company's assessment of the merits of the particular claim, as
well as its current reserves and insurance coverage, the Company does not expect
that such legal proceedings will have any material adverse impact on the cash
flow, results of operations or financial condition of the Company on a
consolidated basis in the foreseeable future.
ENVIRONMENTAL:
The Company has accrued for environmental remediation costs associated with
identified sites consistent with the policy set forth in Note 1, "Accounting
Policies." In management's opinion, the total amount 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 the Company's share, if any, of liability for such conditions,
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 cash flows.
In the ordinary course of business, and similar to other industrial
companies, the Company is subject to extensive and changing federal, state,
local, and foreign environmental laws and regulations. The Company has received
notice that it is considered a potentially responsible party ("PRP") at a
limited number of 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. As of December 31, 2004, the Company is responsible, or is alleged
to be responsible, for approximately 80 environmental investigation and
remediation sites in various countries. In many of these proceedings, the
Company's liability is considered de minimis. At December 31, 2004, the Company
calculated a best estimate of $98.0, which approximates its accrual, related to
the cleanup of soil and ground water. The low range estimate for its
environmental liabilities is $72.9 and the high range estimate for those
liabilities is $160.8. On an annual basis the Company spends between $8.0 and
$11.0 on its environmental remediation liabilities. These estimates, and related
accruals, are reviewed periodically and updated for progress of remediation
efforts and changes in facts and legal circumstances. Liabilities for
environmental expenditures are recorded on an undiscounted basis.
F-33
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is involved in an environmental proceeding in Glendale,
California relating to the San Fernando Valley aquifer. The Company is one of
numerous PRPs who are alleged by the EPA to have contributed to the
contamination of the aquifer. In January 1999, the EPA filed a complaint in the
United States District Court for the Central District of California against the
Company and Lockheed Martin Corporation, United States v. ITT Industries, Inc.
and Lockheed Martin Corp. CV99-00552 SVW AIJX, to recover costs it incurred in
connection with the foregoing. In May 1999, the EPA and the PRPs, including the
Company and Lockheed Martin, reached a settlement, embodied in a consent decree,
requiring the PRPs to perform additional remedial activities. Pursuant to the
settlement, the PRPs, including the Company, have constructed and are operating
a water treatment system. The operation of the water treatment system is
expected to continue until 2013. ITT and the other PRPs continue to pay their
respective allocated costs of the operation of the water treatment system and
the Company does not anticipate a default by any of the PRPs which would
increase its allocated share of the liability. As of December 31, 2004, the
Company's accrual for this liability was $10.4 representing its best estimate;
its low estimate for the liability is $7.0 and its high estimate is $15.9.
ITT Corporation operated a facility in Madison County, Florida from 1968
until 1991. In 1995, elevated levels of contaminants were detected at the site.
Since then, ITT has completed the investigation of the site in coordination with
state and federal environmental authorities and is in the process of evaluating
various remedies. A remedy for the site has not yet been selected. Currently,
the estimated range for the remediation is between $5.5 and $19.3. The Company
has accrued $8.1 for this matter, which approximates its best estimate.
The Company is involved with a number of PRPs regarding property in the
City of Bronson, Michigan operated by a former subsidiary of ITT Corporation,
Higbie Manufacturing, prior to the time ITT acquired Higbie. The Company and
other PRPs are investigating and remediating discharges of industrial waste
which occurred in the 1930's. The Company's current estimates for its exposure
are between $5.7 and $13.5. It has an accrual for this matter of $9.2 which
represents its best estimate of its current liabilities. The Company does not
anticipate a default on the part of the other PRPs.
In a suit filed in 1991 by the Company, in the California Superior Court,
Los Angeles County, ITT Corporation, et al. v. Pacific Indemnity Corporation et
al., against its insurers, the Company is seeking recovery of costs it incurred
in connection with its environmental liabilities including the three listed
above. Discovery, procedural matters, changes in California law, and various
appeals have prolonged this case. Currently, the matter is before the California
Court of Appeals from a decision by the California Superior Court dismissing
certain claims of the Company. The dismissed claims were claims where the costs
incurred were solely due to administrative (versus judicial) actions. A hearing
is expected in 2005. In the event the appeal is successful, the Company will
pursue the administrative claims against its excess insurers. During the course
of the litigation, the Company has negotiated settlements with certain defendant
insurance companies and is prepared to pursue its legal remedies where
reasonable negotiations are not productive.
PRODUCT LIABILITY:
The Company and its subsidiary Goulds Pumps, Inc. ("Goulds") have been
joined as defendants with numerous other industrial companies in product
liability lawsuits alleging injury due to asbestos. These claims stem primarily
from products sold prior to 1985 that contained a part manufactured by a third
party, e.g., a gasket, which allegedly contained asbestos. The asbestos was
encapsulated in the gasket (or other) material and was non-friable. In certain
other cases, it is alleged that former ITT companies were distributors for other
manufacturers' products that may have contained asbestos.
Frequently, the plaintiffs are unable to demonstrate any injury or do not
identify any ITT or Goulds product as a source of asbestos exposure. During
2004, ITT and Goulds resolved in excess of 4,200 claims through settlement or
dismissal. The average amount of settlement per plaintiff has been nominal and
substantially
F-34
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
all defense and settlement costs have been covered by insurance. Based upon past
claims experience, available insurance coverage, and after consultation with
counsel, management believes that these matters will not have a material adverse
effect on the Company's consolidated financial position, results of operations,
or cash flows.
The Company is involved in two actions, Cannon Electric, Inc. et al. v. Ace
Property & Casualty Company ("ACE") et al. Superior Court, County of Los
Angeles, CA., Case No. BC 290354, and Pacific Employers Insurance Company et
al., v. ITT Industries, Inc., et al., Supreme Court, County of New York, N.Y.,
Case No. 03600463. The parties in both cases are seeking an appropriate
allocation of responsibility for the Company's historic asbestos liability
exposure among its insurers. The California action is filed in the same venue
where the Company's environmental insurance recovery litigation has been pending
since 1991. The New York action has been stayed in favor of the California suit.
ITT and ACE have successfully resolved the matter and the Company is working
with other parties in the suit to resolve the matter as to those insurers. In
addition, Utica National, Goulds' historic insurer, has requested that the
Company negotiate a coverage in place agreement to allocate the Goulds' asbestos
liabilities between insurance policies issued by Utica and those issued by
others. The Company is continuing to receive the benefit of insurance payments
during the pendency of these proceedings. The Company believes that these
actions will not materially affect the availability of its insurance coverage
and will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
The Company is one of several defendants in a suit filed in El Paso, Texas,
Bund zur Unterstutzung Radargeschadigter et al. v. ITT Industries et al., Sup.
Ct., El Paso, Texas, C.A. No. 2002-4730. This Complaint, filed by both U.S. and
German citizens, alleges that ITT and four other major companies failed to warn
the plaintiffs of the dangers associated with exposure to x-ray radiation from
radar devices. The Complaint also seeks the certification of a class of
similarly injured persons. Numerous motions are currently pending before the
Court. A hearing on class certification is expected in late 2005. On October 5,
2004, the Company filed an action, ITT Industries, Inc. et al. v. Fireman's Fund
Insurance Company et al., Superior Court, County of Los Angeles, C.A. No. B.C.
322546, against various insurers who issued historic aircraft products coverage
to the Company seeking a declaration that each is liable for the costs of
defense of the El Paso matter. The parties have an agreement in principle to
resolve this matter whereby the Company will continue to receive the cost of
defense of this matter from the insurers. Management believes that the El Paso
suit will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
The Company has received demands from U.S. Silica for partial indemnity
regarding personal injury actions alleging injury due to silica. In 1985, the
Company sold the stock of its subsidiary Pennsylvania Glass Sand to U.S. Silica.
As part of that transaction, the Company provided an indemnity to U.S. Silica
for silica personal injury suits. That indemnity expires in September 2005.
Costs incurred in these matters related to the defense, settlements or judicial
awards are allocated between U.S. Silica and the Company. The Company's
allocated portion is paid in part by its historic product liability carriers and
then shared pursuant to the Distribution Agreement. See "Company History and
Certain Relationships" within Part 1, Item 1 of this Annual Report for a
description of the Distribution Agreement. Management believes that these
matters will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
OTHER:
The Company is involved in an arbitration with Rayonier, Inc., a former
subsidiary of the Company's predecessor ITT Corporation. The arbitration
involves a claim by Rayonier stemming from the 1994 Distribution Agreement for
the spinoff of Rayonier by ITT Corporation. Rayonier seeks a portion of the
proceeds from certain settlements in connection with the Company's environmental
insurance recovery litiga-
F-35
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tion. The parties completed the arbitration hearings in late 2004. A decision is
expected in the spring of 2005. The Company believes the claim is grossly
overstated and will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
NOTE 22
GUARANTEES, INDEMNITIES AND WARRANTIES
GUARANTEES & INDEMNITIES:
In September of 1998, the Company completed the sale of its automotive
electrical systems business to Valeo SA for approximately $1,700. As part of the
sale, the Company provided Valeo SA with representations and warranties with
respect to the operations of the Business, including: Conveyance of Title,
Employee Benefits, Tax, Product Liability, Product Recall, Contracts,
Environmental, Intellectual Property, etc. The Company also indemnified Valeo SA
for losses related to a misrepresentation or breach of the representations and
warranties. With a few limited exceptions, the indemnity periods within which
Valeo SA may assert new claims have expired. Under the terms of the sales
contract, the original maximum potential liability to Valeo SA on an
undiscounted basis is $680. However, because of the lapse of time, or the fact
that the parties have resolved certain issues, at December 31, 2004 the Company
has an accrual of $7.8 which is its best estimate of the potential exposure.
In September of 1998, the Company completed the sale of its brake and
chassis unit to Continental AG for approximately $1,930. As part of the sale,
the Company provided Continental AG with representations and warranties with
respect to the operations of that Business, including: Conveyance of Title,
Employee Benefits, Tax, Product Liability, Product Recall, Contracts,
Environmental, Intellectual Property, etc. The Company also indemnified
Continental AG for losses related to a misrepresentation or breach of the
representations and warranties. With a few limited exceptions, the indemnity
periods within which Continental AG may assert new claims have expired. Under
the terms of the sales contract, the original maximum potential liability to
Continental AG on an undiscounted basis is $950. However, because of the lapse
of time, or the fact that the parties have resolved certain issues, at December
31, 2004 the Company has an accrual of $14.2 which is its best estimate of the
potential exposure.
Since its incorporation in 1920, the Company has acquired and disposed of
numerous entities. The related acquisition and disposition agreements contain
various representation and warranty clauses and may provide indemnities for a
misrepresentation or breach of the representations and warranties by either
party. The indemnities address a variety of subjects; the term and monetary
amounts of each such indemnity are defined in the specific agreements and may be
affected by various conditions and external factors. Many of the indemnities
have expired either by operation of law or as a result of the terms of the
agreement. The Company does not have a liability recorded for the historic
indemnifications and is not aware of any claims or other information that would
give rise to material payments under such indemnities. The Company has
separately discussed material indemnities provided within the last nine years.
The Company provided three guarantees with respect to its real estate
development activities in Flagler County, Florida. Two of these guarantee bonds
were issued by the Dunes Community Development District (the District). The bond
issuances were used primarily for the construction of infrastructure, such as
water and sewage utilities and a bridge. The Company has been released from its
obligation to perform under both of these guarantees in the third quarter of
2004. The third guarantee is a performance bond in the amount of $10.0 in favor
of Flagler County, Florida. The Company would be required to perform under this
guarantee if certain parties did not satisfy all aspects of the development
order, the most significant aspect being the expansion of a bridge. The maximum
amount of the undiscounted future payments on the third guarantee equals $10.0.
At December 31, 2004, the Company has an accrual related to the expansion of a
bridge in the amount of $10.0.
F-36
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December of 2002, the Company entered into a sales-type lease agreement
for its corporate aircraft and then leased the aircraft back under an operating
lease agreement. The Company has provided, under the agreement, a residual value
guarantee to the counterparty in the amount of $44.8, which is the maximum
amount of undiscounted future payments. The Company would have to make payments
under the residual value guarantee only if the fair value of the aircraft was
less than the residual value guarantee upon termination of the agreement. At
December 31, 2004, the Company does not believe that a loss contingency is
probable and therefore does not have an accrual recorded in its financial
statements.
The Company has a number of individually immaterial guarantees outstanding
at December 31, 2004, that may be affected by various conditions and external
forces, some of which could require that payments be made under such guarantees.
The Company does not believe these payments will have any material adverse
impact on the cash flow, results of operations or financial condition of the
Company on a consolidated basis in the foreseeable future.
PRODUCT WARRANTIES:
Accruals for estimated expenses related to warranties are made at the time
products are sold or services are rendered. These accruals are established using
historical information on the nature, frequency, and average cost of warranty
claims. The Company warrants numerous products, the terms of which vary widely.
In general, the Company warrants its products against defect and specific
non-performance. In the automotive businesses, liability for product defects
could extend beyond the selling price of the product and could be significant if
the defect shuts down production or results in a recall. At December 31, 2004,
the Company has a product warranty accrual in the amount of $40.3.
PRODUCT WARRANTY LIABILITIES
ACCRUALS FOR CHANGES IN PRE-EXISTING
BEGINNING BALANCE PRODUCT WARRANTIES WARRANTIES INCLUDING ENDING BALANCE
JANUARY 1, 2004 ISSUED IN THE PERIOD CHANGES IN ESTIMATES (PAYMENTS) DECEMBER 31, 2004
----------------- -------------------- ----------------------- -------------- -----------------
$34.3 $26.4 $2.9 $(23.3) $40.3
ACCRUALS FOR CHANGES IN PRE-EXISTING
BEGINNING BALANCE PRODUCT WARRANTIES WARRANTIES INCLUDING ENDING BALANCE
JANUARY 1, 2003 ISSUED IN THE PERIOD CHANGES IN ESTIMATES (PAYMENTS) DECEMBER 31, 2003
----------------- -------------------- ----------------------- -------------- -----------------
$40.2 $22.8 $(4.5) $(24.2) $34.3
F-37
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23
BUSINESS SEGMENT INFORMATION
DEFENSE MOTION CORPORATE,
FLUID ELECTRONICS & FLOW ELECTRONIC ELIMINATIONS
TECHNOLOGY & SERVICES CONTROL COMPONENTS & OTHER TOTAL
---------- ----------- -------- ---------- ------------ --------
2004
Sales and revenues.................... $2,594.1 $2,414.0 $1,070.5 $696.9 $ (11.4) $6,764.1
Operating income (loss)............... 285.9 254.1 147.8 29.5 (82.4) 634.9
Interest income....................... 22.5
Interest expense...................... 50.4
Gain on sale of assets................ 20.8
Miscellaneous expense (income)........ 17.8
--------
Income from continuing operations
before income tax expense........... $ 610.0
========
Long-lived assets..................... 381.2 218.8 235.0 141.2 4.7 980.9
Investments in unconsolidated
companies........................... 7.5 -- 8.6 -- -- 16.1
Total assets.......................... 2,577.4 1,717.1 763.8 796.8 1,421.6 7,276.7
Gross plant additions................. 54.3 37.4 44.1 28.0 1.3 165.1
Depreciation.......................... 63.5 31.8 45.7 33.7 1.1 175.8
Amortization.......................... 4.8 4.8 2.2 4.7 6.3 22.8
2003
Sales and revenues.................... $2,249.9 $1,790.9 $ 992.3 $585.7 $ (8.0) $5,610.8
Operating income (loss)............... 271.4 187.1 134.7 14.7 (74.7) 533.2
Interest income....................... 53.3
Interest expense...................... 43.2
Miscellaneous expense (income)........ 7.9
--------
Income from continuing operations
before income tax expense........... $ 535.4
========
Long-lived assets..................... 365.8 149.9 227.1 143.1 6.1 892.0
Investments in unconsolidated
companies........................... 7.4 11.4 9.0 -- -- 27.8
Total assets.......................... 2,049.0 833.1 715.9 763.2 1,576.4 5,937.6
Gross plant additions................. 55.1 29.7 38.5 29.3 0.7 153.3
Depreciation.......................... 62.9 28.8 43.3 30.5 0.8 166.3
Amortization.......................... 6.2 -- 3.4 5.5 5.5 20.6
2002
Sales and revenues.................... $1,956.3 $1,513.9 $ 935.5 $563.2 $ (6.2) $4,962.7
Operating income (loss)............... 251.5 154.0 122.4 72.3 (60.5) 539.7
Interest income....................... 24.1
Interest expense...................... 56.5
Miscellaneous (income) expense........ (3.6)
--------
Income from continuing operations
before income tax expense........... $ 510.9
========
Long-lived assets..................... 342.3 153.4 209.6 129.8 4.2 839.3
Investments in unconsolidated
companies........................... 7.3 53.9 9.3 -- -- 70.5
Total assets.......................... 1,867.5 850.1 661.3 676.0 1,334.7 5,389.6
Gross plant additions................. 45.8 36.7 39.7 29.8 0.7 152.7
Depreciation.......................... 57.6 26.8 39.5 26.3 0.9 151.1
Amortization.......................... 5.3 -- 4.6 5.6 3.9 19.4
F-38
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET SALES AND REVENUES* LONG-LIVED ASSETS
------------------------------ ------------------------
2004 2003 2002 2004 2003 2002
-------- -------- -------- ------ ------ ------
GEOGRAPHICAL INFORMATION
United States........................................ $3,865.0 $3,104.9 $2,866.9 $486.4 $435.1 $462.9
Western Europe....................................... 1,734.3 1,506.9 1,208.3 415.5 386.0 313.8
Asia Pacific......................................... 472.5 374.6 355.2 52.9 46.6 43.7
Other................................................ 692.3 624.4 532.3 26.1 24.3 18.9
-------- -------- -------- ------ ------ ------
Total Segments....................................... $6,764.1 $5,610.8 $4,962.7 $980.9 $892.0 $839.3
======== ======== ======== ====== ====== ======
---------------
* Net sales to external customers are attributed to individual regions based
upon the destination of product or service delivery.
Sales and revenues by product category, net of intercompany balances, is as
follows:
2004 2003 2002
-------- -------- --------
Sales and Revenues by
Product Category
Pumps & Complementary
Products........... $2,593.9 $2,249.9 $1,956.3
Defense Products..... 1,309.2 997.2 885.9
Defense Services..... 1,103.9 792.2 627.8
Connectors &
Switches........... 689.0 583.0 560.2
Fluid Handling....... 436.7 447.3 470.3
Flow Control......... 194.5 158.6 156.1
Brakes............... 265.6 206.1 153.6
Marine Products...... 75.6 86.9 76.7
Shock Absorbers...... 95.7 89.6 75.8
-------- -------- --------
Total................ $6,764.1 $5,610.8 $4,962.7
======== ======== ========
Defense Electronics & Services had sales and revenues from the United
States government of $2,098.2, $1,454.7 and $1,105.3 for 2004, 2003 and 2002,
respectively. Apart from the United States government, no other government or
commercial customer accounted for 10% or more of sales and revenues for the
Company.
FLUID TECHNOLOGY:
This segment contains the Company's pump and pumping system businesses,
including brands such as Flygt(R), Goulds(R), Bell & Gossett(R), A-C Pump(R),
Marlow(R), Flowtronex(R), Lowara(R), Vogel(R), and Richter(R) making the Company
the world's largest pump producer. Businesses within this segment also supply
mixers, heat exchangers, engineered valves and related products as well as
systems for municipal, industrial, residential, agricultural and commercial
applications with brand names such as McDonnell & Miller(R), Hoffman
Specialty(TM) and ITT Standard(R) in addition to those mentioned above.
Additionally, the Fluid Technology segment produces wastewater aeration and
diffuser systems under the brands Sanitaire(R) and ABJ(R), ultraviolet and ozone
water disinfection systems under the WEDECO(R) brand and membrane filtration and
bioreactor systems under the Aquious(TM) brand for the water and wastewater
treatment markets. This segment comprises approximately 38% of the Company's
sales and revenues and approximately 40% of its segment operating income for
2004.
DEFENSE ELECTRONICS & SERVICES:
The businesses in this segment are those that directly serve the military
and government agencies with products and services. These include air traffic
control systems, jamming devices that guard military planes against radar guided
missiles, digital combat radios, night vision devices and satellite instruments.
Approximately 46% of the sales and revenues in this segment are generated
through contracts for technical and support services which the Company provides
for the military and other government agencies. Approximately 87%, 81% and 73%
of 2004, 2003 and 2002 Defense Electronics & Services sales and revenues,
respectively, were to the U.S. government. The Defense Electronics & Services
segment comprises about 36% of the Company's sales and revenues and 35% of its
segment operating income in 2004.
MOTION & FLOW CONTROL:
Businesses in the Motion & Flow Control segment produce switches and valves
for industrial and aerospace applications, products for the marine and leisure
markets under the brands Jabsco(R), Rule(R), Flojet(R) and Danforth(R), system
components for the whirlpool baths, hot
F-39
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tub and spa markets under the HydroAir(R) brand, fluid handling materials such
as HydroLogic(TM) brand tubing systems and Posi-Lock(R) and HydroLock(R) brand
connectors for various automotive and industrial markets, specialty shock
absorbers under the brand KONI(R) and brake components for the transportation
industry. The Motion & Flow Control segment comprises approximately 16% of the
Company's sales and revenues and approximately 20% of its segment operating
income for 2004.
ELECTRONIC COMPONENTS:
This business consists of the Company's products marketed under the
Cannon(R) brand. These products include connectors, switches and cabling used in
communications, computing, aerospace and industrial applications. This segment
comprises about 10% of the Company's sales and revenues and 4% of its segment
operating income for 2004.
CORPORATE AND OTHER:
This primarily includes the operating results and assets of Corporate
Headquarters.
F-40
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 24
QUARTERLY RESULTS FOR 2004 AND 2003 (UNAUDITED)
THREE MONTHS ENDED
--------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2004
Sales and revenues....................................... $1,511.1 $1,646.8 $1,663.2 $1,943.0 $6,764.1
Costs of sales and revenues.............................. 1,003.4 1,074.6 1,097.3 1,291.1 4,466.4
Income from continuing operations........................ 89.0 113.6 110.3 124.6 437.5
Net income............................................... 88.9 112.0 109.8 121.6 432.3
Income from continuing operations per share
-- Basic............................................... $ 0.96 $ 1.23 $ 1.20 $ 1.35 $ 4.74
-- Diluted............................................. $ 0.94 $ 1.20 $ 1.17 $ 1.32 $ 4.63
Net income per share
-- Basic............................................... $ 0.96 $ 1.21 $ 1.19 $ 1.32 $ 4.68
-- Diluted(a).......................................... $ 0.94 $ 1.18 $ 1.16 $ 1.29 $ 4.58
Common stock information
Price range:
High................................................... $ 78.52 $ 85.98 $ 84.61 $ 86.72 $ 86.72
Low.................................................... $ 71.03 $ 75.64 $ 75.17 $ 77.40 $ 71.03
Close.................................................. $ 76.33 $ 83.00 $ 79.99 $ 84.45 $ 84.45
Dividends per share...................................... $ 0.17 $ 0.17 $ 0.17 $ 0.17 $ 0.68
-------- -------- -------- -------- --------
2003
Sales and revenues....................................... $1,291.5 $1,434.0 $1,371.8 $1,513.5 $5,610.8
Costs of sales and revenues.............................. 843.2 946.4 901.2 981.2 3,672.0
Income from continuing operations........................ 87.0 92.9 103.5 110.6 394.0
Net income............................................... 86.7 99.9 109.2 108.1 403.9
Income from continuing operations per share
-- Basic(a)............................................ $ 0.95 $ 1.01 $ 1.12 $ 1.20 $ 4.27
-- Diluted(a).......................................... $ 0.93 $ 0.99 $ 1.10 $ 1.17 $ 4.18
Net income per share
-- Basic(a)............................................ $ 0.94 $ 1.08 $ 1.18 $ 1.17 $ 4.38
-- Diluted............................................. $ 0.92 $ 1.06 $ 1.16 $ 1.15 $ 4.29
Common stock information
Price range:
High................................................... $ 62.09 $ 67.20 $ 69.59 $ 75.40 $ 75.40
Low.................................................... $ 50.11 $ 53.17 $ 59.00 $ 60.13 $ 50.11
Close.................................................. $ 53.41 $ 65.46 $ 59.84 $ 74.21 $ 74.21
Dividends per share...................................... $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.64
-------- -------- -------- -------- --------
---------------
(a) The sum of the quarters' earnings per share does not equal the full year
amounts due to rounding.
The above table reflects the range of market prices of the Company's common
stock for 2004 and 2003. The prices are as reported in the consolidated
transaction reporting system of the New York Stock Exchange, the principal
market in which the Company's common stock is traded, under the symbol "ITT".
The Company's common stock is listed on the following exchanges: Frankfurt,
London, Midwest, New York, Pacific, and Paris.
During the period from January 1, 2005 through February 28, 2005, the high
and low reported market prices of the Company's common stock were $89.95 and
$80.48, respectively. The Company declared dividends of $0.18 per common share
in the first quarter of 2005. There were 25,511 holders of record of the
Company's common stock on February 28, 2005.
F-41
INDEX TO SCHEDULE
PAGE
----
Valuation and Qualifying Accounts........................... S-1
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
BALANCE CHARGED TO WRITE-OFF/
AT COSTS AND TRANSLATION PAYMENTS/ BALANCE AT
JANUARY 1 EXPENSES ADJUSTMENT OTHER DECEMBER 31
--------- ---------- ----------- ---------- -----------
YEAR ENDED DECEMBER 31, 2004
Trade Receivables -- Allowance for
doubtful accounts................. $22.9 $10.4 $1.1 $ (6.4) $28.0
Restructuring....................... 20.1 36.0 -- (33.4) 22.7
YEAR ENDED DECEMBER 31, 2003
Trade Receivables -- Allowance for
doubtful accounts................. $22.3 $ 6.6 $2.6 $ (8.6) $22.9
Restructuring....................... 16.3 32.5 -- (28.7) 20.1
YEAR ENDED DECEMBER 31, 2002
Trade Receivables -- Allowance for
doubtful accounts................. $21.3 $ 5.8 $1.4 $ (6.2) $22.3
Restructuring....................... 51.9 9.6 -- (45.2) 16.3
S-1
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ITT INDUSTRIES, INC.
By /s/ ROBERT J. PAGANO, JR.
-----------------------------------
ROBERT J. PAGANO, JR.
VICE PRESIDENT AND CORPORATE
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
March 15, 2005
II-1
EXHIBIT
NUMBER DESCRIPTION LOCATION
23.1 Consent of Deloitte & Touche LLP.......... Filed herewith.
31.1 Certification pursuant to Rule 13a-14a/
15d-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section
302 of the Sarbanes Oxley Act of 2002..... Filed herewith.
31.2 Certification pursuant to Rule 13a-14a/
15d-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section
302 of the Sarbanes Oxley Act of 2002..... Filed herewith.
32.1 Certification Pursuant to 18. U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of This Exhibit is intended to be
2002.................................... furnished in accordance with
Regulation S-K item 601(b)(32)(ii)
and shall not be deemed to be filed
for purposes of Section 18 of the
Securities Exchange Act of 1934 or
incorporated by reference into any
filing under the Securities Act of
1933, except as shall be expressly
set forth by specific reference.
32.2 Certification Pursuant to 18. U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of This Exhibit is intended to be
2002.................................... furnished in accordance with
Regulation S-K item 601(b)(32)(ii)
and shall not be deemed to be filed
for purposes of Section 18 of the
Securities Exchange Act of 1934 or
incorporated by reference into any
filing under the Securities Act of
1933, except as shall be expressly
set forth by specific reference.
II-2