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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from............ to..............
COMMISSION FILE NO. 1-5627
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ITT INDUSTRIES, INC.
INCORPORATED IN THE STATE OF INDIANA
13-5158950
(I.R.S. EMPLOYER IDENTIFICATION NO.)
4 WEST RED OAK LANE, WHITE PLAINS, NY 10604
(PRINCIPAL EXECUTIVE OFFICE)
TELEPHONE NUMBER: (914) 641-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT, ALL OF WHICH ARE
REGISTERED ON THE NEW YORK STOCK EXCHANGE, INC.:
COMMON STOCK, $1 PAR VALUE (ALSO REGISTERED ON PACIFIC STOCK EXCHANGE)
SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK PURCHASE RIGHTS (ALSO
REGISTERED ON PACIFIC STOCK EXCHANGE)
8 7/8% SENIOR DEBENTURES DUE JUNE 2003
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /X/
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on January 31, 1996, was approximately
$2.9 billion.
As of February 29, 1996, there were outstanding 117,618,486 shares of
Common Stock, $1 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 21, 1996, is incorporated by reference in
Part III of this Form 10-K.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
<C> <C> <S> <C>
PART 1 Business of ITT Industries........................................... 1
I 2 Properties........................................................... 10
3 Legal Proceedings.................................................... 10
4 Submission of Matters to a Vote of Security Holders.................. 11
* Executive Officers of ITT Industries................................. 11
PART 5 Market for Common Stock and Related Stockholder Matters.............. 12
II 6 Selected Financial Data.............................................. 13
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 14
8 Financial Statements and Supplementary Data.......................... 21
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 21
PART 10 Directors and Executive Officers of ITT Industries................... 21
III 11 Executive Compensation............................................... 21
12 Security Ownership of Certain Beneficial Owners and Management....... 21
13 Certain Relationships and Related Transactions....................... 21
PART 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 21
IV
Signatures.................................................................. II-1
Exhibit Index............................................................... II-2
</TABLE>
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* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
PART I
ITEM 1. BUSINESS OF ITT INDUSTRIES
ITT Industries, Inc. ("ITT Industries"), an Indiana corporation
incorporated on September 5, 1995 as, and originally named, ITT Indiana, Inc.,
is the successor pursuant to a statutory merger of ITT Corporation, a Delaware
corporation ("ITT Delaware"), into ITT Industries effective December 20, 1995.
ITT Delaware, originally incorporated in Maryland in 1920 as International
Telephone and Telegraph Corporation, was reincorporated in Delaware in 1968 and
changed its name to ITT Corporation in 1983. On December 19, 1995, ITT Delaware
made a distribution (the "Distribution") to its stockholders consisting of all
the shares of common stock of ITT Destinations, Inc., a Nevada corporation ("ITT
Destinations"), and all the shares of common stock of ITT Hartford Group, Inc.,
a Delaware corporation ("ITT Hartford"), both of which were wholly-owned
subsidiaries of ITT Delaware. Immediately prior to the Distribution, ITT
Destinations changed its name to ITT Corporation ("ITT Corporation"). Reference
is made to "-- CERTAIN RELATIONSHIPS AMONG ITT INDUSTRIES, ITT CORPORATION and
ITT HARTFORD AFTER THE DISTRIBUTION."
ITT Industries has its World Headquarters at 4 West Red Oak Lane, White
Plains, NY 10604 and has approximately 59,000 employees based in over 40
countries. Unless the context otherwise indicates, references herein to ITT
Industries include its subsidiaries. The telephone number for ITT Industries is
914-641-2000.
ITT Industries, with 1995 sales of approximately $8.9 billion, is a
worldwide enterprise engaged directly and through its subsidiaries in the design
and manufacture of a wide range of high technology products, focused on the
three principal business segments of ITT Automotive, ITT Defense & Electronics
and ITT Fluid Technology. In addition, certain other subsidiaries of ITT
Industries have been, or are in the process of being, discontinued or sold as
described under "-- DISCONTINUED OPERATIONS". See "Business Segment Information"
in the Notes to the Consolidated Financial Statements for information concerning
ITT Community Development Corporation, ITT Semiconductors, other non-core
businesses, and businesses which have been sold.
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The table below shows in percentage terms ITT Industries' consolidated net
sales and operating income attributable to each of its ongoing lines of business
for the last three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1995 1994 1993
--- --- ---
<S> <C> <C> <C>
NET SALES
ITT Automotive...................................................................... 66% 64% 59%
ITT Defense & Electronics........................................................... 19 21 24
ITT Fluid Technology................................................................ 15 15 17
--- --- ---
100% 100% 100%
==== ==== ====
OPERATING INCOME
ITT Automotive...................................................................... 62% 63% 49%
ITT Defense & Electronics........................................................... 18 18 23
ITT Fluid Technology................................................................ 20 19 28
--- --- ---
100% 100% 100%
==== ==== ====
</TABLE>
BUSINESS AND PRODUCTS
ITT Automotive
ITT Automotive, one of the largest independent suppliers of systems and
components to vehicle manufacturers worldwide, and also supplying related
products to the aftermarket, had 1995 sales of approximately $5.6 billion.
Through operations located in Europe, North America and South America and joint
ventures and licensees in Asia and South Africa, ITT Automotive designs,
engineers and manufactures a broad range of automotive systems and components
under two major worldwide product groupings -- Brake and Chassis Systems and
Body and Electrical Systems.
The Brake and Chassis Systems group, which had 1995 sales of in excess of
$3 billion, produces anti-lock brake ("ABS") and traction control systems
("TCS"), chassis systems, foundation brake components, fluid handling products
and shock absorbers. Sales of four-wheel ABS and TCS exceeded $1.0 billion in
1995 for the third consecutive year. ABS remains the largest product line of ITT
Automotive with 24%, 27% and 31% of total sales in 1995, 1994 and 1993,
respectively.
The Body and Electrical Systems group, which had 1995 sales of in excess of
$2.0 billion, produces automotive products, such as door and window assemblies,
wiper module assemblies, seat systems, air management systems, switches and
fractional horsepower DC motors. In 1994, ITT Automotive strengthened its
previously established position as a leading producer of electric motors and
wiper systems, through the acquisition from General Motors of its motors and
actuators business unit, now renamed ITT Automotive Electrical Systems, Inc.
("ESI"). ESI accounted for 18% of ITT Automotive's sales in 1995.
The following table illustrates the percentage sales by group for the
periods specified.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Brake & Chassis Systems............................................................. 61 % 64 % 76 %
Body & Electrical Systems........................................................... 39 36 24
---- ---- ----
100 % 100 % 100 %
==== ==== ====
</TABLE>
ITT Automotive is beginning to introduce front and rear corner modules
(which contain brake components, suspension components, bearings and other
smaller items) and is developing new product lines such as complete axle
assemblies and vehicle stability management systems (i.e., integrated chassis
systems, including, for example, functions such as traction control, anti-lock
braking, electronic brake-force distribution and control of engine torque to
improve vehicle stability), although there can be no assurance ITT Automotive
will ultimately have a significant presence in such product areas. In February
1996, ITT Automotive and Tenneco Automotive announced plans for a joint venture
to develop modular chassis systems for passenger cars and light trucks
worldwide.
ITT Automotive also has various recognizable brand names in the automotive
industry, including ITT Teves and Ate (brake components and systems), ITT SWF
(wiper systems, electric motors and switches) and ITT Koni (shock absorbers).
The principal customers for products of ITT Automotive are the top vehicle
manufacturers worldwide. Of these manufacturers, ITT Automotive's largest
customers are General Motors (27% of 1995 ITT
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Automotive net sales) and Ford (15% of 1995 ITT Automotive net sales). In
addition, approximately 7% of ITT Automotive's 1995 net sales were to customers
in the aftermarket. ITT Automotive sells a variety of products in this market,
including brake parts, shocks and struts and windshield wiper components.
ITT Automotive companies have approximately 35,400 employees in 76
facilities located in 18 countries.
ITT Defense & Electronics
ITT Defense & Electronics, with 1995 sales of approximately $1.6 billion,
develops, manufactures and supports high technology electronic systems and
components for defense and commercial markets on a worldwide basis with
operations in North America, Europe and Asia. Defense market products include
tactical communications equipment, electronic warfare systems, night vision
devices, radar, space payloads, and operations and maintenance services.
Commercial products include interconnect products (such as connectors, switches
and cable assemblies), night vision devices, and space launch services.
ITT Defense & Electronics continues to concentrate its efforts in those
market segments where it can be a market leader, with increasing expansion into
international defense markets. It is a leading supplier of products that
management believes will be critical to the armed forces in the 21st century,
particularly products designated to facilitate communications in the forward
area battlefield, night vision devices that enable soldiers to conduct night
combat operations and electronic systems that protect allied forces from enemy
radar controlled missiles. In addition, through its international field
engineering business, management believes that ITT Defense & Electronics may
benefit from trends to commercialize and outsource military support operations.
In the interconnect products market (which includes products such as
connectors, switches and cable assemblies used with workstations, local area
networks and personal computers and other applications), ITT Cannon maintains a
position as one of the world's largest connector companies based on revenue and
is a leading supplier to the military/aerospace and industrial sectors.
Management believes that progress continues to be made in redirecting business
expansion into the growing communication and information systems sectors of the
interconnect market.
In tactical communications, ITT Defense & Electronics manufactures products
that facilitate communications in the forward area battlefield. A team led by
ITT Aerospace/Communications Division ("A/CD") won a United States Army contract
to produce the Near Term Digital Radio ("NTDR"). A/CD won the major share of the
U.S. Army's Single Channel Ground and Airborne Radio System ("SINCGARS")
contract competition in 1994 and, in the view of ITT Industries' management,
maintains its position as the world's largest producer of combat radios. In
remote sensing/navigation space payloads, ITT A/CD produces extremely
sophisticated sounding and imaging instruments such as those used by the
National Oceanographic and Atmospheric Agency to track hurricanes, tornadoes and
other weather patterns.
In operations and maintenance services, ITT Federal Services Corporation
("FSC") provides military base operations support, equipment and facility
maintenance, and training services for government sites around the world. In
1994, ITT FSC was awarded a major contract by the U.S. Army to provide combat
support services in Kuwait and, in 1995, was awarded a renewal of competitive
contracts for continued support at two major United States military bases in
Germany.
The ITT Night Vision Division provides United States and Allied soldiers
with the capability to conduct night combat operations (as demonstrated in the
Persian Gulf War) with the production of advanced goggles for airborne and
ground applications. In February 1996, ITT Industries announced that its Night
Vision Division received a contract to provide 100% of the United States Army's
next procurement of image intensification devices.
Radar, produced by ITT Gilfillan, includes ship and air defense radar and
air traffic control systems. In airborne electronic warfare, ITT Avionics was
selected by the U.S. Army to develop the next-generation fully integrated
airborne electronic warfare system, called Advanced Threat Radar Jammer
("ATRJ"). In 1995, ITT Avionics, teamed with Lockheed Martin Sanders, was
awarded the development contract for the United States Integrated Defensive
Countermeasures ("IDECM") program for its F/A-18 fighter
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fleet. In addition, ITT Avionics' Airborne Self-Protection Jammer ("ASPJ") was
selected by both Finland and Switzerland to protect their new F-18 fighter
aircraft.
The following table illustrates the percentage sales by product line for
the periods specified.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interconnect...................................................................... 33 % 30 % 30 %
Tactical Communications........................................................... 28 28 29
Government Services............................................................... 18 16 16
Night Vision/Radar................................................................ 10 16 14
Electronic Defense................................................................ 9 7 8
Other............................................................................. 2 3 3
--- --- ---
100 % 100 % 100 %
=== === ===
</TABLE>
ITT Defense & Electronics sells its products to a wide variety of
governmental and non-governmental entities located throughout the world.
Approximately 65% of 1995 net sales of ITT Defense & Electronics was to
governmental entities, of which approximately 90% was to the United States
Government (principally in defense programs).
A substantial portion of the work of ITT Defense & Electronics is performed
in the United States under prime contracts and subcontracts, some of which by
statute are subject to profit limitations and all of which are subject to
termination by the United States Government. Apart from the United States
Government, no other governmental or commercial customer accounted for more than
3% of 1995 net sales for ITT Defense & Electronics.
Sales to non-governmental entities have remained at approximately one-third
of sales from 1993 through 1995. Certain of the products sold by ITT Defense &
Electronics have particular commercial application, including night vision
products and those products already sold to the commercial sector, such as
connectors and switches. In addition, ITT Defense & Electronics has entered into
a partnership with California Commercial Spaceport, Inc. to form Spaceport
Systems International ("SSI"). It is currently expected that SSI will build and
operate the first commercial satellite launch facility in the United States at
Vandenberg Air Force Base in California to launch commercial satellite payloads
into low earth polar orbits. The new facility is expected to be ready for
operation in 1997, at which time SSI expects to be able to provide full launch
and support services to commercial and government customers worldwide.
ITT Defense & Electronics companies have approximately 14,700 employees in
74 facilities in 15 countries.
ITT Fluid Technology
ITT Fluid Technology, with 1995 sales of approximately $1.2 billion, is a
worldwide enterprise engaged in the design, development, production and sale of
products, systems and services used to move, handle, transfer, control and
contain fluids of all kinds. With sales to more than 100 countries, ITT Fluid
Technology is a leading supplier of pumps, valves, heat exchangers, mixers,
instruments and controls for the management of fluids.
The majority of ITT Fluid Technology sales are in North America and Western
Europe. Principal markets are water and wastewater treatment, industrial and
process, and construction. Industrial and process market activity includes
strong market niche positions in the chemical processing, pharmaceutical and
biotechnology sectors, and in selected segments of the oil and gas and mining
markets. Construction market activity includes leading market positions in
certain heating, ventilation and air conditioning ("HVAC") segments of the
residential and non-residential construction market and in construction
dewatering. ITT Fluid Technology also has significant niche positions in the
leisure boating, commercial marine and aerospace markets and in markets for fire
protection and whirlpool bath pumps.
Sales are made directly and through independent distributors and
representatives. ITT Fluid Technology is structured in three divisions, each of
which is briefly described below. No single customer accounted for more than 2%
of 1995 net sales for ITT Fluid Technology.
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ITT Flygt, headquartered in Sweden, is a pioneer in submersible technology
and is the world leader in submersible pumping and mixing products. About half
of Flygt's worldwide sales come from wastewater treatment products for the
municipal sector.
ITT Fluid Transfer produces a wide range of commercial and industrial
pumps, heat exchangers and related components. The division holds market
leadership positions in a number of product/market sectors under long
established brand names such as A-C Pump, Bell & Gossett, McDonnell & Miller,
Jabsco, Marlow, Standard and others. Major markets are the construction building
trades including residential heating, pool and spa, commercial HVAC, and fire
protection; industrial and process, encompassing chemical, paper, mining, power
and general industry; municipal water and wastewater; and leisure boating and
commercial marine.
ITT Controls & Instruments primarily produces measuring instruments and
valves. This division also holds market leadership positions in a number of
product/market niches under long established brand names such as Barton(R),
Dia-Flo(R), Cam-Tite(R) and others. Markets include chemical, industrial and
process, oil and gas, power generation and aerospace.
The following table illustrates the percentage sales by division for the
periods specified.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1995 1994 1993
--- --- ---
<S> <C> <C> <C>
Flygt (Submersible Products)...................................................... 48% 46% 46%
Fluid Transfer.................................................................... 32 34 34
Controls & Instruments............................................................ 20 20 20
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
In 1995, ITT Fluid Technology acquired Mintec GmbH, a sales and
distribution company for Jabsco products in Germany; acquired a rotary pump
product line in Canada to broaden product offerings in the wastewater market;
acquired a sales company for Flygt pumps in New Zealand; established a joint
venture company in Chile for the sale of Flygt pumps; began a joint venture
sales company for Flygt products in Greece; and increased the percentage
ownership in joint venture companies in China, Portugal and Turkey. In 1994, ITT
Fluid Technology acquired Richter Chemie-Technik GmbH ("Richter") of Kempen,
Germany. Richter, with annual sales of approximately $25 million, is a leading
European producer of specialized pumps and valves designed to handle the flow of
corrosive liquid at high temperatures and pressures. Also, during 1994, ITT
Fluid Technology announced the formation of manufacturing and sales joint
ventures with local partners in China and in Brazil.
Management of ITT Industries believes that ITT Fluid Technology has a solid
technology base and proven expertise in applying its products to meet customer
needs. Management of ITT Industries also believes its continuing development of
new products enables ITT Fluid Technology to maintain and build market
leadership positions in served markets.
ITT Fluid Technology companies have approximately 8,300 employees in 40
facilities located in 18 countries, with sales in over 100 countries.
GEOGRAPHIC MARKETS
Approximately one-half of ITT Industries' sales are to customers outside
the United States. The geographic sales mix of ITT Industries is illustrated (in
percentage terms) by the following table for the periods specified.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
United States................................................................. 48 % 50 % 46 %
Canada and Mexico............................................................. 6 6 5
--- --- ---
Total North America....................................................... 54 56 51
Europe........................................................................ 40 39 44
Asia/Pacific and Other........................................................ 6 5 5
--- --- ---
100 % 100 % 100 %
=== === ===
</TABLE>
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The geographic sales base of ITT Automotive is predominantly in Europe and
North America. In 1995, approximately 48% of sales of ITT Automotive were to
customers in the United States and Canada and 49% of sales were to customers in
Western Europe.
The economic performance of ITT Automotive is reasonably dependent upon
economic growth in all major international markets, including that of the United
States. The geographic sales mix differs between products and is greatly
influenced, from year to year, by vehicle production levels in the relevant
countries. Management of ITT Industries sees growth opportunities in Latin
America, Mexico and Asia, particularly China. Recently, ITT Automotive formed
two joint ventures in China, one with Shanghai Automotive Industry Corporation,
Ltd. to manufacture brake systems and another with Shanghai SIIC Transportation
Electric Company Ltd. to manufacture electrical systems and other components for
the automotive market. Also, ITT Automotive established a joint venture in Korea
with Kia Motors and Kia Precision Works to produce advanced braking systems. In
1994, ITT Automotive established a manufacturing facility in Hungary. The plant
currently is producing switches and door checks and plans call for it also to
produce sensors and electric motors. A manufacturing facility is presently under
construction in the Czech Republic to produce brake boosters and master
cylinders. ITT Automotive is involved in joint venture arrangements and
licensing arrangements throughout the world as a means of serving its
international customer base.
The economic performance of ITT Defense & Electronics is particularly
dependent upon sales in the United States, which accounted for over 78% of 1995
sales. Management of ITT Defense & Electronics is attempting to increase its
international defense business and sees growth opportunities in the Asia/Pacific
region and Middle East. For example, a subsidiary of ITT Defense & Electronics
was awarded a $44 million contract in 1994 from the Republic of Korea for air
traffic, precision approach and control radar systems. In addition, ITT Cannon
has formed a joint venture, as a majority owner, in China with Zhenjiang
Connector Factory to supply connectors and switches for, in large part, consumer
electronics products in that growing market. This new Far East production
capability is in addition to ITT Cannon's wholly owned subsidiary in Japan.
The geographic sales mix of ITT Fluid Technology is broad based. In 1995,
slightly under one-half of the sales of ITT Fluid Technology was derived from
the United States while 40% was derived from Western Europe. The economic
performance of ITT Fluid Technology is dependent upon continued economic growth
in major international markets, particularly that of the United States and
Europe. The geographic sales mix differs among products and among divisions of
ITT Fluid Technology. Management of ITT Industries sees growth opportunities in
Eastern Europe and Russia, Africa/Middle East, Latin America and the
Asia/Pacific region. Recently, ITT Fluid Technology established a manufacturing
and distribution joint venture arrangement, as a majority owner, with First Auto
Jinbei Automobile Co., Ltd. of Shenyang, China to produce and sell submersible
pumps in China for the sewage handling and mining markets. ITT Fluid Technology
has also established joint venture sales and manufacturing operations and other
operations in Eastern Europe, Latin America and other locations in the
Asia/Pacific region.
COMPETITION
Substantially all of ITT Industries' operations are in highly competitive
businesses, although the nature of the competition varies among the business
segments. A number of large companies engaged in the manufacture and sale of
similar lines or products and the provision of similar services are included in
the competition, as are many small enterprises with only a few products or
services. Technological innovation, price, quality and reliability are primary
factors in markets served by the various segments of ITT Industries' businesses.
ITT Automotive
In the global automotive industry, competition is intense. This competitive
environment has resulted in increased pressure to reduce costs. Since purchased
items represent a major portion of the total costs of vehicle manufacturers,
vehicle manufacturers are expected to continue to pressure suppliers such as ITT
Automotive to provide cost reductions through a variety of means. Suppliers such
as ITT Automotive are also likely to continue to experience competitive and
pricing pressures as vehicle manufacturers
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adopt manufacturing strategies such as the use of worldwide common platforms for
the manufacture of automobiles.
ITT Defense & Electronics
Competition in the businesses of ITT Defense & Electronics continues to
increase. Reductions in government defense budgets, particularly in the United
States, have produced overcapacity in various market segments, including markets
in which ITT Defense & Electronics participates. This overcapacity has had
various adverse consequences, including aggressive price competition in most
markets served by ITT Defense & Electronics.
In most of the markets served by ITT Defense & Electronics competition is
based primarily upon price, quality, technological expertise, cycle time and
service.
ITT Fluid Technology
The ITT Fluid Technology business is affected by strong competition and
changing economic conditions, significant industry overcapacity that leads to
intense pricing pressures, and public bidding in some markets. Management of ITT
Fluid Technology responds to competitive pressures by utilizing strong
distribution networks, strong brand names, broad product lines focused on market
niches, a global customer base, a continuous stream of new products developed
from a strong technology base, a focus on quality and customer service, and
through continuous cost improvement programs.
EXPOSURE TO CURRENCY FLUCTUATIONS
ITT Industries' companies conduct operations worldwide. ITT Industries is
therefore exposed to the effects of fluctuations in relative currency values.
Although ITT Industries' companies engage where appropriate in various hedging
strategies in respect of their foreign currency exposure, it is not possible to
hedge all such exposure. Accordingly, the operating results of ITT Industries
will be impacted by fluctuations in relative currency values.
CYCLICALITY
Many of the markets in which ITT Industries' businesses operate are
cyclical and can be affected by general economic conditions in those markets.
For example, a large percentage of the ITT Industries' 1995 net sales was
derived from sales to automobile manufacturers. The automobile industry is
highly cyclical, although cycles in the major markets of North America and
Europe are not necessarily concurrent. A decline in the demand for new
automobiles and industry production levels could have an adverse effect on ITT
Industries. ITT Industries also manufactures and sells products used in other
historically cyclical industries, such as the construction, mining and minerals
and aerospace industries, and thus could be adversely affected by negative
cycles affecting those and other industries.
GOVERNMENTAL REGULATION AND RELATED MATTERS
A number of ITT Industries' businesses are subject to governmental
regulation by law or through contractual arrangements. ITT Industries'
businesses in the defense segment perform work under contracts with the United
States Department of Defense and similar agencies in certain other countries.
These contracts are subject to security and facility clearances under applicable
governmental regulations, including regulations requiring background
investigations for high-level security clearances for ITT Industries' executive
officers, and most of such contracts are subject to termination by the
respective governmental parties on various grounds, although such terminations
generally do not occur with significant regularity.
ENVIRONMENTAL MATTERS
ITT Industries is subject to stringent environmental laws and regulations
concerning air emissions, water discharges and waste disposal. Such
environmental laws and regulations include the Federal Clean Air Act, the Clean
Water Act, the Resource, Conservation and Recovery Act ("RCRA") and the
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Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"
or "Superfund"). Environmental requirements are significant factors affecting
all operations. Management believes that ITT Industries' companies closely
monitor all their respective environmental responsibilities, together with
trends in environmental laws. ITT Industries has established an internal program
to assess compliance with applicable environmental requirements for all its
facilities, both domestic and overseas. The program is designed to identify
problems in a timely manner, correct deficiencies and prevent future
noncompliance. Over the past 15 years, usually with the assistance of
independent consultants, ITT Industries has conducted regular, thorough audits
of its major operating facilities. As a result, management of ITT Industries
believes that ITT Industries' companies are in substantial compliance with
current environmental requirements. Management does not believe, based on
current circumstances, that it will incur compliance costs pursuant to such
requirements that will have a material adverse effect on ITT Industries'
financial position, results of operations or cash flows.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- ENVIRONMENTAL MATTERS" and "LEGAL PROCEEDINGS".
RAW MATERIALS
All the businesses of ITT Industries require various raw materials (e.g.,
metals, plastics and packaging), the availability and prices of which may
fluctuate. Although some of these costs may be reflected through increased
prices to customers, the operating results of ITT Industries are exposed to
fluctuations. ITT Industries' companies attempt to control such costs through
various purchasing programs and otherwise. In recent years, the businesses of
ITT Industries have not experienced any significant difficulties in obtaining an
adequate supply of raw materials necessary for manufacturing and related
activities.
RESEARCH, DEVELOPMENT AND ENGINEERING
The businesses of ITT Industries require substantial commitment of
resources to research, development and engineering activities. Research,
development and engineering activities of ITT Industries are conducted in
laboratory and engineering facilities at most of its major manufacturing
subsidiaries. Because ITT Industries believes that continued leadership in
technology is essential to its future, most ITT Industries' funds dedicated to
research and development are applied to areas of high technology, such as
aerospace, automotive braking and electrical systems, and applications involving
electronic components.
For a further discussion of the research, development and engineering
expenditures of ITT Industries, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL
RESOURCES".
INTELLECTUAL PROPERTY
While ITT Industries owns and controls a number of patents, trade secrets,
confidential information, trademarks, trade names, copyrights and other
intellectual property rights which, in the aggregate, are of material importance
to its business, management of ITT Industries believes that its business, as a
whole, is not materially dependent upon any one intellectual property or related
group of such properties. ITT Industries is licensed to use certain patents,
technology and other intellectual property rights owned and controlled by
others, and, similarly, other companies are licensed to use certain patents,
technology and other intellectual property rights owned and controlled by ITT
Industries.
Patents, patent applications and license agreements will expire or
terminate over time by operation of law, in accordance with their terms or
otherwise. The expiration or termination of such patents, patent applications
and license agreements is not expected by the management of ITT Industries to
have a material adverse effect on ITT Industries' financial position, results of
operations or cash flows.
ITT Industries has obtained the exclusive right and license from ITT
Corporation to use the "ITT" name, mark and logo in the operation of the
businesses ITT Industries operated on the date of Distribution and in the
operation of any businesses closely related thereto, as well as the
non-exclusive right to use the "ITT" name, mark and logo in the operation of any
new business it operates so long as such new
8
<PAGE> 10
business is not included in ITT Corporation's or ITT Hartford's businesses on
the date of Distribution or businesses closely related thereto. These rights and
licenses are perpetual, subject to the maintenance of certain quality standards
and other terms of the operative license agreement and are considered by ITT
Industries' management to be of material importance to ITT Industries.
EMPLOYEES
As of December 31, 1995, ITT Industries, through its subsidiaries, employed
an aggregate of approximately 59,000 people. Of this number, approximately
26,000 are employees in the United States, of whom approximately 35% are
represented by labor unions. Generally, labor relations have been maintained in
a normal and satisfactory manner.
DISCONTINUED OPERATIONS
Effective December 19, 1995, ITT Delaware made a distribution to its
shareholders of its former subsidiary ITT Destinations which conducted its
hospitality, entertainment and information services businesses and its former
subsidiary ITT Hartford which conducted its insurance businesses. Both ITT
Destinations renamed ITT Corporation and ITT Hartford have been reflected as
"Discontinued Operations".
In 1994, ITT Delaware announced plans to seek offers for the purchase of
its former subsidiary (ITT Financial Corporation, "ITT Financial") which
conducted its commercial and consumer finance, related insurance and other
financial services businesses, including a mortgage banking operation. ITT
Financial merged into ITT Delaware effective May 1, 1995, and indebtedness of
ITT Financial was assumed by ITT Delaware and subsequently by ITT Industries.
ITT Financial has been reflected as a "Discontinued Operation" in the financial
statements of ITT Industries.
In 1994, ITT Delaware completed the distribution to its shareholders of all
the outstanding common shares of its former forest products subsidiary (formerly
ITT Rayonier Incorporated, "Rayonier"). The former subsidiary has been reflected
as a "Discontinued Operation" in the Consolidated Income Statements. See Notes
to the Consolidated Financial Statements contained herein.
CERTAIN RELATIONSHIPS AMONG ITT INDUSTRIES, ITT CORPORATION AND ITT HARTFORD
AFTER THE DISTRIBUTION
ITT Delaware, ITT Corporation and ITT Hartford entered into a Distribution
Agreement (the "Distribution Agreement") providing for, among other things,
certain corporate transactions required to effect the Distribution and other
arrangements among ITT Industries, ITT Corporation and ITT Hartford subsequent
to the Distribution.
The Distribution Agreement provides for, among other things, assumptions of
liabilities and cross-indemnities designed to allocate generally the financial
responsibility for the liabilities arising out of or in connection with (i) the
automotive, defense & electronics, and fluid technology businesses to ITT
Industries and its subsidiaries, (ii) the hospitality, entertainment and
information services businesses to ITT Corporation and its subsidiaries and
(iii) the insurance businesses to ITT Hartford and its subsidiaries. The
Distribution Agreement also provides for the allocation generally of the
financial responsibility for the liabilities arising out of or in connection
with former and present businesses not described in the immediately preceding
sentence to or among ITT Industries, ITT Corporation and ITT Hartford.
The Distribution Agreement provides that neither ITT Industries, ITT
Corporation or ITT Hartford will take any action that would jeopardize the
intended tax consequences of the Distribution. Specifically, each of ITT
Industries, ITT Corporation and ITT Hartford agrees to maintain its status as a
company engaged in the active conduct of a trade or business, as defined in
Section 355(b) of the Internal Revenue Code, until the first anniversary of the
Distribution. ITT Industries does not expect that this limitation will inhibit
its financing or other activities or its ability to respond to unanticipated
developments. However, compliance with these provisions of the Distribution
Agreement may make the acquisition of control of ITT Industries prior to the
first anniversary more difficult or less likely to occur because of the
potential substantial contractual damages associated with a breach of such
provisions. The Distribution Agreement also provides for the payment of expenses
related to the Distribution.
9
<PAGE> 11
ITT Industries, ITT Corporation and ITT Hartford have also entered into
agreements in connection with the Distribution relating to intellectual property
(see "-- INTELLECTUAL PROPERTY"), tax and employee benefit matters.
A number of members of the Board of Directors of ITT Industries also serve
on the Board of Directors of ITT Corporation and/or ITT Hartford.
ITEM 2. PROPERTIES
ITT Industries, whose principal executive offices are in leased premises
located in White Plains, NY, considers the many offices, plants, warehouses and
other properties that it owns or leases to be in good condition. These
properties are located in several states in the United States as well as in
numerous countries throughout the world. ITT Industries believes the properties
to be adequate for the needs of its businesses.
ITEM 3. LEGAL PROCEEDINGS
ITT Industries or its subsidiaries are responsible or are alleged to be
responsible for environmental investigation and remediation at approximately 80
sites in North America and Europe. Of those sites, ITT Industries has received
notice that it is considered a Potentially Responsible Party ("PRP") at
approximately 60 sites by the United States Environmental Protection Agency
("EPA") and/or a similar state agency under CERCLA or its state equivalent. In
many of these proceedings, ITT Industries' liability is considered de minimis.
In addition, at approximately 20 of the sites, formerly operated by subsidiaries
of the Company, ITT Industries' incurred costs related to liability and/or
defense are to be divided equally among ITT Industries, ITT Corporation and ITT
Hartford pursuant to the Distribution Agreement. The remaining cases are
generally actions either brought by private parties relating to sites formerly
owned or operated by subsidiaries of the Company seeking to recoup incurred
costs or shift environmental liability to ITT Industries pursuant to contractual
language, or situations discovered by ITT Industries through its internal
environmental assessment program.
ITT Industries is involved in an EPA administrative proceeding in
California relating to the San Fernando Valley aquifer. ITT Industries is one of
numerous PRPs who is alleged by the EPA to have contributed to the contamination
of the aquifer. Currently, ITT Industries is involved in an allocation among the
PRPs to fund the clean up required by the EPA. ITT Industries has filed a suit
against its insurers in the California Court, Los Angeles County, ITT
Corporation, et al. v. Pacific Indemnity Corporation et al. for recovery of
costs it has incurred in connection with this and other environmental matters.
ITT Delaware and its former subsidiaries, Rayonier and Southern Wood
Piedmont Company ("SWP"), are named defendants in a lawsuit filed in 1991 in the
U.S. District Court for the Southern District of Georgia, Ernest L. Jordan, Sr.
et. al. v. Southern Wood Piedmont Company, et al., in which plaintiffs allege
property damage and personal injury based on alleged exposure to toxic chemicals
used by SWP in its former wood preserving operations, sought certification as a
class action and ask for compensatory and punitive damages in the amount of $700
million. The Court disposed of plaintiffs' claim of class action, and plaintiffs
amended their complaint by adding over 100 individual residents. Several other
suits arising out of former wood preserving operations of SWP also include ITT
Delaware among the named defendants. Under an agreement entered into by ITT
Delaware and Rayonier in connection with the distribution of Rayonier stock to
ITT Delaware's shareholders in February 1994, ITT Delaware is entitled to be
indemnified by Rayonier for any expenses or losses incurred by the ITT Delaware
in connection with the aforementioned suits as well as in any other legal
proceedings arising out of Rayonier or SWP operations. ITT Industries continues
to have the benefit of such agreement after the Distribution. In connection with
the Distribution, ITT Industries, ITT Corporation and ITT Hartford agreed that
certain liabilities, including those related to Rayonier, would be shared
equally among the three companies.
While there can be no assurance as to the ultimate outcome of any
litigation involving ITT Industries, management does not believe any pending
legal proceeding will result in a judgment or settlement that will have, after
taking into account ITT Industries' existing provisions for such liabilities, a
material adverse effect on ITT Industries' financial position, results of
operations or cash flows.
Reference is made to "-- CERTAIN RELATIONSHIPS AMONG ITT INDUSTRIES, ITT
CORPORATION AND ITT HARTFORD AFTER THE DISTRIBUTION" for information concerning
the allocation of certain liabilities.
10
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
Other than organizational matters voted upon by ITT Delaware when it was
the sole shareholder of ITT Indiana, Inc. prior to changing its name to ITT
Industries, Inc., no matter was submitted to a vote of shareholders of the
Company or ITT Industries during the fourth quarter of the fiscal year covered
by this report. Members of the Board of Directors of ITT Delaware prior to the
Distribution who continued as members of the Board of Directors of ITT
Industries are: Rand V. Araskog, Robert A. Burnett, Michel David-Weill, S.
Parker Gilbert and Edward C. Meyer.
EXECUTIVE OFFICERS OF ITT INDUSTRIES
The following information is provided as to the executive officers of ITT
Industries.
<TABLE>
<CAPTION>
DATE OF
AGE AT YEAR OF ELECTION
FEBRUARY 1, INITIAL ELECTION TO PRESENT
NAME 1996 POSITION AS AN OFFICER POSITION
- --------------------------------------------- --------------------------------------- ---------------- ----------
<S> <C> <C> <C> <C>
Ralph D. Allen.................... 54 Vice President, Director of 1981 12/19/95
Investor Relations
Travis Engen...................... 51 Chairman, President and Chief Executive 1987 12/19/95
and Director
Louis J. Giuliano................. 49 Senior Vice President 1988 12/19/95
Richard J.M. Hamilton............. 46 Senior Vice President and Controller 1992 12/19/95
Martin Kamber..................... 47 Senior Vice President, Director of 1995 12/19/95
Corporate Development
Heidi Kunz........................ 41 Senior Vice President and Chief 1995 12/19/95
Financial Officer
Richard J. Labrecque.............. 57 Senior Vice President 1985 3/1/96
Timothy D. Leuliette.............. 46 Senior Vice President 1991 12/19/95
Vincent A. Maffeo................. 45 Senior Vice President and General 1995 12/19/95
Counsel
Richard W. Powers................. 54 Vice President, Director of Taxes 1991 12/19/95
James P. Smith, Jr................ 53 Senior Vice President, Director of 1995 12/19/95
Human Resources
</TABLE>
Each of the above-named officers was elected to his or her present position
to serve at the pleasure of the Board of Directors. Mr. Engen has an employment
agreement with ITT Industries providing, among other things, for his employment
as Chairman and Chief Executive through December 31, 1999.
Throughout the past five years, all of the above-named officers have held
executive positions with ITT Industries or with its predecessor, ITT Delaware,
bearing at least substantially the same responsibilities as those borne in their
present offices, except that (i) Mr. Engen, prior to his election as Chairman,
President and Chief Executive, was Executive Vice President of ITT Delaware
(1991) and Senior Vice President of ITT Delaware; (ii) Mr. Giuliano, prior to
his election as Senior Vice President, was Senior Vice President of ITT Delaware
(1991), and, prior to that, was Vice President of ITT Delaware; (iii) Mr.
Hamilton, prior to his election as Senior Vice President and Controller, was
Vice President of ITT Delaware (1992) and Assistant Controller and General
Auditor of ITT Delaware (1991) and, prior to that, held various financial
positions with ITT Delaware and its subsidiaries; (iv) Mr. Kamber, prior to his
election as Senior Vice President, Director of Corporate Development, was Vice
President, Corporate Development, of ITT Automotive, Inc. (1993) and Executive
Assistant to the President, Chief Operating Officer and Executive Vice President
of ITT Delaware; (v) Ms. Kunz, prior to her election as Senior Vice President
and Chief Financial Officer, was Vice President (1994) and Treasurer (1993) of
General Motors Corporation and, prior to that, Assistant Treasurer of General
Motors Corporation; (vi) Mr. Labrecque, prior to his election as Senior Vice
President, was Vice President of ITT Delaware; (vii) Mr. Leuliette, prior to his
election as Senior Vice President, was Senior Vice President of ITT Delaware
(1991) and, prior to that, was President and Chief Executive of Siemens
Automotive, L.P.; (viii) Mr. Maffeo, prior to his election as Senior Vice
President and General Counsel, was Vice President and General Counsel of ITT
Automotive, Inc. (1992) and Vice President and General Counsel of ITT Defense,
Inc.; (ix) Mr. Powers, prior to his election as Vice President, Director of
Taxes, was Vice President of ITT Delaware; and (x) Mr. Smith, prior to his
election as Senior Vice President, was Executive Vice President of ITT Sheraton
Corporation (1993) and Senior Vice President of ITT Sheraton Corporation.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
COMMON STOCK -- MARKET PRICES AND DIVIDENDS PRIOR TO THE DISTRIBUTION
<TABLE>
<CAPTION>
1995 1994
------------------- -----------------
HIGH LOW HIGH LOW
------- ------- ------ ------
IN DOLLARS
<S> <C> <C> <C> <C>
Three Months Ended
March 31................................................ $104.00 $ 86.63 $94.66 $80.25
June 30................................................. 119.50 99.63 90.75 81.13
September 30............................................ 128.50 112.00 87.13 78.63
December 31*............................................ 127.50 117.00 90.38 77.00
</TABLE>
- ---------------
* Through December 19 in the case of 1995.
On December 19, 1995, ITT Delaware made the Distribution to its
shareholders consisting of all outstanding shares of its subsidiaries ITT
Destinations (renamed ITT Corporation, a Nevada corporation) and ITT Hartford.
The above table reflects the range of market prices of Common Stock of ITT
Delaware as reported in the consolidated transaction reporting system of the New
York Stock Exchange, the principal market in which this security was traded
(under the trading symbol "ITT") prior to the Distribution. Following the
Distribution, from December 20 through December 31, 1995, the high and low
market prices for ITT Industries Common Stock as reported in the consolidated
transaction reporting system of the New York Stock Exchange, the principal
market in which this security is traded (under the trading symbol "IIN"), were
$24.00 and $21.25, respectively. During the period from January 1, 1996 through
February 29, 1996, the high and low reported market prices of ITT Industries
Common Stock were $27.75 and $22.25, respectively.
ITT Delaware declared dividends of $.495 per common share in each of the
four quarters of 1994 and the first and second quarters of 1995. No cash
dividends were declared in the third and fourth quarters of 1995. ITT Delaware
also paid a special dividend on its common stock and Cumulative Preferred Stock,
Convertible Series N, during the first quarter of 1994 in the form of a
distribution of all the outstanding common shares of ITT Rayonier Incorporated,
its former forest products subsidiary.
An initial quarterly dividend of $.15 per share was declared by ITT
Industries in the first quarter of 1996. The payment and level of future cash
dividends by ITT Industries will be subject to the discretion of the Board of
Directors of ITT Industries, and dividend decisions will be based on, and
affected by, a number of factors, including the operating results and financial
requirements of ITT Industries. Although management of ITT Industries presently
contemplates that for the foreseeable future dividends will be paid at the
initial dividend rate, there can be no assurance that such dividends will be
paid.
There were 52,218 holders of record of ITT Industries Common Stock on
February 29, 1996.
ITT Industries Common Stock is listed on the following exchanges: Basel,
Bern, Frankfurt, Geneva, Lausanne, London, Midwest, New York, Pacific, and
Paris.
12
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
IN MILLIONS, EXCEPT PER SHARE
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
RESULTS AND POSITION
Net sales........................................................ $8,884 $ 7,758 $ 6,621 $ 6,845 $ 6,430
Operating income................................................. 446 418 229 19 158
Income from continuing operations(a)............................. 21 202 135 655 231
Income from continuing operations, as adjusted(b)................ 185 202 135 33 231
Net income (loss)................................................ 708 1,022 913 (885) 749
Expenditures on plant additions.................................. 450 407 337 351 348
Depreciation and amortization.................................... 423 373 323 315 295
Total assets..................................................... 5,879 11,035 12,981 12,560 13,283
Total assets, excluding discontinued operations.................. 5,879 5,577 5,063 5,746 4,589
Long-term debt................................................... 961 1,712 1,994 2,272 2,323
Total debt....................................................... 1,607 2,640 2,971 2,792 2,717
Cash dividends declared per common share......................... .99 1.98 1.98 1.84 1.72
EARNINGS (LOSS) PER SHARE(c)
Income from continuing operations
Primary........................................................ $ .03 $ 1.46 $ .83 $ 5.34 $ 1.58
Fully diluted.................................................. $ .09 $ 1.46 $ .88 $ 4.77 $ 1.58
Net income (loss)
Primary........................................................ $ 6.16 $ 8.57 $ 7.32 $ (7.93) $ 5.84
Fully diluted.................................................. $ 5.93 $ 8.02 $ 6.90 $ (6.90) $ 5.49
SIGNIFICANT RATIOS FOR 1995(d)
Ratios prior to 1995 are not considered relevant to ITT
Industries.
Return on total capital.......................................... 12.3%
Return on shareholders' equity................................... 31.1%
Debt to total capitalization..................................... 71.9%
Book value per share............................................. $ 5.35
</TABLE>
- ---------------
(a) The 1995 income from continuing operations included a charge of $164, after
tax, for losses from the planned disposal of certain non-core operations.
Included in 1992 income was a gain of $622, after tax, from the sale of an
equity interest in Alcatel N.V.
(b) Income from continuing operations excluding the items in note (a) above.
(c) The reported net loss in 1992 causes the calculation of the fully diluted
loss per share in 1992 to be anti-dilutive. In such a case, Generally
Accepted Accounting Principles suggest the fully diluted loss per share to
be the same as the primary loss per share; however, the Company has
presented the actual calculated amount in order that all calculations and
comparisons with previously reported and future amounts be on a consistent
basis. In 1993 and 1995, a similar situation exists in regard to the impact
of the ESOP on income from continuing operations per share.
(d) Excluding the 1995 item in note (a) above, together with discontinued
operations, extraordinary items, and the effect of the ESOP on debt and
equity.
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On December 19, 1995, ITT Corporation, a Delaware corporation, ("ITT
Delaware"), made a distribution (the "Distribution") to its shareholders
consisting of all the shares of common stock of ITT Destinations, Inc., a Nevada
corporation which held ITT Delaware's interests in the hospitality,
entertainment, and information services businesses and all the shares of common
stock of ITT Hartford Group, Inc., a wholly-owned subsidiary which held ITT
Delaware's interests in the insurance businesses ("ITT Hartford"). Effective
December 20, 1995, pursuant to a statutory merger, ITT Delaware merged into ITT
Industries, Inc., an Indiana corporation ("ITT Industries"), with ITT Industries
as the surviving corporation (the "Company"). ITT Destinations changed its name
to ITT Corporation.
In this discussion and analysis of the financial condition and results of
operations, ITT Corporation and ITT Hartford, their respective subsidiaries,
affiliated companies and other assets and liabilities that were transferred to
those companies, shall be collectively referred to as "Discontinued Operations".
BACKGROUND AND BUSINESS CONDITIONS
ITT Industries is engaged, directly and through its subsidiaries, in the
design and manufacture of a wide range of high technology products, focused on
the principal business segments of automotive, defense and electronics, and
fluid technology.
ITT Automotive is one of the largest independent suppliers of systems and
components to vehicle manufacturers worldwide with 1995 sales of $5.6 billion.
In 1995, ITT Automotive maintained its position as a leading global supplier of
four-wheel anti-lock braking systems ("ABS") and traction-control systems
("TCS"), sales of which exceeded $1 billion for the third consecutive year.
During 1994, ITT Automotive substantially increased its previously established
position as a leading producer of electric motors and wiper systems, through the
acquisition from General Motors of its motors and actuators business unit, now
renamed ITT Automotive Electrical Systems, Inc. ("ESI"). Future operating income
is expected to be affected by an anticipated increase in market penetration,
continued cost reductions to offset declining prices, and by worldwide vehicle
production levels.
ITT Defense & Electronics companies, with 1995 sales of $1.6 billion,
develop, manufacture, and support high technology electronic systems and
components for defense and commercial markets on a worldwide basis. ITT Defense
& Electronics enjoys a leadership position in certain products that are expected
to be critical to the armed forces in the 21st century, particularly products
that facilitate communications in the forward area battlefield, night vision
devices, and electronic systems that protect allied forces from enemy radar
controlled missiles. Key development orders captured in 1995 provide the
possible foundation for significant future production orders. Export sales
increased by 45.0% in 1995 and export orders now account for 17.0% of Defense
order input. In the Electronics sector, restructuring and repositioning of the
product range is resulting in improved operating margins.
ITT Fluid Technology, with 1995 sales of $1.2 billion, is a worldwide
leader in the design, development, production and sale of products, systems and
services used to move, handle, transfer, control, and contain fluids of all
kinds. Customer focused marketing, new products, and geographic expansion are
expected to contribute to growth in sales and profits.
RESULTS OF OPERATIONS
Year ended December 31, 1995 compared with the year ended December 31, 1994
Income from continuing operations of ITT Industries, adjusted to eliminate
charges associated with the planned disposal of certain non-core units, was $185
million or $1.57 per fully diluted share, compared with a similarly adjusted
amount in 1994 of $220 million or $1.76 per fully diluted share. Operating
income was $446 million, an increase of 6.7% over the $418 million reported in
the prior year. Operating income improved in each of ITT Industries' three
principal business segments reflecting successful cost control efforts, the
smooth integration of acquisitions and strong product sales; however, this
improvement was offset by substantially higher net interest expense in 1995.
After deducting one-
14
<PAGE> 16
time charges for costs and losses associated with the planned disposal of
certain operations, reported income from continuing operations in 1995 was $21
million, or $.09 per fully diluted share, compared with $202 million, or $1.46
per fully diluted share, in 1994. These charges, which after tax amounted to
$164 million in 1995, are principally related to ITT Community Development
Corporation (a business unit that develops real estate), ITT Semiconductors (a
business unit that manufactures and produces semiconductor devices), and certain
minor automotive product lines. After tax income from Discontinued Operations
totaled $994 million (including $403 million reflecting the gain on the sale of
ITT Financial) and $831 million for 1995 and 1994, respectively, and represents
the results of ITT Hartford, ITT Corporation, ITT Financial and, in 1994,
Rayonier, partly offset by charges related to the Distribution. These charges,
net of tax, included $39 million related to the restructuring of the Company's
headquarters (including ITT Sheraton and Caesars World headquarters), and $109
million related to the Distribution (including legal and advisory fees, taxes,
and other costs). Net income, which also reflects an extraordinary charge of
$307 million for the early retirement of debt prior to the Distribution, was
$708 million or $5.93 per fully diluted share, compared with $1.0 billion or
$8.02 per fully diluted share in 1994.
Net sales totaling $8.9 billion rose 14.5% compared with 1994, with
improvements at Automotive, Defense & Electronics, and Fluid Technology. Gross
margin approximated 13.7% in 1995 and 14.8% in 1994 due to lower sales prices
for ABS systems and higher material costs in all businesses. Selling, general
and administrative expenses, excluding service charges from affiliated
companies, decreased to 7.7% of sales from 8.3% in 1994 due to a continuing
focus on cost reduction and efficiency programs. Service charges from affiliated
companies represent fees for advice and assistance in connection with cash
management, legal, accounting, tax, and insurance services provided by the
centralized general and administrative functions of the Company before the
Distribution. These charges totaled $80 million and $73 million in 1995 and
1994, respectively. Fees for such services, which were based upon a general
relations agreement, were approximately 1% of sales. Reduction of expenses for
such services will be a focus of ITT Industries as these services are developed
internally or purchased from other sources. Other operating expenses, which
include gains and losses from foreign exchange transactions, restructuring and
other charges, totaled $2 million in 1995, compared with $17 million in 1994.
Operating margins were 5.0% in 1995, compared with 5.4% in 1994, a result
of the factors discussed above.
Interest expense, net of interest income, increased to $135 million in 1995
from $48 million in 1994, reflecting the absence of $32 million of interest
income on a note receivable related to the sale of Alcatel N.V. which was
collected in 1994, higher borrowings in connection with the March 1994 ESI
acquisition, and allocations of total corporate interest expense in connection
with the Distribution.
Miscellaneous income (expense), net, includes a provision for the expected
loss on the disposal of ITT Semiconductors, portions of ITT Community
Development Corporation, and certain other non-core business units of ITT
Industries.
The effective income tax rate was 70.4% in 1995, compared with 42.1% in
1994, largely the result of lower than normal tax benefits on certain loss
provisions. Income tax expense decreased by $97 million, to $50 million in 1995,
due to the lower pretax earnings.
Business Segments -- Sales and operating income before corporate expenses
(principally the service charges from affiliated companies) for each of ITT
Industries' three major business segments were as follows ($ in millions):
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
------------------- ---------------
1995 1994 1995 1994
------ ------ ---- ----
<S> <C> <C> <C> <C>
AUTOMOTIVE................................ $5,575 $4,668 $344 $336
</TABLE>
Automotive's sales increased 19.4%, reflecting, in part, the full year
impact of the March, 1994 acquisition of ESI. Excluding this acquisition, sales
improved 14.7% driven by increasing dollar content of ITT Industries product per
vehicle manufactured, foreign exchange translation, and a slight increase in
European vehicle production. Growth in Body & Electrical sales also reflected
new wiper systems
15
<PAGE> 17
business on light trucks and higher installation rates of power seat options.
Sales to two customers accounted for approximately 42% and 44% of 1995 and 1994
sales, respectively.
Operating income improved 2.4% in 1995 as a result of increased sales
volume and continued cost reductions, while margins declined due to lower sales
prices, the costs associated with the launch of a new ABS MK 20 line of
products, and increases in engineering expense due to major forward programs.
Sales and operating income for 1994 have been restated to reflect non-core
business operations that will be closed or divested in 1996.
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
--------------------- --------------
1995 1994 1995 1994
------- ------- --- ---
<S> <C> <C> <C> <C>
DEFENSE AND ELECTRONICS.................... $ 1,559 $ 1,498 $97 $96
</TABLE>
Defense & Electronics' sales increased 4.1% over 1994 due principally to
improved sales of ITT Cannon connector products in mobile communications and
information systems. However, Defense & Electronics' operating income in 1995
was up marginally over 1994 because strong improvements in profitability of
connectors was largely offset by the absence in 1995 of one-time favorable
adjustments on completed contracts in 1994. Defense & Electronics' order backlog
was $2.0 billion at December 31, 1995 compared with $2.1 billion at year end
1994. Export sales increased by 45.0% over the prior year and export orders now
account for 17.0% of Defense segment order input. Approximately 65% and 66% of
1995 and 1994 sales, respectively, were to governmental entities, of which
approximately 90% were to the U.S. government in both years.
Sales and operating income for 1994 have been restated to reflect the
previously disposed Electron Technology and ITT Semiconductors, which is planned
for divestiture in 1996.
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
--------------------- --------------
1995 1994 1995 1994
------- ------- ---- ---
<S> <C> <C> <C> <C>
FLUID TECHNOLOGY........................... $ 1,248 $ 1,125 $113 $99
</TABLE>
Fluid Technology's 1995 sales and operating income increased at all units,
most significantly at ITT Flygt due to higher volume and favorable foreign
exchange. New product initiatives, global business development activities, and
improvements in the mining, pharmaceutical, pulp and paper, and chemical
industries contributed to Fluid Technology's strong performance. Operating
income for 1995 increased by 14.1% over the prior year. Operating margins
outpaced sales growth due to re-engineering and cost improvement programs,
volume leverage, and operating improvement at certain underperforming
operations.
Year ended December 31, 1994 compared with the year ended December 31, 1993
The Company's net income in 1994 was $1.0 billion or $8.02 per fully
diluted share, compared with $913 million or $6.90 per fully diluted share in
1993, including income from Discontinued Operations totaling $831 million and
$828 million, respectively.
Such net income was adversely impacted by the net effect of three
accounting changes, the cumulative effect of which totaled $11 million after tax
or $.09 per fully diluted share as of January 1, 1994. The Company adopted
Statement of Financial Accounting Standards ("SFAS") 115 and related
pronouncements which required adjustments to the fair value of mortgage-backed
interest-only securities held by its discontinued businesses. The cumulative
effect of this accounting change was a $36 million after tax charge or $.29 per
fully diluted share. In an unrelated change, the basis for discounting certain
workers' compensation liabilities at ITT Hartford was changed from an insurance
guideline-based method to an estimated risk-free rate of return to reflect more
appropriately current market conditions. The cumulative effect of this
accounting change was a benefit of $42 million after tax or $.33 per fully
diluted share. Finally, the Company changed its method of accounting to expense
certain marketing and start-up costs at ITT Educational Services, Inc., now a
unit of ITT Corporation, which had been previously deferred and amortized. The
cumulative effect of this accounting change was an after tax charge of $17
million or $.13 per fully diluted share. The Company's 1993 net income was
adversely impacted by an extraordi-
16
<PAGE> 18
nary loss of $50 million after tax, or $.38 per fully diluted share resulting
from the retirement of fixed rate debt.
Income from continuing operations of $202 million rose by $67 million
(49.6%) from the 1993 level of $135 million. Over 46.3% of the net income growth
was contributed by ESI, which was acquired by the Automotive segment in March
1994. Net income in 1994 included a $15 million after tax loss from the
divestment of ITT Instruments, a non-strategic business previously reported
within the Defense & Electronics business segment. Net income in 1993 included
an after tax gain of $10 million for the divestment of ITT Components
Distribution, also previously within the ITT Defense & Electronics segment.
Higher volumes at Automotive and Fluid Technology combined with the favorable
impact of ongoing cost reduction programs in all businesses contributed to the
favorable net income comparison.
The Company's net sales in 1994 rose to $7.8 billion, an increase of 17.2%
from $6.6 billion in 1993. Without ESI, net sales from existing businesses rose
6.6%, principally from higher ITT Automotive volumes.
The Company's gross margins remained steady at approximately 15% in both
periods. Selling, general, and administrative expenses declined by $12 million
or 1.8%, in response to ongoing efforts to reduce costs and increase efficiency.
Service charges from affiliated companies, which were based on a percentage of
sales, rose by $14 million to $73 million. Other operating expenses declined
from $31 million to $17 million due chiefly to the absence of significant
restructuring provisions recorded by ITT Automotive in the fourth quarter of
1993 for the downsizing and consolidation of its European operations. Operating
margins increased to 5.4%, compared with 3.5% in 1993.
Interest expense, net, benefited from income on notes receivable related to
the 1992 Alcatel N.V. sale totaling $32 million in 1994 and $90 million in 1993.
Excluding interest income, interest expense decreased to $114 million compared
with $153 million in 1993, due principally to the collection of Alcatel notes in
July and the use of those proceeds to reduce debt. Share repurchases in excess
of $1.0 billion resulted in higher debt levels at year end.
Miscellaneous expense in 1994 totaled $21 million due primarily to the loss
on the sale of the ITT Instruments subsidiary. Results in 1993 included the gain
on the fourth quarter sale of ITT Components Distribution, partially offset by
losses on the disposition of certain ITT Automotive operations.
Income taxes of $147 million were provided on pretax income of $349 million
representing a 42.1% effective income tax rate. In 1993, the effective income
tax rate was 32.5%. This rate was unusually low and reflected the one-time
remeasurement of deferred tax liabilities pursuant to changes in the German
statutory tax rates as well as the realization of tax benefits on the
disposition of certain subsidiaries.
Business Segments -- Sales and operating income before the service charges
from affiliated companies, which are described above, for each of ITT
Industries' three major business segments were as follows ($ in millions):
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
------------------- ---------------
1994 1993 1994 1993
------ ------ ---- ----
<S> <C> <C> <C> <C>
AUTOMOTIVE................................ $4,668 $3,457 $336 $164
</TABLE>
Sales in 1994 for Automotive increased 35.0% from 1993 levels to $4.7
billion. Approximately 57.8% of the increase was due to the March 1994 ESI
acquisition, with the balance reflecting higher market penetration of ABS in
North America and Europe as well as increased vehicle production. The ESI
acquisition improved the geographic balance of Automotive's North American and
European sales mix. In 1994, North American sales comprised 50.8% of the total,
compared with 41.2% in 1993. Sales to two customers accounted for approximately
44% of 1994 sales and sales to three customers accounted for 46% of 1993 sales.
The Automotive segment's operating income doubled in the year on increased
sales volumes (including the ESI acquisition) and continued cost reductions.
Lower sales prices and higher labor costs partially offset the growth in sales.
Excluding ESI, higher sales volume resulted in an operating improvement of 64.0%
compared with 1993. The benefits of cost reduction programs and the successful
integration of ESI enabled Automotive to improve operating margins despite
significant price concessions
17
<PAGE> 19
granted to customers. Operating margins (excluding service charges from
affiliated companies) increased to 7.2% from 4.7% in 1993.
Sales and operating income for 1994 and 1993 have been restated to reflect
non-core business operations, that will be closed or divested in 1996.
<TABLE>
<CAPTION>
SALES OPERATING INCOME
------------------- -----------------
1994 1993 1994 1993
------ ------ ---- ----
<S> <C> <C> <C> <C>
DEFENSE & ELECTRONICS..................... $1,498 $1,426 $96 $77
</TABLE>
Sales for Defense & Electronics rose 5.0% compared with 1993, due primarily
to increased international defense radar and radio product sales as well as
higher connector volumes. Operating income increased 24.7% to $96 million due
principally to the return to profitability of the connectors business, which
benefited from restructuring actions in prior years. Operating income in other
defense businesses declined in 1994 due to lower margin adjustments on mature
military programs, partially offset by higher sales volumes and the benefits of
cost reduction programs. Order backlog at the end of 1994 remained even with the
$2.1 billion backlog at the end of 1993. Approximately 66% and 68% of 1994 and
1993 sales, respectively, were to governmental entities, of which approximately
90% and 94%, respectively, were to the U.S. government.
Sales and operating income for 1994 and 1993 have been restated to reflect
the previously disposed Electron Technology and ITT Semiconductors, which is
planned for divestiture in 1996.
<TABLE>
<CAPTION>
SALES OPERATING INCOME
------------------- -----------------
1994 1993 1994 1993
------ ------ ---- ----
<S> <C> <C> <C> <C>
FLUID TECHNOLOGY.......................... $1,125 $1,030 $99 $95
</TABLE>
ITT Fluid Technology reported a 9.2% growth in sales in 1994. The
improvement was the result of new product initiatives, global market development
activities, a strong North American heating season caused by severe winter
weather, and generally strengthening economic conditions worldwide. The
acquisition of Richter Chemie-Technik, a German manufacturer of plastic-lined
valves and pumps, also contributed to the increase. ITT Flygt, through an
increase in market share, was the primary contributor to the improvements at
Fluid Technology. Operating income improved in 1994 despite intense competition,
increased raw material costs, and the absence of favorable 1993 foreign exchange
transactions. The improvement was achieved through higher sales volume, price
increases, and benefits from cost reduction efforts.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated EBITDA (defined as operating earnings before
interest, taxes, depreciation, and amortization) of $869 million in 1995,
compared with $791 million in the full year 1994, a 9.9% improvement. EBITDA in
1993 was $552 million. The improvements are a result of ITT Industries' earnings
growth, primarily in the Automotive business segment which benefited from the
ESI acquisition in 1994. Cash from continuing operating activities, as defined
by SFAS 95, was $619 million in 1995 compared with $637 million in 1994. This
change reflects timing differences with respect to tax payments and receipts and
working capital requirements. The SFAS definition of cash from continuing
operating activities differs from EBITDA largely due to the inclusion of
interest, taxes, and changes in working capital.
In 1995, the Company realized $12.7 billion of proceeds from the sale of
assets at ITT Financial. Proceeds were used mainly to repay indebtedness, which
amounted to $11.6 billion at December 31, 1994. Funds of $853 million were
generated in 1994 from the sale of divested assets, due primarily to the receipt
of $817 million as the final installment from the 1992 sale of Alcatel N.V.
Previous payments from that sale totaled $767 million in 1993. The cash
generated was used to fund strategic acquisitions and capital additions along
with repurchases of common stock in 1994.
Many of ITT Industries' businesses require substantial investment in plant
and tooling in order to produce competitively superior products. Historically,
ITT Industries' businesses have generated sufficient operating cash flow to fund
such investments. Spending on plant additions totaled $450 million in
18
<PAGE> 20
1995, compared with $407 million in 1994 and $337 million in 1993. Approximately
61% of the 1995 total was incurred at Automotive, as expenditures for anti-lock
braking systems, including the latest variation of low cost ABS technology, was
and continues to be important to overall strategy. Investments in foundation
brakes and brake actuation technology, electrical systems and motors, and
facilities in developing countries, including the Far East, the Czech Republic,
and Hungary, were also integral to ITT Industries' investment strategy. At
December 31, 1995, contractual commitments have been made for capital
expenditures totaling $128 million. Total spending on plant additions in future
periods is expected to approximate 1995 levels, in order to support known
customer demands. In addition, certain facilities and equipment are utilized by
ITT Industries' businesses through operating leases. Rental expenses for
operating leases in 1995 were $87 million. As of December 31, 1995, minimum
rental commitments under operating leases total $91 million in 1996, $84 million
in 1997, and a total of $154 million from 1998 through 2000. The commitments
discussed are expected to be funded through the operating cash flows of ITT
Industries.
The Company's acquisition spending in 1995 totaled $15 million for a small
acquisition at Automotive, and $418 million in 1994, consisting of Automotive's
purchase of ESI for $374 million in March 1994 and Fluid Technology's
acquisition of Richter Chemie-Technik.
The Company's expenditures for research, development, and engineering
totaled $422 million in 1995, $396 million in 1994, and $460 million in 1993,
approximately 50% of which was pursuant to customer contracts. ITT Industries'
research and development expenditure levels, excluding those pursuant to
customer contracts, are expected to remain at approximately 3% of sales for the
foreseeable future, although there can be no assurance that such results will
occur. Research, development, and engineering expenditures have funded numerous
product developments such as anti-lock brake and wiper systems, electronic
countermeasures, and tactical radio communications technology.
ITT Industries' cash flows after gross plant additions are expected to be
sufficient to cover working capital needs, interest, taxes, and dividends to
shareholders. Cash flows in 1996 are also expected to cover approximately $200
million of tax and certain other liabilities related to the Distribution and the
Discontinued Operations prior to the Distribution. Efficiencies in the use of
working capital resulted in a minimal increase in cash requirements in 1995 and
1994 despite substantial sales growth. ITT Industries declared a dividend of
$.15 per share payable on April 1, 1996.
External borrowings at ITT Industries were $1.6 billion at December 31,
1995 compared with $2.6 billion at December 31, 1994, and $3.0 billion at
December 31, 1993. The 1994 and 1993 amounts include approximately $600 million
of ESOP debt, which was repaid in 1995, and also reflect allocations of
corporate debt between ITT Industries and Discontinued Operations. Cash and cash
equivalents totaled $94 million at December 31, 1995 compared with $322 million
at year-end 1994 and $240 million at year-end 1993.
Effective January 1, 1994, the Company adopted SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities", which requires investments
to be reflected at fair value, with the corresponding impact reported as a
separate component of shareholders' equity in situations where those investments
are "available for sale", as defined in SFAS 115. The accounting standard does
not allow for a corresponding fair value adjustment to liabilities.
Shareholders' equity can vary significantly between reporting periods as market
interest rates and other factors change. Following the Distribution, the impact
of this accounting standard to ITT Industries' shareholders' equity will not be
material.
Excluding the dividend of ITT Hartford and ITT Corporation, shareholders'
equity increased $626 million in 1995, due to growth in retained earnings.
Excluding the SFAS 115 impact, shareholders' equity decreased $735 million in
1994 mainly as the result of share repurchases ($1.0 billion), dividends ($264
million), and the spin-off of Rayonier ($621 million), which were partially
offset by 1994 net income.
In 1995, the Company terminated the ESOP portion of the ITT Investment and
Savings Plan for Salaried Employees and the trustee of the ESOP completed the
sale of 5.3 million unallocated shares of ITT common stock in the ESOP. The
sales proceeds were used to repay the debt associated with the ESOP, which
totaled $541 million. In addition, proceeds from the sale of ITT Financial
assets were used to repay outstanding borrowings.
19
<PAGE> 21
In 1995, the Company completed a tender offer for an aggregate $4.1 billion
of its debt securities, with $3.4 billion of the aggregate principal amount of
the securities having been tendered. The premium paid for securities tendered
resulted in an after tax loss of $307 million ($472 million pretax).
The Company used derivative financial instruments extensively in ITT
Hartford as part of its risk management strategy. Derivative financial
instruments are also used to a much lesser degree in other segments of the
Company. Interest rate risk relative to the Company's debt portfolio is managed
through interest rate swap agreements, primarily in the now discontinued Finance
segment. The multinational operations of ITT Industries also create exposure to
foreign currency fluctuation. Foreign currency risk relative to ITT Industries'
net investment in a foreign country, foreign denominated debt or a specific
foreign denominated transaction is managed in part through currency swaps and
forward exchange contracts. Foreign currency transaction gains or losses were
not significant in the periods discussed above.
ITT Industries is an end-user of derivatives and does not utilize them for
speculative purposes. The notional amounts of derivative contracts represent the
basis upon which pay and receive amounts are to be calculated and therefore are
not reflective of credit risk. Credit risk is limited to the amounts calculated
to be due or owed by ITT Industries on such contracts. ITT Industries expects to
continue to use interest rate swaps to reduce its cost of borrowing in the
future, although the divestment of the Discontinued Operations will result in
substantially reduced activity in the future.
INCOME TAXES
As a global company, ITT Industries provides and pays taxes in numerous
jurisdictions, some of which impose income taxes in excess of equivalent U.S.
domestic rates. Credit for these taxes is generally available against U.S.
taxation when earnings are remitted, or deemed to be remitted. In all years
presented, credits for income taxes paid in foreign jurisdictions were fully
utilizable in the United States in the consolidated tax return of the Company,
including Discontinued Operations. As a result of the Distribution, the
Discontinued Operations will not be included in the consolidated Federal income
tax return of ITT Industries after December 19, 1995. After the Distribution,
this full utilization of credits may not be achievable in the future by ITT
Industries, and, to the extent foreign tax credits cannot be used to reduce the
U.S. tax obligation, a higher effective income tax rate will be incurred.
Tax burdens and benefits that relate to periods on or before the
Distribution are shared in accordance with a tax allocation agreement between
the Company, ITT Hartford, and ITT Corporation.
No valuation allowances have been provided for deferred tax assets, as
these assets are expected to be realized in future years.
ENVIRONMENTAL MATTERS
ITT Industries is subject to stringent environmental laws and regulations
that affect its operating facilities and impose liability for the clean-up of
past discharges of hazardous substances. In the United States, these laws
include the Federal Clean Water Act, the Clean Air Act, the Resource
Conservation and Recovery Act, and the Comprehensive Environmental Response,
Compensation and Liability Act. The management of ITT Industries believes that
ITT Industries is in substantial compliance with these and all other applicable
environmental requirements. Environmental compliance costs are accounted for
primarily as normal operating expenses. The management of ITT Industries does
not believe that such environmental compliance costs will have a material
adverse effect on ITT Industries' financial position, results of operations, or
cash flows.
In estimating the costs of environmental investigation and remediation, ITT
Industries considers, among other things, regulatory standards, its prior
experience in remediating contaminated sites, and the professional judgment of
environmental experts. It is difficult to estimate the total costs of
investigation and remediation due to various factors, including incomplete
information regarding particular sites and other potentially responsible
parties, uncertainty regarding the extent of contamination and ITT Industries'
share, if any, of liability for such problems, the selection of alternative
remedies, and changes in cleanup standards. When it is possible to create
reasonable estimates of liability with respect to environmental matters, ITT
Industries establishes reserves in accordance with Generally Accepted Accounting
Princi-
20
<PAGE> 22
ples. While the outcome of ITT Industries' various remediation efforts presently
cannot be predicted with a high level of certainty, management does not expect
that these matters will have a material adverse effect on ITT Industries'
financial position, results of operations, or cash flows.
EFFECT OF INFLATION
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the revenues or operating results of ITT
Industries during the three most recent fiscal years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ITT INDUSTRIES
The information called for by Item 10 with respect to directors is
incorporated herein by reference to the definitive proxy statement involving the
election of directors filed or to be filed by ITT Industries with the Securities
and Exchange Commission pursuant to Regulation 14A within 120 days after the end
of the fiscal year covered by this Form 10-K.
The information called for by Item 10 with respect to executive officers is
set forth above in Part I under the caption "Executive Officers of ITT
Industries."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. See Index to Financial Statements and Schedules appearing on page
F-1 for a list of the financial statements and schedules filed as a part of
this report.
2. See Exhibit Index appearing on pages II-2, II-3 and II-4 for a list
of the exhibits filed or incorporated herein as a part of this report.
21
<PAGE> 23
(b) On November 7, 1995, ITT Delaware filed a Current Report on Form 8-K
reporting under Item 5 certain changes in projections and forecasted data and
information previously reported in its Proxy Statement dated August 30, 1995. On
November 16, 1995, ITT Delaware filed a Current Report on Form 8-K reporting
under Item 7 information with respect to its recently issued 7.40% Debentures
due November 15, 2025. On December 21, 1995, ITT Industries filed a Current
Report on Form 8-K reporting under Items 5 and 7 with respect to the
Distribution to ITT Delaware's shareholders of all outstanding shares of its
wholly-owned subsidiaries, ITT Destinations (renamed ITT Corporation, a Nevada
corporation) and ITT Hartford and the merger of ITT Delaware with and into ITT
Industries.
22
<PAGE> 24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Management.................................................................. F-2
Report of Independent Public Accountants.............................................. F-3
Consolidated Income Statements for the three years ended December 31, 1995............ F-4
Consolidated Balance Sheets as of December 31, 1995 and 1994.......................... F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1995..... F-6
Consolidated Statements of Retained Earnings for the three years ended December 31,
1995................................................................................ F-7
Consolidated Statements of Common Stock and Capital Surplus for the three years ended
December 31, 1995................................................................... F-7
Notes to Consolidated Financial Statements............................................ F-8
Business Segment Information.......................................................... F-20
Geographical Information.............................................................. F-21
Quarterly Results for 1995 and 1994................................................... F-22
Export Sales.......................................................................... F-22
Valuation and Qualifying Accounts..................................................... S-1
</TABLE>
F-1
<PAGE> 25
REPORT OF MANAGEMENT
The management of ITT Industries, Inc. is responsible for the preparation
and integrity of the information contained in the consolidated financial
statements and other sections of the Annual Report. The consolidated financial
statements are prepared in accordance with Generally Accepted Accounting
Principles and, where necessary, include amounts that are based on management's
informed judgments and estimates. Other information in the Annual Report is
consistent with the consolidated financial statements.
ITT Industries' consolidated financial statements are audited by Arthur
Andersen LLP, independent public accountants, whose appointment is ratified by
the shareholders. Management has made ITT Industries' financial records and
related data available to Arthur Andersen LLP, and believes that the
representations made to the independent public accountants are valid and
complete.
ITT Industries' system of internal controls is a major element in
management's responsibility to assure that the consolidated financial statements
present fairly the Company's financial condition. The system includes both
accounting controls and the internal auditing program, which are designed to
provide reasonable assurance that the Company's assets are safeguarded, that
transactions are properly recorded and executed in accordance with management's
authorization, and that fraudulent financial reporting is prevented or detected.
ITT Industries' internal controls provide for the careful selection and
training of personnel and for appropriate divisions of responsibility. The
controls are documented in written codes of conduct, policies and procedures
that are communicated to ITT Industries' employees. Management continually
monitors the system of internal controls for compliance. ITT Industries'
internal auditors independently assess the effectiveness of internal controls
and make recommendations for improvement on a regular basis. The independent
public accountants also evaluate internal controls and perform tests of
procedures and accounting records to enable them to express their opinion on ITT
Industries' consolidated financial statements. They also make recommendations
for improving internal controls, policies and practices. Management takes
appropriate action in response to each recommendation from the internal auditors
and the independent public accountants.
The Audit Committee of the Board of Directors, composed of nonemployee
directors, meets periodically with management and with the independent public
accountants and internal auditors to evaluate the effectiveness of the work
performed by them in discharging their respective responsibilities and to assure
the independent and free access of the independent accountants and internal
auditors.
F-2
<PAGE> 26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ITT Industries, Inc.:
We have audited the consolidated financial statements of ITT Industries,
Inc. (an Indiana corporation; formerly named ITT Corporation and incorporated in
Delaware) and subsidiaries as of December 31, 1995 and 1994, and for each of the
three years in the period ended December 31, 1995, as described in the
accompanying Index to Consolidated Financial Statements and Schedule. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ITT
Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in the accompanying notes to consolidated financial
statements, effective January 1, 1994, the Company changed its methods of
accounting for certain investments in debt and equity securities, workers'
compensation liabilities and marketing and start-up costs.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
January 30, 1996
F-3
<PAGE> 27
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
IN MILLIONS, EXCEPT PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Net sales...................................................... $8,884 $7,758 $6,621
Cost of sales.................................................. 7,669 6,607 5,647
------ ------ ------
Gross margin................................................... 1,215 1,151 974
Selling, general, and administrative expenses.................. 687 643 655
Service charges from affiliated companies...................... 80 73 59
Other operating expenses....................................... 2 17 31
------ ------ ------
Operating income............................................... 446 418 229
Interest expense............................................... (175) (114) (153)
Interest income................................................ 40 66 121
Miscellaneous income (expense), net............................ (240) (21) 3
------ ------ ------
Income from continuing operations before income tax expense.... 71 349 200
Income tax expense............................................. (50) (147) (65)
------ ------ ------
Income from continuing operations.............................. 21 202 135
Discontinued operations:
Operating income, net of tax of $297, $328, and $310......... 591 831 828
Gain on sale of Financial operations, net of tax of $264..... 403 -- --
Extraordinary items, net of tax benefit of $165 and $25........ (307) -- (50)
Cumulative effect of accounting changes, net of tax benefit of
$8........................................................... -- (11) --
------ ------ ------
Net income..................................................... $ 708 $1,022 $ 913
====== ====== ======
EARNINGS (LOSS) PER SHARE:
Income from continuing operations
Primary...................................................... $ .03 $ 1.46 $ .83
Fully diluted................................................ $ .09 $ 1.46 $ .88
Discontinued operations
Primary...................................................... 8.87 7.21 6.90
Fully diluted................................................ 8.45 6.65 6.40
Extraordinary items
Primary...................................................... (2.74) -- (.41)
Fully diluted................................................ (2.61) -- (.38)
Cumulative effect of accounting changes
Primary...................................................... -- (.10) --
Fully diluted................................................ -- (.09) --
Net income
Primary...................................................... $ 6.16 $ 8.57 $ 7.32
Fully diluted................................................ $ 5.93 $ 8.02 $ 6.90
AVERAGE COMMON EQUIVALENT SHARES -- PRIMARY.................... 112 115 120
AVERAGE COMMON EQUIVALENT SHARES -- FULLY DILUTED.............. 118 125 129
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-4
<PAGE> 28
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
IN MILLIONS, EXCEPT FOR SHARES AND PER SHARE
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................ $ 94 $ 322
Receivables, net..................................................... 1,257 1,138
Inventories.......................................................... 908 990
Other current assets................................................. 243 80
------ -------
Total current assets......................................... 2,502 2,530
Plant, property, and equipment, net.................................... 2,235 2,114
Deferred U.S. income taxes............................................. 218 161
Goodwill, net.......................................................... 363 365
Other assets........................................................... 561 407
Net assets of discontinued operations.................................. -- 5,458
------ -------
$ 5,879 $ 11,035
====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................................... $ 781 $ 774
Accrued expenses..................................................... 1,072 753
Accrued taxes........................................................ 162 95
Notes payable and current maturities of long-term debt............... 646 928
------ -------
Total current liabilities.................................... 2,661 2,550
Pension and postretirement costs....................................... 1,101 998
Long-term debt (including ESOP of $0 and $562)......................... 961 1,712
Deferred foreign, state and local income taxes......................... 121 90
Other liabilities...................................................... 408 226
------ -------
5,252 5,576
Shareholders' Equity:
Cumulative preferred stock........................................... -- 655
Common stock: Authorized 200,000,000 shares, $1 par value per share
Outstanding 117,068,833 shares and 105,672,252 shares............. 117 106
Capital surplus...................................................... 399 --
Deferred compensation -- ESOP........................................ -- (562)
Cumulative translation adjustments................................... 111 (113)
Unrealized loss on securities, net of tax............................ -- (1,376)
Retained earnings.................................................... -- 6,749
------ -------
627 5,459
------ -------
$ 5,879 $ 11,035
====== =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above balance sheets.
F-5
<PAGE> 29
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- ------- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 708 $ 1,022 $ 913
Discontinued operations:
Operating income.......................................... (591) (831) (828)
Gain on sale of Financial operations...................... (403) -- --
Extraordinary items......................................... 307 -- 50
Cumulative effect of accounting changes..................... -- 11 --
-------- ------- -----
Income from continuing operations......................... 21 202 135
Adjustments to income from continuing operations:
Depreciation.............................................. 390 343 287
Amortization.............................................. 33 30 36
Provision for doubtful receivables........................ 2 4 6
(Gain) loss on divestments -- pretax...................... 245 2 (13)
Change in receivables, inventories, accounts payable, and
accrued expenses....................................... (6) (18) 83
Change in accrued and deferred taxes...................... 30 87 83
Other, net................................................ (96) (13) 11
-------- ------- -----
Cash from continuing operations............................. 619 637 628
Cash from (used for) discontinued operations................ (411) 1,152 (496)
-------- ------- -----
Cash from operating activities.................... 208 1,789 132
-------- ------- -----
INVESTING ACTIVITIES
Additions to plant, property, and equipment................. (450) (407) (337)
Acquisitions................................................ (15) (418) --
Proceeds from divestments................................... 12,675 853 862
Other, net.................................................. (2) (15) 3
-------- ------- -----
Cash from investing activities.................... 12,208 13 528
-------- ------- -----
FINANCING ACTIVITIES
Short-term debt, net........................................ (803) (66) 166
Long-term debt issued....................................... 250 -- 11
Long-term debt repaid....................................... (342) (381) (237)
Repayment of Financial obligations.......................... (11,640) -- --
Repurchase of common stock.................................. (35) (1,016) (306)
Dividends paid.............................................. (193) (280) (277)
Other, net.................................................. 96 (5) 82
-------- ------- -----
Cash used for financing activities................ (12,667) (1,748) (561)
-------- ------- -----
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS.......... 23 28 (8)
-------- ------- -----
Increase (decrease) in cash and cash equivalents............ (228) 82 91
Cash and cash equivalents -- beginning of year.............. 322 240 149
-------- ------- -----
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $ 94 $ 322 $ 240
======== ======= =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.................................................. $ 147 $ 112 $ 110
=== === ===
Income taxes.............................................. $ 314 $ 243 $ 162
=== === ===
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-6
<PAGE> 30
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
IN MILLIONS, EXCEPT PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Balance -- Beginning of Year.................................. $ 6,749 $7,588 $7,058
Net income.................................................. 708 1,022 913
Dividends declared --
Cumulative preferred stock, net of tax benefit........... (15) (36) (36)
Common stock -- $.99, $1.98 and $1.98 per share.......... (104) (228) (235)
Common stock of ITT Hartford and ITT Corporation(a)...... (7,338) -- --
Common stock of ITT Rayonier............................. -- (621) --
Repurchases of common stock................................. -- (976) (112)
------- ------ ------
Balance -- End of Year........................................ $ -- $6,749 $7,588
======= ====== ======
</TABLE>
(a) Dividend of ITT Hartford and ITT Corporation was applied against retained
earnings to the extent available and then against capital surplus.
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK AND CAPITAL SURPLUS
IN MILLIONS, EXCEPT FOR SHARES
<TABLE>
<CAPTION>
CUMULATIVE
PREFERRED STOCK COMMON STOCK
------------------- -------------------- CAPITAL
SHARES AMOUNT SHARES AMOUNT SURPLUS
---------- ------ ----------- ------ --------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1992....................... 9,894,753 $ 687 119,059,132 $119 $ 76
Redemption of ESOP Series preferred stock........ (175,964) (14 ) -- -- (2)
Stock incentive plans............................ -- -- 1,915,760 2 121
Stock conversions................................ (137,460) -- 173,993 -- --
Repurchases...................................... -- -- (3,588,008) (3) (195)
---------- ----- ----------- ---- -----
Balance -- December 31, 1993....................... 9,581,329 673 117,560,877 118 --
Redemption of ESOP Series preferred stock........ (179,555) (13 ) -- -- --
Stock conversions................................ (99,345) (5 ) 116,428 -- 5
Stock incentive plans............................ -- -- 283,463 -- 18
Repurchases...................................... -- -- (12,288,516) (12) (23)
---------- ----- ----------- ---- -----
Balance -- December 31, 1994....................... 9,302,429 655 105,672,252 106 --
Redemption of ESOP Series preferred stock........ (120,652) (9 ) -- -- (10)
Conversion of ESOP Series preferred stock........ (8,636,231) (644 ) 9,660,766 10 634
Stock conversions................................ (522,647) (2 ) 661,671 -- 2
Stock redemption................................. (22,899) -- -- -- (2)
Stock incentive plans............................ -- -- 1,451,346 1 124
Repurchases...................................... -- -- (377,202) -- (35)
Distribution of ITT Hartford and ITT
Corporation(a)................................. -- -- -- -- (314)
---------- ----- ----------- ---- -----
Balance -- December 31, 1995....................... -- $ -- 117,068,833 $117 $ 399
========== ===== =========== ==== =====
</TABLE>
(a) Dividend of ITT Hartford and ITT Corporation was applied against retained
earnings to the extent available and then against capital surplus.
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-7
<PAGE> 31
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
On December 19, 1995, ITT Corporation, a Delaware Corporation ("ITT
Delaware") made a distribution ("the Distribution") to its shareholders
consisting of all the shares of common stock of ITT Destinations, Inc., a Nevada
corporation which held ITT Delaware's interests in the hospitality,
entertainment, and information services businesses and all the shares of common
stock of ITT Hartford Group, Inc., a wholly-owned subsidiary which held ITT
Delaware's interests in the insurance businesses ("ITT Hartford"). Effective
December 20, 1995, pursuant to a statutory merger, ITT Delaware merged into ITT
Industries, Inc. an Indiana Corporation ("ITT Industries"), with ITT Industries
as the surviving corporation (the "Company"). ITT Destinations changed its name
to ITT Corporation. For purposes of these consolidated financial statements, all
references to ITT Corporation and ITT Hartford include those companies, their
subsidiaries, affiliated companies and other assets and liabilities that were
transferred to those companies.
In the accompanying consolidated financial statements for all periods
presented, ITT Corporation, ITT Hartford and other previously discontinued
operations of the Company are reported as Discontinued Operations.
1. ACCOUNTING POLICIES
Consolidation Principles: The consolidated financial statements are
prepared in accordance with Generally Accepted Accounting Principals and include
the accounts of all majority-owned subsidiaries. All significant intercompany
transactions have been eliminated.
Revenue Recognition: The Company recognizes sales as products are shipped
to customers. Sales from long-term contracts are recognized on the percentage of
completion method, generally based on the ratio of units delivered to total
units. Expected losses on long-term contracts are recognized currently.
Research and Development: Significant costs are incurred each year in
connection with research, development, and engineering programs that are
expected to contribute profits to future operations. Such costs are charged to
income as incurred except to the extent recoverable under existing contracts.
Total expenditures were $422, $396, and $460 in 1995, 1994, and 1993,
respectively, of which approximately 50% was expended pursuant to customer
contracts.
Cash and Cash Equivalents: The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Inventories: Inventories are generally valued at the lower of cost
(first-in, first-out) or market. A full absorption procedure is employed using
standard cost techniques. The standards are customarily reviewed and adjusted
annually. Potential losses from obsolete and slow-moving inventories are
provided for in the current period.
Plant, Property, and Equipment: Plant, property, and equipment, including
capitalized interest applicable to major project expenditures, are recorded at
cost. The Company normally claims the maximum depreciation deduction allowable
for tax purposes. In general, for financial reporting purposes, depreciation is
provided on a straight-line basis over the useful economic lives of the assets
involved as follows: buildings and improvements -- 5 to 40 years, machinery and
equipment -- 2 to 10 years and other -- 5 to 40 years. Gains or losses on sale
or retirement of assets are included in income.
Goodwill: The excess of cost over the fair value of net assets acquired is
amortized on a straight-line basis over 40 years. Accumulated amortization was
$32 and $29 at December 31, 1995 and 1994, respectively. The Company continually
reviews goodwill to assess recoverability from future operations using
undiscounted cash flows. Based upon the Company's review, no impairment has
occurred as of December 31, 1995.
Foreign Currency Translation: Balance sheet accounts are translated at the
exchange rate in effect at each year-end and income accounts are translated at
the average rates of exchange prevailing during the year. The national
currencies of the foreign companies are generally the functional currencies.
Gains
F-8
<PAGE> 32
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
(losses) from foreign currency transactions are reported currently in other
operating expenses and were $(4), $4, and $8 in 1995, 1994, and 1993,
respectively.
Derivative Financial Instruments: The Company uses a variety of derivative
financial instruments, including interest rate swaps and foreign currency
forward contracts and/or swaps as a means of hedging exposure to interest rate
and foreign currency risks. The Company and its subsidiaries are end-users and
do not utilize these instruments for speculative purposes. The Company has
strict policies regarding financial stability and credit standing of its major
counterparties.
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 income. Should the swap be terminated, unrealized
gains or losses are deferred and amortized over the shorter of the remaining
original term of the hedging instrument or the remaining life of the underlying
debt instrument.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS") 52. Changes
in the spot rate of instruments designated as hedges of the net investment in a
foreign subsidiary are reflected in the cumulative translation adjustment
component of shareholders' equity.
Earnings Per Share: Fully diluted earnings per share is based on the
weighted average of common stock and common stock equivalents which include
stock options, the proceeds received upon exercise of which, will be used to
acquire common stock of the Company. Fully diluted earnings per share also
reflect the conversion of convertible preferred stock, including the ESOP
Series. Net income applicable to fully diluted earnings per share consists of
reported net income or loss adjusted for the amount, net of tax, that the
Company would have to pay, in excess of common stock dividends, to extinguish
the related ESOP debt.
Primary earnings per share is based on the weighted average of common stock
and common stock equivalents. Net income applicable to primary earnings per
share consists of reported net income adjusted for dividend requirements on
preferred stock not considered common stock equivalents, net of the related tax
benefits. The ESOP was terminated in 1995 and all ESOP series preferred stock
was converted to shares of the Company's common stock (see "Employee Benefit
Plans"). If the conversion had occurred on January 1, 1995, primary earnings per
share for the year ended December 31, 1995 would have been $6.01.
Use of Estimates: The preparation of these consolidated financial
statements required the use of certain estimates by management in determining
the Company's assets, liabilities, sales, and expenses.
Reclassifications: Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform with the current year
presentation.
2. CHANGES IN ACCOUNTING PRINCIPLES
In 1994, the Company made several accounting changes, all of which were
included in cumulative effect of accounting changes and related solely to
Discontinued Operations. During the first quarter of 1994, the Company adopted
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities".
Under SFAS 115, the Company's portfolios were classified as "available for sale"
and accordingly, investments were reflected at fair value with the corresponding
impact included as a component of shareholders' equity designated "unrealized
loss on securities, net of tax". At December 31, 1994, the unrealized loss on
securities, net of tax was $1.4 billion.
The amortized cost basis of mortgage-backed interest-only investments that
were determined to have other-than-temporary impairment losses at the time of
initial adoption of SFAS 115 was written down to fair value. The writedown
totaled $36 after tax or $.29 per fully diluted share.
F-9
<PAGE> 33
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
Also, in the first quarter of 1994, the Company changed its method used to
discount long-term tabular workers compensation liabilities, at its discontinued
insurance segment, from a statutory interest rate to an appropriate market
interest rate. A benefit of $42 after tax or $.33 per fully diluted share was
recorded.
During the fourth quarter of 1994, the Company changed its method of
accounting to expense certain marketing and start-up costs at ITT Educational
Services, now a unit of ITT Corporation, which had previously been deferred and
amortized. A charge of $17 after tax or $.13 per fully diluted share was
recorded.
The Company's cash flows were not impacted by these changes in accounting
principles.
3. ALCATEL N.V.
In 1992, the Company sold its 30% equity interest in Alcatel N.V. (Alcatel)
to its joint venture partner, Alcatel Alsthom, resulting in a pretax gain of
$942 or $622 after tax ($4.71 per fully diluted share). The Company received
cash at the closing of $1.0 billion, two notes payable in 1993 and 1994 valued
at $1.4 billion and 9.1 million shares of Alcatel Alsthom stock recorded at
$806. The Alcatel Alsthom stock, which was contributed to ITT Corporation prior
to the Distribution, was included as of December 31, 1994, in "net assets of
discontinued operations" in the accompanying balance sheet.
4. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Trade.................................................... $1,254 $1,148
Accrued for completed work............................... 41 26
Less -- reserves......................................... (38) (36)
------ ------
$1,257 $1,138
====== ======
</TABLE>
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Finished goods........................................... $ 417 $ 452
Work in process.......................................... 421 480
Raw materials and supplies............................... 333 355
Less -- reserves......................................... (85) (97)
-- progress payments............................... (178) (200)
------ ------
$ 908 $ 990
====== ======
</TABLE>
6. OTHER CURRENT ASSETS
At December 31, 1995, other current assets consist primarily of tax refund
claims, advance payments on contracts, and other prepaid expenses. At December
31, 1994, other current assets consist mainly of prepaid expenses.
F-10
<PAGE> 34
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
7. PLANT, PROPERTY, AND EQUIPMENT
Plant, property, and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Land and improvements.................................. $ 115 $ 106
Buildings and improvements............................. 888 788
Machinery and equipment................................ 3,425 3,224
Construction work in progress.......................... 297 262
Other.................................................. 330 249
----- -----
5,055 4,629
Less -- accumulated depreciation and amortization...... (2,820) (2,515)
----- -----
$ 2,235 $ 2,114
===== =====
</TABLE>
8. OTHER ASSETS
At December 31, 1995, other assets consist primarily of prepaid pension and
employee benefit plan costs, tax refund claims, and expected recoveries from
third parties in relation to environmental and other claims. At December 31,
1994, other assets consist mainly of prepaid pension and employee benefit plan
costs and tax refund claims.
9. INCOME TAX
Income tax data from continuing operations is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Pretax income
U.S.............................................. $(81) $187 $ 104
Foreign.......................................... 152 162 96
---- ---- ----
$ 71 $349 $ 200
==== ==== ====
Provision for income tax
Current
U.S. Federal.................................. $ 9 $171 $ 160
State and local............................... 8 3 8
Foreign....................................... 38 83 32
---- ---- ----
55 257 200
Deferred
U.S. Federal.................................. (28) (98) (122)
Foreign and other............................. 23 (12) (13)
---- ---- ----
(5) (110) (135)
---- ---- ----
$ 50 $147 $ 65
==== ==== ====
</TABLE>
No provision was made for U.S. taxes payable on accumulated undistributed
foreign earnings of approximately $456 since these amounts are permanently
reinvested.
Deferred income taxes are established for all temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and for tax purposes. The December 31, 1995 and 1994 balance sheets include net
U.S. Federal deferred tax assets of $218 and $161, respectively, and net foreign
and other deferred tax liabilities of $121 and $90, respectively.
F-11
<PAGE> 35
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
Deferred tax assets (liabilities), for which no valuation allowances have
been provided, include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1995 1994
--------------------- ---------------------
U.S. FOREIGN U.S. FOREIGN
FEDERAL AND OTHER FEDERAL AND OTHER
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Employee benefits.......................... $ 119 $ 30 $ 111 $ 32
Accelerated depreciation................... (42) (172) (28) (165)
Reserves................................... 120 40 83 16
Other...................................... 21 (19) (5) 27
---- ---- ---- ----
$ 218 $(121) $ 161 $ (90)
==== ==== ==== ====
</TABLE>
A reconciliation of the tax provision at the U.S. statutory rate to the
income tax expense as reported is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Tax provision at U.S. statutory rate.................. $ 25 $122 $ 70
Foreign tax rate differential......................... 2 14 (9)
Taxes on repatriation of foreign earnings............. 19 9 13
Tax basis differential on dispositions................ -- -- (20)
State income taxes, net of Federal benefit............ 5 1 5
Other................................................. (1) 1 6
--- --- ---
Income tax expense.................................... $ 50 $147 $ 65
=== === ===
</TABLE>
10. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Commercial paper......................................... $ 295 $ 323
Bank loans and other short-term.......................... 172 455
Long-term................................................ 1,140 1,300
ESOP debt................................................ -- 562
---- ----
1,607 2,640
Less -- current maturities............................... (646) (928)
---- ----
$ 961 $1,712
==== ====
</TABLE>
The fair value of the Company's commercial paper and bank loans and other
short-term loans approximates carrying value. The weighted average interest rate
for commercial paper was 5.76% and 5.41% at December 31, 1995 and 1994,
respectively. The weighted average interest rate for bank loans and other
short-term borrowings was 5.39% and 5.88% at December 31, 1995 and 1994,
respectively. The estimated fair value of long-term debt at December 31, 1995
and 1994 was $1.2 billion and $1.4 billion, respectively, based on discounted
cash flows using the Company's incremental borrowing rates for similar
arrangements. Bank loans and other short-term debt are drawn down under lines of
credit, some of which extend for a fixed term of several years. In November
1995, the Company entered into two new revolving credit agreements with terms
ranging from one to five years with 61 domestic and foreign banks providing
aggregate commitments of $3.0 billion. These commitments, which were unused at
December 31, 1995, were made to ITT Industries and certain of its subsidiaries
and are intended to assure their working capital needs and to support their
commercial paper. The interest rate for
F-12
<PAGE> 36
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
borrowings under these agreements is generally based on the London Interbank
Offered Rate (LIBOR), plus a spread dependent on the Company's debt rating. The
provisions of these agreements require the Company to maintain certain financial
ratios and restrict indebtedness. Commitment fees on these revolving credit
agreements range from .045% to .150% of the total commitment, based on the
Company's debt ratings from the previous quarter.
Long-term debt maturities and interest rate percentages as of December 31,
1995 were:
<TABLE>
<CAPTION>
BELOW 6.0- 7.0- 8.0- 9.0- OVER
6.0 6.99 7.99 8.99 9.99 10.0 TOTAL
----- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1996......................................... $ 54 $ 1 $ 29 $ 80 $ 1 $ 14 $ 179
1997......................................... 7 1 160 -- 27 112 307
1998......................................... 1 10 -- 37 -- -- 48
1999......................................... 1 -- -- 28 -- 31 60
2000......................................... 1 63 -- -- -- -- 64
Thereafter................................... 1 134 287 76 54 -- 552
----- ---- ---- ---- ---- ---- ------
Total -- 1995................................ $ 65 $209 $476 $221 $ 82 $157 $1,210
===== ==== ==== ==== ==== ==== ======
Total -- 1994................................ $283 $171 $275 $279 $249 $189 $1,446
===== ==== ==== ==== ==== ==== ======
</TABLE>
The above balances as of December 31, 1995 and 1994 include amortizable
debt discounts of $70 and $146, respectively. Assets pledged to secure
indebtedness (including mortgage loans) amounted to approximately $15 as of
December 31, 1995.
ESOP debt of $562 as of December 31, 1994, was included in the balance
sheet due to the Company's guarantee of its repayment by the ESOP and was offset
by a reduction in shareholders' equity as deferred compensation and was at fixed
rates ranging between 8.4% and 8.8% and was repaid in 1995 with the proceeds
from the sale of common shares held by the ESOP trustee (see "Employee Benefit
Plans").
11. EARLY EXTINGUISHMENT OF DEBT
In July 1995, the Company announced the successful completion of a tender
offer for an aggregate of $4.1 billion of its debt securities, with $3.4
billion, or 82% of the aggregate principal amount, having been tendered. The
tender offer was financed with the proceeds of commercial paper borrowings of
approximately $3.7 billion. The tender offer resulted in the Company paying a
tender premium of $307 after tax ($472 pretax) or $2.61 per fully diluted share
in the third quarter of 1995 which has been recorded as an extraordinary loss on
the early extinguishment of debt. In 1993, fixed rate debt was retired,
resulting in an extraordinary loss of $50 after tax, or $.38 per fully diluted
share.
12. CAPITAL STOCK
ITT Industries has authority to issue an aggregate of 250,000,000 shares of
capital stock, of which 200,000,000 have been designated as "Common Stock"
having a par value of $1 per share and 50,000,000 have been designated as
"Preferred Stock" not having any par or stated value. Of the shares of Preferred
Stock, 300,000 shares have initially been designated as "Series A Participating
Cumulative Preferred Stock". Such Series A Preferred Stock will be issuable
pursuant to the provisions of a Rights Agreement dated as of November 1, 1995
between ITT Industries and The Bank of New York, as Rights Agent.
In 1995, the Company repurchased 377,202 common shares for $35. During
1994, the Company repurchased 12,288,516 common shares for $1.0 billion. The
excess over par value was charged to capital surplus to the extent available and
then to retained earnings. In 1993, a total of 3,588,008 common shares were
repurchased for $310.
F-13
<PAGE> 37
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
At December 31, 1994, there were 8,756,883 shares of ESOP series preferred
stock outstanding with a stated value of $653. In 1995, the Company terminated
the ESOP portion of the Company's Investment and Savings Plan and the trustee of
the ESOP converted the preferred stock held by the trustee to 9,660,766 shares
of the Company's common stock.
At December 31, 1994, there were 545,546 Series N preferred shares
outstanding with a stated value of $2. These shares were redeemed on August 29,
1995.
As of December 31, 1995, there were 7,627,461 shares of common stock
reserved in connection with incentive stock plans. In addition, shares held in
treasury totaled 28,079,175.
13. FOREIGN CURRENCY
Translation adjustments recorded in a separate component of shareholders'
equity were:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Balance -- Beginning of year..................................... $(113) $(206) $ (92)
Translation of foreign currency financial statements........... 31 110 (125)
Hedges of net foreign investments.............................. (1) (17) 11
Distribution of ITT Corporation and ITT Hartford............... 194 -- --
------ ------ ------
Balance -- End of year........................................... $ 111 $(113) $(206)
====== ====== ======
</TABLE>
14. LEASES AND RENTALS
As of December 31, 1995, minimum rental commitments under operating leases
were $91, $84, $67, $49, and $38 for 1996, 1997, 1998, 1999, and 2000,
respectively. For the remaining years, such commitments amounted to $68,
aggregating total minimum lease payments of $397.
Rental expenses for operating leases were $87, $74, and $69 for 1995, 1994,
and 1993, respectively.
15. MISCELLANEOUS INCOME (EXPENSE)
Miscellaneous income (expense) includes the following:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ---
<S> <C> <C> <C>
Provision for gain (loss) on disposition of businesses............. $(235) $(18) $ 3
Other expense...................................................... (5) (3) --
------ ----- ---
$(240) $(21) $ 3
====== ===== ===
</TABLE>
16. EMPLOYEE BENEFIT PLANS
PENSION PLANS -- The Company and its subsidiaries sponsor numerous pension
plans. The Company funds employee pension benefits, except in some countries
outside the U.S. where funding is not required. The plans' assets are comprised
of a broad range of domestic and foreign securities, fixed income investments,
and real estate.
F-14
<PAGE> 38
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
Total pension expense for 1995, 1994, and 1993 was:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Defined Benefit Plans
Service cost....................................................... $ 68 $ 78 $ 71
Interest cost...................................................... 240 218 214
Return on assets................................................... (426) (44) (414)
Net amortization and deferral...................................... 228 (130) 234
------ ------ ------
Net periodic pension cost.......................................... 110 122 105
Other Pension Cost
Defined contribution (savings) plans............................... 15 14 13
Other.............................................................. 4 4 4
------ ------ ------
Total Pension Expense................................................ $ 129 $ 140 $ 122
====== ====== ======
</TABLE>
U.S. pension expense included in the net periodic pension cost in the table
above were $43, $60, and $49 for 1995, 1994, and 1993, respectively.
Discontinued Operations accounted for $10, $18, and $20, for 1995, 1994, and
1993, respectively, of the U.S. pension expense.
The following table sets forth the funded status of the Company's pension
plans, amounts recognized in the Company's balance sheets, and the principal
weighted average assumptions inherent in their determination:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------- --------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation......................... $2,153 $ 829 $1,820 $ 691
====== ====== ====== ======
Accumulated benefit obligation.................... $2,266 $ 859 $1,909 $ 720
====== ====== ====== ======
Projected benefit obligation........................ $2,424 $ 936 $2,064 $ 785
Plan assets at fair value........................... 2,243 193 1,902 221
------ ------ ------ ------
Projected benefit obligation in excess of plan
assets............................................ (181) (743) (162) (564)
Unrecognized net (gain)/loss........................ 321 (9) 225 (55)
Unrecognized net (asset)/obligation................. (26) 31 (35) 32
------ ------ ------ ------
Pension asset (liability) recognized in the balance
sheet............................................. $ 114 $(721) $ 28 $(587)
====== ====== ====== ======
Discount rate....................................... 7.50% 7.66% 8.50% 8.31%
Rate of return on invested assets................... 9.75% 9.22% 9.75% 8.78%
Salary increase assumption.......................... 5.00% 4.23% 4.94% 4.34%
</TABLE>
For substantially all domestic plans, assets exceed accumulated benefits,
and for substantially all foreign plans, accumulated benefits exceed the related
assets.
INVESTMENT AND SAVINGS PLAN -- The ITT Investment and Savings Plan for
Salaried Employees included an Employee Stock Ownership Plan (ESOP) feature. In
1989, the Company sold to the ESOP 9,384,951 shares of a new series of
cumulative preferred stock at a price of $74.5875 per share, which was financed
through borrowings by the ESOP guaranteed by the Company. Shares were allocated
to participants as a percent of each covered employee's salary and respective
contribution.
In connection with the Distribution, the Company terminated the ESOP
portion of the ITT Investment and Savings Plan for Salaried Employees. As a
result of the termination, in 1995, the trustee of the ESOP converted the
preferred stock held by the trustee to Company common stock. The trustee then
completed the sale of 5.3 million shares into the open market. The sales
proceeds were used to repay the
F-15
<PAGE> 39
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
debt associated with the ESOP and the remainder was allocated pro rata to
participants in the Plan. The Company changed the name of the Plan to the ITT
Industries Investment and Savings Plan for Salaried Employees and will transfer
the balances related to employees of ITT Corporation and ITT Hartford to plans
created by those companies.
POSTRETIREMENT HEALTH AND LIFE -- The Company and its subsidiaries provide
health care and life insurance benefits for certain eligible retired employees.
The Company has prefunded a portion of the health care and life insurance
obligations through trust funds where such prefunding can be accomplished on a
tax effective basis. Postretirement health care and life insurance benefits
expense was comprised of the following in 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost................................................ $ 8 $ 8 $ 5
Interest cost............................................... 32 29 28
Return on assets............................................ (30) 3 (14)
Net amortization and deferral............................... 12 (18) 1
---- ---- ----
Net periodic expense...................................... $ 22 $ 22 $ 20
==== ==== ====
</TABLE>
Net periodic expense includes expenses related to Discontinued Operations
of $1 for each of the three years ended December 31, 1995.
The following table sets forth the funded status of the postretirement
benefit plans other than pensions, amounts recognized in the Company's balance
sheet and the principal weighted average assumptions inherent in their
determination:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
----- -----
<S> <C> <C>
Accumulated postretirement benefit obligation..................... $ 440 $ 392
Plan assets at fair value......................................... 150 121
----- -----
Accumulated postretirement benefit obligation in excess of plan
assets.......................................................... (290) (271)
Unrecognized net gain............................................. (1) (27)
Unrecognized past service liability............................... (36) (41)
----- -----
Liability recognized in the balance sheet......................... $(327) $(339)
===== =====
Discount rate..................................................... 7.50% 8.50%
Rate of return on invested assets................................. 9.75% 9.75%
Ultimate health care trend rate................................... 6.00% 6.00%
</TABLE>
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 10.1% for 1995, decreasing ratably to 6.0% in
the year 2001. Increasing the table of health care trend rates by one percent
per year would have the effect of increasing the accumulated postretirement
benefit obligation by $47 and the annual expense by $4. To the extent that the
actual experience differs from the inherent assumptions, the effect will be
amortized over the average future service of the covered active employees.
17. STOCK INCENTIVE PLANS
The Company's stock option incentive plans provide for the awarding of
options on common shares to employees, exercisable over ten-year periods.
Certain options become exercisable upon the attainment of specified market price
appreciation of the Company's common shares or at nine years after the date of
grant, while the remaining options become exercisable 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.
F-16
<PAGE> 40
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
The following table summarizes the activity in common shares subject to
options for the three years ended December 31, 1995 (shares in thousands):
<TABLE>
<CAPTION>
OPTION PRICE SHARES
---------------- ------
<S> <C> <C>
January 1, 1993......................................... $31.00 - $ 70.75 3,703
Granted............................................... 72.63 - 93.50 1,764
Exercised............................................. 31.00 - 66.75 (1,910)
Canceled or expired................................... 44.38 - 55.25 (43)
------
December 31, 1993....................................... 32.38 - 93.50 3,514
Rayonier spin-off adjustment.......................... 304
Granted............................................... 81.13 - 91.14 2,212
Exercised............................................. 32.38 - 84.16 (260)
Canceled or expired................................... 44.49 - 92.00 (182)
------
December 31, 1994....................................... 29.62 - 91.14 5,588
Granted............................................... 89.88 - 120.00 2,148
Exercised............................................. 29.62 - 108.75 (1,478)
Canceled or expired................................... 29.62 - 109.25 (4,087)
ITT Corporation and ITT Hartford spin-off
adjustment......................................... 9,448
------
December 31, 1995....................................... $ 7.91 - $ 22.42 11,619
======
</TABLE>
In December 1995, in conjunction with the Distribution, those individuals
who became employees of ITT Hartford and ITT Corporation were offered substitute
awards in the respective stock of their new employer, and any stock awards or
options held by them in respect of ITT Industries are reflected as canceled in
the table above. For the remaining holders of unexercised options, including
employees of ITT Industries, retirees and certain other former employees of the
Company, the number of shares subject to options was increased and the option
exercise price was decreased immediately following the Distribution to preserve,
as closely as possible, the economic value of the options that existed prior to
the Distribution.
In March 1994, the number and exercise price of all options then
outstanding were similarly adjusted to recognize the effect of the Rayonier
spin-off.
As of December 31, 1995 and 1994, options for 6,942,000 and 1,914,000
shares, respectively, were exercisable under the Company's incentive plans and
at year-end 1995, 2,811,000 shares were available for future grants. Effective
January 1, 1996, option shares available for future grants increased to
4,988,000 as a result of the allotment formula established in the 1994 Incentive
Stock Plan. The incentive stock plans also provide for the awarding of
restricted stock to employees which is subject to a restriction period and
cannot be sold, exchanged, pledged, or otherwise disposed of during that period.
As of December 31, 1995, there were no such shares outstanding.
F-17
<PAGE> 41
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
18. DISCONTINUED OPERATIONS
Summarized financial information for ITT Corporation and ITT Hartford is as
follows (income statement data for 1995 reflects earnings through December 19,
1995, and for 1994 and 1993, reflects earnings for the full year):
ITT CORPORATION
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------------------
<S> <C> <C> <C>
Income Statement Data:
Revenues................................ $6,155 $4,760 $4,169
Operating income........................ 602 292 142
Income before cumulative effect of
accounting changes................... 155 74 39
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------
<S> <C> <C> <C>
Balance Sheet Data:
Total assets............................................... $5,012
Debt....................................................... 631
Investments and advances from ITT Industries............... 3,353
</TABLE>
ITT HARTFORD
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ------------------
<S> <C> <C> <C>
Income Statement Data:
Revenues.............................. $11,727 $11,102 $ 10,338
Operating income...................... 693 852 687
Income before cumulative effect of
accounting changes................. 535 632 537
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------
<S> <C> <C> <C>
Balance Sheet Data:
Total assets............................................... $ 76,765
Debt....................................................... 1,498
Equity..................................................... 3,184
</TABLE>
Company interest expense is allocated to Discontinued Operations based upon
the amount of debt to be repaid with the proceeds from those operations or
refinanced by those operations. In addition, results of Discontinued Operations
include $109 of legal and advisory fees, taxes, and other costs related to the
Distribution and $39 after tax of severance and other costs related to the
restructuring of the Company's headquarters operations in connection with the
Distribution.
As a result of the Distribution, the Discontinued Operations will not be
included in the consolidated Federal income tax return of ITT Industries after
December 19, 1995. The allocation of the tax burdens and benefits, which
occurred on or prior to December 19, 1995, will be determined in accordance with
a tax allocation agreement between the Company, ITT Hartford, and ITT
Corporation.
In September 1994, the Company announced plans to seek offers for the
purchase of its Financial business segment. Gross proceeds totaling $12.7
billion were realized in 1995 from the sale of the businesses comprising ITT
Financial. Proceeds from these transactions were used primarily to repay ITT
Financial debt. The Company recognized an after tax gain of $403 ($667 pretax)
or $3.44 per fully diluted share in the second quarter of 1995, including a
provision for the remaining asset sales and closedown costs of ITT Financial. In
1993, an after tax gain of $63 was realized on the sale of ITT Financial's
domestic unsecured consumer small loan portfolio.
F-18
<PAGE> 42
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
Summarized financial information is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Income Statement Data:
Revenues..................................... $ 476 $1,452 $1,633
Operating income............................. 79 163 181
Income before cumulative effect of accounting
changes................................... 49 113 136
Gain on sale, net of tax..................... 403 -- 63
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------
<S> <C>
Balance Sheet Data:
Total assets............................................... $ 13,398
Financial debt............................................. 11,640
Equity..................................................... 664
</TABLE>
In January 1995, the holders of ITT Financial term debt consented to a
merger of ITT Financial with the Company, which was completed on May 1, 1995.
In December 1993, the Company announced plans to spin off ITT Rayonier, the
Company's wholly-owned Forest Products subsidiary, to the Company's
shareholders. On February 28, 1994, all of the shares of common stock of ITT
Rayonier (approximately 29.6 million shares) were distributed to holders of
Company common stock and holders of Company cumulative preferred stock, $2.25
Convertible Series N, on the basis of one share of Rayonier common stock for
every four shares of Company common stock held and one share of Rayonier common
stock for every 3.1595 shares of Company Series N held. Sales totaled $147, and
$962 for the two months ended February 28, 1994 and the year ended December 31,
1993, respectively. Income from Rayonier operations totaled $12, and $53,
respectively, for the comparable periods.
19. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap agreements are in effect with major financial
institutions to manage exposure from fluctuations in interest rates on the
Company's variable rate debt. The Company has entered into agreements with a
notional principal amount of $389 which require the Company to make fixed
payments in exchange for variable payments. The weighted average pay rate on
these agreements (which mature at various times through 2000) is 6.9% and the
weighted average receive rate is 4.6%. The estimated fair value of these swaps
was $15 at December 31, 1995 and $1 at December 31, 1994. Fair value represents
the incremental benefit (cost) over the recorded amount that the Company would
receive (pay) to terminate the swap agreements based on current interest rates.
The Company enters into foreign exchange contracts with major financial
institutions (currency swaps and forward exchange contracts) to hedge exchange
exposure on the net investment in a foreign country or on foreign currency
denominated debt. These contracts are therefore of a long-term duration or are
meant to hedge a specified transaction.
The contractual amounts of these foreign exchange contracts at December 31,
1995 and 1994 totaled $1.1 billion and $843, respectively, and mature at varying
dates through 1998. Under these contracts, $505 relates to swaps in which the
Company is the seller and $552 relates to exchange contracts (the Company is the
seller under $31 and the buyer under $521). Approximately $401 hedges Deutsche
marks against Belgian francs, while the balance principally hedges dollars
against other major European currencies. There is no significant unrealized gain
or loss on these contracts. The estimated fair value at December 31, 1995 and
1994 approximates the recorded amounts. The estimated fair value is the present
value of the changed cash flows that would result from the agreements being
replaced at the year-end market rate for the remaining term of the agreements.
F-19
<PAGE> 43
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED
20. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in various other legal
actions including those related to government contracts and environmental
matters. Some of these actions include claims for substantial sums. Reserves
have been established where the outcome is probable and can be reasonably
estimated. While the ultimate result of these legal actions and related claims
cannot be determined, the Company does not expect that they will have a material
adverse effect on its consolidated financial position, results of operations or
cash flows.
- --------------------------------------------------------------------------------
BUSINESS SEGMENT INFORMATION
IN MILLIONS
<TABLE>
<CAPTION>
NET SALES OPERATING INCOME
------------------------ ------------------
1995 1994 1993 1995 1994 1993
------ ------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Automotive(a)................................... $5,575 $4,668 $3,457 $344 $336 $164
Defense & Electronics(a)........................ 1,559 1,498 1,426 97 96 77
Fluid Technology................................ 1,248 1,125 1,030 113 99 95
Dispositions and other(a)....................... 502 467 708 (9) (34) (35)
------ ------ ------ ---- ---- ----
Total segments............................. 8,884 7,758 6,621 545 497 301
Other........................................... -- -- -- (99) (79) (72)
------ ------ ------ ---- ---- ----
$8,884 $7,758 $6,621 $446 $418 $229
====== ====== ====== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
GROSS PLANT
IDENTIFIABLE ASSETS ADDITIONS DEPRECIATION
-------------------------- ------------------ ------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
------ ------- ------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Automotive(a)............. $2,902 $ 2,733 $ 1,795 $276 $272 $232 $237 $205 $146
Defense &
Electronics(a).......... 818 783 678 69 55 43 62 58 61
Fluid Technology.......... 807 728 613 47 43 34 40 38 36
Dispositions and
other(a)................ 600 677 674 59 48 27 50 42 44
------ ------- ------- ---- ---- ---- ---- ---- ----
Total segments.......... 5,127 4,921 3,760 451 418 336 389 343 287
Net assets of Discontinued
Operations.............. -- 5,458 7,918 -- -- -- -- -- --
Other..................... 752 656 1,303 3 -- -- 1 -- --
------ ------- ------- ---- ---- ---- ---- ---- ----
$5,879 $11,035 $12,981 $454 $418 $336 $390 $343 $287
====== ======= ======= ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(a) 1994 and 1993 were restated to reflect non-core business operations within
the Automotive segment and ITT Semiconductors and Electron Technology within
the Defense & Electronics business segment, that were divested in 1995 or
will be closed or divested in 1996, in "Dispositions and other".
AUTOMOTIVE: ITT Automotive is one of the largest independent suppliers of
systems and components to vehicle manufacturers worldwide and also supplies
related products to the aftermarket. Through operations located in Europe, North
America and South America, and joint ventures and licensees in Asia, ITT
Automotive designs, engineers, and manufactures a broad range of automotive
systems and components under two major worldwide product groupings.
The Brake and Chassis Systems group produces anti-lock brake systems
("ABS") and traction control systems ("TCS"), chassis systems, foundation brake
components, fluid handling products, and Koni(R) shock absorbers.
F-20
<PAGE> 44
The Body and Electrical Systems group produces automotive products, such as
door and window assemblies, wiper module assemblies, seat systems, air
management systems, switches, and fractional horsepower DC motors.
Sales to two customers accounted for approximately 42% and 44% of 1995 and
1994 sales, respectively. Sales to three customers accounted for approximately
46% of 1993 sales.
DEFENSE & ELECTRONICS: ITT Defense & Electronics companies develop,
manufacture, and support high technology electronic systems and components for
defense and commercial markets on a worldwide basis, with operations in North
America, Europe, and Asia. Defense market products include tactical
communications equipment, electronic warfare systems, night vision devices,
radar, space payloads, and operations and maintenance services. Commercial
products include interconnect products (such as connectors, switches, and cable
assemblies) and night vision devices.
Companies in the electronics sector of this segment operate in several
European countries, Japan, and North America and produce a wide variety of
electronic connectors, switches, and components which are used in industrial,
professional, and telecommunications equipment as well as in consumer appliances
and automobiles. Approximately 65%, 66%, and 68% of 1995, 1994, and 1993 sales,
respectively, were to governmental entities, of which approximately 90%, 90%,
and 94%, respectively, were to the U.S. government.
FLUID TECHNOLOGY: ITT Fluid Technology is a worldwide enterprise engaged in
the design, development, production, and sale of products, systems and services
used to move, handle, transfer, control, and contain fluids of all kinds. ITT
Fluid Technology is a leading supplier of pumps, valves, heat exchangers,
mixers, instruments, and controls for the management of fluids, with sales in
more than 100 countries.
The majority of ITT Fluid Technology sales are in North America and Western
Europe. Principal markets are water and wastewater treatment, industrial and
process, and construction.
"Dispositions and other" include the operating results of units other than
"Discontinued Operations," including ITT Community Development Corporation, ITT
Semiconductors, other non-core businesses, and businesses which have been sold.
"Other" in the Operating Income table primarily includes service charges
from affiliated companies and other corporate charges. "Other" in the
Identifiable Assets table consists primarily of corporate assets. Intercompany
sales, which are priced on an arm's-length basis and eliminated in
consolidation, are not material.
GEOGRAPHICAL INFORMATION (BY COUNTRY OF ORIGIN) -- TOTAL SEGMENTS
IN MILLIONS
<TABLE>
<CAPTION>
NET SALES OPERATING INCOME IDENTIFIABLE ASSETS
------------------------ ------------------ ------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
------ ------ ------ ---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S......................................... $4,497 $4,063 $3,133 $255 $224 $130 $2,457 $2,462 $1,737
Western Europe.............................. 3,832 3,205 3,033 261 223 116 2,355 2,168 1,798
Canada and Other............................ 555 490 455 29 50 55 315 291 225
------ ------ ------ ---- ---- ---- ------ ------ ------
Total Segments.............................. $8,884 $7,758 $6,621 $545 $497 $301 $5,127 $4,921 $3,760
====== ====== ====== ==== ==== ==== ====== ====== ======
</TABLE>
F-21
<PAGE> 45
QUARTERLY RESULTS FOR 1995 AND 1994
IN MILLIONS, EXCEPT PER SHARE; (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
1995
Net sales........................................ $2,248 $2,337 $2,048 $2,251 $8,884
Costs and expenses............................... 2,145 2,198 1,953 2,142 8,438
Income (loss) from continuing operations......... 45 46 (54) (16 ) 21
Net income (loss)................................ 228 612 (174) 42 708
Earnings per share --
Income (loss) from continuing operations
-- Primary(a)................................ $ .34 $ .35 $ (.47) $ (.14 ) $ .03
-- Fully diluted............................. $ .34 $ .35 $ (.46) $ (.14 ) $ .09
Net income (loss)
-- Primary(a)................................ $ 2.05 $ 5.61 $(1.52) $ .34 $ 6.16
-- Fully diluted............................. $ 1.91 $ 5.17 $(1.49) $ .34 $ 5.93
1994
Net sales........................................ $1,691 $2,036 $1,863 $2,168 $7,758
Costs and expenses............................... 1,629 1,917 1,782 2,012 7,340
Income from continuing operations................ 37 61 20 84 202
Net income....................................... 202 258 257 305 1,022
Earnings per share --
Income from continuing operations
-- Primary................................... $ .24 $ .44 $ .11 $ .67 $ 1.46
-- Fully diluted............................. $ .25 $ .44 $ .13 $ .64 $ 1.46
Net income
-- Primary................................... $ 1.63 $ 2.11 $ 2.14 $ 2.69 $ 8.57
-- Fully diluted............................. $ 1.54 $ 1.97 $ 2.01 $ 2.50 $ 8.02
</TABLE>
- ---------------
(a) Quarterly and full year earnings per share amounts were calculated
independently based on the average common equivalent shares applicable to
each period. Because of the conversion of ESOP Series preferred stock to
common stock in 1995, the sum of the four quarters of 1995 does not equal
the calculation for the full year.
EXPORT SALES
IN MILLIONS
In serving its global markets, ITT Industries generates significant export
sales, which benefit local economies. Sales of products (including intercompany)
manufactured in various countries for shipment to other countries consisted of
the following:
<TABLE>
<CAPTION>
MANUFACTURING SALES
LOCATION DESTINATION 1995 1994 1993
- --------------------------------- --------------------------------- ------ ------ ------
<S> <C> <C> <C> <C>
United States Canada $ 346 $ 312 $ 177
Western Europe 65 45 39
Other 123 82 66
------ ------ ------
534 439 282
------ ------ ------
Canada United States 192 172 159
Other 10 10 5
------ ------ ------
202 182 164
------ ------ ------
Western Europe United States 121 98 63
Western Europe 1,051 838 664
Other 248 178 142
------ ------ ------
1,420 1,114 869
------ ------ ------
Other 24 13 11
------ ------ ------
$2,180 $1,748 $1,326
====== ====== ======
</TABLE>
F-22
<PAGE> 46
VALUATION AND QUALIFYING ACCOUNTS
IN MILLIONS
<TABLE>
<CAPTION>
ADDITIONS (DEDUCTIONS)
------------------------------------------------------------------
CHARGED TO WRITE-OFFS/
BALANCE COSTS AND TRANSLATION PAYMENTS BALANCE
JANUARY 1 EXPENSES ADJUSTMENT OTHER DECEMBER 31
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Trade Receivables -- Allowance for
doubtful accounts.................. $ 36 $ 2 $ 2 $ (2) $ 38
Accumulated depreciation of plant,
property, and equipment............ 2,515 390 79 (164)(a) 2,820
YEAR ENDED DECEMBER 31, 1994
Trade Receivables -- Allowance for
doubtful accounts.................. $ 33 $ 4 $ 1 $ (2) $ 36
Accumulated depreciation of plant,
property, and equipment............ 2,186 343 144 (158)(a) 2,515
YEAR ENDED DECEMBER 31, 1993
Trade Receivables -- Allowance for
doubtful accounts.................. $ 40 $ 6 $ (1) $ (12) $ 33
Accumulated depreciation of plant,
property, and equipment............ 2,111 287 (95) (117)(a) 2,186
</TABLE>
- ---------------
(a) Principally retirements as well as companies sold during the year.
S-1
<PAGE> 47
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, AND BY THE UNDERSIGNED IN THE
CAPACITY INDICATED.
ITT INDUSTRIES, INC.
By RICHARD J.M. HAMILTON
---------------------------------------
RICHARD J.M. HAMILTON
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
March 25, 1996
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------- ---------------
<C> <S> <C>
TRAVIS ENGEN Chairman, President and Chief March 25, 1996
- ------------------------- Executive and Director
TRAVIS ENGEN
(PRINCIPAL EXECUTIVE
OFFICER)
HEIDI KUNZ Senior Vice President and Chief March 25, 1996
- -------------------------- Financial Officer
HEIDI KUNZ
(PRINCIPAL FINANCIAL
OFFICER)
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE SIGNATURE TITLE DATE
- ---------------------- ---------------- --------------- ---------------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
RAND V. ARASKOG Director March 25, 1996 S. PARKER GILBERT Director March 25, 1996
- ---------------------- ----------------------
RAND V. ARASKOG S. PARKER GILBERT
ROBERT A. BURNETT Director March 25, 1996 EDWARD C. MEYER Director March 25, 1996
- ---------------------- ----------------------
ROBERT A. BURNETT EDWARD C. MEYER
CURTIS J. CRAWFORD Director March 25, 1996
- ----------------------
CURTIS J. CRAWFORD
</TABLE>
II-1
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
<C> <C> <S> <C>
3
(a) ITT Industries, Inc.'s Articles of
Incorporation........................ Incorporated by reference to Exhibit
3.1 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(b) Agreement and Plan of Merger dated
November 1, 1995..................... Incorporated by reference to Exhibit A
to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(c) Form of Rights Agreement between ITT
Indiana, Inc. and The Bank of New
York, as Rights Agent................ Incorporated by reference to Exhibit 1
to ITT Industries' Form 8-A dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(d) Articles of Amendment Setting Forth the
Designations, Voting Powers, Prefer-
ences and Relative, Participating,
Optional and Other Special Rights and
Qualifications, Limitations or
Restrictions of Series A
Participating Cumulative Preferred
Stock................................ Incorporated by reference to Exhibit
4.5 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(e) ITT Industries, Inc.'s By-laws......... Incorporated by reference to Exhibit
3.2 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
4 Instruments defining the rights of security
holders, including indentures............. Not required to be filed. The
Registrant hereby agrees to file with
the Commission a copy of any
instrument defining the rights of
holders of long-term debt of the
Registrant and its consolidated
subsidiaries upon request of the
Commission.
9 Voting Trust Agreement...................... None.
10 Material contracts
(a) Stock Option Incentive Plan (1977)..... Incorporated by reference to ITT
Delaware's Registration Statement on
Form S-8 (Registration No. 2-77677).
(b) ITT Industries Long-Term Performance
Plan (as amended).................... Incorporated by reference to ITT
Delaware's Form SE dated March 25,
1992 relating to ITT Delaware's Form
10-K for the fiscal year ended
December 31, 1991 (CIK No. 216228,
File No. 1-5627).
(c) Incentive Bonus Plan................... Incorporated by reference to ITT
Delaware's Form SE dated March 29,
1989 relating to ITT Delaware's Form
10-K for the fiscal year ended
December 31, 1988 (CIK No. 216228,
File No. 1-5627).
</TABLE>
II-2
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
<C> <C> <S> <C>
(d) Form of D. Travis Engen employment
agreement............................ Incorporated by reference to Exhibit
10.16 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(e) Form of group life insurance plan for
non-employee members of the Board of
Directors............................ Incorporated by reference to exhibits
to ITT Delaware's Form 10-K for the
fiscal year ended December 31, 1983
(CIK No. 216228, File No. 1-5627).
(f) ITT Industries, Inc. 1986 Incentive
Stock
Plan................................. Incorporated by reference to ITT
Delaware's Registration Statement on
Form S-8 (Registration No. 33-5412)
(CIK No. 216228, File No. 1-5627).
(g) Form of indemnification agreement with
directors............................ Incorporated by reference to ITT
Delaware's Form SE dated March 28,
1988 relating to ITT's Form 10-K for
the fiscal year ended December 31,
1987 (CIK No. 216228, File No.
1-5627).
(h) ITT Industries, Inc. Senior Executive
Severance Pay Plan................... Incorporated by reference to Exhibit
10.15 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(i) 1994 ITT Industries, Inc. Incentive
Stock Plan........................... Incorporated by reference to Appendix A
to ITT Delaware's Proxy Statement
dated March 28, 1994 (CIK No. 216228,
File No. 1-5627).
(j) ITT Industries 1996 Restricted Stock
Plan for Non-Employee Directors...... Incorporated by reference to Annex G to
ITT Delaware's Proxy Statement dated
August 30, 1995 (CIK No. 216228, File
No. 1-5627).
(k) Distribution Agreement among ITT
Corporation, ITT Destinations, Inc.
and ITT Hartford Group, Inc.......... Incorporated by reference to Exhibit
10.1 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(l) Intellectual Property License Agreement
between and among ITT Corporation,
ITT Destinations, Inc. and ITT
Hartford Group, Inc.................. Incorporated by reference to Exhibit
10.2 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(m) Tax Allocation Agreement among ITT
Corporation, ITT Destinations, Inc.
and ITT Hartford Group, Inc.......... Incorporated by reference to Exhibit
10.3 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
</TABLE>
II-3
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
<C> <C> <S> <C>
(n) Employee Benefit Services and Liability
Agreement among ITT Corporation, ITT
Destinations, Inc. and ITT Hartford
Group, Inc........................... Incorporated by reference to Exhibit
10.7 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(o) 364-Day Competitive Advance and
Revolving Credit Facility Agreement
dated as of November 10, 1995........ Incorporated by reference to Exhibit
10.8 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(p) Five-year Competitive Advance and
Revolving Credit Facility Agreement
dated as of November 10, 1995........ Incorporated by reference to Exhibit
10.9 to ITT Industries' Form 8-B dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(q) ITT Industries, Inc. Annual
Performance-Based Incentive Plan for
Executive Officers................... Incorporated by reference to pages
18-21 of ITT Delaware's Proxy Statement
dated March 28, 1994 and pages 7 and
8 of ITT Delaware's Proxy Statement
dated March 21, 1995 (CIK No. 216228,
File No. 1-5627).
11 Statement re computation of per share
earnings.................................. Filed herewith.
12 Statement re computation of ratios.......... Filed herewith.
13 Annual report to security holders, Form 10-Q
or quarterly report to security holders... Not required to be filed.
16 Letter re change in certifying accountant... None.
18 Letter re change in accounting principles... None.
21 Subsidiaries of the Registrant.............. Filed herewith.
22 Published report regarding matters submitted
to vote of security holders............... Not required to be filed.
23 Consents of Arthur Andersen LLP............. Filed herewith.
24 Power of attorney........................... None.
27 Financial data schedule..................... Filed herewith.
99 Additional exhibits......................... None.
</TABLE>
II-4
<PAGE> 1
EXHIBIT 11
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Primary Basis --
Net income.......................................................................... $ 708 $1,022 $ 913
ESOP preferred dividends -- net of tax.............................................. (17) (34) (35)
Dividend requirement on other preferred stock....................................... (1) (1) (1)
Preferred dividends on common stock equivalents..................................... 1 1 1
------ ------ ------
Net income applicable to primary earnings per share................................. $ 691 $ 988 $ 878
====== ====== ======
Average common shares outstanding................................................... 111 114 118
Common shares issuable in respect to common stock equivalents....................... 1 1 2
------ ------ ------
Average common equivalent shares.................................................... 112 115 120
====== ====== ======
Earnings Per Share
Continuing operations............................................................... $ .03 $ 1.46 $ .83
Discontinued operations............................................................. 8.87 7.21 6.90
Extraordinary item.................................................................. (2.74) -- (.41)
Cumulative effect of accounting changes............................................. -- (.10) --
------ ------ ------
Net income.......................................................................... $ 6.16 $ 8.57 $ 7.32
====== ====== ======
Fully Diluted Basis --
Net income applicable to primary earnings per share................................. $ 691 $ 988 $ 878
ESOP preferred dividends -- net of tax.............................................. 17 34 35
If converted ESOP expense adjustment -- net of tax benefit.......................... (10) (20) (22)
------ ------ ------
Net income applicable to fully diluted earnings per share........................... $ 698 $1,002 $ 891
====== ====== ======
Average common equivalent shares.................................................... 112 115 120
Additional common shares issuable assuming full dilution............................ 6 10 9
------ ------ ------
Average common equivalent shares assuming full dilution............................. 118 125 129
====== ====== ======
Earnings Per Share
Continuing operations............................................................... $ .09 $ 1.46 $ .88
Discontinued operations............................................................. 8.45 6.65 6.40
Extraordinary item.................................................................. (2.61) -- (.38)
Cumulative effect of accounting changes............................................. -- (.09) --
------ ------ ------
Net income.......................................................................... $ 5.93 $ 8.02 $ 6.90
====== ====== ======
</TABLE>
The Series N convertible preferred stock was considered a common stock
equivalent. With respect to options, it is assumed that the proceeds received
upon exercise are used to acquire common stock of the Corporation. The dilutive
nature of securities is determined quarterly based on the forecast of annual
earnings.
<PAGE> 1
EXHIBIT 12
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CALCULATION OF RATIOS OF EARNINGS TO TOTAL FIXED CHARGES
AND CALCULATION OF EARNINGS TO TOTAL FIXED CHARGES AND
PREFERRED DIVIDEND REQUIREMENTS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income from continuing operations............................... $ 21 $ 202 $ 135 $ 655 $ 231
Add (deduct):
Adjustment for distributions in excess of (less than)
undistributed equity earnings and losses.................... 1 -- (2) (31) (146)
Income taxes.................................................. 50 147 65 311 84
Amortization of interest capitalized.......................... 2 1 4 3 2
------ ------ ------ ------ ------
74 350 202 938 171
------ ------ ------ ------ ------
Fixed Charges:
Interest and other financial charges............................ 175 114 153 180 125
Interest factor attributable to rentals......................... 29 22 24 25 25
------ ------ ------ ------ ------
204 136 177 205 150
------ ------ ------ ------ ------
Earnings, as adjusted, from continuing operations................. $ 278 $ 486 $ 379 $1,143 $ 321
====== ====== ====== ====== ======
Fixed Charges:
Fixed charges above............................................. $ 204 $ 136 $ 177 $ 205 $ 150
Interest capitalized............................................ 3 7 8 12 11
------ ------ ------ ------ ------
Total fixed charges........................................... 207 143 185 217 161
Dividends on preferred stock (pre-income tax basis)............... 24 48 50 63 78
------ ------ ------ ------ ------
Total fixed charges and preferred dividend requirements....... $ 231 $ 191 $ 235 $ 280 $ 239
====== ====== ====== ====== ======
Ratios:
Earnings, as adjusted, from continuing operations to total fixed
charges....................................................... 1.34 3.40 2.05 5.27 1.99
====== ====== ====== ====== ======
Earnings, as adjusted, from continuing operations to total fixed
charges and preferred dividend requirements................... 1.20 2.54 1.61 4.08 1.34
====== ====== ====== ====== ======
</TABLE>
- ---------------
Notes:
<TABLE>
<C> <S>
a) The adjustment for distributions in excess of (less than) undistributed equity earnings and losses represents
the adjustment to income for distributions in excess of (less than) undistributed earnings and losses of
companies in which at least 20% but less than 50% equity is owned.
b) The interest factor attributable to rentals was computed by calculating the estimated present value of all
long-term rental commitments and applying the approximate weighted average interest rate inherent in the lease
obligations and adding thereto the interest element assumed in short-term cancelable and contingent rentals
excluded from the commitment data but included in rental expense.
c) The dividend requirements on preferred stock have been determined by adding to the total preferred dividends an
allowance for income taxes, calculated on the effective income tax rate.
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
WHOLLY-OWNED DIRECT OR
INDIRECT SUBSIDIARIES OF
ITT INDUSTRIES CARRYING ON
THE SAME LINE OF BUSINESS
AS NAMED SUBSIDIARIES
PERCENTAGE --------------------------------
JURISDICTION OF VOTING OPERATING OPERATING IN
IN WHICH SECURITIES IN THE FOREIGN
NAME ORGANIZED PARENT OWNED UNITED STATES COUNTRIES
- --------------------------------------- -------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
ITT Industries, Inc. ("ITT
Industries")......................... Indiana -- -- -- 2
ITT Canada Limited ("Canada")........ Canada ITT Industries 100 -- 1
ITT Industries of Canada Limited... Canada Canada 100 -- --
International Standard Electric
Corporation ("ISEC")............... Delaware ITT Industries 100 1 64
ITT Delaware Investments, Inc...... Delaware ISEC 100 -- 3
ITT Flygt AB....................... Sweden ISEC 100 -- 22
ITT Gesellschaft fur Beteiligungen
mbH ("ITTG")..................... Germany ISEC 99.5 -- 22
ITT Automotive Europe GmbH....... Germany ITTG 100 -- 4
ITT Industrie Beteiligungs
GmbH........................... Germany ITTG 100 -- 3
ITT Industries Limited............. England ISEC 100 -- 3
ITT Automotive Enterprises, Inc.
("Enterprises").................... Delaware ITT Industries 100 3 2
ITT Automotive, Inc.
("Automotive")................. Delaware Enterprises 100 2 --
ITT AES Enterprises, Inc. ("AES
Ent.")....................... Delaware Automotive 100 1 2
ITT Automotive Electrical
Systems, Inc............... Delaware AES Ent. 80 -- 2
ITT Defense & Electronics, Inc.
("ITTD&E")......................... Delaware ITT Industries 100 15 4
ITT Cannon, Inc.................. Delaware ITTD&E 100 -- 2
ITT Defense, Inc................. Delaware ITTD&E 100 -- --
ITT Federal Services
Corporation.................... Delaware ITTD&E 100 11 2
ITT Schadow Inc.................. Minnesota ITTD&E 100 -- --
ITT Fluid Technology International... Delaware ITT Industries 100 -- 2
ITT Flygt Corporation................ Delaware ITT Industries 100 -- 1
ITT Manufacturing Enterprises,
Inc................................ Delaware ITT Industries 100 -- 3
ITT Resource Development Corporation
("ITTRDC")......................... Delaware ITT Industries 100 35 --
Carbon Industries, Inc............. West Virginia ITTRDC 100 14 --
ITT Community Development
Corporation...................... Delaware ITTRDC 100 21 --
Computer Equipment & Leasing
Corporation........................ Wisconsin ITT Industries 100 -- --
Gilcron Corporation.................. Delaware ITT Industries 100 -- --
Palm Coast Utility Corporation....... Florida ITT Industries 100 -- --
</TABLE>
Note: The names of some consolidated wholly-owned subsidiaries of ITT Industries
carrying on the same lines of business as other subsidiaries named above
have been omitted, the number of such omitted subsidiaries operating in
the United States and in foreign countries being shown. Also omitted from
the list are the names of other subsidiaries since, if considered in the
aggregate as a single subsidiary, they would not constitute a significant
subsidiary.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ITT Industries, Inc.:
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statements (i) on Form S-3 (File No. 33-45756) and (ii) on Form S-8
(File Nos. 2-77677, 33-5412, 33-6004, 33-53771 and 333-1109).
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1995 Financial Statements included in Form 10-K and is qualified in
its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<CASH> 94
<SECURITIES> 0
<RECEIVABLES> 1,295
<ALLOWANCES> 38
<INVENTORY> 908
<CURRENT-ASSETS> 2,502
<PP&E> 5,055
<DEPRECIATION> 2,820
<TOTAL-ASSETS> 5,879
<CURRENT-LIABILITIES> 2,661
<BONDS> 961
0
0
<COMMON> 117
<OTHER-SE> 510
<TOTAL-LIABILITY-AND-EQUITY> 5,879
<SALES> 8,884
<TOTAL-REVENUES> 8,884
<CGS> 7,669
<TOTAL-COSTS> 7,669
<OTHER-EXPENSES> 769
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 175
<INCOME-PRETAX> 71
<INCOME-TAX> 50
<INCOME-CONTINUING> 21
<DISCONTINUED> 994
<EXTRAORDINARY> (207)
<CHANGES> 0
<NET-INCOME> 708
<EPS-PRIMARY> 6.19
<EPS-DILUTED> 5.93
</TABLE>
