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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from
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COMMISSION FILE NO. 1-5627
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ITT INDUSTRIES, INC.
INCORPORATED IN THE STATE OF INDIANA
13-5158950
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
4 WEST RED OAK LANE, WHITE PLAINS, NY 10604
(PRINCIPAL EXECUTIVE OFFICE)
TELEPHONE NUMBER: (914) 641-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT, ALL OF WHICH ARE
REGISTERED ON THE NEW YORK STOCK EXCHANGE, INC.:
COMMON STOCK, $1 PAR VALUE (ALSO REGISTERED ON PACIFIC STOCK EXCHANGE)
SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK PURCHASE RIGHTS (ALSO
REGISTERED
ON PACIFIC STOCK EXCHANGE)
8 7/8% SENIOR DEBENTURES DUE JUNE 2003
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No....
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on January 31, 1998, was approximately $3.5
billion.
As of February 28, 1998, there were outstanding 118,445,827 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 14, 1998, 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
7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 20
8 Financial Statements and Supplementary Data................. 20
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 20
PART 10 Directors and Executive Officers of ITT Industries.......... 20
III 11 Executive Compensation...................................... 20
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 20
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" or the "Company"), 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 (now known as Hartford
Financial Services Group, Inc. or "The Hartford"), both of which were
wholly-owned subsidiaries of ITT Delaware. In connection with the Distribution,
ITT Destinations changed its name to ITT Corporation ("ITT Corporation").
Reference is made to "-- CERTAIN RELATIONSHIPS AMONG ITT INDUSTRIES, ITT
CORPORATION and THE HARTFORD AFTER THE DISTRIBUTION."
ITT Industries has its World Headquarters at 4 West Red Oak Lane, White
Plains, NY 10604 and has approximately 58,500 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 1997 sales of approximately $8.8 billion, is a
worldwide enterprise engaged directly and through its subsidiaries in the design
and manufacture of a wide range of engineered products, focused on the three
principal business segments of ITT Automotive, ITT Defense & Electronics and ITT
Fluid Technology. See "-- RESTRUCTURING" for information concerning the ongoing
evaluation process with respect to ITT Industries' businesses and "BUSINESS
SEGMENT INFORMATION" in the "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for
information concerning ITT Community Development Corporation, 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,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET SALES
ITT Automotive............................................ 60% 66% 66%
ITT Defense & Electronics................................. 19 19 19
ITT Fluid Technology...................................... 21 15 15
--- --- ---
100% 100% 100%
=== === ===
OPERATING INCOME
ITT Automotive............................................ 52% 60% 62%
ITT Defense & Electronics................................. 21 20 18
ITT Fluid Technology...................................... 27 20 20
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
BUSINESS AND PRODUCTS
ITT Automotive
ITT Automotive, with 1997 sales of approximately $5.2 billion, is one of
the largest independent suppliers of components, systems and modules to vehicle
manufacturers worldwide and also is a supplier of related products to the
aftermarket. Through operations located in Europe, North America and South
America, and joint ventures and licensees throughout the world, ITT Automotive
designs, engineers and manufactures a broad range of automotive components,
systems and modules under three major worldwide product groupings -- Brake and
Chassis Systems, Electrical Systems and Automotive Components.
The Brake and Chassis Systems group, which had 1997 sales of approximately
$2.2 billion, produces anti-lock brake systems ("ABS"), traction control systems
("TCS"), the electronic stability program ("ESP"), chassis systems and
foundation brake components. ESP provides functions such as traction control,
anti-lock braking, electronic brake-force distribution and control of engine
torque and is designed to provide assistance in braking, starting, steering and
achieving control of the vehicle under various driving conditions. ABS remains
the largest product line of ITT Automotive with 21%, 22% and 24% of total sales
in 1997, 1996 and 1995, respectively.
The Electrical Systems group, which had 1997 sales of approximately $1.9
billion, produces automotive products, such as wiper module assemblies, air
management systems, switches and fractional horsepower direct current motors.
The wiper business unit accounted for 15% of ITT Automotive's sales in 1997.
The Automotive Components group, which had 1997 sales of approximately $1.1
billion, produces fluid handling systems, friction material and Koni(R) shock
absorbers. The fluid handling business unit accounted for 7% of ITT Automotive's
sales in 1997.
The following table illustrates the percentage sales by group for the
periods specified:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Brake and Chassis Systems................................... 43% 44% 44%
Electrical Systems.......................................... 37 33 33
Automotive Components....................................... 20 23 23
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
ITT Automotive markets products using various recognizable brand names in
the automotive industry, including Teves(R) and Ate(R) (brake components and
systems), SWF(R) (wiper systems, electric motors and switches) and Koni(R)
(shock absorbers).
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ITT Automotive provides modules which are pre-assembled components and
units installed in a particular location of a vehicle. At present, ITT
Automotive provides corner modules, which contain brake components, knuckles,
bearings and other smaller items, and windshield wiper modules, which contain
wiper arms, blades, linkages, motors, a washer fluid reservoir and a pump motor.
ITT Automotive is also developing new product lines such as complete axle
assemblies.
The principal customers for products of ITT Automotive are the top vehicle
manufacturers worldwide. Of these manufacturers, ITT Automotive's largest
customers are General Motors, Ford, Volkswagen, Chrysler, Mercedes and BMW,
contributing 21% 13%, 9%, 8%, 7% and 6%, respectively, to ITT Automotive's 1997
sales. In addition, approximately 6% of ITT Automotive's 1997 net sales, which
included brake parts, shocks and struts and windshield wiper components, were to
customers in the aftermarket.
The level of activity of ITT Automotive is generally dependent upon the
condition of major economies throughout the world. Of particular importance are
light vehicle production levels in markets served by ITT Automotive and the
amount of ITT Automotive products included in the vehicles being produced. See
"-- COMPETITION."
During 1997, the North America aftermarket, the seats and the body systems
businesses of ITT Automotive were sold in an effort to focus more on the core
business of ITT Automotive.
ITT Automotive companies have approximately 30,000 employees in 63
facilities located in 18 countries.
ITT Defense & Electronics
ITT Defense & Electronics, with 1997 sales of approximately $1.7 billion,
develops, manufactures and supports high technology electronic systems and
components for worldwide defense and commercial markets with operations in North
America, Europe and Asia. Defense market products include tactical
communications equipment, airborne electronic warfare systems, night vision
devices, radar, space payloads, and operations, maintenance and technical
services. Commercial products and services include interconnect products (such
as connectors, switches and cable assemblies), night vision devices and space
launch services.
ITT Defense & Electronics concentrates its efforts in those market segments
where management believes it can be a market leader. It is a leading supplier of
products that management believes will be critical to the armed forces in the
21st century, particularly products designated to facilitate communications in
the forward area battlefield, night vision devices that enable soldiers to
conduct night combat operations and airborne electronic warfare systems that
protect aircraft from enemy missiles. In addition, through its global
operations, maintenance and technical services business, management believes
that ITT Defense & Electronics may benefit from trends to commercialize and
outsource military support services.
In the interconnect market, ITT Cannon maintains a position as one of the
world's largest connector companies based on revenue and is a leading supplier
to the industrial and military/aerospace sectors. Its products include
electronic connectors, switches, test accessories and cable assemblies for
information systems, industrial, military/aerospace and transportation
applications.
In tactical communications the ITT Aerospace/Communications Division
manufactures products, including voice and data systems, that facilitate
communications in the forward area battlefield. ITT Aerospace/Communications
Division produces the Single Channel Ground and Airborne Radio System
("SINCGARS") and has a contract to produce the Near Term Digital Radio ("NTDR"),
which will have data transmission capacity twenty times greater than SINCGARS.
In addition, the ITT Aerospace/Communications Division produces sophisticated
sounding and imaging instruments such as those used by the National
Oceanographic and Atmospheric Agency in remote sensing/navigation space payloads
to track hurricanes, tornadoes and other weather patterns.
In operations, maintenance and technical services, ITT Federal Services
Corporation provides military base operations support, equipment and facility
maintenance, and training services for government sites around the world.
At the end of 1997, ITT Industries acquired Kaman Sciences Corporation (now
renamed ITT Systems & Sciences Corporation), a supplier of information
technology services and systems to the government.
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ITT Night Vision provides United States and allied soldiers with the
capability to conduct night combat operations with the production of advanced
goggles for airborne and ground applications. ITT Night Vision was awarded 100%
of the United States Army's Generation III night vision production needs through
1998. ITT Night Vision also produces a commercial line of night vision products
for law enforcement and marine applications.
ITT Gilfillan produces ship and air defense radar and air traffic control
systems.
ITT Avionics produces airborne electronic warfare systems, such as the
Airborne Self-Protection Jammer ("ASPJ"), to help protect aircraft from
radar-guided weapons. ITT Avionics was selected by the United States Army to
develop the next-generation fully integrated airborne electronic warfare system
for rotary wing aircraft called Suite of Integrated Radio Frequency
Countermeasures ("SIRFC"). ITT Avionics, teamed with Lockheed Martin Sanders,
was also awarded the development contract for the United States Integrated
Defensive Countermeasures ("IDECM") program for fixed wing aircraft such as the
F/A-18 E/F fighter fleet.
The following table illustrates the percentage sales by product line for
the periods specified:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interconnect................................................ 34% 33% 33%
Tactical Communications/Space Payloads...................... 28 27 28
Operations, Maintenance and Technical Services.............. 18 19 18
Night Vision/Radar.......................................... 12 12 10
Airborne Electronic Warfare................................. 6 6 9
Other....................................................... 2 3 2
--- --- ---
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 66% of 1997 net sales of ITT Defense & Electronics was to
governmental entities, of which approximately 85% was to the United States
Government (principally in defense programs). In 1997 ITT Defense & Electronics,
along with Racal Electronics and Siemens Plessey Systems, announced a joint
venture to develop the Bowman Program, a $3.2 billion tactical communications
system for the British Armed Forces.
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 1997 net sales for ITT Defense & Electronics.
Sales to non-governmental entities have remained at approximately one-third
of total sales from 1994 through 1997. Certain products sold by ITT Defense &
Electronics have particular commercial application, including night vision
products and those products already sold to the commercial sector, such as
connectors and switches. In addition, ITT Defense & Electronics has entered into
a partnership with California Commercial Spaceport, Inc. to form Spaceport
Systems International ("SSI"). It is currently planned that SSI will build and
operate a commercial satellite launch facility at Vandenberg Air Force Base in
California to launch commercial and government satellite payloads into low polar
earth orbits.
Order backlog for ITT Defense & Electronics in 1997 was $2.2 billion,
compared with $2.3 billion for 1996 and $2.0 billion for 1995.
The level of activity in ITT Defense & Electronics is affected by different
factors in its two major businesses. At Defense, significant factors are overall
defense budgets and the portion of those defense budgets devoted to products and
services of the type provided by ITT Defense & Electronics. At Electronics, a
significant factor is the overall condition of the economies in the markets
served. See "-- COMPETITION."
During 1997, the lighting business of ITT Defense & Electronics was sold.
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ITT Defense & Electronics companies have approximately 15,000 employees in
85 facilities in 16 countries.
ITT Fluid Technology
ITT Fluid Technology, with 1997 sales of approximately $1.8 billion, is a
worldwide enterprise engaged in the design, development, production and sale of
products, systems and services used to move, handle, transfer, control and
contain fluids. With sales to more than 135 countries, ITT Fluid Technology is a
leading supplier of pumps, valves, heat exchangers, mixers and controls for the
management of fluids.
The majority of ITT Fluid Technology's sales are in North America and
Western Europe. Principal markets are water supply and wastewater treatment,
industrial and process, and construction. Industrial and process market activity
includes strong market positions in chemical processing, pulp and paper, and in
selected segments of the hydrocarbon processing industry, power, mining and
general industrial markets. Construction market activity includes residential,
commercial and municipal water well pumps and systems, heating, ventilation and
air conditioning ("HVAC") segments of the residential and non-residential
construction market and in construction dewatering. ITT Fluid Technology also
has significant niche positions in leisure marine, fire protection, whirlpool
bath pumps and in aerospace valves.
Sales are made directly and through independent distributors and
representatives. ITT Fluid Technology is structured in three worldwide product
groups and one international sales group, each of which is briefly described
below. No single customer accounted for more than 2% of 1997 net sales for ITT
Fluid Technology.
ITT Flygt, with 1997 sales of approximately $610 million, is a pioneer in
submersible technology and is the world leader in submersible pumping and mixing
products. About half of ITT Flygt's worldwide sales come from wastewater
treatment markets. Other sales are to construction, mining and industrial
markets.
Commercial & Specialty Products, with 1997 sales of approximately $800
million, offers a range of products, including dry-mount pumps and heat
exchangers, control and accessory products for liquid based heating and cooling
systems, residential water well pumps, pumps for light industrial, original
equipment manufacturers and irrigation markets, and specialty valves, pumps and
associated products for the leisure marine, pool and whirlpool bath markets.
Brand names include Bell & Gossett(R), Dia-Flo(R), Fabri-Valve(R), Goulds(R),
ITT Standard(R), Jabsco(R), Lowara(R), Marlow(R), McDonnell & Miller(R),
Neo-Dyn(R) and Pure-Flo(R).
Industrial Pumps, with 1997 sales of approximately $400 million, offers a
broad line of pumps and valves for industrial, process and heavy duty commercial
application world-wide. Brand names include A-C(R) Pump, Goulds(R), Marlow(R),
Richter(R), Vogel(R) and others.
ITT Fluid Technology International is the international selling arm of ITT
Fluid Technology. ITT Fluid Technology International sells and distributes
various products manufactured by ITT Fluid Technology companies worldwide and
provides aftermarket support and services to customers in Europe, the Middle
East and Africa and in the Asia Pacific region, Central Asia and Latin America.
During 1997, ITT Industries acquired Goulds Pumps, Incorporated ("Goulds
Pumps"), a leading supplier of industrial, residential and commercial pumps,
parts and accessories.
The following table illustrates the percentage sales by division for the
periods specified:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Flygt....................................................... 34% 48% 48%
Commercial & Specialty Products*............................ 44 41 41
Industrial Pumps*........................................... 22 11 11
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
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* Amounts for 1997 include sales from Goulds Pumps for seven months.
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Management of ITT Industries believes that ITT Fluid Technology has a solid
technology base and proven expertise in applying its products to meet customer
needs and that the continuing development of new products will enable ITT Fluid
Technology to maintain and build market leadership positions in served markets.
The level of activity in ITT Fluid Technology is dependent upon the
condition of the economies in the markets served and, in the case of municipal
markets, the ability of municipalities to fund projects for products and
services of the type provided by ITT Fluid Technology. See "-- COMPETITION."
ITT Fluid Technology companies have approximately 13,500 employees in 115
facilities and sales in over 135 countries.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "BUSINESS SEGMENT INFORMATION" in the "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for further details with respect to business
segments.
RESTRUCTURING
Since its inception in December of 1995 after the spin-off of ITT
Corporation and The Hartford, ITT Industries has been continually evaluating its
businesses and operations. This evaluation process, which has led to a shift in
the mix of ITT Industries' businesses, continues with the goal of improving ITT
Industries' businesses and operations thereby providing efficiencies and
opportunities to create value for ITT Industries' shareholders. In 1996,
divestitures were made in both core and non-core segments of ITT Industries'
businesses, and small acquisitions were also made.
In 1997, ITT Industries divested its semiconductor operations and began an
extensive, overall evaluation of its automotive business and operations. To
date, that evaluation has led to the divestiture of its North American
aftermarket, seat subsystems, European body systems and magnet production
operations and the initiation of a significant cost reduction program.
The evaluation process, which continues, is focusing in particular on the
businesses involved in engineering, manufacturing and marketing automotive
brakes, chassis modules and electrical systems and will encompass an examination
of all strategic alternatives, including the possible sale of one or more of
these major businesses. This does not include the remaining lines of business
comprising the automotive segment which account for approximately twenty percent
of overall automotive sales constituting the components group which produces
fluid handling, friction and shock absorber products, and the automotive switch
business. ITT Industries has engaged investment bankers to assist in this
evaluation.
The Company also made significant acquisitions in 1997 with Goulds Pumps
and Kaman Sciences being added.
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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
United States............................................... 48% 47% 48%
Canada and Mexico........................................... 6 6 6
--- --- ---
Total North America..................................... 54 53 54
Europe...................................................... 39 41 40
Asia/Pacific and Other...................................... 7 6 6
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
The geographic sales base of ITT Automotive is predominantly in Europe and
North America. In 1997, approximately 48% of sales of ITT Automotive were to
customers in the United States and Canada and approximately 46% of sales were to
customers in Western Europe. Management of ITT Industries sees growth
opportunities in South America, Mexico and Asia, particularly in China. In
addition to its wholly-
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owned facilities, ITT Automotive also is involved in other joint venture and
licensing arrangements throughout the world as a means of serving its
international customer base.
The geographic sales base of ITT Defense & Electronics is predominantly the
United States, which accounted for approximately 74% of 1997 sales. Management
of ITT Defense & Electronics is attempting to increase its international defense
business and sees growth opportunities in the Asia/Pacific region, Europe and
the Middle East. ITT Cannon has a 90% joint venture in China and a wholly-owned
subsidiary in Japan to supply connectors and switches for, in large part,
consumer electronics products in those markets.
The geographic sales base of ITT Fluid Technology is broad. In 1997,
approximately 53% of the sales of ITT Fluid Technology was derived from the
United States and Canada while approximately 31% was derived from Western
Europe. The geographic sales mix differs among products and among divisions of
ITT Fluid Technology. Management of ITT Industries sees growth opportunities in
Eastern Europe and Central Asia, Africa/Middle East, Latin America and the
Asia/Pacific region. In China, ITT Fluid Technology has manufacturing and
distribution facilities to produce and sell submersible pumps for the sewage
handling and mining markets and a joint venture which produces vertical turbine
pumps and includes a foundry operation. It also has joint venture sales and
manufacturing and other operations in Eastern Europe, Latin America,
Africa/Middle East and other locations in the Asia/Pacific region.
See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further geographical
information and information with respect to export sales.
COMPETITION
Substantially all of ITT Industries' operations are in highly competitive
businesses, although the nature of the competition varies across all business
segments. A number of large companies engaged in the manufacture and sale of
similar lines of products and the provision of similar services are included in
the competition, as are many small enterprises with only a few products or
services. Technological innovation, price, quality and reliability are primary
factors in markets served by the various segments of ITT Industries' businesses.
ITT Automotive
Competition is intense in the global automotive industry. This competitive
environment has resulted in increased pressure to reduce prices and, therefore,
costs. Since purchased items represent a major portion of the total costs of
vehicle manufacturers, vehicle manufacturers are expected to continue to
pressure suppliers such as ITT Automotive to provide cost reductions through a
variety of means. Suppliers such as ITT Automotive are also likely to continue
to experience competitive pricing pressures, as vehicle manufacturers adopt
manufacturing strategies such as the use of worldwide common platforms for the
manufacture of automobiles.
ITT Defense & Electronics
ITT Defense & Electronics competes in two business sectors. In Defense,
government defense budgets, particularly in the United States, generally have
leveled off after years of significant declines. Business consolidations
continue to change the competitive environment. ITT Defense & Electronics has
adjusted to these changes by focusing on the defense electronics and services
markets, by making process improvements and through capacity rationalization. In
Electronics, primarily interconnects, competitive pressures continue on a global
basis. In most of the markets served by ITT Defense & Electronics competition is
based primarily upon price, quality, technological expertise, cycle time and
service.
ITT Fluid Technology
The ITT Fluid Technology business is affected by strong competition,
changing economic conditions, 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
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continuous stream of new products developed from a strong technology base, a
focus on quality and customer service, and through continuous cost improvement
programs.
EXPOSURE TO CURRENCY FLUCTUATIONS
ITT Industries' companies conduct operations worldwide. ITT Industries is,
therefore, exposed to the effects of fluctuations in relative currency values.
Although ITT Industries' companies engage where appropriate in various hedging
strategies with respect to their foreign currency exposure, it is not possible
to hedge all such exposure. Accordingly, the operating results of ITT Industries
may be impacted by fluctuations in relative currency values.
CYCLICALITY
Many of the markets in which ITT Industries' businesses operate are
cyclical and can be affected by general economic conditions in those markets.
For example, a large percentage of the ITT Industries' 1997 net sales was
derived from sales to automobile manufacturers. The automobile industry is
highly cyclical, although cycles in the major markets of North America and
Europe are not necessarily concurrent. A decline in the demand for new
automobiles and industry production levels could have an adverse effect on ITT
Industries. ITT Industries also manufactures and sells products used in other
historically cyclical industries, such as the construction, mining and minerals
and aerospace industries, and thus could be adversely affected by negative
cycles affecting those and other industries.
GOVERNMENTAL REGULATION AND RELATED MATTERS
A number of ITT Industries' businesses are subject to governmental
regulation by law or through contractual arrangements. ITT Industries'
businesses in the defense segment perform work under contracts with the United
States Department of Defense and similar agencies in certain other countries.
These contracts are subject to security and facility clearances under applicable
governmental regulations, including regulations requiring background
investigations for high-level security clearances for ITT Industries' executive
officers. Most of such contracts are subject to termination by the respective
governmental parties on various grounds, although such terminations rarely
occur.
ENVIRONMENTAL MATTERS
ITT Industries is subject to stringent environmental laws and regulations
concerning air emissions, water discharges and waste disposal. Such
environmental laws and regulations include the Federal Clean Air Act, the Clean
Water Act, the Resource, Conservation and Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA" or
"Superfund"). Environmental requirements are significant factors affecting all
operations. Management believes that ITT Industries' companies closely monitor
all of their respective environmental responsibilities, together with trends in
environmental laws. ITT Industries has established an internal program to assess
compliance with applicable environmental requirements for all of its facilities,
both domestic and overseas. The program is designed to identify problems in a
timely manner, correct deficiencies and prevent future noncompliance. Over the
past 15 years ITT Industries has conducted regular, thorough audits of its major
operating facilities. As a result, management of ITT Industries believes that
ITT Industries' companies are in substantial compliance with current
environmental regulations. Management does not believe, based on current
circumstances, that it will incur compliance costs pursuant to such regulations
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 -- RISKS AND UNCERTAINTIES -- ENVIRONMENTAL MATTERS" and
"LEGAL PROCEEDINGS".
RAW MATERIALS
All the businesses of ITT Industries require various raw materials (e.g.,
metals and plastics), the availability and prices of which may fluctuate.
Although some of these costs may be recovered through increased prices to
customers, the operating results of ITT Industries are exposed to fluctuations.
ITT Industries' companies attempt to control such costs through various
purchasing programs and otherwise.
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In recent years, the businesses of ITT Industries have not experienced any
significant difficulties in obtaining an adequate supply of raw materials
necessary for the manufacturing process.
RESEARCH, DEVELOPMENT AND ENGINEERING
The businesses of ITT Industries require substantial commitment of
resources to research, development and engineering activities which are
conducted in laboratory and engineering facilities at most of its major
manufacturing subsidiaries. Because ITT Industries believes that continued
leadership in technology is essential to its future, most ITT Industries' funds
dedicated to research and development are applied to areas of high technology,
such as aerospace, automotive braking and electrical systems, and applications
involving electronic components. Expenditures by ITT Industries for research,
development, and engineering totaled $496.9 million in 1997, $535.2 million in
1996 and $513.9 million in 1995. Of those amounts 71.5% in 1997, 65.6% in 1996
and 58.7% in 1995 was expended pursuant to customer contracts.
INTELLECTUAL PROPERTY
While ITT Industries owns and controls a number of patents, trade secrets,
confidential information, trademarks, trade names, copyrights and other
intellectual property rights which, in the aggregate, are of material importance
to its business, management of ITT Industries believes that its business, as a
whole, is not materially dependent upon any one intellectual property or related
group of such properties. ITT Industries is licensed to use certain patents,
technology and other intellectual property rights owned and controlled by
others, and, similarly, other companies are licensed to use certain patents,
technology and other intellectual property rights owned and controlled by ITT
Industries.
Patents, patent applications and license agreements will expire or
terminate over time by operation of law, in accordance with their terms or
otherwise. The expiration or termination of such patents, patent applications
and license agreements is not expected by the management of ITT Industries to
have a material adverse effect on ITT Industries' financial position, results of
operations or cash flows.
ITT Industries has obtained the exclusive right and license from ITT
Corporation to use the "ITT" name, mark and logo with respect to the businesses
that ITT Industries operated on the date of Distribution and in the operation of
any businesses closely related thereto. ITT Industries also has the
non-exclusive right to use the "ITT" name, mark and logo in the operation of any
new business it operates so long as such new business is not included in ITT
Corporation's or The 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, 1997, ITT Industries and its subsidiaries employed an
aggregate of approximately 58,500 people. Of this number, approximately 26,000
are employees in the United States, of whom approximately 40% are represented by
labor unions. Generally, labor relations have been maintained in a normal and
satisfactory manner.
DISCONTINUED OPERATIONS
Effective December 19, 1995, ITT Delaware made a distribution to its
shareholders of its former subsidiary, ITT Destinations, which conducted its
hospitality, entertainment and information services businesses and its former
subsidiary, The Hartford, which conducted its insurance businesses. Both ITT
Destinations, renamed ITT Corporation, and The Hartford have been reflected as
"Discontinued Operations".
In 1995, ITT Financial Corporation, a former subsidiary of ITT Delaware,
merged into ITT Delaware and its indebtedness was assumed by ITT Delaware and
subsequently by ITT Industries. ITT Financial has been reflected as
"Discontinued Operations" in the financial statements of ITT Industries.
See "Dispositions and Discontinued Operations" in the "Notes to
Consolidated Financial Statements" herein.
9
<PAGE> 11
CERTAIN RELATIONSHIPS AMONG ITT INDUSTRIES, ITT CORPORATION AND THE HARTFORD
AFTER THE DISTRIBUTION
ITT Delaware, ITT Corporation and The 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 The 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 The 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 The Hartford. The
Distribution Agreement provides that neither ITT Industries, ITT Corporation nor
The Hartford will take any action that would jeopardize the intended tax
consequences of the Distribution.
ITT Industries, ITT Corporation and The Hartford have also entered into
agreements in connection with the Distribution relating to intellectual
property, tax and employee benefit matters.
Two members of the Board of Directors of ITT Industries also serve on the
Board of Directors of The Hartford.
On February 23, 1998, ITT Corporation was acquired by Starwood Hotels &
Resorts Worldwide, Inc. It cannot be determined at this time what effect, if
any, the acquisition of ITT Corporation may have with respect to ongoing
obligations under the Distribution Agreement and related matters.
------------------------
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FORWARD-LOOKING STATEMENTS" for information regarding
forward-looking statements and cautionary statements relating thereto.
------------------------
ITEM 2. PROPERTIES
ITT Industries, whose principal executive offices are in leased premises
located in White Plains, NY, considers the many offices, plants, warehouses and
other properties that it owns or leases to be in good condition. These
properties are located in several states in the United States, as well as in
numerous countries throughout the world. ITT Industries believes the properties
to be adequate for the needs of its businesses.
ITEM 3. LEGAL PROCEEDINGS
ITT Industries and its subsidiaries are responsible, in whole or in part,
or are alleged to be responsible for environmental investigation and remediation
at approximately 110 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 47 sites by the United States Environmental
Protection Agency ("EPA") and/or a similar state agency under CERCLA or its
state equivalent. In many of these proceedings, ITT Industries' liability is
considered de minimis. At 21 of these sites, formerly operated by subsidiaries
of the Company, liability and/or defense costs are to be divided equally among
ITT Industries, ITT Corporation and The 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.
10
<PAGE> 12
ITT Industries is involved in an environmental proceeding in California
relating to the San Fernando Valley aquifer. ITT Industries is one of numerous
PRPs who are alleged by the EPA to have contributed to the contamination of the
aquifer. ITT Industries and other allegedly responsible parties have completed
an arbitration to allocate among the PRPs responsibility to fund the clean-up
required by the EPA. Lockheed Martin Corporation challenged the allocation in
the Superior Court, Los Angeles County. The lower court ruled in ITT Industries'
favor; however, Lockheed Martin has appealed. Oral argument is expected in the
second quarter of 1998. The parties, including Lockheed Martin, negotiated an
interim funding arrangement, pending the appeal, which will permit the EPA
ordered clean-up to proceed. ITT Industries has filed a suit against its
insurers in the California Superior Court, Los Angeles County, ITT Corporation,
et al. v. Pacific Indemnity Corporation et al. for recovery of costs it has
incurred in connection with this and other environmental matters. ITT Industries
already has negotiated settlements with certain defendant insurance companies,
is engaged in negotiations with others, and is prepared to pursue its legal
remedies where reasonable negotiations are not productive.
While there can be no assurance as to the ultimate outcome of any
litigation involving ITT Industries, management does not believe any pending
legal proceeding will result in a judgment or settlement that will have, after
taking into account ITT Industries' existing provisions for such liabilities, a
material adverse effect on ITT Industries' financial position, results of
operations or cash flows.
Reference is made to "BUSINESS OF ITT INDUSTRIES -- CERTAIN RELATIONSHIPS
AMONG ITT INDUSTRIES, ITT CORPORATION AND THE HARTFORD AFTER THE DISTRIBUTION"
for information concerning the allocation of certain liabilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders of ITT Industries during
the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF ITT INDUSTRIES
The following information is provided as to the executive officers of ITT
Industries:
<TABLE>
<CAPTION>
DATE OF
AGE AT YEAR OF ELECTION
FEBRUARY 1, INITIAL ELECTION TO PRESENT
NAME 1998 POSITION AS AN OFFICER POSITION
---- ---- -------- ------------- --------
<S> <C> <C> <C> <C>
Ralph D. Allen.................... 56 Vice President, Director of 1981 12/19/95
Investor Relations
Travis Engen...................... 53 Chairman, President and Chief Executive 1987 12/19/95
and Director
Donald E. Foley................... 46 Vice President and Treasurer 1996 5/21/96
Louis J. Giuliano................. 51 Senior Vice President 1988 12/19/95
Martin Kamber..................... 49 Senior Vice President, Director of 1995 12/19/95
Corporate Development
Heidi Kunz........................ 43 Senior Vice President and Chief 1995 12/19/95
Financial Officer
Richard J. Labrecque.............. 59 Senior Vice President 1985 3/1/96
Frank E. Macher................... 56 Senior Vice President 1997 6/19/97
Vincent A. Maffeo................. 47 Senior Vice President and General 1995 12/19/95
Counsel
Thomas R. Martin.................. 44 Vice President, Director of Corporate 1996 9/10/96
Relations
Richard W. Powers................. 56 Vice President, Director of Taxes 1991 12/19/95
James P. Smith, Jr................ 55 Senior Vice President, Director of 1995 12/19/95
Human Resources
Richard J. Townsend............... 47 Vice President, Controller and 1997 1/20/98
Director, Strategy
</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,
11
<PAGE> 13
President and Chief Executive, was Executive Vice President of ITT Delaware
(1991); (ii) Mr. Foley, prior to his election as Vice President and Treasurer,
was Assistant Treasurer of International Paper Company; (iii) Mr. Kamber, prior
to his election as Senior Vice President, Director of Corporate Development, was
Vice President, Corporate Development, of ITT Automotive, Inc. (1993) and
Executive Assistant to the President, Chief Operating Officer and to the
Executive Vice President of ITT Delaware; (iv) Ms. Kunz, prior to her election
as Senior Vice President and Chief Financial Officer, was Vice President (1994)
and Treasurer (1993) of General Motors Corporation and, prior to that, Assistant
Treasurer of General Motors Corporation; (v) Mr. Labrecque, prior to his
election as Senior Vice President, was Vice President of ITT Delaware; (vi) Mr.
Macher, prior to his election as Senior Vice President, held a number of
management positions with Ford Motor Company, including Vice President & General
Manager, Automotive Components Division; (vii) Mr. Maffeo, prior to his election
as Senior Vice President and General Counsel, was Vice President and General
Counsel of ITT Automotive, Inc. (1992); (viii) Mr. Martin, prior to his election
as Vice President, Director of Corporate Relations, was Vice President of
Corporate Communications of Federal Express Corp. (1995) and, prior to that, was
Managing Director of Public Relations of Federal Express Corp. (ix) Mr. Powers,
prior to his election as Vice President, Director of Taxes, was Vice President
of ITT Delaware; (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; and (xi) Mr. Townsend, who acquired the
additional title of Director, Strategy on January 20, 1998, was, prior to his
election as Vice President and Controller (1997), Assistant Corporate Controller
of IBM Corporation (1995) and, prior to that, held various other management
positions in the IBM organization.
PART II
ITEM 5. MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
COMMON STOCK -- MARKET PRICES AND DIVIDENDS
<TABLE>
<CAPTION>
1997 1996
---------------- -------------------
HIGH LOW HIGH LOW
------ ------ ------- -------
IN DOLLARS
<S> <C> <C> <C> <C>
Three Months Ended
March 31............................................... $26.38 $22.38 $ 27.75 $ 22.25
June 30................................................ 27.75 22.13 28.63 24.75
September 30........................................... 33.69 25.00 26.00 21.50
December 31............................................ 33.38 28.75 25.75 22.75
</TABLE>
The above table reflects the range of market prices of Common Stock of ITT
Industries as reported in the consolidated transaction reporting system of the
New York Stock Exchange, the principal market in which this security is traded
(under the trading symbol "IIN"). During the period from January 1, 1998 through
February 28, 1998, the high and low reported market prices of ITT Industries
Common Stock were $34.44 and $28.13, respectively.
ITT Industries declared dividends of $.15 per common share in each of the
four quarters of 1996 and 1997 and in the first quarter of 1998.
The payment and level of future cash dividends by ITT Industries will be
subject to the discretion of the Board of Directors of ITT Industries, and
dividend decisions will be based on, and affected by, a number of factors,
including the operating results and financial requirements of ITT Industries.
Although management of ITT Industries presently contemplates that for the
foreseeable future dividends will be paid at the present dividend rate, there
can be no assurance that such dividends will be paid.
There were 51,830 holders of record of ITT Industries Common Stock on
February 28, 1998.
ITT Industries Common Stock is listed on the following exchanges:
Frankfurt, London, Midwest, New York, Pacific, and Paris.
12
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
IN MILLIONS, EXCEPT PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C>
RESULTS AND POSITION
Net sales............................. $8,777.1 $8,718.1 $8,884.2 $7,757.7 $6,621.2
Operating income...................... 286.6 508.4 446.2 417.7 229.5
Income from continuing
operations(a)....................... 113.7 222.6 20.7 201.6 134.8
Net income............................ 108.1 222.6 707.9 1,021.8 912.8
Net income from continuing operations,
as adjusted(b)...................... 253.9 222.6 185.0 201.6 134.8
Expenditures on plant additions....... 459.7 406.3 449.6 407.0 336.7
Depreciation and amortization......... 436.4 433.0 423.2 373.0 323.0
Total assets.......................... 6,220.5 5,491.2 5,879.2 11,035.2 12,980.9
Total assets, excluding discontinued
operations.......................... 6,220.5 5,491.2 5,879.2 5,577.0 5,063.0
Long-term debt........................ 532.2 583.2 961.2 1,712.5 1,993.9
Total debt............................ 2,183.0 1,418.8 1,606.7 2,640.6 2,970.5
Cash dividends declared per common
share............................... .60 .60 .99 1.98 1.98
EARNINGS PER SHARE
Net income from continuing operations,
as adjusted(b)
Basic............................... $ 2.14 $ 1.89 $ 1.67 $ 1.46 $ .83
Diluted............................. $ 2.10 $ 1.85 $ 1.66 $ 1.45 $ .83
Net income
Basic............................... $ .91 $ 1.89 $ 6.24 $ 8.65 $ 7.40
Diluted............................. $ .89 $ 1.85 $ 6.18 $ 8.02 $ 7.36
</TABLE>
- ---------------
(a) Income from continuing operations in 1997 includes a special charge of
$145.8, after tax, for restructuring and other items as described in note 5.
The 1995 income from continuing operations included a charge of $164.3,
after tax, for losses from the planned disposal of certain non-core
operations.
(b) Net income from continuing operations, as adjusted, in 1997 excludes the
item in note (a) above and includes the cumulative effects of accounting
change (net of tax benefit) of $5.6 million. The 1995 net income from
continuing operations, as adjusted, excludes the item in note (a) above and
$590.8, after-tax, for operating income from discontinued operations;
$403.4, after-tax, for gain on sale of ITT Financial; $307.0, after-tax, for
charges related to extraordinary items.
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT 1997 EVENTS AND INITIATIVES
During 1997, ITT Industries, Inc. and its businesses undertook the
following significant actions:
1. ITT Industries purchased Goulds Pumps, Incorporated (Goulds) in
May, adding more than $750 million in annual sales and making ITT
Industries the world's largest pump manufacturer. Assimilation of Goulds'
operations began immediately, and sales improvements, product
rationalization and cost-savings initiatives are now well underway.
2. In December, ITT Industries purchased Kaman Sciences Corporation
(renamed ITT Systems & Sciences Corporation), a high technology services
provider with annual sales of approximately $150 million. The purchase
increased the scope of services that ITT Industries can provide for the
U.S. military as the military accelerates its outsourcing.
3. ITT Industries formed a joint venture, of which it holds a 40%
share, that will supply a state-of-the-art tactical communications system
to the British military.
4. In the third quarter, ITT Industries recorded a pre-tax charge of
$239.0 million ($145.8 million after-tax or $1.21 per diluted share),
relating to a series of restructuring actions affecting the Automotive and
Fluid Technology segments. These actions include writing down assets of
businesses to be divested and severance costs associated with the closure
and consolidation of facilities and related workforce reductions. These
charges have a cash impact of approximately $73 million, the majority of
which will be incurred in 1998.
5. In addition to the restructuring actions referred to above, ITT
Industries announced that it is undertaking an evaluation of its automotive
businesses involved in engineering, manufacturing and marketing automotive
brakes, chassis modules and electrical systems and which will encompass an
examination of all strategic alternatives, including the possible sale of
one or more of these major businesses. This does not include the remaining
lines of business comprising the automotive segment which account for
approximately twenty percent of overall automotive sales constituting the
components group which produces fluid handling, friction and shock absorber
products, and the automotive switch business.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31,
1996: Net sales in 1997 were $8.78 billion, an increase of $59.0 million, or
0.7% compared to 1996. Automotive sales were lower by $325.6 million, or 5.9%.
Sales volume increases of $326.7 million at Automotive were more than offset by
sales price decreases, the absence of sales of divested units, and unfavorable
foreign exchange translation of $356.1 million. Defense & Electronics sales
increased by $96.6 million, or 6.1%, due to strong order input carryover from
1996 and improved market conditions in the 1997 interconnect market. Fluid
Technology sales increased by $454.0 million, or 34.9%, due to the acquisition
of Goulds.
Gross margin increased to 15.5% in 1997 compared to 14.2% in 1996,
primarily due to changes in the Company's business portfolio through
acquisitions and dispositions. The Company has expanded its higher margin Fluid
Technology business while disposing of lower margin, non-core businesses from
its Automotive segment.
Selling, general, and administrative expenses of $805.3 million reflect an
increase of $65.9 million over 1996. The acquisition of Goulds added $85.1
million over the prior year. However, this increase was partially offset by
reduced expenses at Automotive and the absence of expense at Semiconductors
after its disposition in October.
Other operating expenses (income) include gains and losses from foreign
exchange transactions, amortization expense, restructuring, and other charges.
In 1997, other operating expenses of $32.9 million primarily consisted of
amortization expense of $20.6 million and $10.6 million of relocation expense.
In 1996, other operating income of $13.3 million was principally from the gains
on sales of assets.
14
<PAGE> 16
Total operating income in 1997 of $286.6 million includes a pretax special
charge of $239.0 million. Of the charge, $113.0 million was taken at Automotive
for losses on the sale of non-core businesses and to exit facilities and reduce
headcount. This action will significantly reduce factory overhead, selling,
general and administrative expenses. Fluid Technology's portion of the charge
was $68.8 million for losses on the sale of non-core businesses and for plant,
warehouse and office consolidations, and product rationalization. The remainder
of the charge was primarily for the disposal of Semiconductors.
Excluding the special charges, operating income was $525.6 million, an
improvement of 3.4% over the $508.4 million reported in 1996. The increase in
operating income is attributable to improvements in Defense & Electronics and
Fluid Technology, offset by a slight decrease in the Automotive segment.
Interest expense decreased to $133.2 million in 1997 from $169.0 million in
1996, reflecting a restructuring of outstanding debt and increasing the amount
of floating rate debt. Interest income decreased to $17.5 million in 1997 from
$32.7 million in 1996, primarily as a result of maintaining lower cash balances
by using available cash to reduce debt.
Miscellaneous income of $15.5 million in 1997 includes the gain on sale of
non-core Automotive businesses and the results of equity investments. In 1996,
miscellaneous expense of $1.1 million reflected the results of equity
investments.
Net income in 1997 was $108.1 million or $.89 per diluted share compared
with $222.6 million or $1.85 per diluted share in 1996. The decline was
primarily caused by after-tax special charges of $145.8 million, or $1.21 per
diluted share, as discussed above. Excluding the special charges, net income was
$253.9 million or a diluted earnings per share of $2.10. Net income for 1997
also was adversely impacted as a result of the implementation of the Emerging
Issues Task Force Issue No. 97-13, which requires that reengineering costs
incurred in connection with software installation efforts be expensed as
incurred and that costs previously capitalized be written-off in 1997. As a
consequence, net income was adversely impacted by $5.6 million after-tax ($.05
per diluted share).
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31,
1995: In 1996, net sales were $8.72 billion, a decrease of $166 million or 1.9%
less than the $8.88 billion reported in 1995, due mainly to lower sales from
companies held for disposition. Among the three principal business segments,
Automotive sales decreased 1.5%, Defense & Electronics increased 0.8%, and Fluid
Technology increased 4.3%.
Gross margin increased to 14.2% in 1996 from 13.7% in 1995, due to
increases at the three principal business segments and a significant decrease at
the companies held for disposition.
Selling expenses were $430.0 million in 1996, compared to $427.5 million in
1995, an increase of 0.6%. However, within this total, increases of 5.3% at
Automotive and 6.1% at Fluid Technology were offset by decreases of 2.7% at
Defense & Electronics and 33.0% at the companies held for disposition. Selling
expenses in total were 4.9% of sales in 1996 and 4.8% in 1995.
Other operating expenses include gains and losses from foreign exchange
transactions, restructuring, and other charges. In 1996, other operating income
of $13.3 million consisted of $5.8 million from foreign exchange gains and $7.5
million from gains on sales of assets, compared with a loss of $1.5 million in
1995.
Interest expense decreased to $169.0 million in 1996 from $175.2 million in
1995, partially reflecting a reduction in debt levels and a restructuring of
outstanding debt. Interest income decreased to $32.7 million in 1996, from $40.0
million in 1995, generally as a result of maintaining lower cash balances by
using available cash to reduce debt.
Miscellaneous expenses of $1.1 million in 1996 were due primarily to losses
from equity investments. In 1995, miscellaneous expenses included a provision
for the expected loss on the disposal of ITT Semiconductors, portions of ITT
Community Development Corporation, and certain other non-core business units of
ITT Industries.
15
<PAGE> 17
BUSINESS SEGMENTS
Sales and operating income before corporate expenses for each of ITT
Industries' three major business segments were as follows ($ in millions):
<TABLE>
<CAPTION>
AUTOMOTIVE
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales...................................... $5,167.0 $5,492.6 $5,574.8
Operating Income........................... $ 198.0 $ 337.1 $ 343.6
Operating Income (excluding special
charges)................................. $ 311.0 $ 337.1 $ 343.6
</TABLE>
Automotive's sales decreased 5.9% in 1997, primarily due to the divestiture
of non-core businesses, unfavorable foreign exchange translation, and original
equipment manufacturers' (OEM) pricing pressures, partially offset by an
increase in North American and European vehicle production and volume gains
across several product lines, especially in Europe. Automotive's exposure to the
Latin American market (particularly Brazil) was approximately 3.0%. In 1996,
sales decreased 1.5%, primarily due to OEM pricing pressures and unfavorable
foreign exchange translation, partially offset by an increase in Western Europe
vehicle production. Sales to two customers accounted for approximately 36%, 40%,
and 42% of 1997, 1996, and 1995 sales, respectively.
Operating income, excluding special charges, declined 7.8% in 1997 as a
result of lower sales prices, unfavorable foreign exchange, and the divestiture
of non-core businesses. These declines were partially offset by volume gains and
increased vehicle production. A decline of 1.9% in 1996 operating income was a
result of lower sales prices, the costs associated with the launch of the ABS MK
20 line of products, the effect of strikes at General Motors Corporation's
facilities, restructuring costs (primarily to relocate facilities to lower cost
locations), and an increase in selling, general and administrative expenses.
<TABLE>
<CAPTION>
DEFENSE & ELECTRONICS
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales..................................... $1,668.2 $1,571.6 $1,559.3
Operating Income.......................... $ 127.2 $ 110.2 $ 96.6
</TABLE>
Sales for Defense & Electronics increased 6.1% over 1996 due to the strong
order input received in 1996 at Defense and improved conditions in the
interconnect market, especially in the Information Systems' portion of the
interconnect market. Defense & Electronics' operating income in 1997 was up
15.5% over 1996 and operating income in 1996 was up 14.1% over 1995. The
profitability improvement at Defense is due to continued manufacturing
improvements, while the Electronics business benefited from the consolidation of
production facilities, improved cost structure, and the launch of new commercial
products. Defense & Electronics' order backlog was $2.26 billion at December 31,
1997 compared with $2.30 billion at year-end 1996. Export sales in the Defense
portion increased by 13.6% over the prior year and now account for 15.4% of
Defense sales. Approximately 66%, 64%, and 65% of 1997, 1996, and 1995 Defense &
Electronics sales, respectively, were to governmental entities, of which
approximately 85%, 86%, and 90%, respectively, were to the military and space
programs of the U.S. government.
<TABLE>
<CAPTION>
FLUID TECHNOLOGY
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales..................................... $1,755.3 $1,301.3 $1,248.0
Operating Income.......................... $ 87.9 $ 113.2 $ 112.8
Operating Income (excluding special
charges)................................ $ 156.7 $ 113.2 $ 112.8
</TABLE>
Fluid Technology's 1997 sales increased 34.9% over 1996, reflecting the
acquisition of Goulds in May 1997. The sales increase was partially offset by
unfavorable foreign exchange translation and the absence of sales from the
General Controls product line which was sold in the second quarter of 1996.
During 1997 Fluid Technology reorganized into an international sales
organization and three operations groups: Industrial Pumps; Flygt; and
Commercial and Specialty Products. The 1996 sales increase of 4.3% over 1995 was
driven by global business development activities. Sales outside the U.S.,
Canada, and Western Europe grew at a rate of 27.7% in 1997 and accounted for
14.2% of Fluid Technology's sales. Fluid Technology benefited from several
growth segments in its industry, including pharmaceutical
16
<PAGE> 18
and biotechnology and aerospace controls. Weak market conditions in France and
Germany and the sale of the General Controls product line partially offset
higher sales volume at the other units.
Operating income, excluding special charges, was $156.7 million, up 38.4%
from 1996 primarily due to the inclusion of Goulds' operations since the date of
acquisition. Operating income in 1996 was relatively flat due to fast growth in
emerging markets with relatively high selling expenses, partially offset by cost
improvements in other areas. Fluid Technology also sold its General Controls
product line, which impacted 1996 profits compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations of $783.1 million, net divestiture proceeds of
$167.8 million, and net borrowings of $800.3 million were used primarily for
acquisitions of $1,103.9 million, capital expenditures of $459.7 million,
dividend payments of $71.1 million and repurchase of common stock of $67.8
million.
CASH FLOWS: Cash from continuing operating activities was $783.1 million
in 1997, an increase of $186.4 million or 31% from the $596.7 million generated
in 1996. In 1997, working capital cash requirements decreased, primarily due to
the timing of accounts payable at Automotive and a reduction in inventory at
Defense & Electronics. The increase in working capital requirements in 1996 was
the result of unusually high accounts payable from the prior year-end and the
build-up of inventories in anticipation of a strike at one of the Automotive
production facilities.
DEBT AND CREDIT FACILITIES: External debt at December 31, 1997 was $2.18
billion, compared to $1.42 billion at December 31, 1996. Debt was increased in
1997 to fund the acquisition of Goulds and Kaman Sciences. The maximum amount of
borrowing available under the Company's revolving credit agreements at December
31, 1997 was $1.5 billion.
ADDITIONS TO PLANT, PROPERTY AND EQUIPMENT: Capital expenditures during
1997 were $459.7 million, an increase of $53.4 million from $406.3 million in
1996. Of this increase, $23.6 million was expended at Goulds. Approximately 64%
of the 1997 spending was incurred in Automotive primarily related to anti-lock
braking systems, foundation brakes, brake actuation, electrical systems and
motors, and facilities in developing countries, such as the Czech Republic and
Hungary. Additions to plant, property and equipment in future periods are
expected to approximate 1997 levels and are expected to be funded through the
operating cash flows of the Company. At December 31, 1997, contractual
commitments have been made for such future expenditures totaling $241.2 million.
ACQUISITIONS: During 1997, the Company acquired Goulds, Kaman Sciences,
and several smaller businesses for which it paid a total of $1.10 billion. The
acquisitions were accounted for as purchases and, accordingly, the results of
operations of each acquired company is included in the income statement from the
date of acquisition. In 1995, the Company spent $15.5 million for a European
fluid handling business for its Automotive segment.
DISPOSITIONS: A number of non-core businesses were sold in 1997, primarily
ITT Semiconductors and several Automotive product lines. The sales of these
assets generated $167.8 million in cash. In 1996, funds of $200.4 million were
generated from the sale of a portion of ITT Community Development Corporation's
assets and the General Controls product line.
OTHER INVESTMENTS: In 1997, the Company increased its equity investments
by $3.5 million, primarily related to joint ventures in China. In 1996, the
Company's investments in joint ventures in China were increased by $16.7
million.
SHARE REPURCHASE: During 1997 and 1996, the Company purchased 2,323,814
and 522,132 shares of common stock, respectively, in connection with stock
option exercises. In 1995, 377,202 shares were purchased as part of a share
repurchase program.
MARKET RISK EXPOSURES
The Company, in the normal course of doing business, is exposed to the
risks associated with changes in interest rates, currency exchange rates, and
commodity prices. To limit the risks from such fluctuations, the Company enters
into various hedging transactions that have been authorized pursuant
17
<PAGE> 19
to the Company's policies and procedures. See Note 1, Accounting Policies, and
Note 16, Financial Instruments, in the Notes to Consolidated Financial
Statements.
To manage exposure to interest rate movements and to reduce its borrowing
costs, the Company uses interest rate swaps. Based on the Company's overall
exposure to interest rate changes, a 53 basis point change in interest rates
(which is equivalent to 10% of the Company's weighted average worldwide interest
rate at December 31, 1997) on the Company's floating rate debt obligations and
related interest rate derivatives, would have a $7.4 million effect on the
Company's pretax earnings in the year ending December 31, 1998. A similar 53
basis point change in interest rates would have a $25.2 million effect on the
fair value of the Company's fixed rate debt and related interest rate
derivatives.
The multinational operations of the Company are exposed to foreign currency
exchange rate risk. The Company utilizes foreign currency forward contracts to
hedge against adverse changes in foreign exchange rates. Such contracts
generally have durations of less than one year. The Company also utilizes
foreign currency denominated derivative instruments to selectively hedge its net
long-term investments in foreign countries. The Company's largest exposures to
foreign exchange rates primarily exist with the Deutsche Mark, Belgian Franc,
Swedish Krona, and Italian Lira against the U.S. Dollar.
A 10% adverse change in currency exchange rates for the Company's foreign
currency derivatives and other foreign currency denominated financial
instruments, held as of December 31, 1997, would have an impact of approximately
$63 million on the fair value of such instruments. This quantification of the
Company's exposure to the market risk of foreign exchange sensitive financial
instruments is necessarily limited as it does not take into account the
offsetting impact of the Company's underlying investment exposures and limited
operating transactions.
The Company purchases various non-ferrous metals for use in the production
of certain of its products. On a limited basis, Goulds used commodity based
financial instruments to hedge the cost of anticipated purchases of non-ferrous
metals. Commodity activity is not material to the Company's consolidated
financial position, results of operations, or cash flows.
INCOME TAXES
FOREIGN TAX CREDITS: As a global company, ITT Industries makes provisions
for and pays taxes in numerous jurisdictions, some of which impose income taxes
in excess of equivalent U.S. domestic rates. Credit for such taxes is generally
available under U.S. tax laws when earnings are remitted or deemed to be
remitted to the U.S. Currently, the Company is not able to fully utilize credits
for income taxes paid in foreign jurisdictions in its U.S. consolidated tax
return.
DEFERRED TAX ASSETS: The Company had a U.S. Deferred Tax Asset of $258.8
million at December 31, 1997 and $205.1 million at December 31, 1996. The
increase of $53.7 million is substantially due to the acquisition of Goulds and
the special charges taken in the third quarter of 1997. It is management's
expectation that the Company will have sufficient future taxable income from
continuing operations to utilize these deductions in future periods.
RISKS AND UNCERTAINTIES
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, Comprehensive Environmental
Response, and the Compensation and Liability Act. Management believes that the
Company is in substantial compliance with these and all other applicable
environmental requirements. Environmental compliance costs are accounted for as
normal operating expenses.
In estimating the costs of environmental investigation and remediation, the
Company 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 the Company's
share, if any, of liability for such problems, the selection of alternative
remedies, and changes in
18
<PAGE> 20
clean-up standards. When it is possible to create reasonable estimates of
liability with respect to environmental matters, ITT Industries establishes
reserves in accordance with generally accepted accounting principles. Insurance
recoveries are recorded when fixed and determinable. Although the outcome of the
Company's 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 the Company's consolidated financial position,
results of operations, or cash flows.
IMPACT OF THE YEAR 2000 ISSUE: The Year 2000 issue arises because many
computer programs were written using two digits rather than four to define the
applicable year. As a result, many computer applications that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of normal business activities and operations.
The Company has determined that it will be necessary to modify, upgrade or
replace portions of its software so that its computer applications will properly
utilize dates beyond December 31, 1999 and has developed a plan to implement
such modifications, upgrades, and replacements. The Company will utilize both
internal and external resources to implement its plan. However, there can be no
guarantee that all of such resources will be available at the times required,
nor that the costs therefore will not be different from the Company's current
estimates.
Based on its assessment of presently available information, the Company
does not expect that the cost of addressing its Year 2000 issues will have a
material adverse effect on the future financial results of the Company.
The Company also is engaged in communications with its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to such third parties' failure to address their own Year 2000 issues.
The Company's assessment of the impact of its Year 2000 issues includes an
assessment of the Company's vulnerability to such third parties, based on
information currently available to the Company from such third parties. However,
there can be no guarantee that such third parties' systems, on which the
Company's systems rely, will be converted in a timely manner.
EFFECT OF ASIAN MARKET CONDITIONS: Automotive's sales to the Asian market
amounted to approximately $58 million, or 1.1% of Automotive sales. Most of the
Asian sales were to China and Korea. Sales from the Defense & Electronics
segment to the Asian market amounted to approximately $77 million, or 4.6% of
total sales. Fluid Technology's sales to the Asian market were $104 million, or
5.9% of total sales. Compared to 1996, Fluid Technology's sales to the Asian
market were up 53.6%, due to the addition of Goulds' sales. Excluding Goulds,
sales to the Asian markets were down.
For the total Company, sales to the Asian market represented 3% of total
sales. Although the reduction in the rate of growth in sales to the Asian market
is expected to continue during 1998, it is not expected to have a material
effect on operating income.
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 calendar years.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document, including in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, that are not historical facts, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results or performance
of the Company and its businesses to be materially different from that expressed
or implied by such forward-looking statements. Such factors include, among
others, the following: general economic and business conditions; political,
social and economic conditions and local regulations in the countries in which
the Company conducts its businesses; government regulations and compliance
therewith; demographic changes; sales mix; pricing levels; changes in sales to,
or the identity of, significant customers; changes in technology; industry
capacity and production rates; competition; capacity constraints; availability
of raw materials and adequate labor; availability of liquidity sufficient to
meet the Company's needs; the ability to adapt to changes resulting from
acquisitions and
19
<PAGE> 21
divestitures and to effect cost reduction programs; the outcome of the
evaluation of the Company's Automotive businesses; and various other factors
referenced in this Management's Discussion and Analysis.
ITT Industries' Automotive business also could be particularly affected by
factors including consumer debt levels and interest rates; the cyclical nature
of the automotive industry; moderation or decline in the global automobile build
rate; work stoppages; consumer perception of the advantages of automotive
products; the regulatory environment regarding automotive safety; and
application rates of products per vehicle.
ITT Industries' Defense & Electronics business also could be particularly
affected by factors including the level of defense funding by domestic and
foreign governments; the Company's ability to receive contract awards; and the
ability to develop and market products and services for customers outside of
traditional markets.
ITT Industries' Fluid Technology business also could be particularly
affected by factors including governmental funding levels; international demand
for fluid management products; the ability to successfully expand into new
geographic markets; and the continued demand for replacement parts.
The Company assumes no obligation to update forward-looking statements to
reflect actual results or changes in or additions to the factors affecting such
forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information called for by Item 7A is provided under the caption "Market
Risk Exposures" in Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedule 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.
20
<PAGE> 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. See Index to Consolidated Financial Statements and Schedule
appearing on page F-1 for a list of the financial statements and schedule
filed as a part of this report.
2. See Exhibit Index appearing on pages II-2, II-3 and II-4 for a list
of the exhibits filed or incorporated herein as a part of this report.
(b) There were no reports on Form 8-K filed by ITT Industries during the
last quarter of the period covered by this report.
21
<PAGE> 23
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, 1997......................................... F-4
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997................................... F-6
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 1997............... F-7
Notes to Consolidated Financial Statements.................. F-8
Business Segment Information................................ F-23
Geographical Information.................................... F-24
Export Sales................................................ F-25
Quarterly Results for 1997 and 1996......................... F-26
Valuation and Qualifying Accounts........................... S-1
</TABLE>
F-1
<PAGE> 24
ITT INDUSTRIES, INC. AND SUBSIDIARIES
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 this document. 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 herein is consistent with
the consolidated financial statements.
ITT Industries' consolidated financial statements are audited by Arthur
Andersen LLP, independent public accountants, whose appointment is ratified by
the shareholders. Management has made ITT Industries' financial records and
related data available to Arthur Andersen LLP, and believes that the
representations made to the independent public accountants are valid and
complete.
ITT Industries' system of internal controls is a major element in
management's responsibility to assure that the consolidated financial statements
present fairly the Company's financial condition. The system includes both
accounting controls and the internal auditing program, which are designed to
provide reasonable assurance that the Company's assets are safeguarded, that
transactions are properly recorded and executed in accordance with management's
authorization, and that fraudulent financial reporting is prevented or detected.
ITT Industries' internal controls provide for the careful selection and
training of personnel and for appropriate divisions of responsibility. The
controls are documented in written codes of conduct, policies, and procedures
that are communicated to ITT Industries' employees. Management continually
monitors the system of internal controls for compliance. In addition, based upon
management's assessment of risk, both operational and financial, special reviews
are performed by contracted auditors to periodically test the effectiveness of
selected controls. The independent public accountants also evaluate internal
controls and perform tests of procedures and accounting records to enable them
to express their opinion on ITT Industries' consolidated financial statements.
They also make recommendations for improving internal controls, policies, and
practices. Management takes appropriate action in response to each
recommendation.
The Audit Committee of the Board of Directors, composed of non-employee
directors, meets periodically with management and with the independent public
accountants and contracted auditors to evaluate the effectiveness of the work
performed by them in discharging their respective responsibilities.
TRAVIS ENGEN
--------------------------------------
Travis Engen
Chairman, President and
Chief Executive
HEIDI KUNZ
--------------------------------------
Heidi Kunz
Senior Vice President and
Chief Financial Officer
F-2
<PAGE> 25
ITT INDUSTRIES, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ITT Industries, Inc.:
We have audited the consolidated financial statements of ITT Industries,
Inc. (an Indiana corporation) and subsidiaries as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997, 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1997,
the Company changed its method of accounting for reengineering costs incurred in
connection with the development and installation of software for internal use in
accordance with the Emerging Issues Task Force Issue No. 97-13.
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 26, 1998
F-3
<PAGE> 26
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................. $8,777.1 $8,718.1 $8,884.2
-------- -------- --------
Cost of sales............................................. 6,916.4 6,948.4 7,155.0
Selling, general and administrative expenses.............. 805.3 739.4 767.6
Research, development, and engineering expenses........... 496.9 535.2 513.9
Special charges........................................... 239.0 -- --
Other operating expenses (income)......................... 32.9 (13.3) 1.5
-------- -------- --------
Total costs and expenses.................................. 8,490.5 8,209.7 8,438.0
-------- -------- --------
Operating income.......................................... 286.6 508.4 446.2
Interest expense.......................................... (133.2) (169.0) (175.2)
Interest income........................................... 17.5 32.7 40.0
Miscellaneous income (expenses)........................... 15.5 (1.1) (240.1)
-------- -------- --------
Income from continuing operations before income tax
expense................................................. 186.4 371.0 70.9
Income tax expense........................................ (72.7) (148.4) (50.2)
-------- -------- --------
Income from continuing operations......................... 113.7 222.6 20.7
Discontinued operations:
Operating income, net of tax of $297.2.................. -- -- 590.8
Gain on sale of ITT Financial, net of tax of $263.9..... -- -- 403.4
Extraordinary items, net of tax benefit of $165.3......... -- -- (307.0)
Cumulative effect of accounting change, net of tax benefit
of $3.6................................................. (5.6) -- --
-------- -------- --------
Net income................................................ $ 108.1 $ 222.6 $ 707.9
======== ======== ========
EARNINGS (LOSS) PER SHARE
Income from continuing operations
Basic................................................... $ .96 $ 1.89 $ .03
Diluted................................................. $ .94 $ 1.85 $ .03
Discontinued operations
Basic................................................... -- -- 8.99
Diluted................................................. -- -- 8.90
Extraordinary items
Basic................................................... -- -- (2.78)
Diluted................................................. -- -- (2.75)
Cumulative effect of accounting change
Basic................................................... (.05) -- --
Diluted................................................. (.05) -- --
Net income
Basic................................................... $ .91 $ 1.89 $ 6.24
Diluted................................................. $ .89 $ 1.85 $ 6.18
AVERAGE COMMON SHARES -- BASIC............................ 118.4 117.9 110.6
AVERAGE COMMON SHARES -- DILUTED.......................... 121.0 120.4 111.6
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above statements.
F-4
<PAGE> 27
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 192.2 $ 121.9
Receivables, net.......................................... 1,252.4 1,189.8
Inventories, net.......................................... 812.8 856.9
Other current assets...................................... 120.0 120.5
-------- --------
Total current assets.............................. 2,377.4 2,289.1
Plant, property, and equipment, net......................... 2,024.3 2,166.7
Deferred U.S. income taxes.................................. 258.8 205.1
Goodwill, net............................................... 1,116.5 349.8
Other assets................................................ 443.5 480.5
-------- --------
$6,220.5 $5,491.2
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Commercial paper.......................................... $ 698.4 $ --
Accounts payable.......................................... 848.3 731.8
Accrued expenses.......................................... 884.3 874.2
Accrued taxes............................................. 161.5 96.8
Notes payable and current maturities of long-term debt.... 952.4 835.6
-------- --------
Total current liabilities......................... 3,544.9 2,538.4
Pension benefits............................................ 567.8 780.3
Postretirement benefits other than pensions................. 370.7 346.4
Long-term debt.............................................. 532.2 583.2
Deferred foreign, state and local income taxes.............. 31.6 109.5
Other liabilities........................................... 351.0 334.2
-------- --------
5,398.2 4,692.0
Shareholders' Equity:
Common stock: Authorized -- 200,000,000 shares, $1 par
value per share Outstanding -- 118,445,827 shares and
118,436,579 shares..................................... 118.4 118.4
Capital surplus........................................... 397.0 418.2
Unrealized gain on investment securities, net of tax...... 1.6 --
Cumulative translation adjustments........................ 116.8 111.2
Retained earnings......................................... 188.5 151.4
-------- --------
822.3 799.2
-------- --------
$6,220.5 $5,491.2
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above balance sheets.
F-5
<PAGE> 28
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- ------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 108.1 $ 222.6 $ 707.9
Discontinued operations:
Operating income..................................... -- -- (590.8)
Gain on sale of ITT Financial........................ -- -- (403.4)
Extraordinary items.................................... -- -- 307.0
Cumulative effect of accounting change................. 5.6 -- --
--------- ------- ----------
Income from continuing operations...................... 113.7 222.6 20.7
Adjustments to net income from continuing operations:
Special charges...................................... 239.0 -- --
Depreciation......................................... 377.7 399.4 390.3
Amortization......................................... 58.7 33.6 32.9
Reserves for divestment.............................. -- -- 244.9
Change in receivables, inventories, accounts payable,
and accrued expenses................................. 129.8 (136.5) (6.0)
Change in accrued and deferred taxes................... (69.4) 78.1 30.6
Other, net............................................. (66.4) (.5) (94.4)
--------- ------- ----------
Cash from continuing operations........................ 783.1 596.7 619.0
Cash (used for) discontinued operations................ -- (123.8) (411.0)
--------- ------- ----------
Cash from operating activities....................... 783.1 472.9 208.0
--------- ------- ----------
INVESTING ACTIVITIES
Additions to plant, property, and equipment............ (459.7) (406.3) (449.6)
Acquisitions........................................... (1,103.9) -- (15.5)
Proceeds from sale of assets........................... 167.8 200.4 12,675.5
Other, net............................................. (3.5) (16.7) (2.3)
--------- ------- ----------
Cash from (used for) investing activities............ (1,399.3) (222.6) 12,208.1
--------- ------- ----------
FINANCING ACTIVITIES
Short-term debt, net................................... 1,058.6 (111.4) (803.0)
Long-term debt repaid.................................. (259.7) (66.5) (342.0)
Long-term debt issued.................................. 1.4 1.1 250.0
Repayment of ITT Financial obligations................. -- -- (11,640.0)
Repurchase of common stock............................. (67.8) (11.4) (35.2)
Dividends paid......................................... (71.1) (53.4) (193.3)
Other, net............................................. 36.0 31.1 96.8
--------- ------- ----------
Cash from (used for) financing activities............ 697.4 (210.5) (12,666.7)
--------- ------- ----------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS..... (10.9) (12.1) 22.7
--------- ------- ----------
Increase (decrease) in cash and cash equivalents....... 70.3 27.7 (227.9)
Cash and cash equivalents -- beginning of year......... 121.9 94.2 322.1
--------- ------- ----------
CASH AND CASH EQUIVALENTS -- END OF YEAR............... $ 192.2 $ 121.9 $ 94.2
========= ======= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................. $ 111.9 $ 158.7 $ 147.0
Income taxes......................................... $ 118.8 $ 37.1 $ 314.0
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of the above statements
F-6
<PAGE> 29
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN MILLIONS, EXCEPT FOR SHARES AND PER SHARE AMOUNTS
<TABLE>
<CAPTION>
SHARES OUTSTANDING DOLLARS
--------------------------------------- ---------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
Beginning balance........................... -- -- 9,302,429 $ -- $ -- $ 655.0
Redemption of ESOP Series preferred stock... -- -- (120,652) -- -- (9.0)
Conversion of ESOP Series preferred stock... -- -- (8,636,231) -- -- (644.2)
Stock conversions........................... -- -- (522,647) -- -- (1.8)
Stock redemption............................ -- -- (22,899) -- -- --
----------- ----------- ----------- ------ ------ ---------
Ending Balance.............................. -- -- -- $ -- $ -- $ --
----------- ----------- ----------- ------ ------ ---------
COMMON STOCK
Beginning balance........................... 118,436,579 117,068,833 105,672,252 $118.4 $117.1 $ 105.7
Conversion of ESOP Series preferred stock... -- -- 9,660,766 -- -- 9.7
Stock conversions........................... -- -- 661,671 -- -- .7
Stock incentive plans....................... 2,333,062 1,889,878 1,451,346 2.3 1.8 1.4
Repurchases................................. (2,323,814) (522,132) (377,202) (2.3) (.5) (.4)
----------- ----------- ----------- ------ ------ ---------
Ending Balance.............................. 118,445,827 118,436,579 117,068,833 $118.4 $118.4 $ 117.1
----------- ----------- ----------- ------ ------ ---------
CAPITAL SURPLUS
Beginning balance.................................................................... $418.2 $398.5 $ --
Redemption of ESOP Series preferred stock............................................ -- -- (10.2)
Conversion of ESOP Series preferred stock............................................ -- -- 634.5
Stock conversions.................................................................... -- -- 1.1
Stock redemption..................................................................... -- -- (1.9)
Stock incentive plans................................................................ 43.3 31.7 123.9
Repurchases.......................................................................... (64.5) (12.0) (34.8)
Distribution of The Hartford and ITT Corporation(a).................................. -- -- (314.1)
------ ------ ---------
Ending Balance....................................................................... $397.0 $418.2 $ 398.5
------ ------ ---------
UNREALIZED GAIN ON INVESTMENT SECURITIES, NET
OF TAX
Beginning balance.................................................................... $ -- $ -- $ --
Unrealized gain...................................................................... 1.6 -- --
------ ------ ---------
Ending Balance....................................................................... $ 1.6 $ -- $ --
------ ------ ---------
CUMULATIVE TRANSLATION ADJUSTMENTS
Beginning balance.................................................................... $111.2 $111.1 $ (112.7)
Translation of foreign currency financial statements................................. 16.9 (11.7) 30.8
Hedges of net foreign investments.................................................... 13.9 11.8 (1.0)
Sale of net foreign investments...................................................... (25.2) -- --
Distribution of The Hartford and ITT Corporation..................................... -- -- 194.0
------ ------ ---------
Ending Balance....................................................................... $116.8 $111.2 $ 111.1
------ ------ ---------
RETAINED EARNINGS
Beginning balance.................................................................... $151.4 $ -- $ 6,749.3
Net income........................................................................... 108.1 222.6 707.9
Dividends declared:
Cumulative preferred stock, net of tax benefit....................................... -- -- (14.6)
Common stock -- $.60, $.60 and $.99 per share........................................ (71.0) (71.2) (104.6)
Common stock of The Hartford and ITT Corporation..................................... -- -- (7,338.0)
------ ------ ---------
Ending Balance....................................................................... $188.5 $151.4 $ --
------ ------ ---------
TOTAL SHAREHOLDERS' EQUITY............................................................. $822.3 $799.2 $ 626.7
====== ====== =========
</TABLE>
- ---------------
(a) Dividend of The 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> 30
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED
NOTE 1. ACCOUNTING POLICIES
CONSOLIDATION PRINCIPLES: The consolidated financial statements are
prepared in accordance with generally accepted accounting principles and include
the accounts of all majority-owned subsidiaries. All significant intercompany
transactions have been eliminated.
REVENUE RECOGNITION: ITT Industries, Inc. (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 as incurred.
RESEARCH, DEVELOPMENT, AND ENGINEERING: Significant costs are incurred
each year in connection with research, development, and engineering (RD&E)
programs that are expected to contribute to future earnings. Such costs are
charged to income as incurred, except to the extent recoverable under existing
contracts. Approximately 71.5%, 65.6%, and 58.7% of total RD&E costs was
expended pursuant to customer contracts for each of the three years ended
December 31, 1997.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
INVENTORIES: Most inventories are valued at the lower of cost (first-in,
first-out) or market. A full absorption procedure is employed using standard
cost techniques that are customarily reviewed and adjusted annually. Potential
losses from obsolete and slow-moving inventories are provided for when
identified. Goulds' domestic inventories are valued using the last-in, first-out
(LIFO) method and represent 16% of total 1997 inventories. There would not have
been a material difference in the value of inventories if the FIFO method had
been used by the Company to value all inventories.
ASSET IMPAIRMENT LOSSES: The Company records impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets may be impaired and the undiscounted net cash flows estimated to be
generated by those assets are less than their carrying amounts.
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 periods up to 40 years. Accumulated
amortization was $67.1 and $43.2 at December 31, 1997 and 1996, respectively.
FOREIGN CURRENCY TRANSLATION: Balance sheet accounts are translated at the
exchange rate in effect at each year-end and income accounts are translated at
the average rates of exchange prevailing during the year. The national
currencies of the foreign companies are generally the functional currencies.
Gains (losses) from foreign currency transactions are reported currently in
other operating expenses (income) and were $9.5, $5.8, and $(4.5) in 1997, 1996,
and 1995, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company uses a variety of derivative
financial instruments, including interest rate swaps and foreign currency
forward contracts and/or swaps as a means of hedging exposure to interest rate
and foreign currency risks. Changes in the spot rate of instruments designated
as hedges of the net investment in a foreign subsidiary are reflected in the
cumulative translation adjustment component of shareholders' equity. The Company
and its subsidiaries are end-users and do not utilize these instruments for
speculative purposes. The Company has rigorous standards regarding the financial
stability and credit standing of its major counterparties.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying
F-8
<PAGE> 31
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principal or notional amounts. Net payments are recognized as an adjustment to
interest. 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.
ENVIRONMENTAL REMEDIATION COSTS: Accruals for environmental matters are
recorded on a site by site basis when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated, based on
current law and existing technologies. The Company's estimated liability is
reduced to reflect the anticipated participation of other potentially
responsible parties in those instances where it is probable that such parties
are legally responsible and financially capable of paying their respective
shares of the relevant costs. These accruals are adjusted periodically as
assessment and remediation efforts progress or as additional technical or legal
information becomes available. Actual costs to be incurred at identified sites
in future periods may vary from the estimates, given inherent uncertainties in
evaluating environmental exposures. Accruals for environmental liabilities are
generally included in the balance sheet as "Other liabilities" at undiscounted
amounts and exclude claims for recoveries from insurance companies or other
third parties. Recoveries from insurance companies or other third parties are
recorded as "Other assets" when it is probable that a claim will be realized.
EARNINGS PER SHARE: Diluted earnings per share is based on the weighted
average number of common shares outstanding and potentially dilutive common
shares, which include stock options. Diluted earnings per share, in 1995, also
reflects the conversion of convertible preferred stock, including the ESOP
Series. Net income applicable to diluted earnings per share consists of the
reported net income adjusted in 1995 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.
Basic earnings per share is based on the weighted average number of common
shares outstanding. Net income applicable to basic earnings per share consists
of reported net income adjusted, in 1995, for dividend requirements on preferred
stock, net of the related tax benefits.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS: Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform with the current year
presentation.
NOTE 2. CHANGES IN ACCOUNTING POLICIES
In December 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share. Under the provisions of SFAS No.
128, the Company replaced primary and fully diluted earnings per share with
basic and diluted earnings per share, respectively. All prior period earnings
per share data have been restated to conform with the provisions of SFAS No.
128.
In December 1997, the Company changed its method of accounting for
reengineering costs incurred in connection with the development and installation
of software for internal use in accordance with Emerging Issues Task Force
(EITF) Issue No. 97-13. EITF Issue No. 97-13 requires that reengineering costs
which previously could be deferred and amortized be expensed as incurred and
costs previously capitalized be written-off in the current year.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income (the all-inclusive income concept). This
statement is effective for fiscal years beginning after December 15, 1997, and
requires reclassification of financial statements for earlier periods for
comparative purposes. Under the all-inclusive income concept, all revenues,
expenses, gains and losses recognized during the period are included in
comprehensive income, regardless of whether they are considered to be results of
operations of the period. The adoption of SFAS No. 130 will have no impact on
F-9
<PAGE> 32
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ITT Industries' financial results. With the exception of reclassification
adjustments, the Company will display the same information, but in a different
format.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 requires that financial information be reported on components of an
enterprise, about which separate financial information is available, that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. This statement is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The adoption of SFAS No. 131 will have no impact on ITT Industries'
financial results. The Company will display the same type of segment
information, but in a different format.
NOTE 3. EARNINGS PER SHARE
A reconciliation of the data used in the calculation of basic and diluted
earnings per share computations for income from continuing operations is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income from continuing operations................ $113.7 $222.6 $ 20.7
Less: Preferred stock dividends.................. -- -- (17.8)
------ ------ ------
Income from continuing operations available to
common shareholders........................... $113.7 $222.6 $ 2.9
====== ====== ======
Average common shares outstanding................ 118.4 117.9 110.6
====== ====== ======
Basic earnings per share......................... $ .96 $ 1.89 $ .03
====== ====== ======
DILUTED EARNINGS PER SHARE
Income from continuing operations available to
common shareholders........................... $113.7 $222.6 $ 2.9
====== ====== ======
Average common shares outstanding................ 118.4 117.9 110.6
Add: Stock options............................... 2.6(1) 2.5(1) 1.0
------ ------ ------
Average common shares outstanding on a diluted
basis......................................... 121.0 120.4 111.6
====== ====== ======
Diluted earnings per share....................... $ .94 $ 1.85 $ .03
====== ====== ======
</TABLE>
- ---------------
(1) Options to purchase 205,900 and 1,924,300 shares of common stock at $31.94
and $25.38 per share were outstanding during 1997 and 1996, respectively,
but were not included in the computation of diluted EPS because the options'
exercise price was greater than the annual average market price of the
common shares. These options, which expire in 2007 and 2006, were
outstanding at the end of the respective periods.
NOTE 4. ACQUISITIONS
On May 23, 1997, the Company acquired Goulds Pumps, Incorporated (Goulds)
for a purchase price of $865.2. Complementing the Company's existing pump
businesses, Goulds has been a leader in the manufacture and marketing of high
quality pumps for residential, chemical, sewage and drainage, pulp and paper,
agricultural, mining, and a variety of other applications. The acquisition was
funded with short-term borrowings and was accounted for using the purchase
method. Accordingly, the purchase price was allocated to the assets acquired and
the liabilities assumed, adjusted from earlier estimates based on the completion
of the evaluation of the fair values of Goulds' assets and liabilities at the
date of
F-10
<PAGE> 33
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition. The excess of the purchase price, plus assumed liabilities of $442,
over the fair value of assets acquired is $688 and has been recorded as goodwill
which is being amortized over a period of 40 years. The operating results of
Goulds have been included in the consolidated income statements from the date of
acquisition. The following unaudited pro forma financial information presents
results as if the acquisition had occurred at the beginning of the respective
periods:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Net Sales........................................... $9,079.3 $9,492.5
Net Income.......................................... 97.0 204.8
Earnings Per Share -- Basic......................... .82 1.74
Earnings Per Share -- Diluted....................... .80 1.70
</TABLE>
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional depreciation expense as a
result of a step-up in the basis of fixed assets, additional amortization
expense as a result of goodwill arising from the purchase, and increased
interest expense on acquisition debt. The pro forma results are not necessarily
indicative of the results of operations which actually would have resulted had
the purchase been in effect at the beginning of the respective periods or of
future results.
On December 30, 1997, the Company acquired Kaman Sciences Corporation
(renamed ITT Systems & Sciences Corporation) for a purchase price of
approximately $135. ITT Systems & Sciences Corporation supplies the government
with high technology services in information systems. The acquisition was funded
with short-term borrowings and was accounted for using the purchase method. The
purchase price allocations have been prepared on a preliminary basis and changes
are expected as evaluations of assets and liabilities are completed and as
additional information becomes available. The purchase price, plus assumed
liabilities of $23, exceeded the fair value of assets acquired by approximately
$111 and has been recorded as goodwill.
During 1997, the Company also acquired several other businesses at a net
cost of $103.7. The results of operations of these businesses and of ITT Systems
& Sciences Corporation were not material in relation to the Company's
consolidated results of operations.
NOTE 5. SPECIAL CHARGES
During the third quarter of 1997, the Company took several actions to
strengthen its operating performance and improve operating efficiencies. As a
result, ITT Industries has recognized a $239.0 pretax charge to operating income
($145.8 after taxes or $1.21 per diluted share). A restructuring charge of
$114.4 was recognized at the ITT Automotive and ITT Fluid Technologies units.
These restructuring charges relate primarily to the write-down of assets and to
severance costs associated with the closure and consolidation of facilities and
related workforce reductions. An additional charge of $124.6 was recognized by
the Company principally for estimated losses on the planned sales of certain
non-core businesses including the sale of the ITT Semiconductors business which
consummated in October 1997, and the sale of the Automotive Body Systems Europe
which was consummated in December 1997. On a pretax basis these charges have a
cash impact of approximately $73, most of which will be incurred in 1998. Upon
full implementation in 1999, this restructuring of Automotive would result in
annual pretax savings of approximately $115 and cash savings of approximately
$104.
NOTE 6. DISPOSITIONS AND DISCONTINUED OPERATIONS
During 1997, the Company divested several non-core businesses. Included in
these divestments were the sale of Automotive's North American aftermarket and
seats operations as well as the Defense & Electronics' industrial lighting and
plastics components businesses. Total proceeds from the sales of these
businesses were $133.7 with a pretax gain of $14.2. The Company also disposed of
its Automotive
F-11
<PAGE> 34
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Body Systems Europe and Semiconductors businesses. The losses on the disposal of
these businesses were included as part of the special charges taken in the third
quarter.
In 1996, the Company disposed of several non-core businesses including the
General Controls product line, a portion of ITT Community Development
Corporation, as well as certain minor Automotive product lines. Proceeds from
these sales were $137.7 with a pretax gain of $14.6.
In December 1995, ITT Corporation made a distribution (the Distribution) to
its shareholders consisting of all the shares of common stock of its subsidiary
ITT Destinations, Inc., renamed ITT Corporation, which held interest in the
hospitality, entertainment, and information services businesses, and all the
shares of common stock of ITT Hartford Group, Inc., now known as Hartford
Financial Services Group, Inc. (The Hartford), which held interests in the
insurance business and subsequently merged into ITT Industries, Inc. For
purposes of these consolidated financial statements, all references to ITT
Corporation and The 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, The Hartford, and other previously
discontinued operations of the Company are reported as Discontinued Operations.
In 1995, gross proceeds totaling $12.7 billion were realized from the sale
of the businesses comprising ITT Financial. Proceeds from these transactions
were used primarily to repay ITT Financial debt. The Company recognized an after
tax gain of $403.4 ($667.3 pretax or $3.61 per diluted share) in the second
quarter of 1995, including a provision for the remaining asset sales and
closedown costs of ITT Financial.
Summarized 1995 income statement data for ITT Corporation, The Hartford,
and ITT Financial is as follows:
<TABLE>
<CAPTION>
ITT CORPORATION THE HARTFORD ITT FINANCIAL
--------------- ------------ -------------
<S> <C> <C> <C>
Revenues.......................... $6,154.7 $11,726.7 $476.3
Operating income.................. 602.0 692.7 79.8
Income before cumulative effect of
accounting changes.............. 154.8 535.2 49.0
Gain on sale, net of tax.......... -- -- 403.4
</TABLE>
NOTE 7. MISCELLANEOUS INCOME (EXPENSES)
Miscellaneous income (expenses) includes the following:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -------
<S> <C> <C> <C>
Provision for loss on disposition of
businesses.................................... $ -- $ -- $(235.5)
Other income (expense).......................... 1.3 (1.1) (4.6)
Gain on disposition of businesses............... 14.2 -- --
----- ----- -------
$15.5 $(1.1) $(240.1)
===== ===== =======
</TABLE>
F-12
<PAGE> 35
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. INCOME TAXES
Income tax data from continuing operations is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Pretax income (loss)
U.S.......................................... $ 86.0 $141.2 $(81.5)
Foreign...................................... 100.4 229.8 152.4
------ ------ ------
$186.4 $371.0 $ 70.9
====== ====== ======
Provision (benefit) for income tax
Current U.S. federal......................... $ 78.5 $ 55.8 $ 9.3
State and local.............................. 6.6 5.4 7.9
Foreign...................................... 82.6 88.9 37.5
------ ------ ------
167.7 150.1 54.7
====== ====== ======
Deferred
U.S. federal................................. (50.2) (2.1) (28.0)
State and local.............................. (0.8) (0.3) 0.1
Foreign...................................... (44.0) 0.7 23.4
------ ------ ------
(95.0) (1.7) (4.5)
------ ------ ------
Total income tax expense....................... $ 72.7 $148.4 $ 50.2
====== ====== ======
</TABLE>
A reconciliation of the tax provision at the U.S. statutory rate to the
effective income tax expense rate as reported is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax provision at U.S. statutory rate.................. 35.0% 35.0% 35.0%
Foreign tax rate differential......................... 1.8 2.5 3.5
Taxes on repatriation of foreign earnings............. 0.5 2.2 26.5
State income taxes, net of federal benefit............ 2.0 0.9 7.3
Goodwill.............................................. 2.2 0.2 1.1
Research & expenditures credit........................ (1.9) (0.9) --
Other................................................. (0.6) 0.1 (2.6)
---- ---- ----
Effective income tax expense rate..................... 39.0% 40.0% 70.8%
==== ==== ====
</TABLE>
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.
Deferred tax assets (liabilities), for which no valuation allowances have
been provided, include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1997 1996
------------------ ------------------
U.S. FEDERAL U.S. FOREIGN
FEDERAL & OTHER FEDERAL & OTHER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Employee benefits................... $139.8 $ 10.2 $120.9 $ 31.4
Accelerated depreciation............ (34.4) (85.9) (41.7) (153.7)
Reserves............................ 125.3 16.5 87.0 16.3
Long-term contracts................. 11.9 -- 14.9 --
Uniform capitalization.............. 16.0 -- 12.6 --
Loss carryforward................... -- 39.5 -- 2.5
Other............................... 0.2 (11.9) 11.4 (6.0)
------ ------ ------ -------
$258.8 $(31.6) $205.1 $(109.5)
====== ====== ====== =======
</TABLE>
F-13
<PAGE> 36
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No provision was made for U.S. taxes payable on accumulated undistributed
foreign earnings of approximately $772.5 since these amounts are permanently
reinvested.
Shareholders' equity at December 31, 1997 and 1996 reflects tax benefits
related to the exercise of stock options of approximately $7.9 and $5.7,
respectively.
NOTE 9. RECEIVABLES, NET
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Trade................................................. $1,265.8 $1,194.3
Accrued for completed work............................ 26.8 32.5
Less -- reserves...................................... (40.2) (37.0)
-------- --------
$1,252.4 $1,189.8
======== ========
</TABLE>
NOTE 10. INVENTORIES, NET
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Finished goods......................................... $ 352.4 $ 401.6
Work in process........................................ 438.8 434.7
Raw materials.......................................... 340.6 301.2
Less -- reserves....................................... (85.0) (81.6)
-- progress payments............................. (234.0) (199.0)
------- -------
$ 812.8 $ 856.9
======= =======
</TABLE>
NOTE 11. OTHER CURRENT ASSETS
At December 31, 1997 and 1996, other current assets consist primarily of
advance payments on contracts and prepaid expenses.
NOTE 12. PLANT, PROPERTY AND EQUIPMENT, NET
Plant, property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Land and improvements................................. $ 110.5 $ 101.7
Buildings and improvements............................ 688.7 807.7
Machinery and equipment............................... 2,932.6 3,469.1
Construction work in progress......................... 303.2 244.1
Other................................................. 495.4 469.2
-------- --------
4,530.4 5,091.8
Less accumulated depreciation and amortization........ (2,506.1) (2,925.1)
-------- --------
$2,024.3 $2,166.7
======== ========
</TABLE>
F-14
<PAGE> 37
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. OTHER ASSETS
At December 31, 1997 and 1996, other assets consist primarily of prepaid
pension and employee benefit plan costs, equity investments, and expected
recoveries from third parties in relation to environmental and other claims.
NOTE 14. LEASES AND RENTALS
Rental expenses under operating leases were $108.8, $92.8 and $86.9 for
1997, 1996 and 1995, respectively. Future minimum operating lease payments under
long-term operating leases as of December 31, 1997 are shown below. Future
commitments under capital leases are not significant.
<TABLE>
<S> <C>
1998........................................................ $115.3
1999........................................................ 90.2
2000........................................................ 73.4
2001........................................................ 57.2
2002........................................................ 39.5
2003 and thereafter......................................... 97.2
------
Total minimum lease payments................................ $472.8
======
</TABLE>
NOTE 15. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
--------- --------
<S> <C> <C>
Commercial paper..................................... $ 698.4 $ --
Bank loans and other short-term...................... 904.9 488.1
Long-term............................................ 575.5 930.7
Capital lease obligations............................ 4.2 --
--------- --------
2,183.0 1,418.8
Less -- current maturities........................... (1,650.8) (835.6)
--------- --------
$ 532.2 $ 583.2
========= ========
</TABLE>
The weighted average interest rate for bank loans and other short-term
borrowings was 4.98% and 3.69% at December 31, 1997 and 1996, respectively. The
fair value of the Company's commercial paper and bank loans and other short-term
loans approximates carrying value. The estimated fair value of long-term debt at
December 31, 1997 and 1996 was $654.7 and $989.9 million, respectively, based on
discounted cash flows using the Company's incremental borrowing rates for
similar maturities.
The Company maintains a revolving credit agreement which expires in
November, 2000 with sixty-one domestic and foreign banks providing aggregate
commitments of $1.5 billion. These commitments, which were unused at December
31, 1997. The interest rate for borrowings under these agreements is generally
based on the London Interbank Offered Rate (LIBOR), plus a spread which reflects
the Company's debt rating. The provisions of these agreements require the
Company to maintain certain financial ratios and restrict indebtedness.
Commitment fees on these revolving credit agreements range from .060% to .150%
of the total commitment, based on the Company's current debt ratings.
F-15
<PAGE> 38
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt maturities and interest rate percentages as of December 31,
1997 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>
1998................................. $ 6.4 $ 1.0 $ 6.6 $ 31.1 $ 2.4 $ -- $ 47.5
1999................................. 2.0 9.5 9.0 0.1 -- 25.8 46.4
2000................................. 1.6 0.3 6.9 0.1 -- -- 8.9
2001................................. 1.0 58.9 1.6 11.6 15.9 -- 89.0
2002................................. 1.0 0.2 1.3 0.2 -- -- 2.7
Thereafter........................... 46.9 33.1 285.0 36.1 31.0 -- 432.1
----- ------ ------ ------ ----- ------ ------
Total -- 1997........................ $58.9 $103.0 $310.4 $ 79.2 $49.3 $ 25.8 $626.6
===== ====== ====== ====== ===== ====== ======
Total -- 1996........................ $10.6 $192.9 $443.8 $119.0 $76.5 $139.3 $982.1
===== ====== ====== ====== ===== ====== ======
</TABLE>
The above balances as of December 31, 1997 and 1996 include amortizable
debt discounts of $46.9 and $51.4, respectively. Assets pledged to secure
indebtedness (including mortgage loans) amount to approximately $13.6 as of
December 31, 1997.
EARLY EXTINGUISHMENT OF DEBT: In 1995, the Company announced the
completion of a tender offer for an aggregate of $4.1 billion of its debt
securities, with $3.4 billion, or 82% of the aggregate principal amount, having
been tendered. The tender offer was financed with the proceeds of commercial
paper borrowings of approximately $3.7 billion. The tender offer resulted in the
Company paying a tender premium of $307.0 after tax ($472.3 pretax) or $2.75 per
diluted share in the third quarter of 1995. This charge was recorded as an
extraordinary loss on the early extinguishment of debt.
NOTE 16. FINANCIAL INSTRUMENTS
The Company uses a variety of derivative financial instruments, including
interest rate swaps, foreign currency forward contracts and/or swaps, and, on a
limited basis, commodity collar contracts, as a means of hedging exposure to
interest rate, foreign currency, and commodity price risks.
The Company's credit risk associated with these derivative contracts is
generally limited to the unrealized gain on those contracts with a positive fair
market value, reduced by the effects of master netting agreements, should any
counterparty fail to perform as contracted. The counterparties to the Company's
derivative contracts consist of a number of major international financial
institutions. The Company continually monitors the credit quality of these
financial institutions and does not expect non-performance by any counterparty.
FINANCING STRATEGIES AND INTEREST RATE RISK MANAGEMENT: ITT Industries
maintains a global debt portfolio to fund its operations. The Company and its
subsidiaries primarily use interest rate and cross currency interest rate swaps
to manage the Company's debt portfolio, the related financing costs, and
interest rate structure.
At December 31, 1997 and 1996, the Company had interest rate swaps
outstanding with notional values totaling 150 million and 410 million Deutsche
Marks, respectively. These swaps were designed to manage the interest exposure
of the Company's short-term debt. During 1997, the Company effectively
terminated interest rate swaps with notional values totaling 260 million
Deutsche Marks and original maturities ranging from 1998 to 2000 by entering
into offsetting swaps with identical terms and maturities. These swaps and
related counterswaps were accounted for at fair market value at the time of
termination. Related gains and losses were recorded in income because such swaps
no longer were deemed effective as hedges of the Company's underlying Deutsche
Mark debt. The outstanding 150 million Deutsche Mark interest rate swap
agreements maturing in the year 2000 require the Company to pay interest at
fixed rates averaging 6.96% and receive interest at floating rates based on
LIBOR which averaged 3.75% on December 31, 1997.
F-16
<PAGE> 39
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997 and 1996, the Company held cross currency interest
rate swap agreements, with notional values totaling approximately $212 and $506,
respectively. These swaps have maturities ranging from one year to twenty-four
years, and effectively convert specific long-term U.S. dollar-denominated fixed
rate borrowings with an average interest rate of 8.8% and 8.9%, respectively, to
equivalent Deutsche Mark-denominated variable rate debt (based on LIBOR) with an
average interest rate of 6.1% and 6.2%, respectively.
FOREIGN CURRENCY RISK MANAGEMENT: The Company and its subsidiaries have
significant foreign operations and conduct business in various foreign
currencies. The Company and its subsidiaries may periodically hedge net
investments in currencies other than their own functional currency and non-
functional currency cash flows and obligations, including intercompany
financings. The Company regularly monitors its foreign currency exposures and
ensures that hedge contract amounts do not exceed the amounts of the underlying
exposures.
At December 31, 1997, ITT Industries held foreign currency forward and swap
contracts with notional amounts totaling approximately $560 to hedge foreign
currency exposures. The Company's most significant foreign currency exposures
are in Deutsche Marks, Belgian Francs, Swedish Krona and Italian Lira. These
contracts all have maturities prior to May 31, 1998.
COMMODITY PRICE RISK MANAGEMENT: The Company's recently acquired
subsidiary, Goulds, has utilized commodity derivatives, on a limited basis, to
hedge its anticipated purchases of non-ferrous metals used in the production of
its products. As of December 31, 1997, the Company held two zero cost collars
with a total notional amount of $3.5, with a weighted average ceiling of $2,500
(in whole dollars) per metric ton and with a weighted average floor of $2,034
(in whole dollars) per metric ton. These contracts mature in 1998. At December
31, 1996, the Company did not have any commodity derivatives.
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS: The fair values of the
Company's derivative financial instruments are as follows:
<TABLE>
<CAPTION>
(PAYABLE)/RECEIVABLE
----------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Interest rate swaps.................. $(6.1) $(11.5) $(13.3) $(22.4)
Cross currency interest rate swaps... $38.7 $ 44.1 $ 11.0 $ 13.5
Currency forwards/swaps.............. $ 4.8 $ (0.3) $(12.0) $(15.2)
Commodity collars.................... $ -- $ (0.3) $ -- $ --
</TABLE>
The following method and assumptions were used to estimate the fair value
of these derivative financial instruments:
CURRENCY AND COMMODITY CONTRACTS AND INTEREST RATE SWAP AGREEMENTS: The
fair value of commodity contracts and currency and interest rate swap agreements
is estimated based on quotes from the market makers of these instruments and
represents the estimated amounts that the Company would expect to receive or pay
to terminate the agreements at the reporting date.
FOREIGN CURRENCY EXCHANGE CONTRACTS: The fair value associated with the
foreign currency contracts has been estimated by valuing the net position of the
contracts using the applicable spot rates and forward rates as of the reporting
date.
NOTE 17. 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-17
<PAGE> 40
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total pension expense for 1997, 1996, and 1995 was:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Defined Benefit Plans
Service cost.............................. $ 69.8 $ 68.4 $ 68.0
Interest cost............................. 244.3 239.1 239.7
Return on assets
Actual................................. (535.0) (387.2) (425.7)
Deferred............................... 302.7 176.8 222.9
Net amortization.......................... 14.3 27.3 5.4
------- ------- -------
Net periodic pension cost................. 96.1 124.4 110.3
Other..................................... 3.9 3.9 4.0
------- ------- -------
Total pension expense....................... $ 100.0 $ 128.3 $ 114.3
======= ======= =======
</TABLE>
U.S. pension expense included in the net periodic pension cost in the table
above was $41.7, $58.4, and $42.7 for 1997, 1996, and 1995, respectively. The
above table includes $10.7 of pension expense recorded at foreign operations of
the Company that were sold during 1997.
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, 1997 DECEMBER 31, 1996
-------------------- --------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation.......... $(2,473.8) $(562.7) $(2,190.7) $(799.8)
========= ======= ========= =======
Accumulated benefit obligation..... $(2,616.5) $(582.1) $(2,303.1) $(826.8)
========= ======= ========= =======
Projected benefit obligation......... $(2,801.2) $(618.2) $(2,462.7) $(851.0)
Plan assets at fair value............ 2,877.2 188.0 2,441.8 183.3
--------- ------- --------- -------
Projected benefit obligation, less
than (in excess of) plan assets.... 76.0 (430.2) (20.9) (667.7)
Unrecognized net (gain)/loss......... 9.6 (55.9) 132.9 (58.7)
Unrecognized net
asset/(obligation)................. 12.9 (11.3) 17.2 (24.6)
--------- ------- --------- -------
Pension asset (liability) recognized
in the balance sheet............... $ 72.7 $(474.8) $ 94.8 $(701.8)
========= ======= ========= =======
Discount rate........................ 7.25% 7.31% 7.75% 7.29%
Rate of return on invested assets.... 9.75% 9.33% 9.75% 9.33%
Salary increase assumption........... 5.00% 3.61% 5.00% 2.91%
</TABLE>
For substantially all domestic plans, assets exceed accumulated benefits,
and for substantially all foreign plans, accumulated benefits exceed the related
assets. The significant decrease in foreign benefit obligations and liabilities
recognized in the balance sheet is a result of divestitures of significant
overseas operations and the effect of currency translation adjustments.
Domestically, the increase in the benefit obligations is primarily a result of
the acquisition of Goulds and the change in the discount rate. Increases in plan
assets are a result of the acquisition of Goulds and strong investment
experience.
INVESTMENT AND SAVINGS PLAN: The Company sponsors numerous savings plans
which allow employees to contribute a portion of their pretax and/or after-tax
income in accordance with specified guidelines. Several of the plans require the
Company to match a percentage of the employee contributions up to certain
limits. Matching contributions charged to income amounted to $18.0, $16.7, and
$14.7 for the years ended 1997, 1996, and 1995, respectively.
F-18
<PAGE> 41
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The ITT Investment and Savings Plan for Salaried Employees included an
Employee Stock Ownership Plan (ESOP) feature. In 1995, in connection with the
spin-off of The Hartford and ITT Corporation, the Company terminated the ESOP
portion of the ITT Investment and Savings Plan for Salaried Employees. As a
result of the termination, the trustee of the ESOP converted the preferred stock
held by the trustee to Company common stock. The trustee then completed the sale
of 5.3 million shares into the open market. The sales proceeds were used to
repay the debt associated with the ESOP and the remainder was allocated pro rata
to participants in the Plan. The Company changed the name of the Plan to the ITT
Industries Investment and Savings Plan for Salaried Employees and transferred
the balances related to employees of ITT Corporation and The Hartford to plans
created by those companies.
POSTRETIREMENT HEALTH AND LIFE: The Company and its subsidiaries provide
health care and life insurance benefits for certain eligible retired employees.
The Company has prefunded a portion of the health care and life insurance
obligations through trust funds where such prefunding can be accomplished on a
tax effective basis. The plan's assets are comprised of a broad range of
domestic and foreign securities, fixed income investments, and real estate.
Postretirement health care and life insurance benefits expense was comprised of
the following in 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost................................... $ 10.6 $ 10.4 $ 8.3
Interest cost.................................. 35.4 34.9 31.9
Return on assets
Actual....................................... (28.2) (19.8) (29.7)
Deferred..................................... 12.7 5.7 17.9
Net amortization............................... (6.1) (4.7) (6.1)
------ ------ ------
Net periodic expense......................... 24.4 26.5 22.3
Gains from curtailments........................ (7.1) (5.3) --
------ ------ ------
Net expense.................................... $ 17.3 $ 21.2 $ 22.3
====== ====== ======
</TABLE>
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,
------------------
1997 1996
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation.......... $(533.4) $(480.7)
Plan assets at fair value.............................. 187.3 163.0
------- -------
Accumulated postretirement benefit obligation in excess
of plan assets....................................... (346.1) (317.7)
Unrecognized net gain.................................. 5.3 5.8
Unrecognized past service liability.................... (29.9) (34.5)
------- -------
Liability recognized in the balance sheet.............. $(370.7) $(346.4)
======= =======
Discount rate.......................................... 7.25% 7.75%
Rate of return on invested assets...................... 9.75% 9.75%
Ultimate health care trend rate........................ 6.00% 6.00%
</TABLE>
The increase in the benefit obligations from 1996 to 1997 includes the
effect of the acquisition of Goulds during 1997 and the change in the discount
rate.
The assumed rate of future increases in the per capita cost of health care
(the health care cost trend rate) was 8.5% for 1997, decreasing ratably to 6.0%
in the year 2001. Increasing the table of health care cost trend rates by one
percent per year would have the effect of increasing the accumulated
F-19
<PAGE> 42
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
postretirement benefit obligation by $59.4 and the annual expense by $6.0. 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.
NOTE 18. SHAREHOLDERS' EQUITY
CAPITAL STOCK: ITT Industries has authority to issue an aggregate of
250,000,000 shares of capital stock, of which 200,000,000 have been designated
as "Common Stock" having a par value of $1 per share and 50,000,000 have been
designated as "Preferred Stock" not having any par or stated value. Of the
shares of Preferred Stock, 300,000 shares have initially been designated as
"Series A Participating Cumulative Preferred Stock" (the "Series A Stock"). Such
Series A Stock is issuable pursuant to the provisions of a Rights Agreement
dated as of November 1, 1995 between ITT Industries and The Bank of New York, as
Rights Agent (the "Rights Agreement"). Capitalized terms herein not otherwise
defined are as defined in the Rights Agreement.
The rights issued pursuant to the Rights Agreement (the "Rights") are
currently attached to, and trade with, the Common Stock. The Rights Agreement
provides, among other things, that if any person acquires more than 15% of the
outstanding Common Stock, the Rights will entitle the holders other than the
Acquiring Person (or its Affiliates or Associates) to purchase Series A Stock at
a significant discount to its market value. Rights beneficially owned by the
Acquiring Person, including one of its Affiliates or Associates, become null and
void and nontransferable. Rights generally are exercisable at any time after the
Distribution Date and at or prior to the earlier of the 10th anniversary of the
date of the Rights Agreement or the Redemption Date. The Company may, subject to
certain exceptions, redeem the Rights as provided for in the Rights Agreement.
Each 1/1,000th of a share of Series A Stock would be entitled to vote and
participate in dividends and certain other distributions on an equivalent basis
with one share of Common Stock. Under certain circumstances specified in the
Rights Agreement, the Rights become nonredeemable for a period of time and the
Rights Agreement may not be amended during such period.
As of December 31, 1997, 26,702,181 shares of Common Stock were held in
treasury.
STOCK INCENTIVE PLANS: The Company's stock option incentive plans provide
for the awarding of options on common shares to employees, exercisable over
ten-year periods. Certain options become exercisable upon the attainment of
specified market price appreciation of the Company's common shares or at nine
years after the date of grant. Other options become exercisable upon the earlier
of the attainment of specified market price appreciation of the Company's common
shares or over a three-year period commencing with the date of grant. The
remaining options become exerciseable 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. In 1997, the Company made shares available for the
exercise of stock options by purchasing shares in the open market. During 1996,
the Company made shares available from shares held by the Company in treasury
and from purchasing shares in the open market.
F-20
<PAGE> 43
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option incentive plans as of
December 31, 1997, 1996, and 1995, and changes during the years then ended is
presented below (shares in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year... 11,764 $17.53 11,619 $15.76 5,588 $ 73.60
Granted............... 2,367 25.60 2,114 25.32 2,148 108.07
Exercised............. (2,324) 16.21 (1,879) 15.08 (1,478) 66.47
Canceled or expired... (350) 22.44 (90) 24.11 (4,087) 88.59
ITT Corporation and
The Hartford
Spin-off
adjustment.......... -- -- -- -- 9,448 --
------ ------ ------ ------ ------ -------
Outstanding at end of
year................ 11,457 $19.31 11,764 $17.53 11,619 $ 15.76
====== ====== ====== ====== ====== =======
Options exercisable at
year-end............ 10,573 $18.92 7,817 $15.14 6,942 $ 13.85
====== ====== ====== ====== ====== =======
Weighted-average fair
value of options
granted during the
year................ $ 8.53 $ 6.87 $30.01
====== ====== ======
</TABLE>
The Company accounts for these plans pursuant to Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined based on the fair value at the grant dates consistent with SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C> <C>
Net income.................... As reported $108.1 $222.6 $707.9
Pro forma 99.0 214.8 705.1
Basic earnings per share...... As reported $ .91 $ 1.89 $ 6.24
Pro forma .84 1.82 6.22
Diluted earnings per share.... As reported $ .89 $ 1.85 $ 6.18
Pro forma .82 1.78 6.16
</TABLE>
Because the method of accounting prescribed by SFAS No. 123 is not required
to be applied to options granted prior to January 1, 1995, the resulting pro
forma effect may not be representative of that expected in future years.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model and the following weighted-average
assumptions for grants in 1997, 1996, and 1995: dividend yield of 2.35%, 2.40%,
and 2.40%, respectively; expected volatility of 31%, 23%, and 23%; expected life
of six years; and risk-free interest rate of 6.45%, 6.15%, and 6.46%,
respectively.
In December 1995, in conjunction with the Distribution, those individuals
who became employees of The Hartford and ITT Corporation were offered substitute
awards in the respective stock of their new employer, and any stock awards or
options held by them in respect of ITT Industries are reflected as canceled in
the table above. For the remaining holders of unexercised options, including
employees of ITT Industries, retirees, and certain other former employees of the
Company, the number of shares subject to options was increased and the option
exercise price was decreased immediately following the Distribution to preserve,
as closely as possible, the economic value of the options that existed prior to
Distribution.
F-21
<PAGE> 44
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's stock
options at December 31, 1997 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
--------------- ------ ---------------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$ 8.31 -- 9.89...... 1,218 3.4 years $ 8.84 1,218 $ 8.84
13.78 -- 17.91...... 3,858 6.3 years 15.72 3,847 15.72
20.32 -- 28.38...... 6,165 8.2 years 23.18 5,508 23.39
31.75 -- 32.06...... 216 9.8 years 31.94 -- --
------ --------- ------ ------ ------
11,457 10,573
====== ======
</TABLE>
As of December 31, 1997, 3,125,000 shares were available for future grants.
Effective January 1, 1998, option shares available for future grants increased
to 5,302,000 as a result of the allotment formula established in the 1994
Incentive Stock Plan. The incentive stock plans also provide for awarding
restricted stock subject to a restriction period in which the stock cannot be
sold, exchanged, or pledged. During 1997, pursuant to the ITT Industries, Inc.
1996 Restricted Stock Plan for Non-Employee Directors, the Company awarded 9,248
restricted shares with five-year restriction periods, in lieu of the annual
retainer for such directors.
NOTE 19. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in various legal actions
including those related to government contracts and environmental matters. Some
of these actions include claims for substantial amounts. Reserves have been
established where the outcome is probable and can be reasonably estimated. While
the ultimate results of these legal actions and related claims cannot be
determined, the Company does not expect that they will have a material adverse
effect on its consolidated financial position, results of operations, or cash
flows.
In the ordinary course of business, and similar to other industrial
companies, ITT Industries is subject to extensive and changing federal, state,
local, and foreign environmental laws and regulations. As of December 31, 1997,
ITT Industries or its subsidiaries are responsible, or are alleged to be
responsible, for environmental investigation and remediation at sites in North
America and Europe. ITT Industries has received notice that it is considered a
potentially responsible party (PRP) at a number of those sites by the United
States Environmental Protection Agency (EPA) and/or a similar state agency under
the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA
or Super Fund) or its state equivalent. In many of these proceedings, ITT
Industries' liability is considered de minimis. In Glendale, California, ITT
Industries is involved in an EPA administrative proceeding relating to the San
Fernando Valley aquifer. ITT Industries is one of numerous 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 for
recovery of the costs it has incurred in connection with this and other
environmental matters.
The Company has accrued for environmental remediation costs associated with
identified sites consistent with the policy set forth in the "Accounting
Policies." In management's opinion, the total amounts accrued and related
receivables are appropriate based on existing facts and circumstances. It is
difficult to estimate the total costs of investigation and remediation due to
various factors, including incomplete information regarding particular sites and
other PRPs, uncertainty regarding the extent of contamination and ITT
Industries' share, if any, of liability for such problems, the selection of
alternative remedies, and changes in clean-up standards. In the event that
future remediation expenditures are in excess of amounts accrued, management
does not anticipate that they will have a material adverse effect on the
consolidated financial position, results of operations, or liquidity of the
Company.
F-22
<PAGE> 45
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
DEFENSE & FLUID DISPOSITIONS TOTAL GRAND
AUTOMOTIVE ELECTRONICS TECHNOLOGY & OTHER SEGMENTS OTHER TOTAL
---------- ----------- ---------- ------------ -------- ------ --------
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
1997
Net Sales................. $5,167.0 $1,668.2 $1,755.3 $186.6 $8,777.1 $ -- $8,777.1
Operating Income:
Before special
charges............... 311.0 127.2 156.7 (9.4) 585.5 (59.9) 525.6
Special charges......... (113.0) -- (68.8) (42.2) (224.0) (15.0) (239.0)
-------- -------- -------- ------ -------- ------ --------
After special charges... 198.0 127.2 87.9 (51.6) 361.5 (74.9) 286.6
Identifiable Assets....... 2,576.2 914.4 1,986.2 268.4 5,745.2 475.3 6,220.5
Gross Plant Additions..... 293.6 67.9 65.6 27.6 454.7 7.0 461.7
Depreciation.............. 235.7 59.7 53.9 26.3 375.6 2.1 377.7
1996
Net Sales................. $5,492.6 $1,571.6 $1,301.3 $352.6 $8,718.1 $ -- $8,718.1
Operating Income.......... 337.1 110.2 113.2 1.5 562.0 (53.6) 508.4
Identifiable Assets....... 2,857.7 797.1 779.9 512.7 4,947.4 543.8 5,491.2
Gross Plant Additions..... 256.7 60.1 45.1 44.1 406.0 3.4 409.4
Depreciation.............. 240.8 64.9 40.7 50.9 397.3 2.1 399.4
1995
Net Sales................. $5,574.8 $1,559.3 $1,248.0 $502.1 $8,884.2 $ -- $8,884.2
Operating Income.......... 343.6 96.6 112.8 (9.3) 543.7 (97.5) 446.2
Identifiable Assets....... 2,901.9 817.7 807.0 600.4 5,127.0 752.2 5,879.2
Gross Plant Additions..... 275.9 69.3 46.9 58.5 450.6 3.1 453.7
Depreciation.............. 237.2 62.4 40.0 49.6 389.2 1.1 390.3
</TABLE>
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 three major worldwide product groupings.
The Brake and Chassis Systems group produces anti-lock brake systems (ABS)
and traction control systems (TCS), chassis systems and foundation brake
components.
The Electrical Systems group produces automotive products, such as wiper
module assemblies, air management systems, switches, and fractional horsepower
direct current motors.
The Automotive Components group produces fluid handling systems, friction
material, and Koni(R) shock absorbers.
Sales to two customers (General Motors Corporation and Ford Motor Company)
accounted for approximately 34%, 40%, and 42% of 1997, 1996, and 1995 sales,
respectively.
DEFENSE & ELECTRONICS: ITT Defense & Electronics companies develop,
manufacture, and support high technology electronic systems and components for
defense and commercial markets on a worldwide basis, with operations in North
America, Europe, and Asia. Defense market products include tactical
communications equipment, electronic warfare systems, night vision devices,
radar, space payloads, and operations and maintenance services. Approximately
66%, 64%, and 65% of 1997, 1996, and 1995 Defense & Electronics sales,
respectively, were to governmental entities, of which approximately 85%, 86%,
and 90%, respectively, were to the U.S. government. Commercial products include
interconnect products (such as connectors, switches, and cable assemblies),
night vision devices, and space launch services.
F-23
<PAGE> 46
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, test accessories, and cable assemblies which
are used in information systems, industrial, professional, and
telecommunications equipment as well as in consumer appliances and automobiles.
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. ITT Fluid
Technology is a leading supplier of pumps, valves, heat exchangers, mixers, and
controls for management of fluids, with sales in more than 135 countries.
The majority of ITT Fluid Technology's sales are in North America and
Western Europe. Principal markets are water and wastewater treatment, industrial
and process, and construction.
DISPOSITIONS AND OTHER: This includes the operating results of units other
than "Discontinued Operations," including ITT Community Development Corporation,
ITT Semiconductors, other non-core businesses, and other businesses which have
been sold.
OTHER: The Operating Income line primarily includes service charges from
affiliated companies and other corporate charges. "Other" in the Identifiable
Assets line consists primarily of corporate assets. Intercompany sales, which
are priced on an arm's-length basis and eliminated in consolidation, are not
material.
NOTE 21. GEOGRAPHICAL INFORMATION (BY COUNTRY OF ORIGIN) -- TOTAL SEGMENTS
<TABLE>
<CAPTION>
NET SALES OPERATING INCOME IDENTIFIABLE ASSETS
------------------------------ ------------------------ ------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-------- -------- -------- ------ ------ ------ -------- -------- --------
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $4,689.5 $4,388.7 $4,497.4 $192.9 $270.6 $254.6 $3,515.2 $2,401.3 $2,457.3
Western Europe 3,526.1 3,818.0 3,832.1 128.8 234.1 260.6 1,860.6 2,207.1 2,354.9
Canada and Other 561.5 511.4 554.7 39.8 57.3 28.5 369.4 339.0 314.8
-------- -------- -------- ------ ------ ------ -------- -------- --------
Total Segments $8,777.1 $8,718.1 $8,884.2 $361.5 $562.0 $543.7 $5,745.2 $4,947.4 $5,127.0
======== ======== ======== ====== ====== ====== ======== ======== ========
</TABLE>
F-24
<PAGE> 47
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22. EXPORT SALES
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 consist of the
following:
<TABLE>
<CAPTION>
MANUFACTURING SALES
LOCATION DESTINATION 1997 1996 1995
- ------------- -------------- -------- -------- --------
IN MILLIONS
<S> <C> <C> <C> <C>
United States Canada $ 353.2 $ 265.6 $ 345.7
Western Europe 89.1 64.0 65.1
Other 190.2 169.0 123.0
-------- -------- --------
632.5 498.6 533.8
-------- -------- --------
Canada United States 99.7 93.2 192.2
Other 19.7 10.8 9.3
-------- -------- --------
119.4 104.0 201.5
-------- -------- --------
Western Europe United States 69.7 94.1 120.7
Western Europe 967.4 1,105.5 1,051.1
Other 213.8 269.5 248.7
-------- -------- --------
1,250.9 1,469.1 1,420.5
-------- -------- --------
Other 75.1 43.3 24.6
-------- -------- --------
$2,077.9 $2,115.0 $2,180.4
======== ======== ========
</TABLE>
F-25
<PAGE> 48
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23. QUARTERLY RESULTS FOR 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
-------- -------- -------- -------- --------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS; (UNAUDITED)
<S> <C> <C> <C> <C> <C>
1997
Net sales............................. $2,166.6 $2,250.9 $2,060.4 $2,299.2 $8,777.1
Cost of sales(a)...................... 1,868.7 1,896.3 1,740.1 1,908.2 7,413.3
Income (loss) from continuing
operations(b)....................... 44.3 82.6 (91.1) 77.9 113.7
Cumulative effect of accounting
change.............................. -- -- -- (5.6) (5.6)
Net income (loss)..................... 44.3 82.6 (91.1) 72.3 108.1
Income (loss) from continuing
operations per share --
-- Basic............................ $ .37 $ .70 $ (.77) $ .66 $ .96
-- Diluted.......................... $ .37 $ .69 $ (.77) $ .65 $ .94
Net (loss) income per share --
-- Basic............................ $ .37 $ .70 $ (.77) $ .61 $ .91
-- Diluted.......................... $ .37 $ .69 $ (.77) $ .60 $ .89
Common stock information
Price range: High..................... $ 26.38 $ 27.75 $ 33.69 $ 33.38 $ 33.69
Low..................... $ 22.38 $ 22.13 $ 25.00 $ 28.75 $ 22.13
Close................... $ 22.38 $ 25.75 $ 33.19 $ 31.38 $ 31.38
Dividends per share................... $ .15 $ .15 $ .15 $ .15 $ .60
1996
Net sales............................. $2,200.9 $2,241.2 $2,044.8 $2,231.2 $8,718.1
Cost of sales(a)...................... 1,907.8 1,907.9 1,755.2 1,912.7 7,483.6
Net income............................ 40.0 67.7 43.7 71.2 222.6
Net income per share --
-- Basic(c)......................... $ .34 $ .57 $ .37 $ .60 $ 1.89
-- Diluted(c)....................... $ .33 $ .56 $ .36 $ .59 $ 1.85
Common stock information
Price range: High..................... $ 27.75 $ 28.63 $ 26.00 $ 25.75 $ 28.63
Low..................... $ 22.25 $ 24.75 $ 21.50 $ 22.75 $ 21.50
Close................... $ 25.50 $ 25.13 $ 24.13 $ 24.50 $ 24.50
Dividends per share................... $ .15 $ .15 $ .15 $ .15 $ .60
</TABLE>
- ---------------
(a) Includes research, development, and engineering expenses.
(b) Income from continuing operations in the quarter ended September 30,
includes a special charge of $145.8, after tax, for restructuring and other
items as described in note 5.
(c) Quarterly and full year earnings per share amounts were calculated
independently based on the average common shares and potentially dilutive
shares applicable to each period. Because of the issuance of common stock
upon the exercise of stock options in 1996, the sum of the four quarters
does not equal the calculation for the full year 1996.
The above table reflects the range of market prices of ITT Industries'
Common Stock for 1997 and 1996. The prices are as reported in the consolidated
transaction reporting system of the New York Stock Exchange, the principal
market in which ITT Industries' Common Stock is traded, under the symbol "IIN".
ITT Industries' Common Stock is listed on the following exchanges: Frankfurt,
London, Midwest, New York, Pacific, and Paris.
F-26
<PAGE> 49
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the period from January 1, 1998 through February 28, 1998, the high
and low reported market prices of ITT Industries' Common Stock were $34.44 and
$28.13. ITT Industries declared dividends of $.15 per common share in the first
quarter of 1998. There were approximately 51,830 holders of record of ITT
Industries common stock on February 28, 1998.
F-27
<PAGE> 50
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, 1997
Trade Receivables -- Allowance for doubtful
accounts....................................... $ 37.0 $ 8.5 $ (1.0) $ (4.3) $ 40.2
Accumulated depreciation of plant, property, and
equipment...................................... 2,925.1 377.7 (164.9) (631.8)(a) 2,506.1
YEAR ENDED DECEMBER 31, 1996
Trade Receivables -- Allowance for doubtful
accounts....................................... $ 39.3 $ 3.7 $ (.8) $ (5.2) $ 37.0
Accumulated depreciation of plant, property, and
equipment...................................... 2,819.6 399.4 (99.4) (194.5)(a) 2,925.1
YEAR ENDED DECEMBER 31, 1995
Trade Receivables -- Allowance for doubtful
accounts....................................... $ 36.8 $ 2.2 $ 2.3 $ (2.0) $ 39.3
Accumulated depreciation of plant, property, and
equipment...................................... 2,515.7 390.3 78.5 (164.9)(a) 2,819.6
</TABLE>
- ---------------
(a) Principally retirements as well as companies sold during the year.
S-1
<PAGE> 51
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, AND BY THE UNDERSIGNED IN THE
CAPACITY INDICATED.
ITT INDUSTRIES, INC.
By RICHARD J. TOWNSEND
---------------------------------------
RICHARD J. TOWNSEND
VICE PRESIDENT, CONTROLLER AND
DIRECTOR, STRATEGY
(PRINCIPAL ACCOUNTING OFFICER)
March 26, 1998
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 DATE
--------- TITLE ----
<C> <S> <C>
TRAVIS ENGEN Chairman, President and Chief March 17,1998
- ---------------------------- Executive and Director
TRAVIS ENGEN
(PRINCIPAL EXECUTIVE
OFFICER)
HEIDI KUNZ Senior Vice President and Chief March 17,1998
- ---------------------------- 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 17, 1998 S. PARKER GILBERT Director March 17, 1998
- ------------------------- -------------------------
RAND V. ARASKOG S. PARKER GILBERT
ROBERT A. BURNETT Director March 17, 1998 CHRISTINA A. GOLD Director March 17, 1998
- ------------------------- -------------------------
ROBERT A. BURNETT CHRISTINA A. GOLD
Director March 17, 1998 EDWARD C. MEYER Director March 17, 1998
- ------------------------- -------------------------
CURTIS J. CRAWFORD EDWARD C. MEYER
Director March 17, 1998 SIDNEY TAUREL Director March 17, 1998
- ------------------------- -------------------------
MICHEL DAVID-WEILL SIDNEY TAUREL
</TABLE>
II-1
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
<C> <C> <S> <C>
3
(a) ITT Industries, Inc.'s Restated
Articles of Incorporation........... Incorporated by reference to Exhibit
3(i) to ITT Industries' Form 10-Q for
the quarterly period ended June 30,
1997 (CIK No. 216228, File No.
1-5627).
(b) 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).
(c) ITT Industries, Inc.'s By-laws, as
amended............................. Incorporated by reference to Exhibit
3(b) to ITT Industries' Form 8-K
Current Report dated June 5, 1997
(CIK No. 216228, File No. 1-5627).
4 Instruments defining the rights of security
holders, including indentures.............. Not required to be filed. The
Registrant hereby agrees to file with
the Commission a copy of any
instrument defining the rights of
holders of long-term debt of the
Registrant and its consolidated
subsidiaries upon request of the
Commission.
9 Voting Trust Agreement..................... None.
10 Material contracts
(a) ITT Industries 1997 Long-Term
Incentive Plan...................... Incorporated by reference to Appendix
II to ITT Industries' Proxy Statement
dated March 26, 1997 (CIK No.
216228, File No. 1-5627).
(b) ITT Industries 1997 Annual Incentive
Plan for Executive Officers......... Incorporated by reference to Appendix
I to ITT Industries' Proxy Statement
dated March 26, 1997 (CIK No.
216228, File No. 1-5627).
(c) Form of Travis Engen's employment
agreement........................... Incorporated by reference to Exhibit
10.16 to ITT Industries' Form 8-B
dated December 20, 1995 (CIK No.
216228, File No. 1-5627).
(d) Amendment to Employment Agreement
between ITT Industries and Travis
Engen............................... Incorporated by reference to Exhibit
10(e) to ITT Industries' Form 8-K
Current Report dated June 5, 1997
(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).
</TABLE>
II-2
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
<C> <C> <S> <C>
(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 Exhibit
10(h) to ITT Industries' Form 10-K
for the fiscal year ended December
31, 1996 (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) ITT Industries Special Senior
Executive Severance Pay Plan........ Incorporated by reference to Exhibit
10(j) to ITT Industries' Form 10-K
for the fiscal year ended December
31, 1996 (CIK No. 216228, File No.
1-5627).
(j) 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).
(k) ITT Industries, Inc. 1996 Restricted
Stock Plan for Non-Employee
Directors, as amended............... Incorporated by reference to Exhibit
10(l) to ITT Industries' Form 10-K
for the fiscal year ended December
31, 1996 (CIK No. 216228, File No.
1-5627).
(l) 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).
(m) 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).
(n) 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).
(o) 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).
</TABLE>
II-3
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
<C> <C> <S> <C>
(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) Trade Name and Trademark License
Agreement........................... Incorporated by reference to Exhibit
10(r) to ITT Industries' Form 8-K
Current Report dated June 5, 1997
(CIK No. 216228, File No. 1-5627).
(r) ITT Industries Enhanced Severance Pay
Plan................................ Incorporated by reference to Exhibit
10(s) to ITT Industries' Form 8-K
Current Report dated June 5, 1997
(CIK No. 216228, File No. 1-5627).
11 Statement re computation of per share
earnings................................. Not required to be filed.
12 Statement re computation of ratios......... Filed herewith.
13 Annual report to security holders, Form
10-Q or quarterly report to security Not required to be filed.
holders..................................
16 Letter re change in certifying None.
accountant.................................
18 Letter re change in accounting None.
principles.................................
21 Subsidiaries of the Registrant............. Filed herewith.
22 Published report regarding matters
submitted to vote of security holders.... Not required to be filed.
23 Consent of Arthur Andersen LLP............. Filed herewith.
24 Power of attorney.......................... None.
27 Financial data schedule.................... Filed herewith.
99 Additional exhibits........................ None.
</TABLE>
II-4
<PAGE> 1
EXHIBIT 12
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CALCULATION OF RATIO 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,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings:
Income from continuing operations......................... $ 113.7 $222.6 $ 20.7 $201.6 $134.8
Add (deduct):
Adjustment for distributions in excess of (less than)
undistributed equity earnings and losses(a)........... 1.3 1.9 .6 -- (2.6)
Income taxes............................................ 72.7 148.4 50.2 147.5 65.1
Amortization of interest capitalized.................... .4 .9 2.5 .7 3.9
-------- ------ ------ ------ ------
188.1 373.8 74.0 349.8 201.2
-------- ------ ------ ------ ------
Fixed Charges:
Interest and other financial charges...................... 135.4 169.0 175.2 115.2 154.0
Interest factor attributable to rentals(b)................ 36.3 30.9 29.0 22.0 24.2
-------- ------ ------ ------ ------
171.7 199.9 204.2 137.2 178.2
-------- ------ ------ ------ ------
Earnings, as adjusted, from continuing operations........... $ 359.8 $573.7 $278.2 $487.0 $379.4
======== ====== ====== ====== ======
Fixed Charges:
Fixed charges above....................................... $ 171.7 $199.9 $204.2 $137.2 $178.2
Interest capitalized...................................... 1.1 1.1 2.9 6.8 8.0
-------- ------ ------ ------ ------
Total fixed charges..................................... 172.8 201.0 207.1 144.0 186.2
Dividends on preferred stock (pre-income tax basis)(c)...... -- -- 23.4 47.5 50.0
-------- ------ ------ ------ ------
Total fixed charges and preferred dividend
requirements.......................................... $ 172.8 $201.0 $230.5 $191.5 $236.2
======== ====== ====== ====== ======
Ratios:
Earnings, as adjusted, from continuing operations to total
fixed charges........................................... 2.08 2.85 1.34 3.38 2.04
======== ====== ====== ====== ======
Earnings, as adjusted, from continuing operations to total
fixed charges and preferred dividend requirements....... 2.08 2.85 1.21 2.54 1.61
======== ====== ====== ====== ======
</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) One-third of rental expense is deemed to be representative
of interest factor in rental expense.
c) The dividend requirements on preferred stock have been
determined by adding to the total preferred dividends an
allowance for income taxes, calculated at the effective
income tax rate.
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
WHOLLY-OWNED DIRECT OR
INDIRECT SUBSIDIARIES
PERCENTAGE ---------------------------
JURISDICTION OF VOTING OPERATING OPERATING IN
IN WHICH SECURITIES IN THE FOREIGN
NAME ORGANIZED PARENT OWNED UNITED STATES COUNTRIES
---- ------------ ------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ITT Industries, Inc. ("ITT Industries")....... Indiana -- -- 90 79
Goulds Pumps, Incorporated.................. Delaware ITT Industries 100 8 31
International Standard Electric Corporation
("ISEC").................................. Delaware ITT Industries 100 1 3
ITT Delaware Investments, Inc.
("Delaware")............................ Delaware ISEC 100 -- --
ITT Industries Europe GmbH ("Europe")..... Germany 50% Delaware 100 -- 6
50% ISEC
ITT Automotive Czech Republic........... Czech Republic Europe 100 -- --
ITT Automotive Hungary Kft.............. Hungary Europe 100 -- --
ITT Composants et Instruments S.A. ..... France Europe 100 -- 1
ITT Flygt AB............................ Sweden Europe 100 -- 14
ITT Gesellschaft fur Beteiligungen mbH
("ITTG").............................. Germany Europe 99.5 -- 8
ITT Automotive Europe GmbH ("ITT
AUTO").............................. Germany ITTG 100 -- 6
ITT Industriebeteiligungsgesellschaft
mbH................................. Germany ITTG 100 -- 3
ITT Richter Chemie-Technik Gmbh....... Germany ITTG 100 -- 1
ITT Industries (China) Investment Company,
Limited................................. China ISEC 100 -- 1
ITT Industries Limited ("ITTUK").......... England ISEC 100 -- 3
ITT Automotive (UK)..................... England ITTUK 100 -- --
ITT Defence Ltd......................... England ITTUK 100 -- --
ITT Datacommunications Ltd.............. England ITTUK 100 -- --
ITT Automotive Enterprises, Inc............. Delaware ITT Industries 100 1 --
ITT Automotive, Inc.*....................... Delaware ITT Industries 100 2 3
ITT Canada Limited ("Canada")............... Canada ITT Industries 100 -- 1
ITT Industries of Canada, Ltd............. Canada Canada 100 -- --
ITT Defense & Electronics**................. ITT Industries 100 -- 1
ITT Federal Services Corporation............ Delaware ITT Industries 100 11 2
ITT Systems & Sciences Corporation.......... Delaware ITT Industries 100 -- --
ITT Fluid Technology***..................... ITT Industries 100 -- --
ITT Fluid Technology International.......... Delaware ITT Industries 100 -- 2
ITT Flygt Corporation....................... Delaware ITT Industries 100 -- 5
ITT Manufacturing Enterprises, Inc.
("ITTME")................................. Delaware ITT Industries 100 -- 2
ITTG.................................... Germany ITTME .5 -- --
ITT Resource Development Corporation
("ITTRDC")................................ Delaware ITT Industries 100 32 --
Carbon Industries, Inc.................... West Virginia ITTRDC 100 14 --
ITT Community Development Corporation..... Delaware ITTRDC 100 16 --
Computer Equipment & Leasing Corporation.... Wisconsin ITT Industries 100 -- --
Gilcron Corporation......................... Delaware ITT Industries 100 -- --
Palm Coast Utility Corporation.............. Florida ITT Industries 100 -- --
</TABLE>
- ---------------
See notes on following page.
<PAGE> 2
EXHIBIT 21
CONTINUED
- ---------------
Note: The names of some consolidated wholly-owned subsidiaries of ITT Industries
carrying on the same lines of business as other subsidiaries named above
have been omitted, the number of such omitted subsidiaries operating in
the United States and in foreign countries being shown. Also omitted from
the list are the names of other subsidiaries since, if considered in the
aggregate as a single subsidiary, they would not constitute a significant
subsidiary.
* Businesses under ITT Automotive:
Alfred Teves Technologies
Allwork Manufacturing Company
Baylock Manufacturing Company
Hisan, Inc.
ITT AES Enterprises, Inc.
ITT Automotive Division
ITT Automotive Electrical Systems, Inc.
Korea Advanced Brake System
P.E.A. Industrial S.A. de C.V.
Rochester Form Machine
Shanghai Automotive Brake System
** Businesses under ITT Defense & Electronics:
Avcron Incorporated
Electrix Corporation
Gilcron Corporation
ITT Aerospace/Communications Division
ITT Arctic Services, Inc.
ITT Avionics Division
ITT Cannon Division
ITT Cannon International, Inc.
ITT Cannon Italy S.p.A.
ITT Cannon Mexico, Inc.
ITT Cannon de Mexico S.A. de C.V.
ITT Cannon (Zhenjiang) Electronics Ltd.
ITT Cannon (Japan) Ltd.
ITT DCD Saudi Arabia, Inc.
ITT Defense & Electronics Division
ITT Federal Services Corporation
ITT Gallium Arsenide Tech Center Division
ITT Gilfillan Division
ITT Gilfillan Inc.
ITT Night Vision Division
ITT Pomona Electronics Division
ITT Schadow Inc.
Sealectro International, Inc.
*** Businesses under ITT Fluid Technology:
ITT Aerospace Controls Division
ITT Controls and Instruments Division
ITT Fluid Technology Division
ITT Fluid Technology International
ITT Fluid Transfer Division
ITT FTC Manufacturing Division
ITT Grindex Pump Division
Flygt Holdings Pty Limited
ITT Flygt Corporation
<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 on (i) Form S-3 (File No. 33-45756) and (ii) Form S-8
(File Nos. 33-5412, 33-6004, 33-53771, 333-1109 and 333-04611).
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1997 Financial Statements included in Form 10-K and is qualified in
its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 192,200
<SECURITIES> 0
<RECEIVABLES> 1,292,600
<ALLOWANCES> 40,200
<INVENTORY> 812,800
<CURRENT-ASSETS> 2,377,400
<PP&E> 4,530,400
<DEPRECIATION> 2,506,100
<TOTAL-ASSETS> 6,220,500
<CURRENT-LIABILITIES> 3,544,900
<BONDS> 532,200
0
0
<COMMON> 118,400
<OTHER-SE> 703,900
<TOTAL-LIABILITY-AND-EQUITY> 6,220,500
<SALES> 8,771,100
<TOTAL-REVENUES> 8,771,100
<CGS> 6,916,400
<TOTAL-COSTS> 7,413,300
<OTHER-EXPENSES> 1,077,200
<LOSS-PROVISION> 8,500
<INTEREST-EXPENSE> 133,200
<INCOME-PRETAX> 186,400
<INCOME-TAX> 72,700
<INCOME-CONTINUING> 113,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 5,600
<NET-INCOME> 108,100
<EPS-PRIMARY> .91<F1>
<EPS-DILUTED> .89
<FN>
<F1>THE AMOUNT IS REPORTED AS EPS BASIC AND NOT FOR EPS PRIMARY.
</FN>
</TABLE>
