<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 1-5627
ITT INDUSTRIES, INC.
INCORPORATED IN THE STATE OF INDIANA 13-5158950
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
4 West Red Oak Lane, White Plains, NY 10604
(Principal Executive Office)
TELEPHONE NUMBER: (914) 641-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of July 31, 1999, there were outstanding 87,914,595 shares of common
stock ($1 par value per share) of the registrant.
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<PAGE> 2
ITT INDUSTRIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Condensed Income Statements -- Three Months and Six
Months Ended June 30, 1999 and 1998..............................................2
Consolidated Condensed Balance Sheets -- June 30, 1999 and
December 31, 1998................................................................3
Consolidated Condensed Statements of Cash Flows -- Six Months Ended
June 30, 1999 and 1998............................................................4
Notes to Consolidated Condensed Financial Statements .................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Three Months and Six Months Ended June 30, 1999 and 1998..............................7
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings......................................................................12
Item 2. Changes in Securities and Use of Proceeds..............................................13
Item 4. Submission of Matters to a Vote of Security Holders....................................13
Item 6. Exhibits and Reports on Form 8-K.......................................................13
Signature..........................................................................................14
Exhibit Index......................................................................................15
</TABLE>
1
<PAGE> 3
PART I.
ITEM 1. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
The following unaudited consolidated condensed financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) and, in the opinion of management, reflect all
adjustments (which include normal recurring adjustments) necessary for a fair
presentation of the financial position, results of operations, and cash flows
for the periods presented. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC rules.
The Company believes that the disclosures made are adequate to make the
information presented not misleading. Certain amounts in the prior periods'
consolidated condensed financial statements have been reclassified to conform
with the current period presentation. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's 1998 Annual Report on Form 10-K.
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Sales and revenues .................................. $ 1,191.7 $ 1,125.3
------- -------
Costs of sales and revenues.......................... 838.3 795.3
Selling, general, and administrative expenses........ 170.1 180.9
Research, development, and engineering expenses...... 70.2 55.1
Restructuring and nonrecurring items................. --- 10.7
Other operating expense (income)..................... 1.9 2.1
------- -------
Total costs and expenses............................. 1,080.5 1,044.1
------- -------
Operating income..................................... 111.2 81.2
Interest expense..................................... (18.9) (34.3)
Interest income...................................... 7.8 4.0
Miscellaneous income (expense), net.................. .5 (1.3)
------- -------
Income from continuing operations before income taxes 100.6 49.6
Income tax expense................................... (37.3) (19.4)
------- -------
Income from continuing operations.................... 63.3 30.2
Discontinued operations:
Operating income, net of tax of $25.0 and $55.4 --- 39.1
------- -------
Net income........................................... $ 63.3 $ 69.3
======= =======
EARNINGS PER SHARE:
Income from continuing operations
Basic.............................................. $ .72 $ .25
Diluted............................................ .70 .25
Discontinued operations
Basic.............................................. --- .34
Diluted............................................ --- .32
Net income
Basic.............................................. .72 .59
Diluted............................................ .70 .57
Cash dividends declared per common share............. $ .15 $ .15
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------------------
1999 1998
------------------- --------------------
<S> <C> <C>
Sales and revenues .................................. $ 2,283.4 $ 2,224.5
------- -------
Costs of sales and revenues.......................... 1,613.2 1,572.1
Selling, general, and administrative expenses........ 338.8 359.8
Research, development, and engineering expenses...... 136.2 127.1
Restructuring and nonrecurring items................. --- 30.8
Other operating expense (income)..................... 8.1 7.2
------- -------
Total costs and expenses............................. 2,096.3 2,097.0
------- -------
Operating income..................................... 187.1 127.5
Interest expense..................................... (37.8) (73.4)
Interest income...................................... 17.8 10.6
Miscellaneous income (expense), net.................. .9 (2.0)
------- -------
Income from continuing operations before income taxes 168.0 62.7
Income tax expense................................... (62.2) (24.5)
------- -------
Income from continuing operations.................... 105.8 38.2
Discontinued operations:
Operating income, net of tax of $25.0 and $55.4 --- 86.7
------- -------
Net income........................................... $ 105.8 $ 124.9
======= =======
EARNINGS PER SHARE:
Income from continuing operations
Basic.............................................. $ 1.17 $ .32
Diluted............................................ 1.13 .31
Discontinued operations
Basic.............................................. --- .73
Diluted............................................ --- .72
Net income
Basic.............................................. 1.17 1.05
Diluted............................................ 1.13 1.03
Cash dividends declared per common share............. $ .30 $ .30
</TABLE>
- ----------
The accompanying notes to consolidated condensed financial statements are an
integral part of the above statements.
2
<PAGE> 4
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT FOR SHARES AND PER SHARE)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................... $ 128.4 $ 880.9
Receivables, net.................................................................... 850.3 842.6
Inventories, net.................................................................... 576.0 578.9
Other current assets................................................................ 83.2 80.0
------- -------
Total current assets............................................................. 1,637.9 2,382.4
Plant, property, and equipment, net................................................... 870.8 991.6
Deferred U.S. income taxes............................................................ 346.6 367.4
Goodwill, net......................................................................... 872.4 865.3
Other assets ......................................................................... 435.2 442.1
------- -------
$ 4,162.9 $ 5,048.8
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................... $ 361.2 $ 396.2
Accrued expenses.................................................................... 791.6 932.9
Accrued taxes....................................................................... 305.1 570.1
Notes payable and current maturities of long-term debt.............................. 167.8 251.6
------- -------
Total current liabilities........................................................ 1,625.7 2,150.8
Pension benefits...................................................................... 113.3 178.0
Postretirement benefits other than pensions........................................... 281.4 241.9
Long-term debt........................................................................ 510.5 515.5
Other liabilities..................................................................... 609.9 662.6
------- -------
3,140.8 3,748.8
Shareholders' Equity:
Cumulative Preferred Stock: Authorized 50,000,000 shares,
no par value, none issued...................................................... -- --
Common stock:
Authorized 200,000,000 shares, $1 par value per share
Outstanding 87,914,595 shares and 95,967,976 shares.............................. 87.9 96.0
Capital surplus..................................................................... -- --
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on investment securities................................ 0.7 (0.5)
Cumulative translation adjustments............................................. (85.0) (67.0)
------- ------
(84.3) (67.5)
Retained earnings................................................................... 1,018.5 1,271.5
------- -------
1,022.1 1,300.0
------- -------
$ 4,162.9 $ 5,048.8
======= =======
</TABLE>
- ----------
The accompanying notes to consolidated condensed financial statements are an
integral part of the above balance sheets.
3
<PAGE> 5
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income....................................................... $ 105.8 $ 124.9
Discontinued operations:
Operating income............................................... --- (86.7)
------- -------
Income from continuing operations................................ 105.8 38.2
------- -------
Adjustments to income from continuing operations:
Depreciation................................................... 75.6 84.9
Amortization................................................... 16.9 18.7
Restructuring and nonrecurring charges......................... --- 45.8
Payments made for restructuring.................................. (31.6) ---
Change in receivables, inventories, accounts payable, and
accrued expenses............................................. (81.0) (87.0)
Change in accrued and deferred taxes............................. 14.8 31.0
Other, net....................................................... (13.2) (41.9)
------- -------
Cash from (used for) operating activities.................... 87.3 89.7
------- -------
INVESTING ACTIVITIES
Additions to plant, property, and equipment...................... (95.8) ( 74.1)
Proceeds from sale of assets..................................... 36.4 38.0
Acquisitions..................................................... (78.7) ( 71.2)
Other, net....................................................... 6.5 3.3
------- -------
Cash from (used for) investing activities.................... (131.6) (104.0)
------- -------
FINANCING ACTIVITIES
Short-term debt, net............................................. (12.5) 27.7
Long-term debt repaid............................................ (39.4) (15.7)
Long-term debt issued............................................ 1.4 .4
Repurchase of common stock....................................... (383.4) (25.4)
Dividends paid................................................... (29.2) (35.5)
Other, net....................................................... 21.2 15.7
------- -------
Cash from (used for) financing activities.................... (441.9) (32.8)
------- -------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS............... (11.8) (1.1)
CASH FROM (USED FOR) DISCONTINUED OPERATIONS..................... (254.5) (2.9)
------- -------
Decrease in cash and cash equivalents............................ (752.5) (51.1)
Cash and cash equivalents -- beginning of period................. 880.9 192.2
------- -------
Cash and cash equivalents -- end of period....................... $ 128.4 $ 141.1
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period from Continuing Operations:
Interest....................................................... $ 34.4 $ 70.7
======= =======
Income taxes................................................... $ 25.9 $ 13.7
======= =======
</TABLE>
- ----------
The accompanying notes to consolidated condensed financial statements are an
integral part of the above statements.
4
<PAGE> 6
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)
1) RESTRUCTURING: At December 31, 1998, the reserve balance for restructuring
actions was $138.4 million. In the first six months of 1999, the Company made
cash payments of $31.6 million, and recorded $1.1 million of reversals and $1.5
million of other items. The reserve balance at June 30, 1999 for restructuring
was $104.2 million. As reported in the 1998 Annual Report, restructuring
activities include plans to reduce workforce by 2,422 persons. At June 30, 1999,
cumulative headcount reductions were 1,177 persons. The restructuring activities
are progressing according to plans as discussed in the 1998 Annual Report.
2) RECEIVABLES, NET
Receivables consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
Trade.......................................................... $ 790.8 $ 753.5
Other.......................................................... 80.7 111.8
Less reserves.................................................. (21.2) (22.7)
--------- ---------
$ 850.3 $ 842.6
========= =========
</TABLE>
3) INVENTORIES, NET
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
Finished goods................................................. $ 206.6 $ 206.2
Work in process................................................ 465.1 511.6
Raw materials.................................................. 196.7 209.8
Less -- reserves............................................... (112.4) (115.0)
-- progress payments.................................. (180.0) (233.7)
--------- ---------
$ 576.0 $ 578.9
========= =========
</TABLE>
4) PLANT, PROPERTY, AND EQUIPMENT, NET
Plant, property, and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
Land and improvements.......................................... $ 71.7 $ 51.5
Buildings and improvements..................................... 319.9 346.7
Machinery and equipment........................................ 1,110.5 1,295.8
Construction work in progress.................................. 107.4 103.9
Other.......................................................... 523.7 509.1
--------- ----------
2,133.2 2,307.0
Less -- accumulated depreciation and
amortization............................................... (1,262.4) (1,315.4)
--------- ----------
$ 870.8 $ 991.6
========= ==========
</TABLE>
5
<PAGE> 7
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)
5) COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Net income:
Continuing operations.............................. $ 63.3 $ 30.2
Discontinued operations............................ --- 39.1
-------- --------
Total................................................ 63.3 69.3
Other comprehensive income (loss):
Foreign currency translation adjustments........... 11.3 3.7
Unrealized gain (loss) on investment securities.... 0.9 0.5
-------- --------
Other comprehensive income (loss), before tax.... 12.2 4.2
Income tax related to other comprehensive income... (7.3) (2.9)
-------- --------
Other comprehensive income (loss), after tax..... 4.9 1.3
-------- --------
Comprehensive income................................. $ 68.2 $ 70.6
======== ========
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
Net income:
Continuing operations.............................. $ 105.8 $ 38.2
Discontinued operations............................ -- 86.7
------- --------
Total................................................ 105.8 124.9
Other comprehensive income (loss):
Foreign currency translation adjustments........... ( 7.5) (11.3)
Unrealized gain (loss) on investment securities.... 1.2 0.4
------- --------
Other comprehensive income (loss), before tax.... ( 6.3) (10.9)
Income tax related to other comprehensive income... (10.5) (1.9)
------- --------
Other comprehensive income (loss), after tax..... (16.8) (12.8)
------- --------
Comprehensive income................................. $ 89.0 $ 112.1
======= ========
</TABLE>
6) CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------- ----------------------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
BASIC BASIS --
Income from continuing operations.................. $63.3 $ 30.2 $105.8 $ 38.2
---- ----- ----- -----
Average common shares outstanding.................. 87.9 118.4 90.2 118.4
---- ----- ----- -----
Earnings Per Share ................................ $ .72 $ .25 $ 1.17 $ .32
=== ===== ===== =====
DILUTED BASIS --
Income from continuing operations.................. $63.3 $ 30.2 $105.8 $ 38.2
---- ----- ----- -----
Average common shares outstanding.................. 87.9 118.4 90.2 118.4
Add: Stock options................................. 2.9 3.7 3.2 3.4
---- ----- ----- -----
Average common shares outstanding- diluted basis... 90.8 122.1 93.4 121.8
---- ----- ----- -----
Earnings Per Share ................................ $ .70 $ .25 $ 1.13 $ .31
==== ===== ===== =====
</TABLE>
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
Net income from continuing operations for the second quarter of 1999 was
$63.3 million, or $.70 per diluted share. This compares to $36.7 million, or
$.30 per diluted share, excluding nonrecurring items of $6.5 million ($10.7
before tax), from the comparable period last year. The increase in net income of
$26.6 million was attributable to higher operating income resulting from
restructuring and other cost reduction initiatives and a significant reduction
in interest expense.
Sales and revenues for the second quarter of 1999 increased $66.4 million
from the second quarter of 1998 due to an increase of $65.8 million in our
Defense Products & Services segment and an increase of $32.4 million in our
Specialty Products segment. These increases were partially offset by decreases
of $9.5 million in our Connectors & Switches segment and a decrease of $13.4
million in our Pumps & Complementary Products segment. Selling, general and
administrative expenses decreased $10.8 million from last year primarily due to
cost reduction initiatives. Second quarter 1998 had a nonrecurring charge of
$10.7 million consisting of a $25.7 million charge for the shut down of a pump
manufacturing facility in Cincinnati, Ohio and a $15.0 million gain on the sale
of the Barton fluid measurement business. Excluding these items, operating
margin for the second quarter of 1999 increased 1.2 percentage points compared
to the same period last year.
Interest expense, net of interest income, decreased $19.2 million in the
second quarter of 1999 compared to last year. The decrease was due to using a
portion of the proceeds from the automotive sales to significantly lower the
Company's debt level.
The effective income tax rate for the second quarter of 1999 was 37%, compared
with 39% for the second quarter of 1998. The reduction in the effective income
tax rate is due to implementation of tax planning strategies.
Business Segments - Sales and revenues and operating income of the
Company's business segments for the three months ended June 30, 1999, and 1998
were as follows (in millions):
<TABLE>
<CAPTION>
Defense Pumps & Dispositions,
Three months ended Connectors Products & Complementary Specialty Other & Grand
June 30, 1999 & Switches Services Products Products Eliminations Corporate Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and revenues $ 123.8 $ 376.7 $ 441.3 $246.8 $ 3.1 $ ----- $1,191.7
Operating Income $ 16.7 $ 27.5 $ 43.0 $ 41.1 $ 0.2 $ (17.3) $ 111.2
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Three months ended
June 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and revenues $ 133.3 $ 310.9 $ 454.7 $214.4 $12.0 $ ----- $1,125.3
Operating Income $ 13.6 $ 25.6 $ 13.0 $ 28.4 $16.9 $ (16.3) $ 81.2
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Connectors & Switches' sales and revenues decreased $9.5 million compared with
the second quarter of 1998 due to softness in the military, aerospace and
commercial aircraft businesses. This was partially offset by growth in the
switches business. Operating income increased $3.1 million, despite the decline
in sales and revenues, due to restructuring efforts and cost reduction
initiatives.
7
<PAGE> 9
Defense Products & Services' sales and revenues for the second quarter of 1999
increased $65.8 million compared with the second quarter of 1998 due to
increased sales of our SINCGARS and Night Vision products, as well as a $25.6
million claim settlement on a prior year project in our aerospace and
communications division. Operating income increased $1.9 million in the second
quarter of 1999 compared with the same period last year mainly due to higher
sales volume. The receipt of a $5.3 million settlement positively impacted
second quarter 1999 operating income. In the second quarter of 1999, the Company
recorded $28.3 million in charges for loss contracts, warranty provisions, asset
impairments and other matters.
Pumps & Complementary Products' sales for the second quarter of 1999 decreased
$13.4 million compared with the same period last year. Lower sales were
primarily due to weakness in the industrial end-use markets. Operating income
increased $4.3 million in the second quarter of 1999 compared with the second
quarter of 1998 due to cost reduction initiatives. This increase excludes a 1998
restructuring charge of $25.7 million for the shut down of a pump manufacturing
facility in Cincinnati, Ohio.
Specialty Products' sales for the second quarter of 1999 increased $32.4 million
compared with the second quarter of 1998. The increase is due to higher
automotive build rates in North America, increased market share in Europe and
the impact of the General Motors strike last year. Operating income increased
$12.7 million in the second quarter of 1999 compared with the same period last
year due to higher sales volume.
Corporate expenses increased $1.0 million in the second quarter of 1999 compared
to last year mainly due to expenses recorded in the current period for tax
organization costs, terminated projects and other matters offset by lower costs
due to corporate restructuring efforts initiated in the fourth quarter of 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Net income from continuing operations was $105.8 million, or $1.13 per
diluted share. This compares to $57.0 million of net income or $0.47 per diluted
share, excluding nonrecurring items of $18.8 million ($30.8 before tax), for
1998. The increase in net income of $48.8 million was mainly attributable to
restructuring and other cost saving initiatives and a significant reduction in
interest expense.
Sales and revenues for the first six months of 1999 increased $58.9 million
from the first six months of 1998 primarily due to an increase of $55.5 million
in our Defense Products & Services segment and an increase of $68.0 million in
our Specialty Products segment. These increases were partially offset by
decreases of $20.4 million in our Connectors & Switches segment and $13.1
million in our Pumps & Complementary Products segment. Selling, general and
administrative expenses decreased $21.0 million compared to last year primarily
due to cost reduction initiatives. The first six months of 1998 had nonrecurring
charges of $30.8 million. This consisted of $25.7 million for the closure of a
plant and $20.1 million of accruals for anticipated legal expenses and losses on
the divestitures of non-core businesses. These costs were partially offset by a
$15.0 million gain on the sale of Barton. Excluding nonrecurring charges,
operating margin increased 1.0 percentage point from the first six months of
1998.
Interest expense, net of interest income, decreased $42.8 million in the
first six months of 1999 compared to last year. The decrease was due to using a
portion of the proceeds from the automotive sales to significantly lower the
Company's debt level.
The effective income tax rate for the first six months of 1999 was 37%,
compared with 39% for the same period last year. The reduction in the effective
income tax rate is due to implementation of tax planning strategies.
8
<PAGE> 10
Business Segments - Sales and revenues, operating income and total assets of the
Company's business segments for the six months ended June 30, 1999, and 1998
were as follows (in millions):
<TABLE>
<CAPTION>
Defense Pumps & Dispositions,
Six months ended Connectors Products & Complementary Specialty Other & Grand
June 30, 1999 & Switches Services Products Products Eliminations Corporate Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and revenues $ 245.0 $ 703.3 $ 842.8 $486.8 $ 5.5 $ ----- $2,283.4
Operating Income $ 27.2 $ 46.1 $ 72.4 $ 72.3 $ 0.4 $ (31.3) $ 187.1
Total Assets $ 303.5 $ 594.9 $1,750.1 $610.7 $ 138.2 $ 765.5 $4,162.9
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and revenues $ 265.4 $ 647.8 $ 855.9 $418.8 $ 36.6 $ ----- $2,224.5
Operating Income $ 24.2 $ 44.2 $ 42.1 $ 51.7 $ 18.2 $ (52.9) $ 127.5
Total Assets $ 327.9 $ 561.2 $1,804.8 $610.3 $1,281.8 (a) $ 514.5 $5,100.5
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes net assets from discontinued operations of $1,014.2.
Connectors & Switches' sales and revenues decreased $20.4 million from the prior
year mainly due to weak demand in the connectors business in Europe and North
America. This was partially offset by growth in the switches business. Operating
income increased $3.0 million from the prior year mainly due to restructuring
and cost reduction initiatives.
Defense Products & Services' sales and revenues increased $55.5 million from the
prior year principally due to a $25.6 million claim settlement on a prior year
project in our aerospace and communications division and higher sales volume in
our Night Vision unit. Due to capacity restrictions, delayed first quarter
shipments in our aerospace and communications division will be made up
throughout the remainder of the year. Operating income was $1.9 million higher
in the first six months of 1999 compared to the same period last year mainly due
to higher sales volume. The receipt of a $5.3 million settlement positively
impacted the first half of 1999 operating income. In the first half of 1999, the
Company recorded $28.3 million in charges for loss contracts, warranty
provisions, asset impairments and other matters.
Pumps & Complementary Products' sales decreased $13.1 million compared to the
same period last year. The decrease was primarily due to weakness in the
industrial end-use markets. Operating income increased $4.6 million compared to
1998 due to cost reduction initiatives. This increase excludes a 1998
restructuring charge of $25.7 million for the shut down of a pump manufacturing
facility in Cincinnati, Ohio.
Specialty Products' sales increased $68.0 million compared to the same period
last year. The increase is primarily due to higher automotive build rates
in North America, increased market share in Europe, the impact of the General
Motors strike last year and $14.9 million due to the acquisition of Rule
Industries, Inc. in June 1998. Operating income for the first six months of 1999
increased $20.6 million compared to last year due to higher sales volume and
cost reduction initiatives.
Corporate expenses, excluding a $20.1 million charge for restructuring recorded
in the first quarter of 1998, decreased $1.5 million in the first six months of
1999 compared to the comparable period. Expenses recorded in the second quarter
of 1999 for tax organization costs, terminated projects and other matters were
more than offset by lower costs due to corporate restructuring efforts initiated
in the fourth quarter of 1998.
9
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Cash from operating activities of $87.3 million, divestiture proceeds of $36.4
million and $752.5 million of cash and cash equivalents were used primarily for
repurchases of common stock of $383.4 million, capital expenditures of $95.8
million, acquisitions of $78.7 million, dividend payments of $29.2 million, and
$254.5 million for costs related to discontinued operations.
STATUS OF RESTRUCTURING ACTIVITIES: On December 2, 1998, the Company
announced plans to close facilities, discontinue product lines and reduce
headcount. As of June 30, 1999, the Company had closed 9 of the planned 16
facilities, discontinued 19 product lines, which exceeded the 14 planned, and
reduced the workforce by 1,177, or approximately 48.6% of the planned 2,422
persons.
CASH FLOWS: Cash from operating activities in the first six months of 1999
was $87.3 million, a decrease of $2.4 million from the first six months of 1998.
The first six months of 1999 reflect cash payments of $31.6 million for
restructuring. This is offset by lower other net operating activities in the
first six months of 1999 of $28.7 million compared to the comparable period last
year, mainly due to prepayments for insurance and pension expenses last year.
The Company typically experiences an increase in working capital requirements in
the first six months of the year that turns around in the fourth quarter.
ADDITIONS TO PLANT, PROPERTY AND EQUIPMENT: Capital expenditures during the
first six months of 1999 were $95.8 million, an increase of $21.7 million from
the first six months of 1998. The majority of the increase was in our Defense
Products & Services segment related to the purchase of a building.
ACQUISITIONS: During the first six months of 1999 the Company acquired
Water Pollution Control Corporation, Hydro Air Industries, Inc. and made an
equity investment in EarthWatch Inc. The aggregate of these investments was
$78.7 million, net of cash acquired of $1.8 million. During the first six months
of 1998, the Company acquired Rule Industries, Inc. for $63.3 million and two
other small companies.
DIVESTITURES: During the first six months of 1999, the Company had one
divestiture, Palm Coast Utility, that generated $25.8 million of cash. The
remaining $10.6 million of proceeds from the sale of assets for the first six
months of 1999, represents plant, property and equipment sales across all of our
businesses. During the first six months of 1998, most of the proceeds from the
sale of assets were from the divestiture of Barton, which generated $34.9
million of cash.
SHARE REPURCHASE: The Company's $1.1 billion stock repurchase program was
completed in the first quarter of 1999. During the course of the program,
initiated in July of 1998, ITT Industries repurchased 30.5 million of its shares
on the open market, at an average price of approximately $36 per share.
DEBT AND CREDIT FACILITIES: External debt at June 30, 1999 was $678.3
million, compared with $767.1 million at December 31,1998. Cash and cash
equivalents were $128.4 million at June 30, 1999, compared to $880.9 million at
year end 1998. On June 30, 1999, the Company announced that it will redeem all
of its outstanding 8 3/4% senior debentures due March 1, 2006 and 9 1/4% senior
debentures due July 15, 2001 on August 1, 1999. The maximum amount of borrowing
available under the Company's revolving credit agreements at June 30, 1999 was
$1.5 billion.
NEW ACCOUNTING STANDARD: In June 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities"-Deferral of the Effective Date of
FASB Statement No. 133, deferring the effective date of Statement 133 for one
year. Consequently, SFAS 133 will now be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000, which, for the Company would be
the calendar year beginning January 1, 2001. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
companies to formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The Company
10
<PAGE> 12
has not yet quantified the impacts of adopting SFAS 133 on reported financial
results and has not determined the timing of, or method of, adoption. However,
given the current level of the Company's derivative and hedging activities, the
impact is not expected to be material.
YEAR 2000 UPDATE: As presented in the Company's Form 10-K Annual Report for the
fiscal year ended December 31, 1998, the Company has conducted a comprehensive
inventory and assessment of its software and equipment to determine their state
of year 2000 "Y2K" readiness. As of June 30, 1999, the Company estimates that
over 99% of software and equipment essential to the operations of the business,
and 98% of all other software and equipment, have been modified, upgraded or
replaced and tested to confirm Y2K compliance, based upon the number of items
the Company has identified which require remediaton. The Company believes that
all software and equipment essential to the operations of the business will be
made Y2K compliant by early in the third quarter 1999, and all other software
and equipment deemed to require modification, upgrading or replacement should be
completed by the end of the third quarter 1999. The Company is continuing the
process of determining third party Y2K readiness and as of June 30, 1999 had
communicated with all critical suppliers and vendors who supply products and
services critical to the operations of the Company's business. The Company has
utilized questionnaires, telephone interviews, site visits and audits in an
effort to assess preparedness of such suppliers and vendors. Over 98% of our
critical suppliers have advised us that they expect to be fully compliant on a
timely basis. In addition, we have verified that approximately 96% of such
suppliers were substantially compliant as of June 30, 1999 based on the results
of the efforts described above. Alternative supply arrangements or other
contingency plans are being addressed for those critical suppliers/vendors who
we believe may not be Y2K compliant before year-end. Currently, the Company
estimates that the aggregate cost of its Y2K initiatives will total
approximately $20.8 million. As of June 30, 1999, approximately $16.1 million of
costs related to its Y2K initiatives have been incurred, approximately 75% of
which has been expensed.
FORWARD-LOOKING STATEMENTS
Certain material presented herein consists of forward-looking statements which
involve known and unknown risks, uncertainties and other important factors that
could cause actual results to differ materially from those expressed in or
implied from such forward-looking statements. Such factors include those set
forth in Item 1. Business and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking Statements in
the ITT Industries, Inc. Form 10-K Annual Report for the fiscal year ended
December 31, 1998 and other of its filings with the Securities and Exchange
Commission, to which reference is hereby made.
11
<PAGE> 13
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Form 10-K Annual Report for the fiscal year ended
December 31, 1998 filed by ITT Industries. The second full paragraph under Item
3. Legal Proceedings therein concerning environmental matters relating to the
San Fernando Valley aquifer is hereby deleted and replaced in its entirety with
the following:
"ITT Industries has been involved since 1991 in an environmental proceeding
in California relating to the San Fernando Valley aquifer. ITT Industries
is one of numerous PRPs who are alleged by the EPA to have contributed to
the contamination of the aquifer. ITT Industries and other allegedly
responsible parties have completed an allocation arbitration and have
commenced the clean-up required by the EPA. Lockheed Martin Corporation,
one of such parties, challenged the allocation arbitration in the Superior
Court, Los Angeles County. The lower court ruled in ITT Industries' favor
and Lockheed Martin appealed. In April 1999, the California Court of
Appeals rejected Lockheed Martin's appeal. Lockheed Martin has filed a
Petition for Review with the California Supreme Court. In January 1999, the
EPA filed a complaint in the United States District Court for the Central
District of California against ITT Industries and Lockheed Martin
Corporation, United States v. ITT Industries, Inc. and Lockheed Martin
Corp. CV99-00552 SVW AIJX, to recover costs it has incurred in connection
with the foregoing. In June 1999, the parties reached a settlement in
principle of the matter. 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. In April 1999, the Superior Court granted partial summary judgment
under California law, dismissing certain claims in the California action.
The California Court of Appeals has accepted ITT Industries' petition for
review of the Superior Court's order. Argument is set for August 1999. In
April 1999, ITT Fluid Technology Corporation initiated a new coverage
action in New Jersey, ITT Fluid Technology Corp. et al. v. Federal Ins. Co.
et al., (Middlesex County, No. L-1919-99), involving new environmental
insurance claims as well as claims pending but dormant before the court in
California. ITT Industries' insurers have indicated that they intend to
challenge the convenience of New Jersey as the forum for this action, and
the Court is scheduled to hear arguments on this issue in September 1999.
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."
12
<PAGE> 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 13, 1999, each of the outside directors of ITT Industries was
granted 1,281 shares of ITT Industries common stock in lieu of the annual
retainer pursuant to the ITT Industries 1996 Restricted Stock Plan for
Non-Employee Directors. A total of 10,248 shares were so issued. The shares were
not registered under the Securities Act of 1933 pursuant to the exemption
provided by Section 4(2) thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At ITT Industries' annual meeting of shareholders held on May 13, 1999, the
persons whose names are set forth below were elected as directors, constituting
the entire Board of Directors. Relevant voting information for each person
follows:
<TABLE>
<CAPTION>
Votes Cast
-------------------------
Broker
For Withheld Nonvotes
---------- -------- --------
<S> <C> <C> <C>
Rand V. Araskog.......................................80,202,434 1,727,818 0
Robert A. Burnett.....................................81,229,623 700,629 0
Curtis J. Crawford....................................81,065,582 864,670 0
Michel David-Weill....................................80,459,796 1,470,456 0
D. Travis Engen.......................................81,107,899 822,353 0
Christina A. Gold.....................................81,304,015 626,237 0
Edward C. Meyer.......................................81,239,770 690,482 0
Linda Sanford.........................................81,352,314 577,938 0
Sidney Taurel.........................................81,323,884 606,368 0
</TABLE>
In addition to the election of directors, the reappointment of Arthur
Andersen LLP as independent auditors for 1999 was ratified by a vote of
81,247,246 shares in favor, 320,287 shares against, 362,719 shares abstained,
and 0 broker nonvotes. There were no other matters presented for a vote at the
meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit Index for a list of exhibits filed herewith.
(b) ITT Industries did not file any Form 8-K Current Reports during the
quarter for which this Report is filed.
13
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITT INDUSTRIES, INC.
(Registrant)
By Edward W. Williams
-------------------------------------------
Edward W. Williams
Vice President and Controller
(Principal accounting officer)
August 9, 1999
(Date)
14
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Location
--- ----------- --------
<S> <C> <C>
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession None
(3) Articles of Incorporation and by-laws None
(4) Instruments defining the rights of security holders,
including indentures None
(10) Material contracts None
(11) Statement re computation of per share
earnings See Note 6 to notes
to Consolidated Financial
Statements
(15) Letter re unaudited interim financial information None
(18) Letter re change in accounting principles None
(19) Report furnished to security holders None
(22) Published report regarding matters submitted
to vote of security holders None
(23) Consents of experts and counsel None
(24) Power of attorney None
(27) Financial Data Schedule Filed Herewith
(27.1) Restated Financial Data Schedule with respect to June 30, 1998 Filed Herewith
(99) Additional Exhibits None
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
ITT INDUSTRIES, INC. AND SUBSIDIARIES
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1999 FINANCIAL STATEMENTS INCLUDED IN FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
COMMERCIAL AND INDUSTRIAL COMPANIES
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 128,400
<SECURITIES> 0
<RECEIVABLES> 871,500
<ALLOWANCES> 21,200
<INVENTORY> 576,000
<CURRENT-ASSETS> 1,637,900
<PP&E> 2,133,200
<DEPRECIATION> 1,262,400
<TOTAL-ASSETS> 4,162,900
<CURRENT-LIABILITIES> 1,625,700
<BONDS> 510,500
0
0
<COMMON> 87,900
<OTHER-SE> 934,200
<TOTAL-LIABILITY-AND-EQUITY> 4,162,900
<SALES> 2,283,400
<TOTAL-REVENUES> 2,283,400
<CGS> 1,613,200
<TOTAL-COSTS> 1,749,400
<OTHER-EXPENSES> 346,900
<LOSS-PROVISION> 900
<INTEREST-EXPENSE> 37,800
<INCOME-PRETAX> 168,000
<INCOME-TAX> 62,200
<INCOME-CONTINUING> 105,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105,800
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.13
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
ITT INDUSTRIES, INC. AND SUBSIDIARIES
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S RESTATED JUNE 30, 1998 FINANCIAL STATEMENTS. IN THE THIRD QUARTER OF
1998, THE COMPANY SOLD ITS AUTOMOTIVE BRAKE AND CHASSIS AND ELECTRICAL SYSTEMS
UNITS. AS A RESULT OF THESE SALES, THESE TWO UNITS, AS WELL AS SEVERAL OTHER
SMALL PREVIOUSLY SOLD AUTOMOTIVE UNITS, HAVE BEEN ACCOUNTED FOR AS A
DISCONTINUED OPERATION. THE RESTATED FINANCIAL INFORMATION BELOW REFLECTS THE
ACCOUNTING TREATMENT OF SUCH UNITS AS A DISCONTINUED OPERATION.
COMMERCIAL AND INDUSTRIAL COMPANIES
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 141,100
<SECURITIES> 0
<RECEIVABLES> 775,400
<ALLOWANCES> 17,300
<INVENTORY> 577,200
<CURRENT-ASSETS> 1,571,200
<PP&E> 2,315,400
<DEPRECIATION> 1,311,100
<TOTAL-ASSETS> 5,100,500
<CURRENT-LIABILITIES> 2,899,300
<BONDS> 501,900
0
0
<COMMON> 118,400
<OTHER-SE> 771,100
<TOTAL-LIABILITY-AND-EQUITY> 5,100,500
<SALES> 2,224,500
<TOTAL-REVENUES> 2,224,500
<CGS> 1,572,100
<TOTAL-COSTS> 1,699,200
<OTHER-EXPENSES> 397,800
<LOSS-PROVISION> 1,600
<INTEREST-EXPENSE> 73,400
<INCOME-PRETAX> 62,700
<INCOME-TAX> 24,500
<INCOME-CONTINUING> 38,200
<DISCONTINUED> 86,700
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124,900
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.03
</TABLE>
