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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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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, 2000, was approximately $2.8
billion.
As of February 29, 2000, there were outstanding 87,914,595 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 9, 2000, 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........................................... 11
4 Submission of Matters to a Vote of Security Holders......... 12
* Executive Officers of ITT Industries........................ 12
PART 5 Market for Common Stock and Related Stockholder Matters..... 13
II 6 Selected Financial Data..................................... 14
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 23
8 Financial Statements and Supplementary Data................. 23
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 23
PART 10 Directors and Executive Officers of the Registrant.......... 23
III 11 Executive Compensation...................................... 23
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 23
13 Certain Relationships and Related Transactions.............. 23
PART 14 Exhibits, Financial Statement Schedules, and Reports on Form
IV 8-K....................................................... 23
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., with 1999 sales of approximately $4.6 billion, is a
global manufacturing company that is engaged directly and through its
subsidiaries in the design and manufacture of a wide range of engineered
products and the provision of related services. We are focused on the four
principal business segments of Connectors & Switches, Defense Products &
Services, Pumps & Complementary Products, and Specialty Products.
Our World Headquarters is located at 4 West Red Oak Lane, White Plains, NY
10604. We have approximately 38,000 employees based in 47 countries. Unless the
context otherwise indicates, references herein to "ITT Industries," the
"Company," and such words as "we," "us," and "our" include ITT Industries, Inc.
and its subsidiaries. ITT Industries, Inc. was incorporated on September 5, 1995
in Indiana. Reference is made to "-- COMPANY HISTORY AND CERTAIN RELATIONSHIPS."
Our telephone number is (914) 641-2000.
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The table below shows, in percentage terms, our consolidated sales and
revenues and operating income (excluding restructuring and other special items)
attributable to each of our ongoing lines of business for the last three years:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SALES AND REVENUES
Connectors & Switches..................................... 11% 12% 13%
Defense Products & Services............................... 31 29 26
Pumps & Complementary Products............................ 37 39 35
Specialty Products........................................ 21 19 20
Other..................................................... -- 1 6
--- --- ---
100% 100% 100%
=== === ===
OPERATING INCOME
Connectors & Switches..................................... 15% 16% 15%
Defense Products & Services............................... 27 30 29
Pumps & Complementary Products............................ 40 45 47
Specialty Products........................................ 32 28 32
Other..................................................... (14) (19) (23)
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
BUSINESS AND PRODUCTS
CONNECTORS & SWITCHES
Connectors & Switches, with sales and revenues of approximately $516.0
million, $527.9 million, and $537.7 million for 1999, 1998, and 1997,
respectively, is a significant connector and switch company and a leading
supplier to the industrial, communications, and military/aerospace sectors. Its
products are used in telecommunications, computing, aerospace, and industrial
applications, as well as network services.
Connectors & Switches develops and manufactures interconnects, cable
assemblies, switches, key pads, multi-function grips, panel switch assemblies,
input/output card kits, smart card systems, LAN components, high speed/high
band-width network systems, and related services.
Order backlog for Connectors & Switches in 1999 was $158.6 million,
compared with $130.2 million in 1998 and $131.7 million in 1997.
Connectors & Switches products are marketed primarily under the Cannon(R)
brand name.
The level of activity for Connectors & Switches is affected by overall
economic conditions in the markets served and the competitive position with
respect to price, quality, technical expertise, and customer service. See
" -- COMPETITION."
Connectors & Switches companies have an aggregate of approximately 10,000
employees and have 18 facilities located in 9 countries.
DEFENSE PRODUCTS & SERVICES
Defense Products & Services, with sales and revenues of approximately $1.41
billion, $1.29 billion, and $1.10 billion for 1999, 1998, and 1997,
respectively, develops, manufactures, and supports high technology electronic
systems and components for worldwide defense and commercial markets. Operations
are in North America, Europe, and the Middle East. Product groups are government
services; tactical communications; night vision; airborne electronic warfare;
satellite instruments; and radar and other.
Defense Products & Services concentrates its efforts primarily 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. This particularly includes 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. Management
believes that Defense Products & Services may also benefit from trends to
commercialize and outsource military support services.
In government services, ITT Systems provides military base operations
support, equipment and facility maintenance, and training services for
government sites around the world. It also provides advanced technology services
and customized products to government, industrial, and commercial customers in
the areas of information technology, consulting and technical
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assistance, military systems effects and analysis, and hardware design, test and
evaluation.
In tactical communications, the ITT Aerospace/Communications Division
manufactures products, including voice and data systems, that facilitate
communications in the forward area battlefield. The 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 has data transmission capacity twenty times greater than SINCGARS.
ITT Night Vision provides advanced goggles for airborne and ground
applications which give United States and allied soldiers the capability to
conduct night combat operations. ITT Night Vision is the leading full service
supplier to the United States and allied military forces of Generation III night
vision products. ITT Night Vision also produces a commercial line of night
vision products for law enforcement, marine, and recreational applications.
In airborne and electronic warfare, 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 is
developing for the United States Army the next-generation fully integrated
airborne electronic warfare system for rotary wing aircraft called a Suite of
Integrated Radio Frequency Countermeasures ("SIRFC"). ITT Avionics, teamed with
Lockheed Martin Sanders, is also developing the United States Integrated
Defensive Countermeasures ("IDECM") system for fixed wing aircraft such as the
F/A-18 E/F fighter fleet.
In satellite instruments, 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.
Defense Products and Services also produces and installs ship and air
defense radar and air traffic control systems both in the United States and
elsewhere.
The following table illustrates the percentage of sales and revenues by
product group for the periods specified:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
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1999 1998 1997
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<S> <C> <C> <C>
Government Services......................................... 30% 33% 28%
Tactical Communications..................................... 27 20 29
ITT Night Vision............................................ 14 12 11
Airborne Electronic Warfare................................. 12 11 10
Satellite Instruments....................................... 9 16 14
Radar and Other............................................. 8 8 8
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
Defense Products & Services sells its products to a wide variety of
governmental and non-governmental entities located throughout the world.
Approximately 94% of 1999 sales and revenues of Defense Products & Services was
to governmental entities, of which approximately 75% was to the United States
Government (principally in defense programs). Defense Products & Services, Racal
Electronics, and BAE Systems are participating in a joint venture to develop the
Bowman Program, a tactical communications system for the British Armed Forces.
A substantial portion of the work of Defense Products & Services 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
5.4% of 1999 sales and revenues for Defense Products & Services.
Sales and revenues to non-governmental entities as a percentage of total
sales and revenues for Defense Products & Services were 3% in 1999, 2% in 1998,
and 1% in 1997. Certain products sold by Defense Products & Services have
particular commercial application, including night vision devices and radar
systems. In addition, Defense Products & Services, in partnership with
California Commercial Spaceport, Inc. in a venture known as Spaceport Systems
International, provides full service payload processing and launch capability
for
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small to medium satellite systems in low polar earth orbits.
Order backlog for Defense Products & Services in 1999 was $1.84 billion,
compared with $2.22 billion in 1998 and $2.11 billion in 1997.
The level of activity in Defense Products & Services is affected by overall
defense budgets, the portion of those budgets devoted to products and services
of the type provided by Defense Products & Services, demand and budget
availability for such products and services in areas other than defense, and
other factors. See "-- COMPETITION."
Defense Products & Services companies have an aggregate of approximately
10,000 employees and have 75 facilities in 11 countries.
PUMPS & COMPLEMENTARY PRODUCTS
Pumps & Complementary Products, with sales and revenues of approximately
$1.74 billion, $1.77 billion, and $1.46 billion for 1999, 1998, and 1997,
respectively, is engaged in the design, development, production, sale, and
after-sale support of products, systems and services used to move, handle,
transfer, control, and contain fluids. Pumps & Complementary Products is a
leading worldwide supplier of a broad range of pumps, mixers, heat exchangers,
valves, and systems for residential, agricultural, commercial, municipal, and
industrial applications. Principal customers are in North America, Western
Europe, the Asia/Pacific region, and Latin America. No single customer accounted
for more than 1% of 1999 sales for Pumps & Complementary Products. Sales are
made directly and through independent distributors and representatives.
Pumps & Complementary Products concentrates on three major markets:
industrial, water supply and wastewater, and construction.
Pumps & Complementary Products serves the chemical processing, pulp and
paper, hydrocarbon processing, power, and mining industries. However, more than
half of its sales in the industrial market are to a wide range of other
industrial customers. Our Pro Service Centers and industrial distributor network
provide comprehensive service and after-sale support to these industrial
customers. A-C Pump, Goulds, ITT Standard, Richter and Vogel serve the
industrial market.
A-C Pump, Goulds, and Vogel manufacture a broad range of pumps and
accessories for a broad range of industrial applications. ITT Standard
manufactures a complete line of heat transfer products used in industrial and
marine applications such as heating or cooling liquids or gases, heat recovery,
and co-generation. Richter Chemie-Technik is a leading producer of corrosion
resistant, leak proof pumps and valves primarily used by the chemical industry
to handle highly aggressive fluids where human health and safety and concern for
the environment are critical considerations.
Water supply and wastewater applications include residential and municipal
wastewater treatment and transportation, flood control, irrigation, and other
agricultural fluid handling applications. This market is served through leading
brands, by A-C Pump, Flygt, Goulds, and Lowara.
Flygt is the world's leader in submersible technology, offering a strong
product mix of submersible pumps, mixers, and aerators and has the ability to
provide system solutions to wastewater treatment requirements. A-C Pump and
Goulds are leaders in pumps for residential water well systems, agriculture, and
irrigation. Lowara is a leader in stainless steel manufacturing technology. Its
pumps are used in residential, agriculture, and irrigation applications.
Pumps & Complementary Products sells a broad range of pumps, heat
exchangers, controls, and complementary products to the HVAC segment of the
residential and commercial construction and replacement markets. These markets
are served by Bell & Gossett, Goulds, ITT Standard, Lowara, and McDonnell &
Miller. Flygt is also a global leader and pioneer in submersible pumping
technology for construction site dewatering. Its pumps are found at some of the
world's most demanding construction sites, including the Euro Tunnel.
Bell & Gossett designs and manufactures pumps and complementary products
for large commercial HVAC applications and multi-family and single-family
residential hot water heating systems. McDonnell & Miller designs and
manufactures a comprehensive line of steam and hot water boiler liquid level
control products for the industrial, commercial, and residential construction
and replacement markets.
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The following table illustrates the percentage of sales and revenues by
product group for the periods specified:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Industrial.................................................. 39% 40% 43%
Water Supply & Wastewater................................... 38 38 36
Construction................................................ 23 22 21
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
Our management believes that Pumps & Complementary Products has a solid
technology base and proven expertise in designing its products to meet customer
needs. Management believes that the continuing development of new products will
enable Pumps & Complementary Products to maintain and build market leadership
positions in served markets.
Order backlog for Pumps & Complementary Products was $273.8 million in
1999, compared with $274.4 million in 1998 and $266.8 million in 1997.
The level of activity in Pumps & Complementary Products is dependent upon
economic conditions in the markets served; weather conditions; in the case of
municipal markets, the ability of municipalities to fund projects for our
products and services; and other factors. See "-- COMPETITION."
Pumps & Complementary Products companies have an aggregate of approximately
10,500 employees and have 318 facilities in 45 countries.
SPECIALTY PRODUCTS
Specialty Products, with sales and revenues of approximately $959.5
million, $849.3 million, and $823.2 million for 1999, 1998, and 1997,
respectively, comprises a group of units operating in a range of specialty
market segments. Operations are located principally in North America and Europe,
with sales in Latin America and Asia supported through joint ventures or
distribution arrangements. The group consists of fluid handling systems,
friction material, marine and leisure, engineered valves, shock absorbers, and
aerospace controls.
ITT Fluid Handling Systems, with 1999 sales of approximately $429 million,
designs and produces engineered tubing systems and connectors for use in
applications such as braking systems, fuel supply, and other fluid transfer
applications in transportation or industrial uses. Fluid Handling System's
principle customers are the major North American and European automotive makers,
their key Tier 1 suppliers, and other similar customers. Ford and General
Motors, with their respective affiliates, each accounts for approximately 25% of
the sales of this unit. Fluid handling also owns 50% of a joint venture with
Sanoh Industrial Co. of Japan that supplies similar products to the major
transplant manufacturers in the United States.
ITT Industries Galfer, with 1999 sales of approximately $157 million,
designs and manufactures quality friction pads for braking applications on
vehicles. From three facilities in Italy, Galfer services most European OEM auto
makers and also operates a substantial facility for research and testing of new
materials. Approximately 67% of Galfer's business is in aftermarket activity.
Specialty Products' marine and leisure business had 1999 sales of
approximately $132 million. Its Jabsco division is the world's leading producer
of pumps and related products for the leisure marine market. Products are sold
worldwide under the brand names Jabsco(R), Rule(R), Flojet(R), and Danforth(R).
Flojet is also a leading producer of pumps and components for beverage and other
specialty industrial fluid dispensing applications. Specialty Products' units,
under the brand names Hydroair(R) and Marlow(R), design and manufacture pumps
and other components for manufacturers of whirlpool and spa baths.
ITT Engineered Valves, with 1999 sales of $82 million, designs and
manufactures precision valves for Bio-pharmaceutical and other similar
applications under the brand name Pure-Flo(R), and for severe service chemical
and mining applications under brand names including Dia-Flo(R) and
Fabri-valve(R). Sales are achieved through a worldwide network of distributors
and service organizations.
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Our shock absorber unit, with 1999 sales of approximately $90 million,
designs and markets adjustable shock absorbers under the brand name KONI(R) for
high performance vehicles, trucks, buses, and railways. Customers are
principally in Europe, North America, and Asia.
ITT Aerospace Controls, with 1999 sales of $59 million, designs switches,
valves, and controls for aerospace applications. Principal customers are North
American aircraft manufacturers where the quality and performance required for
FAA certification is a key factor. This unit also sells switches to industrial
customers for severe service applications.
Speciality Products also markets pressure regulators and diaphragm seals
for industrial applications and natural gas vehicles under the brand name
Conoflow(R).
The following table illustrates the percentage of sales by product group
for the periods specified:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fluid Handling Systems...................................... 45% 43% 45%
Friction Material........................................... 16 18 18
Marine & Leisure............................................ 14 10 10
Engineered Valves........................................... 10 9 9
Shock Absorbers............................................. 9 11 10
Aerospace Controls.......................................... 6 8 7
Other....................................................... -- 1 1
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
The level of activity for Specialty Products depends upon economic
conditions in the served markets, particularly the automotive and the marine and
leisure markets. See "-- COMPETITION." Order backlog is not a significant factor
in this segment.
Specialty Products companies have an aggregate of approximately 7,200
employees and have 43 facilities located in 10 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.
ACQUISITIONS, DIVESTITURES, AND RELATED MATTERS
We have been involved in an ongoing restructuring that includes continuing
process improvement and structural cost reduction programs. Actions being taken
include the rationalization of operating facilities, consolidation of sales and
distribution facilities, workforce reductions, and product pruning. Also
involved are acquisitions of businesses that provide a rational fit with
businesses we presently conduct and divestitures of businesses that do not
enhance that fit.
During 1999 we acquired STX Pte. Ltd. for our Connectors & Switches
segment, the space and defense communications businesses of Stanford
Telecommunications, Inc. and K and M Electronics, Inc. for our Defense Products
& Services segment, Water Pollution Control Corp. (renamed Sanitaire
Corporation) and assets of Energy Machine Service, Inc. for our Pumps &
Complementary Products segment, and Hydro Air Industries and Flojet Corp. for
our Specialty Products segment, and made an investment in EarthWatch
Incorporated also for our Defense Products & Services segment. Also during 1999
we divested all or portions of our Community Development Corporation, Carbon
Industries and Palm Coast Utility businesses.
In 1998, we acquired Great American Gumball Corporation for our Connectors
& Switches segment and A.G. Johansons Metallfabrik AB, Rule Industries, Inc.,
Sinton Engineering Co. Limited, and Sinton (UK) Limited for our Specialty
Products segment.
On September 25, 1998, we completed the sale to Continental AG and certain
of its subsidiaries of our business of designing, developing, manufacturing, and
marketing brake systems and chassis modules for the automotive industry
worldwide for approximately $1.93 billion in cash. That business was conducted
through various direct and indirect subsidiaries,
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and joint ventures in which we held an ownership interest.
On September 28, 1998, we completed the sale to Valeo SA and certain of its
subsidiaries of our business of designing, developing, manufacturing, and
marketing electrical motors and actuators, air management and engine cooling
products, wiper and washer systems, lamps, power antennas, switches, and sensors
for the automotive industry worldwide for approximately $1.7 billion in cash.
That business was conducted through various direct and indirect subsidiaries and
joint ventures in which we held an ownership interest.
After-tax proceeds from the sales of our automotive Brake and Chassis and
our automotive Electrical Systems businesses were directed to reducing debt,
funding acquisitions, investing in our remaining businesses and repurchasing
approximately 30.5 million of our shares. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- RISKS AND
UNCERTAINTIES -- SALES OF AUTOMOTIVE BUSINESSES" AND NOTE 5 "DISCONTINUED
OPERATIONS" TO "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further
information regarding sales of automotive businesses. Also during 1998 we
divested our Barton fluid measurement and Pomona Electronics businesses.
We made significant acquisitions in 1997 with Goulds Pumps, Incorporated
for our Pumps & Complementary Products segment and Kaman Sciences Corporation
for our Defense Products & Services segment. Also during 1997 we divested our
silicon semiconductor business and several of our automotive product lines.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- RESTRUCTURING AND OTHER SPECIAL ITEMS."
GEOGRAPHIC MARKETS
The geographic sales base of Connectors & Switches is predominantly in
Europe, which accounted for 47% of 1999 sales and revenues, and the United
States, which accounted for 39% of 1999 sales and revenues. Connectors &
Switches has two joint ventures in China, a wholly-owned subsidiary in Japan,
and the San Teh key pad unit (STX Pte. Ltd.) headquartered in Singapore with
four manufacturing locations in China. These Asia/Pacific operations supply
connectors and switch products across a broad market spectrum, including the
communications, industrial, and consumer sectors.
The geographic sales base of Defense Products & Services is predominantly
the United States, which accounted for approximately 84% of 1999 sales and
revenues. Management of Defense Products & Services has been in the process of
increasing its international defense business and anticipates growth
opportunities in the Asia/Pacific region, Europe, and the Middle East.
The geographic sales base of Pumps & Complementary Products is broad. In
1999, approximately 45% of the sales and revenues of Pumps & Complementary
Products was derived from the United States, while approximately 31% was derived
from Western Europe. The geographic sales mix differs among products and among
divisions of Pumps & Complementary Products. Our management anticipates growth
opportunities in Eastern Europe and Central Asia, Africa/Middle East, Latin
America, and the Asia/Pacific region. In China, Pumps & Complementary Products
has manufacturing and distribution facilities to produce and sell submersible
pumps for the sewage handling and mining markets and a joint venture that
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.
The geographic sales base of Specialty Products is predominantly in North
America and Europe. In 1999, approximately 55% of sales and revenues of
Specialty Products were to customers in the United States, and approximately 35%
of sales were to customers in Western Europe. Management of ITT Industries sees
growth opportunities in South America, Mexico, and Asia, particularly in China.
See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further geographical
information concerning sales and revenues and long lived assets.
COMPETITION
Substantially all of our operations are in highly competitive businesses.
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
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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, reliability, and service are primary
factors in the markets served by the various segments of our businesses.
In Connectors & Switches, competitive pressures continue on a global basis.
In most of the markets served, competition is based primarily upon price,
quality, technical expertise, and customer service.
In Defense Products & Services, 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. We have adjusted to these changes by focusing on the defense
electronics and services markets, by making process improvements, and through
capacity rationalization. In most of the markets served by Defense Products &
Services, competition is based primarily upon price, quality, technological
expertise, cycle time, and service.
The Pumps & Complementary Products segment is affected by strong
competition, changing economic conditions, industry overcapacity that leads to
intense pricing pressures, and public bidding in some markets. Management of
Pumps & Complementary Products responds to competitive pressures by utilizing
strong distribution networks, strong brand names, broad product lines focused on
market niches, a global customer base, a continuous stream of new products
developed from a strong technology base, a focus on quality and customer
service, and through continuous cost improvement programs.
In Specialty Products, competition is a significant factor which has
resulted in increased pressure to reduce prices and, therefore, costs. Product
capability, quality, engineering support, and experience are also important
competitive factors.
EXPOSURE TO CURRENCY FLUCTUATIONS
Our companies conduct operations worldwide. We, therefore, are exposed to
the effects of fluctuations in relative currency values. Although our companies
engage in various hedging strategies with respect to their foreign currency
exposure where appropriate, it is not possible to hedge all such exposure.
Accordingly, our operating results may be impacted by fluctuations in relative
currency values.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- MARKET RISK EXPOSURES".
CYCLICALITY
Many of the markets in which our businesses operate are cyclical and can be
affected by general economic conditions in those markets. Since we manufacture
and sell products used in historically cyclical industries, such as the
construction, mining and minerals, transportation, automotive, and aerospace
industries, we could be adversely affected by negative cycles affecting those
and other industries.
GOVERNMENTAL REGULATION AND RELATED MATTERS
A number of our businesses are subject to governmental regulation by law or
through contractual arrangements. Our Defense Products & Services businesses
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 our executive officers. Most of such contracts are
subject to termination by the respective governmental parties on various
grounds, although such terminations have rarely occurred in the past.
ENVIRONMENTAL MATTERS
We are 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 our companies closely monitor all of their respective
environmental responsibilities, together with trends in environmental laws. We
have established an internal program to assess compliance with applicable
environmental requirements for all of our facilities, both domestic and
overseas. The program
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is designed to identify problems in a timely manner, correct deficiencies and
prevent future noncompliance. Over the past several years we have conducted
regular, thorough audits of our major operating facilities. As a result,
management believes that our companies are in substantial compliance with
current environmental regulations. Management does not believe, based on current
circumstances, that we will incur compliance costs pursuant to such regulations
that will have a material adverse effect on our 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 of our businesses require various raw materials (e.g., metals and
plastics), the availability and prices of which may fluctuate. Although some
cost increases may be recovered through increased prices to customers, our
operating results are exposed to such fluctuations. We attempt to control such
costs through purchasing and various other programs. In recent years, our
businesses have not experienced significant difficulties in obtaining an
adequate supply of raw materials necessary for our manufacturing processes.
RESEARCH, DEVELOPMENT, AND ENGINEERING
Our businesses require substantial commitment of resources for research,
development, and engineering activities to maintain significant positions in the
markets we serve. Such activities are conducted in laboratory and engineering
facilities at several of our major manufacturing locations. Although most of our
funds dedicated to research, development, and engineering activities are applied
to areas of high technology, such as aerospace and applications involving
electronic components, these activities are important in all of our business
segments. Expenditures by ITT Industries for research, development, and
engineering relating to our on-going lines of business totaled $264.4 million in
1999, $267.6 million in 1998, and $266.6 million in 1997. Of those amounts 57.8%
in 1999, 67.4% in 1998, and 68.4% in 1997 was expended pursuant to customer
contracts.
INTELLECTUAL PROPERTY
While we own and control 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 our
business, management believes that our business, as a whole, is not materially
dependent upon any one intellectual property or related group of such
properties. We are 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 us.
Patents, patent applications, and license agreements will expire or
terminate over time by operation of law, in accordance with their terms or
otherwise. Such expiration or termination of patents, patent applications, and
license agreements is not expected by our management to have a material adverse
effect on our financial position, results of operations or cash flows.
At the time of the Distribution (see -- "COMPANY HISTORY AND CERTAIN
RELATIONSHIPS"), we obtained from ITT Destinations certain exclusive rights and
licenses to use the "ITT" name, mark, and logo. In 1999 we acquired all right,
title, and interest in and to the "ITT" name, mark, and logo and took an
assignment of certain agreements granting The Hartford and ITT Educational
Services, Inc. (ESI) limited rights to use the "ITT" name, mark, and logo in
their businesses. These agreements are perpetual, and the licenses are subject
to maintenance of certain quality standards by both The Hartford and ESI.
EMPLOYEES
As of December 31, 1999, ITT Industries and its subsidiaries employed an
aggregate of approximately 38,000 people. Of this number, approximately 19,000
are employees in the United States, of whom approximately 30% are represented by
labor unions. Generally, labor relations have been maintained in a normal and
satisfactory manner.
DISCONTINUED OPERATIONS
In September, 1998 we completed the sale of our automotive Brake and
Chassis business and the sale of our automotive Electrical Systems business. As
a result of these sales, these two units, as well as several other small previ-
9
<PAGE> 11
ously sold automotive units, have been accounted for as discontinued operations.
See Note 5 -- "DISCONTINUED OPERATIONS" in the "NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS" for further information concerning discontinued
operations.
COMPANY HISTORY AND CERTAIN RELATIONSHIPS
ITT Industries, Inc. is an Indiana corporation incorporated on September 5,
1995 as ITT Indiana, Inc. It is the successor pursuant to a statutory merger of
ITT Corporation, a Delaware corporation ("ITT Delaware"), into ITT Indiana, Inc.
effective December 20, 1995, whereupon its name became ITT Industries, Inc. ITT
Delaware, originally incorporated in Maryland in 1920 as International Telephone
and Telegraph Corporation, was reincorporated in Delaware in 1968. It 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. On February 23, 1998, ITT Corporation was acquired by Starwood
Hotels & Resorts Worldwide, Inc.
ITT Delaware, ITT Destinations 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 the three parties subsequent to the Distribution.
The Distribution Agreement provides for, among other things, assumptions of
liabilities and cross-indemnities generally designed to allocate the financial
responsibility for the liabilities arising out of or in connection with (i) the
former automotive, defense & electronics, and fluid technology segments to ITT
Industries and its subsidiaries, (ii) the hospitality, entertainment, and
information services businesses to ITT Destinations and its subsidiaries, and
(iii) the insurance businesses to The Hartford and its subsidiaries. The
Distribution Agreement also provides for the allocation 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 Destinations, and The Hartford on a shared basis. The
Distribution Agreement provides that neither ITT Industries, ITT Destinations
nor The Hartford will take any action that would jeopardize the intended tax
consequences of the Distribution.
ITT Industries, ITT Destinations, and The Hartford 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.
------------------------
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
Our principal executive offices are in leased premises located in White
Plains, NY. We consider the many offices, plants, warehouses, and other
properties that we own or lease to be in good condition and generally suitable
for the purposes for which they are used. These properties are located in
several states in the United States, as well as in numerous countries throughout
the world. See "BUSINESS OF ITT INDUSTRIES" for further information with respect
to properties in each of our business segments, including the numbers of
facilities and countries in which they are located.
10
<PAGE> 12
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 130 sites in various countries. Of those sites, ITT Industries
has received notice that it is considered a Potentially Responsible Party
("PRP") at approximately 40 sites by the United States Environmental Protection
Agency ("EPA") and/or a similar state agency under CERCLA or its state
equivalent. In approximately 15 of these proceedings, ITT Industries' liability
is considered de minimis. At 16 of these sites, formerly operated by
subsidiaries of the Company, liability and/or defense costs are being divided
equally among the three parties to the Distribution Agreement. Other situations
generally involve either actions 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.
In Gendale, California ITT Industries has been involved in an environmental
proceeding 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. 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 May 1999, the EPA and the PRPs,
including ITT Industries and Lockheed Martin, reached an agreement in principle
on a consent decree settling that case. The consent decree is awaiting approval
from the EPA.
In a suit filed several years ago by ITT Industries in the California
Superior Court, Los Angeles County. ITT Corporation, et al. v. Pacific Indemnity
Corporation et al. against its insurers, ITT Industries is seeking recovery of
costs it 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 was scheduled for August 1999; however, it has been continued to
an indefinite date pending further developments in other similar cases in
California to which the Company is not a party. In April 1999, ITT Industries
initiated a new coverage action in New Jersey, ITT Industries, Inc. 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 challenged the convenience of New
Jersey as the forum for this action. In its ruling on the motion, the Court
dismissed the non-New Jersey claims, deferred action on certain New Jersey
claims and retained jurisdiction over one New Jersey claim. ITT Industries 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 -- COMPANY HISTORY AND
CERTAIN RELATIONSHIPS" for information concerning the allocation of certain
liabilities among the parties to the Distribution Agreement.
11
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matter was submitted to a vote of our shareholders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF ITT INDUSTRIES
The following information is provided regarding the executive officers of
ITT Industries:
<TABLE>
<CAPTION>
DATE OF
AGE AT YEAR OF ELECTION
FEBRUARY 1, INITIAL ELECTION TO PRESENT
NAME 2000 POSITION AS AN OFFICER POSITION
---- ---- -------- ------------- --------
<S> <C> <C> <C> <C>
David J. Anderson................. 50 Senior Vice President and Chief 1999 12/13/99
Financial Officer
Robert L. Ayers................... 54 Vice President, ITT Industries; 1998 10/1/99
President, Fluid Technology
Travis Engen...................... 55 Chairman and Chief Executive and 1987 12/19/95
Director
Donald E. Foley................... 48 Vice President and Treasurer 1996 5/21/96
Gerard Gendron.................... 47 Vice President, ITT Industries; 1998 10/27/98
President, Cannon Worldwide
Louis J. Giuliano................. 53 President and Chief Operating Officer 1988 10/27/98
Richard J. M. Hamilton............ 50 Vice President, ITT Industries; 1992 9/1/99
President, Specialty Products
Martin Kamber..................... 51 Senior Vice President, Director of 1995 12/19/95
Corporate Development
Vincent A. Maffeo................. 49 Senior Vice President and General 1995 12/19/95
Counsel
Thomas R. Martin.................. 46 Senior Vice President, Director of 1996 3/9/99
Corporate Relations
Richard W. Powers................. 58 Vice President, Director of Taxes and 1991 12/19/95
Assistant Secretary
Marvin R. Sambur.................. 53 Vice President, ITT Industries; 1998 10/27/98
President, Defense
James P. Smith, Jr................ 57 Senior Vice President, Director of 1995 12/19/95
Human Resources
Edward W. Williams................ 61 Vice President and Corporate Controller 1998 10/27/98
</TABLE>
Each of the above-named officers was elected to his present position to
serve at the pleasure of the Board of Directors.
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. Anderson, prior to his election as Senior
Vice President and Chief Financial Officer (1999), was Senior Vice President and
Chief Financial Officer of Newport News Shipbuilding (1996) and, prior to that,
Executive Vice President and Chief Financial Officer of RJR Tobacco; (ii) Mr.
Ayers, prior to his election as Vice President (1998) and President of Fluid
Technology (1999), was President of Sulzer Bingham Pumps Inc. (1990); (iii) Mr.
Engen, prior to his election as Chairman and Chief Executive (1995) (having
yielded his position as President in 1998), was Executive Vice President of ITT
Delaware (1991); (iv) Mr. Foley, prior to his election as Vice President and
Treasurer, was Assistant Treasurer of International Paper Company; (v) Mr.
Gendron, prior to his election as Vice President, was and continues as President
of Cannon Worldwide (1997) and, prior to that, its Vice President (1995), and,
prior to that, its Controller (1992); (vi) Mr. Giuliano, prior to his election
as President and Chief Operating Officer, was Senior Vice President (1995) and,
prior to that was Senior Vice President of ITT Delaware in addition to being
President of our Defense & Electronics business; (vii) Mr. Hamilton, in addition
to his election as Vice President (1992) and President of Specialty Products
(1999), held other senior positions with ITT Industries, including Senior Vice
President and Controller; (viii) Mr. Kamber, prior to his election as Senior
Vice President, Director of Corporate Development, was Vice President, Corporate
Development, of ITT Automotive, Inc. (1993); (ix) Mr. Maffeo, prior to his
election as Senior Vice President and General Counsel, was Vice President and
General Counsel of ITT Automotive, Inc.; (x) Mr. Martin, prior to his election
as Senior Vice President, Director of Corporate Relations, was Vice President,
Director of Corporate Relations (1996), and, prior to that, 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. (xi) Mr.
Powers, prior to his election as Vice President, Director of Taxes, was Vice
President of ITT Delaware; (xii) Mr. Sambur, prior to his
12
<PAGE> 14
election as Vice President (1998) and President of Defense (1998), was President
of our Aerospace/Communications Division (1991); (xiii) Mr. Smith, prior to his
election as Senior Vice President, was Executive Vice President of ITT Sheraton
Corporation (1993); and (xiv) Mr. Williams, prior to his election as Vice
President and Corporate Controller (1998), was Vice President and Controller of
our Defense & Electronics business.
PART II
ITEM 5. MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
COMMON STOCK -- MARKET PRICES AND DIVIDENDS
<TABLE>
<CAPTION>
1999 1998
---------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
IN DOLLARS
<S> <C> <C> <C> <C>
Three Months Ended
March 31................................................. $40.88 $35.00 $38.94 $28.13
June 30.................................................. 41.50 34.88 38.44 32.88
September 30............................................. 40.00 30.50 38.13 29.50
December 31.............................................. 36.25 31.38 40.88 30.69
</TABLE>
The above table reflects the range of market prices of our common stock as
reported in the consolidated transaction reporting system of the New York Stock
Exchange, the principal market in which this security is traded (under the
trading symbol "IIN"). During the period from January 1, 2000 through February
29, 2000, the high and low reported market prices of our common stock were
$34.94 and $22.38, respectively.
We declared dividends of $.15 per share of common stock in each of the four
quarters of 1998 and 1999 and in the first quarter of 2000.
Dividend decisions are subject to the discretion of our Board of Directors
and will be based on, and affected by, a number of factors, including operating
results and financial requirements. Therefore, there can be no assurance as to
what level of dividends, if any, will be paid in the future.
There were 38,871 holders of record of our common stock on February 29,
2000.
ITT Industries common stock is listed on the following exchanges:
Frankfurt, London, Midwest, New York, Pacific, and Paris.
13
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
RESULTS AND POSITION
Sales and revenues................ $4,632.2 $4.492.7 $4,207.6 $3,744.5 $3,726.7
Operating income (loss)(a)........ 415.2 (74.6) 141.3 246.0 (41.6)
Income (loss) from continuing
operations(a)................... 232.9 (97.6) 11.9 66.4 (130.8)
Net income........................ 232.9 1,532.5 108.1 222.6 707.9
Income from continuing operations,
as adjusted(b).................. 230.0 146.0 95.9 66.4 19.7
Expenditures on plant additions... 227.9 212.9 212.5 176.0 213.2
Depreciation and amortization..... 181.1 195.6 196.9 187.3 177.8
Total assets...................... 4,529.8 5,048.8 5,058.4 3,976.9 4,290.6
Total assets, excluding
discontinued operations......... 4,529.8 5,048.8 4,127.0 2,929.6 3,216.8
Long-term debt.................... 478.8 515.5 531.2 582.2 930.7
Total debt........................ 1,088.1 767.1 2,172.6 1,368.0 1,554.4
Cash dividends declared per common
share........................... .60 .60 .60 .60 .99
EARNINGS PER SHARE
Income from continuing operations,
as adjusted(b)
Basic........................... $ 2.58 $ 1.29 $ .81 $ .56 $ .18
Diluted......................... $ 2.50 $ 1.29 $ .79 $ .55 $ .18
Net income
Basic........................... $ 2.61 $ 13.55 $ .91 $ 1.89 $ 6.24
Diluted......................... $ 2.53 $ 13.55 $ .89 $ 1.85 $ 6.18
</TABLE>
(a) Income from continuing operations in 1999, 1998 and 1997 includes (income)
charges of $(4.6), $399.4 and $137.8 pretax, respectively, or $(2.9), $243.6
and $84.0, after-tax, respectively, for restructuring and other items as
described in Note 4.
(b) Income from continuing operations in 1999, as adjusted, excludes
restructuring and other items of $(2.9) after tax. Income from continuing
operations in 1998, as adjusted, excludes the items in note (a) above and
$83.2, after-tax, for operating income from discontinued operations;
$1,546.9, after-tax, for gain on sale of ITT Automotive operations. The 1997
net income from continuing operations, as adjusted, excludes the items in
note (a) above and operating income from discontinued operations of $101.8,
after-tax; and a charge for the cumulative effect of accounting change of
$5.6, after-tax. The 1996 net income from continuing operations, as
adjusted, excludes operating income from discontinued operations of $156.2,
after-tax.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
HIGHLIGHTS
For the years ended December 31, ITT Industries, Inc. (the "Company")
reported the following (in millions):
<TABLE>
<CAPTION>
1999(a) 1998(b) 1997(c)
-------- -------- --------
<S> <C> <C> <C>
Sales and revenues from continuing operations............... $4,632.2 $4,492.7 $4,207.6
Operating income from continuing operations................. $ 410.6 $ 324.8 $ 279.1
Income from continuing operations, after-tax................ $ 230.0 $ 146.0 $ 95.9
======== ======== ========
</TABLE>
(a) 1999 figures are adjusted to exclude restructuring and other special
items of $(4.6) pretax or $(2.9) after-tax.
(b) 1998 figures are adjusted to exclude restructuring and other special
items of $399.4 pretax or $243.6 after-tax.
(c) 1997 figures are adjusted to exclude restructuring and other special
items of $137.8 pretax or $84.0 after-tax.
ACQUISITIONS: During 1999, the Company continued to make acquisitions
intended to strengthen market positions and present the highest potential for
creating value. Most notably, the Company acquired six significant businesses
with combined annualized revenues of approximately $325 million. These
acquisitions include the space and defense communications businesses of Stanford
Telecommunications, Inc., Flojet Corporation, STX Pte. Ltd., Water Pollution
Control Corporation (renamed Sanitaire Corporation), Hydro Air Industries and K
and M Electronics, Inc.
SHARE REPURCHASE COMPLETED: During the first quarter of 1999, the Company
completed a $1.1 billion stock repurchase instituted in conjunction with the
sale of the automotive businesses in 1998. During the entire course of the
program, the Company repurchased 30.5 million of its shares on the open market.
This reduced the number of shares outstanding by approximately 25% and enabled
the Company to contain the EPS dilution from the 1998 sale of its automotive
businesses to 10%.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31,
1998: Sales and revenues in 1999 were $4.6 billion, an increase of $139.5
million, or 3.1% over 1998. Specialty Products' sales increased $110.2 million,
or 13%, primarily due to strong 1999 vehicle build rates in North America and
Europe. Other factors that contributed to the increase at Specialty Products
were the impact of the General Motors strike in 1998, and the benefit of
acquisitions, which include the full year impact of Rule Industries, Inc.,
acquired in June 1998, as well as the impact of Hydro Air Industries and Flojet
Corporation, both acquired during 1999. Defense Products & Services' sales and
revenues increased by $120.5 million, or 9.3%, primarily due to increased
domestic SINCGARS sales and increased Night Vision sales. These increases more
than offset a decrease of $11.9 million in our Connectors & Switches segment,
caused by weak first half 1999 demand within the European connector market and
total year softness within the North American military aerospace market, a
decrease of $35.0 million in our Pumps & Complementary Products' segment due to
weakness in the industrial end-users markets, and lost revenue due to
discontinued product lines and higher selectivity with products and customers
and lower sales of $44.3 million from companies held for disposition.
Gross margin of 23.8% improved slightly over the 23.6% in 1998, reflecting
the improvements from restructuring actions.
Selling, general and administrative expenses decreased $43.0 million from
1998 due to cost reductions. This reduction improved the ratio of selling,
general and administrative expenses to sales, from 16.3% in 1998 to 14.9% in
1999.
Operating income for 1999 was $415.2 million and included a $4.6 million
credit related to restructuring and other special items. The 1998 operating loss
of $74.6 million included restructuring and other special items of $399.4
million. Excluding restructuring and other special items in both years, the
comparative operating income was $410.6 million for 1999 and $324.8 million for
1998. The related operating margin improved to 8.9% in 1999 from 7.2% in 1998.
The year-to-year increases in operating income and margin were the result of
higher sales
15
<PAGE> 17
volumes, cost reductions, and the contribution from acquisitions.
Net interest expense of $46.8 million represented a 43.2% reduction from
the prior year's net expense of $82.4 million. The decrease was due to using a
portion of the proceeds from the automotive sales to significantly lower the
Company's debt level.
Net income from continuing operations excluding restructuring and other
special items in 1999 was $230.0 million, or $2.50 per diluted share, compared
to $146.0 million, or $1.29 per diluted share in 1998. The increase was due to
higher sales volume, benefits from restructuring and other cost reduction
initiatives, a significant reduction in interest expense, and a lower effective
tax rate.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31,
1997: Net sales and revenues in 1998 were $4.5 billion, an increase of $285.1
million, or 6.8% over 1997. Defense Products & Services' sales and revenues
increased by $197.7 million, or 18%, primarily due to the Kaman Sciences
acquisition at the end of 1997 and increases in international sales. Pumps &
Complementary Products' sales increased $309.8 million, or 21.2%, due primarily
to the inclusion of Goulds (a 1997 acquisition) for an additional five months.
Specialty Products' sales increased $26.1 million, or 3.2%, due to increased
sales volume in aerospace controls, friction material, and shock absorber
businesses as well as the acquisitions of Rule, Sinton, and A.G. Johansons.
These improvements were partially offset by the impact of the 1998 General
Motors strike. These increases more than offset the loss of sales due to the
dispositions of non-core businesses.
Gross margin increased to 23.6% in 1998 compared to 22.8% in 1997. This
improvement was largely due to cost reductions implemented early in the year at
Connectors & Switches, to offset the weakening market conditions in Asia and a
decline in sales of Mobile Communications products.
Selling, general and administrative expenses of $734.4 million reflected an
increase of $55.2 million, or 8.1% over 1997. This increased the ratio to sales
from 16.1% in 1997 to 16.3% in 1998. The increase in selling, general and
administrative expense was primarily due to the inclusion of Goulds for an
additional five months and Kaman Sciences (a year-end 1997 acquisition) for the
full year. Other operating expenses of $4.4 million in 1998 and $15.5 million in
1997 that are included in selling, general and administrative expenses, included
gains and losses from foreign exchange transactions, gains and losses on sales
of assets, and other charges. The $11.1 million favorable variance was mostly
due to higher gains on the sales of fixed assets offset partially by unfavorable
foreign exchange effects.
The total operating loss in 1998 of $74.6 million included restructuring
and other special items of $399.4 million. Excluding the restructuring and other
special items, operating income was $324.8 million, an improvement of 16.4% over
the 1997 amount of $279.1 million. Restructuring and other special items
excluded from the 1997 figures were $137.8 million. The increase in operating
income was attributable to improvements across all segments.
Net interest expense decreased $33.3 million in 1998 compared to 1997. A
portion of the proceeds from the automotive sales was used to significantly
reduce the Company's debt level. The debt reduction primarily occurred late in
the third quarter; thus, the entire annualized interest cost savings was not
realized until 1999. The reduction in debt and subsequent reduction in interest
expense toward the end of 1998 more than offset increases in interest expense
earlier in the year.
Operating income from discontinued operations, net of tax, declined to
$83.2 million in 1998 from $101.8 million in 1997. The decline was primarily due
to the absence of any income being reflected in the fourth quarter of 1998 for
the automotive businesses that were sold at the end of the third quarter. In
addition, after-tax charges of $18.5 million were recorded in the fourth quarter
of 1998 for residual exposures related to discontinued businesses sold in
previous years as provided for in the 1995 Distribution Agreement under which
ITT Corporation, a Delaware corporation, was divided into three separate and
unrelated entities.
Net income in 1998 was $1.5 billion, or $13.55 per diluted share, compared
to $108.1 million, or $.89 per diluted share in 1997. Included in 1998 net
income was income from discontinued operations of $1.6 billion, or $14.41 per
diluted share, which included the gain on the sales of automotive operations of
$1.6 billion.
16
<PAGE> 18
In 1997, the Company implemented Emerging Issues Task Force Issue No.
97-13, which required that reengineering costs incurred in connection with
software installation efforts be expensed as incurred and that costs previously
capitalized be written off. As a consequence, net income for 1997 was adversely
impacted by $5.6 million after-tax, or $.05 per diluted share.
BUSINESS SEGMENTS
Sales and revenues and operating income for each of the Company's business
segments were as follows (in millions):
<TABLE>
<CAPTION>
Defense Pumps & Dispositions,
Connectors Products & Complementary Specialty Other &
Year Ended December 31, & Switches Services Products Products Eliminations Corporate Total
----------------------- ---------- ---------- ------------- --------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Sales and revenues............. $516.0 $1,413.9 $1,735.0 $959.5 $ 7.8 $ -- $4,632.2
Operating income (loss):
Before restructuring and
other special items........ 62.1 108.8 164.4 132.9 0.5 (58.1) 410.6
Restructuring and other
special items.............. 9.7 3.9 (5.5) (3.5) -- -- 4.6
------ -------- -------- ------ ------ ------- --------
Total operating income
(loss)....................... $ 71.8 $ 112.7 $ 158.9 $129.4 $ 0.5 $ (58.1) $ 415.2
1998
Sales and revenues............. $527.9 $1,293.4 $1,770.0 $849.3 $ 52.1 $ -- $4,492.7
Operating income (loss):
Before restructuring and
other special items........ 52.7 97.9 145.5 90.9 5.4 (67.6) 324.8
Restructuring and other
special items.............. (102.4) (69.6) (147.6) (9.0) 31.0 (101.8) (399.4)
------ -------- -------- ------ ------ ------- --------
Total operating income
(loss)....................... $(49.7) $ 28.3 $ (2.1) $ 81.9 $ 36.4 $(169.4) $ (74.6)
1997
Sales and revenues............. $537.7 $1,095.7 $1,460.2 $823.2 $290.8 $ -- $4,207.6
Operating income (loss):
Before restructuring and
other special items........ 41.9 81.4 130.2 89.6 (4.1) (59.9) 279.1
Restructuring and other
special items.............. -- -- (44.1) (12.9) (65.8) (15.0) (137.8)
------ -------- -------- ------ ------ ------- --------
Total operating income
(loss)....................... $ 41.9 $ 81.4 $ 86.1 $ 76.7 $(69.9) $ (74.9) $ 141.3
</TABLE>
Connectors & Switches' sales and revenues decreased $11.9 million, or 2.3%,
compared to 1998. The first half 1999 weak demand in the European connector
market and total year softness within the North American military aerospace
market was partially offset by strong demand for the Company's communications
connectors and switches, and the acquisition of the keypad business of San Teh,
Ltd. (STX Pte. Ltd.) during the fourth quarter. Operating income before
restructuring and other special items was $62.1 million, up $9.4 million, or
17.8% from 1998. Operating margin, before restructuring and other special items,
expanded by 2.1 percentage points in 1999. New products, together with ongoing
cost control efforts, contributed to the operating income increase. In 1998,
sales and revenues were off $9.8 million or 1.8% from 1997 due to lower demand
in Asia and a decline in sales of Mobile Communications products. Operating
income, excluding restructuring and other special items, increased $10.8 million
or 25.8% over 1997 due to improved cost structure and the launch of new
commercial products.
Defense Products & Services' sales and revenues were $1.41 billion, up 9.3%
or $120.5 million over 1998. Higher domestic SINCGARS sales, higher export
sales, particularly a large radar sale to Korea in the fourth quarter, higher
sales volume in our Night Vision unit, as well as a $25.6 million claim
settlement on a prior year project at the ITT Aerospace/Communications Division
drove the revenue increase in this segment. Operating margin remained flat for
the year. Operating income excluding restructuring and other special items was
$108.8 million, an increase of $10.9 million or 11.1% over 1998, mainly due to
higher sales volume and the receipt of a $5.3 million settlement during the
second quarter. During 1999, the Company recorded $28.3 million in charges for
loss contracts, warranty provisions and other matters. The 1998 sales and
revenues increased $197.7 million or 18% over 1997 due to the acquisition of
Kaman Sciences and an increase in international sales. Excluding restructuring
and other special items, operating income increased $16.5 million or 20.3% over
1997 due
17
<PAGE> 19
to increased sales and revenues and continued productivity improvements.
Pumps & Complementary Products' sales of $1.74 billion, decreased $35.0
million, or 2.0%, from 1998. The acquisition of Sanitaire and strength in the
water and wastewater markets were offset by continued weakness in the industrial
end-user markets, and lost revenue due to discontinued product lines and higher
selectivity with products and customers. Operating income before restructuring
and other special items was $164.4 million, up $18.9 million or 13.0% over the
prior year. Sales for 1998 increased $309.8 million or 21.2% over 1997 primarily
due to the inclusion of Goulds for an additional five months during 1998.
Excluding restructuring and other special items, operating income increased
$15.3 million or 11.8% over 1997 due to the inclusion of Goulds for an
additional five months and continued cost controls and consolidation efforts in
this segment.
Specialty Products recorded revenues of $959.5 million for the year,
representing an increase of 13% over prior year. Strong sales to OEM Automotive
customers resulting from high North American and European vehicle build rates,
the impact of the 1998 General Motors strike, higher sales in the pharmaceutical
industry, along with the impact of acquisitions fueled the revenue growth.
Operating income before restructuring and other special items for the year rose
46.2% or $42.0 million over 1998, to $132.9 million. Operating margins, before
restructuring and other special items, were up 3.1 percentage points. The 1998
sales were $26.1 million or 3.2% higher than 1997 due to increased sales volume
in the aerospace controls, friction material and shock absorber businesses.
Excluding restructuring and other special items, 1998 operating income increased
$1.3 million or 1.5% compared to 1997.
RESTRUCTURING AND OTHER SPECIAL ITEMS
The Company has undertaken a number of actions in recent years to improve
operating efficiencies and reduce structural costs. The following is a brief
summary of the activity recorded in 1999 and 1998. See Note 4, Restructuring and
Other Special Items, in the Notes to the Consolidated Financial Statements for a
detailed discussion.
During 1998, the Company recorded restructuring and other special items of
$20.1 million in the first quarter, $10.7 million in the second quarter, and
$368.6 million in the fourth quarter. The actions taken affected all four
business segments and included rationalization of operating locations,
consolidations of sales and distribution facilities, workforce reductions and
product pruning. The items included write-downs of businesses to be sold and an
increase in reserves for environmental exposure. As of December 31, 1999, the
Company had closed 16 of the planned 25 facilities, discontinued 18 of the
planned 19 product lines, and reduced the workforce by 1,680, or approximately
70% of the planned aggregate reduction of approximately 2,400 persons. The
remaining activities will be completed in 2000 and early 2001.
In the fourth quarter of 1999, the Company recorded $20.2 million of
charges related to new restructuring activities, primarily for the closure of
four facilities and severance of 326 persons. It is expected that a large
majority of these costs will be expended in 2000. Also in the fourth quarter,
the Company recorded $20.0 million of goodwill write-offs.
During the fourth quarter of 1999, the Company assessed its restructuring
reserves established in 1998, determined that activities related to those
reserves will be completed for $44.8 million less than originally estimated, and
reversed the related reserves into income. The net effect of the reversal of
1998 reserves and the 1999 restructuring and asset write-offs was an increase to
1999 operating income of $4.6 million and EPS of $.03.
During 1997, the Company recorded charges for restructuring and other
special items of $137.8 million. The 1997 restructuring charges were taken
across the business segments as follows: Pumps & Complementary Products $44.1
million; Specialty Products $12.9 million; and Corporate and Other $80.8
million. The charges comprised $64.7 million for the write-down to fair value of
the net assets of two non-core businesses expected to be divested and which have
since been sold, $57.0 million for asset write-offs and severance costs
associated with the closure and consolidation of facilities and related
workforce reductions of 25 persons, $15.0 million to increase environmental
reserves, and $1.1 million to recognize the loss on the sale of a non-core
business. All activities associated with the 1997 charges were completed
according to the plan.
18
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at the beginning of the year were $880.9 million.
During the year, cash from operating activities of $343.2 million, net
borrowings of $345.3 million, and divestiture proceeds of $107.7 million were
used primarily for repurchases of common stock of $402.6 million, capital
expenditures of $227.9 million, acquisitions of $544.8 million, dividend
payments of $55.5 million, and $284.4 million for costs primarily related to
taxes resulting from discontinued operations.
DIVESTITURES: During 1999, the Company made three significant divestitures,
Palm Coast Utility Corporation, Carbon Industries, Inc. and assets of Community
Development Corporation which in aggregate generated $96.5 million of cash. The
remaining $11.2 million of proceeds from the sale of assets in 1999 represented
plant, property and equipment sales across all businesses. In 1998, the Company
sold its automotive Brake and Chassis and Electrical Systems businesses, and the
Barton fluid measurement and Pomona Electronics units for a total of $3.75
billion.
SHARE REPURCHASE: During 1999, the Company repurchased 8.1 million shares
as part of its share repurchase program announced on July 29, 1998. The total
cost of the share repurchases was $318.3 million in 1999. In addition, 2.2
million, 1.3 million and 2.3 million shares in 1999, 1998 and 1997,
respectively, were repurchased to offset the dilutive effect of stock option
exercises.
CASH FLOWS: Cash flows from operating activities were $343.2 million in
1999, an increase of $154.7 million, or 82%, from $188.5 million generated in
1998. In 1999, the Company maintained its investment in working capital despite
making several large acquisitions. In 1998, working capital requirements
increased due to higher inventory levels, the timing of accounts receivable
collection and lower payables throughout the business segments. The slight
improvement in other net operating activities was mainly due to a reduction in
long-term third party receivables.
DEBT AND CREDIT FACILITIES: External debt at December 31, 1999 was $1.09
billion, compared to $767.1 million at December 31, 1998. The increase was
mainly due to acquisitions in 1999. The maximum amount of borrowing available
under the Company's revolving credit agreement at December 31, 1999 was $1.5
billion.
ADDITIONS TO PLANT, PROPERTY AND EQUIPMENT: Capital expenditures during
1999 were $227.9 million, an increase from $212.9 million in 1998. Approximately
31% of the 1999 spending was incurred at Pumps & Complementary Products
primarily related to expansion of existing product lines, new product lines, and
custodial replacements. Approximately 20% was incurred at Specialty Products
related to product line changes resulting in product improvements and expansion
of the capacity for established products as well as new products. Approximately
24% was spent at Connectors & Switches, where key capital investment programs
included manufacturing cost reduction initiatives, implementation of an
enterprise resource planning system and spending for new product introductions.
Defense Products & Services expended approximately 24% of the 1999 total,
primarily related to a purchase by the Avionics division of its major facility
and completion of expanded production facility at its Night Vision division. At
December 31, 1999, contractual commitments have been made for future
expenditures totaling $37.4 million.
ACQUISITIONS: During 1999, the Company acquired Stanford
Telecommunications, Inc.'s space and defense communications businesses, Flojet
Corporation, STX Pte. Ltd., Sanitaire Corporation, Hydro Air Industries, K and M
Electronics, the assets of Energy Machine Service, Inc. and made an equity
investment in EarthWatch. The Company paid a total of $544.8 million for these
acquisitions. The acquisitions were accounted for as purchases and, accordingly,
the results of operations of each acquired company are included in the
consolidated income statement from the date of acquisition. The excess of the
purchase prices over the fair values of the net assets acquired and the
liabilities assumed of $416.1 million has been recorded as goodwill and will be
amortized over periods not to exceed 40 years. In 1998, the Company acquired
Rule Industries, Inc., Sinton Engineering Co. Limited and Sinton (UK) Limited,
A.G. Johansons Metallfabrik AB and The Great American Gumball Corporation for
which it paid a total of $79.6 million.
MARKET RISK EXPOSURES
The Company, in the normal course of doing business, is exposed to the
risks associated with changes in interest rates, currency
19
<PAGE> 21
exchange rates, and commodity prices. To limit the risks from such fluctuations,
the Company enters into various hedging transactions that have been authorized
pursuant 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 has borrowed in several currencies and from various sources
and has used interest rate swaps. At December 31, 1999, the Company's short-term
and long-term debt obligations, net of cash, were $906.4 million. Based on this
position and the Company's overall exposure to interest rate changes, a 67 basis
point change in interest rates (which is equivalent to 10% of the Company's
weighted average short-term interest rate at December 31, 1999) on the Company's
cash and marketable securities, and on its floating rate debt obligations and
related interest rate derivatives, would have a $2.8 million effect on the
Company's pretax earnings for the year ending December 31, 1999. A 74 basis
point increase in long-term interest rates (equivalent to 10% of the company's
weighted average long-term interest rates at December 31, 1999) would have a
$3.5 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 denominated forward
contracts to hedge against adverse changes in foreign exchange rates. Such
contracts generally have durations of less than one year. The Company has also
utilized 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 exist primarily 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, 1999, would have an impact of approximately
$2.0 million on the fair value of such instruments. The Company uses derivative
instruments to hedge exposures, and as such, the quantification of the Company's
market risk for foreign exchange financial instruments does not account for the
offsetting impact of the Company's underlying investment and transactional
positions.
INCOME TAXES
FOREIGN TAX CREDITS: As a global company, the Company 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. As of the end of 1999, the Company was 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 net deferred tax assets of $373.6
million at December 31, 1999 and $367.4 million at December 31, 1998. The
deferred tax assets for both periods are composed of U.S., foreign, and state
and local deferred tax assets. These assets arise from temporary differences
between assets and liabilities for financial reporting and tax purposes and
primarily relate to reserves, employee benefits, and accelerated depreciation.
It is management's expectation that the Company will have sufficient future
taxable income from continuing operations to utilize its deductions in future
periods.
RISKS AND UNCERTAINTIES
SALES OF AUTOMOTIVE BUSINESSES: The Company has received notifications of
claims from the buyers of the automotive businesses requesting post-closing
adjustments to the purchase price under the provisions of the sales agreements.
Those claims have been submitted to arbitration. After a thorough review, the
Company believes that the claims have little merit and intends to vigorously
dispute them. Although it cannot be determined at this time whether or to what
extent, if any, there will be a post-closing adjustment of the purchase prices
as a result of the arbitration, the Company does not believe such adjustments
would have a material adverse effect on the cash flow, results of operations, or
financial condition of the Company and its subsidiaries on a consolidated basis.
ENVIRONMENTAL MATTERS: The Company is subject to stringent environmental
laws and regulations that affect its operating facilities and
20
<PAGE> 22
impose liability for the clean up of past discharges of hazardous substances. In
the United States, these laws 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. 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 clean-up standards. When it is possible to create
reasonable estimates of liability with respect to environmental matters, the
Company establishes reserves in accordance with generally accepted accounting
principles. Insurance recoveries are recorded when it is probable that they will
be received. 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.
YEAR 2000 READINESS DISCLOSURE: The Company completed its year 2000 ("Y2K")
program and successfully transitioned its information systems into the new year.
The Company and its major customers, suppliers, and financial institutions have
not yet experienced any significant systems or other Y2K related problems. In
addition, there were no discernable effects of the date change on the Company's
operations. Costs incurred for our Y2K readiness efforts amounted to $20.3
million. There has been no material deferral of expenditures related to the
development of the Company's regular information technology systems due to
spending on the Y2K readiness efforts. Further, since the transition to the year
2000, no known trends or problems related to Y2K readiness have been identified.
EURO CONVERSION ISSUE: The Company is addressing issues raised by the
conversion to the Euro, such as assessing whether cross-border price
transparency will affect price structures for similar products and adapting its
information technology systems. The Company's efforts to adapt its systems
differ at its various European operations. All operations are able to
accommodate Euro-denominated invoicing and purchasing transactions. The
Company's European operations are formulating plans to accommodate all
Euro-denominated transactions and triangulation conventions by January 1, 2002,
and some of these operations have already implemented the utilization of the
Euro as a transactional currency. The Company anticipates that its costs in
connection with the Euro conversion will not be material. Further, the Company
does not anticipate that the conversion from the legacy currencies to the Euro
would have a material adverse impact on its consolidated financial position,
results of operations, or cash flows.
PENSION PLAN: Effective January 1, 2000, the Company's primary salaried
pension plan was revised to allow employees a choice for future accruals between
the existing pension formula or a pension equity formula which provides enhanced
portability of benefits. Based on the nature of this change, there is no effect
on liabilities accrued to date and no expected material change in the cost of
the plan with respect to future expense accruals. In addition, the Company
revised the plan's formula with respect to employees who first became eligible
for membership in the plan on or after January 1, 2000 by reducing the basic
formula accrual rate. While it is expected that future costs will decrease over
time as a result, the effect is not currently measurable.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document, including within this
Management's Discussion and Analysis of Financial Condition and Results of
Operations (most particularly, material presented under "Restructuring and Other
Special Items," "Liquidity and Capital Resources," "Market Risk Exposures," and
"Risks and Uncertainties"), that are not historical facts, constitute
"Forward-Looking Statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking
21
<PAGE> 23
statements, in general, predict, forecast, indicate or imply future results,
performance or achievements and generally use words so indicative. 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 may be described or referred to
from time to time in filings made by the Company with the Securities and
Exchange Commission. Included in those factors are 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 and
revenues mix; pricing levels; changes in sales and revenues to, or the identity
of, significant customers; changes in technology; industry capacity and
production rates; ability of outside third parties to comply with their
commitments; competition; capacity constraints; availability of raw materials
and adequate labor; availability of appropriate professional expertise;
availability of liquidity sufficient to meet the Company's needs; the ability to
adapt to changes resulting from acquisitions and divestitures and to effect cost
reduction programs and various other factors referenced in this Management's
Discussion and Analysis. In addition to these factors, our business segments may
be affected by the more specific factors referred to below.
Our Connectors & Switches business will be affected by the economic
conditions in foreign markets, both those in which we currently participate, and
those that we are trying to enter; the level of defense funding by domestic and
foreign governments; and the cyclical nature of the industry.
Our Defense Products & Services business will be affected by factors
including the level of defense funding by domestic and foreign governments; our
ability to receive contract awards; and our ability to develop and market
products and services for customers outside of traditional markets.
Our Pumps & Complementary Products business will be affected by factors
including global economic conditions; governmental funding levels; international
demand for fluid management products; the ability to successfully expand into
new geographic markets; weather conditions; and continued demand for replacement
parts and servicing.
Our Specialty Products' business will be affected by the cyclical nature of
the transportation industries; application rates of products per vehicle;
strikes at major auto producers; and international demand for fluid management
products.
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.
22
<PAGE> 24
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 and in Note 16, Financial Instruments, in
the Notes to Consolidated Financial Statements herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedule herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 Annual Report.
The information called for by Item 10 with respect to executive officers is
set forth above in Part I under the caption "Executive Officers of ITT
Industries."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. See Index to Consolidated Financial Statements and Schedule
appearing on page F-1 for a list of the financial statements and schedule
filed as a part of this report.
2. See Exhibit Index appearing on pages II-2, II-3 and II-4 for a list
of the exhibits filed or incorporated herein as a part of this report.
(b) There were no reports on Form 8-K filed by ITT Industries during the
last quarter of the period covered by this report.
23
<PAGE> 25
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, 1999......................................... F-4
Consolidated Statements of Comprehensive Income for the
three years ended December 31, 1999....................... F-5
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-6
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999................................... F-7
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 1999............... F-8
Notes to Consolidated Financial Statements.................. F-9
Business Segment Information................................ F-26
Geographical Information.................................... F-28
Sales and Revenues by Product Category...................... F-28
Quarterly Results for 1999 and 1998......................... F-30
Valuation and Qualifying Accounts........................... S-1
</TABLE>
F-1
<PAGE> 26
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 accounting principles generally
accepted in the United States 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.
/s/ TRAVIS ENGEN
- ------------------------------------------------------
Travis Engen
Chairman and
Chief Executive
/s/ DAVID J. ANDERSON
- ------------------------------------------------------
David J. Anderson
Senior Vice President and
Chief Financial Officer
F-2
<PAGE> 27
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, 1999 and 1998,
and for each of the three years in the period ended December 31, 1999, as set
forth on 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
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 24, 2000
F-3
<PAGE> 28
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
(in millions, except per share amounts)
<S> <C> <C> <C>
Sales and revenues................................ $4,632.2 $4,492.7 $4,207.6
Costs of sales and revenues....................... 3,265.8 3,165.9 2,982.7
Selling, general and administrative expenses...... 691.4 734.4 679.2
Research, development and engineering expenses.... 264.4 267.6 266.6
Restructuring and other special items............. (4.6) 399.4 137.8
-------- -------- --------
Total costs and expenses.......................... 4,217.0 4,567.3 4,066.3
-------- -------- --------
Operating income (loss)........................... 415.2 (74.6) 141.3
Interest expense.................................. (84.8) (125.8) (133.2)
Interest income................................... 38.0 43.4 17.5
Miscellaneous income (expense).................... 1.3 (3.0) (6.1)
-------- -------- --------
Income (loss) from continuing operations before
income tax expense.............................. 369.7 (160.0) 19.5
Income tax (expense) benefit...................... (136.8) 62.4 (7.6)
-------- -------- --------
Income (loss) from continuing operations.......... 232.9 (97.6) 11.9
Discontinued operations:
Operating income, net of tax of $53.1, $65.1.... -- 83.2 101.8
Gain on sales of ITT Automotive, net of tax of
$835.0....................................... -- 1,546.9 --
Cumulative effect of accounting change, net of tax
benefit of $3.6................................. -- -- (5.6)
-------- -------- --------
Net income........................................ $ 232.9 $1,532.5 $ 108.1
======== ======== ========
EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations
Basic........................................... $ 2.61 $ (.86) $ .10
Diluted......................................... $ 2.53 $ (.86) $ .10
Discontinued operations
Basic........................................... $ -- $ 14.41 $ .86
Diluted......................................... $ -- $ 14.41 $ .84
Cumulative effect of accounting change
Basic........................................... $ -- $ -- $ (.05)
Diluted......................................... $ -- $ -- $ (.05)
Net income
Basic........................................... $ 2.61 $ 13.55 $ .91
Diluted......................................... $ 2.53 $ 13.55 $ .89
AVERAGE COMMON SHARES -- BASIC.................... 89.2 113.1 118.4
AVERAGE COMMON SHARES -- DILUTED.................. 92.0 113.1 121.0
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-4
<PAGE> 29
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended December 31, 1999
----------------------------------------------
Pretax Tax (Expense) After-Tax
Income (Expense) Benefit Amount
---------------- ------------- ---------
(in millions)
<S> <C> <C> <C>
Net income...................................... $232.9
Other income (loss):
Foreign currency translation:
Adjustments arising during period.......... $(23.3) $(11.6) (34.9)
Unrealized gain (loss) on investment
securities................................. (0.2) -- (0.2)
------ ------ ------
Total other income (loss)................ $(23.5) $(11.6) (35.1)
------
Comprehensive income............................ $197.8
======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1998
----------------------------------------------
Pretax Tax (Expense) After-Tax
Income (Expense) Benefit Amount
---------------- ------------- ---------
(in millions)
<S> <C> <C> <C>
Net income...................................... $1,532.5
Other income (loss):
Foreign currency translation:
Adjustments arising during period.......... $ 18.0 $ 3.0 21.0
Reclassifications included in net income... (182.7) (22.1) (204.8)
Unrealized gain (loss) on investment
securities................................. (2.1) -- (2.1)
------- ------ --------
Total other income (loss)................ $(166.8) $(19.1) (185.9)
--------
Comprehensive income............................ $1,346.6
========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1997
----------------------------------------------
Pretax Tax (Expense) After-Tax
Income (Expense) Benefit Amount
---------------- ------------- ---------
(in millions)
<S> <C> <C> <C>
Net income...................................... $108.1
Other income (loss):
Foreign currency translation:
Adjustments arising during period.......... $ 38.3 $(7.5) 30.8
Reclassifications included in net income... (24.1) (1.1) (25.2)
Unrealized gain (loss) on investment
securities................................. 1.6 -- 1.6
------ ----- ------
Total other income (loss)................ $ 15.8 $(8.6) 7.2
------
Comprehensive income............................ $115.3
======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-5
<PAGE> 30
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
------------ ------------
(dollars in millions, except
per share amounts)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 181.7 $ 880.9
Receivables, net.......................................... 834.7 842.6
Inventories, net.......................................... 545.8 578.9
Other current assets...................................... 66.1 80.0
-------- --------
Total current assets................................... 1,628.3 2,382.4
Plant, property and equipment, net.......................... 847.0 991.6
Deferred income taxes....................................... 373.6 367.4
Goodwill, net............................................... 1,206.0 865.3
Other assets................................................ 474.9 442.1
-------- --------
Total non-current assets............................... 2,901.5 2,666.4
-------- --------
TOTAL ASSETS........................................... $4,529.8 $5,048.8
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 383.1 $ 396.2
Accrued expenses.......................................... 753.1 932.9
Accrued taxes............................................. 364.9 570.1
Notes payable and current maturities of long-term debt.... 609.3 251.6
-------- --------
Total current liabilities.............................. 2,110.4 2,150.8
Pension benefits............................................ 170.8 178.0
Postretirement benefits other than pensions................. 211.3 268.0
Long-term debt.............................................. 478.8 515.5
Other liabilities........................................... 459.4 636.5
-------- --------
Total non-current liabilities.......................... 1,320.3 1,598.0
-------- --------
TOTAL LIABILITIES...................................... 3,430.7 3,748.8
Shareholders' Equity:
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
Retained earnings......................................... 1,113.8 1,271.5
Accumulated other comprehensive loss...................... (102.6) (67.5)
-------- --------
Total shareholders' equity............................. 1,099.1 1,300.0
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $4,529.8 $5,048.8
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-6
<PAGE> 31
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1999 1998 1997
------ -------- ---------
(in millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $232.9 $1,532.5 $ 108.1
Discontinued operations:
Operating income......................................... -- (83.2) (101.8)
Gain on sales of ITT Automotive.......................... -- (1,546.9) --
Cumulative effect of accounting change..................... -- -- 5.6
------ -------- ---------
Income (loss) from continuing operations................... 232.9 (97.6) 11.9
Adjustments to income (loss) from continuing operations:
Depreciation............................................. 144.3 157.5 166.9
Amortization............................................. 36.8 38.1 30.0
Restructuring and other special items.................... (4.6) 430.5 136.7
Payments made for restructuring and other special items.... (60.0) (25.1) --
Change in receivables, inventories, accounts payable, and
accrued expenses......................................... 4.5 (112.5) 100.0
Change in accrued and deferred taxes....................... 43.4 (136.4) (43.9)
Other, net................................................. (54.1) (66.0) (3.9)
------ -------- ---------
Cash from operating activities........................... 343.2 188.5 397.7
------ -------- ---------
INVESTING ACTIVITIES
Additions to plant, property and equipment................. (227.9) (212.9) (212.5)
Acquisitions............................................... (544.8) (79.6) (1,026.2)
Proceeds from sale of assets and businesses................ 107.7 3,745.1 21.1
Other, net................................................. 4.5 3.9 (0.8)
------ -------- ---------
Cash from (used for) investing activities................ (660.5) 3,456.5 (1,218.4)
------ -------- ---------
FINANCING ACTIVITIES
Short-term debt, net....................................... 426.0 (1,419.8) 1,058.6
Long-term debt repaid...................................... (83.8) (61.4) (259.7)
Long-term debt issued...................................... 3.1 9.0 1.4
Repurchase of common stock................................. (402.6) (830.8) (67.8)
Dividends paid............................................. (55.5) (70.5) (71.1)
Other, net................................................. 29.8 39.5 36.0
------ -------- ---------
Cash from (used for) financing activities................ (83.0) (2,334.0) 697.4
------ -------- ---------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS......... (14.5) 2.4 (10.9)
CASH FROM (USED FOR) DISCONTINUED OPERATIONS............... (284.4) (624.7) 204.5
------ -------- ---------
Increase (decrease) in cash and cash equivalents........... (699.2) 688.7 70.3
Cash and cash equivalents -- beginning of year............. 880.9 192.2 121.9
------ -------- ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR................... $181.7 $ 880.9 $ 192.2
====== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................. $ 76.4 $ 121.8 $ 111.9
Income taxes............................................. $ 42.1 $ 107.1 $ 84.2
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-7
<PAGE> 32
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Outstanding Dollars
-------------------- ----------------------------
1999 1998 1997 1999 1998 1997
---- ----- ----- -------- -------- ------
(amounts in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Beginning balance........................... 96.0 118.4 118.4 $ 96.0 $ 118.4 $118.4
Stock incentive plans..................... 2.2 1.3 2.3 2.2 1.3 2.3
Repurchases............................... (2.2) (1.3) (2.3) (2.2) (1.3) (2.3)
Stock repurchase program.................. (8.1) (22.4) -- (8.1) (22.4) --
---- ----- ----- -------- -------- ------
Ending balance............................ 87.9 96.0 118.4 $ 87.9 $ 96.0 $118.4
---- ----- ----- -------- -------- ------
CAPITAL SURPLUS
Beginning balance........................... $ -- $ 397.0 $418.2
Stock incentive plans..................... -- 28.7 43.3
Repurchases............................... -- (46.9) (64.5)
Stock repurchase program.................. -- (378.8) --
-------- -------- ------
Ending balance............................ $ -- $ -- $397.0
-------- -------- ------
RETAINED EARNINGS
Beginning balance........................... $1,271.5 $ 188.5 $151.4
Net income................................ 232.9 1,532.5 108.1
Common stock dividend declared -- $.60,
$.60 and $.60.......................... (53.4) (68.1) (71.0)
Stock repurchase program.................. (337.2) (381.4) --
-------- -------- ------
Ending balance............................ $1,113.8 $1,271.5 $188.5
-------- -------- ------
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS):
Unrealized Gain (Loss) on Investment
Securities
Beginning balance...................... $ (0.5) $ 1.6 $ --
Unrealized gain (loss)................. (0.2) (2.1) 1.6
-------- -------- ------
Ending balance......................... $ (0.7) $ (0.5) $ 1.6
-------- -------- ------
Cumulative Translation Adjustments
Beginning balance...................... $ (67.0) $ 116.8 $111.2
Translation of foreign currency
financial statements................. (34.9) 21.0 30.8
Sale of net foreign investments........ -- (204.8) (25.2)
-------- -------- ------
Ending balance......................... $ (101.9) $ (67.0) $116.8
-------- -------- ------
TOTAL SHAREHOLDERS' EQUITY.................. $1,099.1 $1,300.0 $822.3
======== ======== ======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-8
<PAGE> 33
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
1. ACCOUNTING POLICIES
CONSOLIDATION PRINCIPLES: The consolidated financial statements include the
accounts of ITT Industries, Inc. (the "Company") and all majority owned
subsidiaries. Investments in unconsolidated companies where management exercises
significant influence are accounted for using the equity method. All significant
intercompany transactions have been eliminated.
SALES AND REVENUE RECOGNITION: The Company recognizes revenues as services
are rendered and recognizes sales as products are shipped to customers. Our
Defense business recognizes revenues based on unit of delivery, milestone
achievements, completion of contract or based on costs incurred for cost
reimbursable contracts, depending on the type of contract and contract terms and
conditions. Expected losses on long-term contracts are recognized when events
and circumstances indicate that a loss will be 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 57.8%, 67.4% and 68.4% of total RD&E costs were expended pursuant
to customer contracts for each of the three years ended December 31, 1999, 1998,
and 1997, respectively.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
INVENTORIES: Most inventories are valued at the lower of cost (first-in,
first-out or "FIFO") or market. A full absorption 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. Domestic inventories valued under the last-in, first-out ("LIFO")
method represent 11.3% of total 1999 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 not exceeding 40 years. Goodwill
is reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.
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
selling, general and administrative expenses and were $2.8, $(2.2) and $(5.5) in
1999, 1998, and 1997, 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
F-9
<PAGE> 34
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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: Basic earnings per share is based on the weighted
average number of common shares outstanding. Diluted earnings per share is based
on the weighted average number of common shares outstanding and potentially
dilutive common shares, which include stock options. However, potential common
shares are not included in the computation of any diluted per share amount when
a loss from continuing operations exists, even when the Company reports net
income.
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.
2. CHANGES IN ACCOUNTING POLICIES
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." Consequently, SFAS No. 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 No. 133 establishes
accounting and reporting standards that require 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 No. 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 has not
yet quantified the impacts of adopting SFAS No. 133 on reported financial
results and has not determined the timing of, or method of, adoption. However,
given the current
F-10
<PAGE> 35
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
level of the Company's derivative and hedging activities, the impact is not
expected to be material to the Company's financial position, results of
operations, or cash flows.
In January 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires the disclosure of comprehensive income, which
includes, in addition to net income, other comprehensive income consisting of
unrealized gains and losses which bypass the traditional income statement and
are recorded directly into a separate section of shareholders' equity on the
balance sheet. The components of other comprehensive income for the Company
consist of unrealized gains and losses relating to the translation of foreign
currency financial statements, as adjusted by hedges of net foreign investments,
and certain investment securities.
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.
3. ACQUISITIONS
On December 14, 1999 the Company completed the purchase of Stanford
Telecommunications Inc.'s space and defense communications businesses for
$192.7. The purchase price exceeded the fair value of the net assets acquired by
$160.6 and the excess has been recorded as goodwill, which is being amortized
over a 40 year period. These units of Stanford Telecommunications have annual
sales of approximately $142 and are leading designers, manufacturers and
marketers of advanced digital communication products and systems.
On September 10, 1999 the Company acquired Flojet Corporation ("Flojet"), a
privately held company, for $141.0, consisting of $131.0 in cash and $10.0 in
notes payable. The purchase price exceeded the fair value of the net assets
acquired by $103.3 and the excess has been recorded as goodwill, which is being
amortized over a 40 year period. Flojet manufactures air and electric driven
pumps, motors, and dispensing equipment for a variety of industries, including
beverage, general industrial equipment, agricultural/lawn and garden,
recreational vehicle, leisure marine, and water purification. Flojet has annual
sales of approximately $50.
On October 29, 1999 the Company completed the purchase of STX Pte. Ltd.
("STX") from Singapore-based San Teh, Ltd., for $119.4. The purchase price
exceeded the fair value of the net assets acquired by $82.1 and the excess has
been recorded as goodwill, which is being amortized over a 40 year period. STX
manufactures conductive rubber switches used in keypads for mobile telephones,
high-end remote control units, and keyless entry systems. STX has annual sales
of approximately $64.
The Company also acquired Sanitaire Corporation, Hydro Air Industries, K
and M Electronics, Inc., the assets of Energy Machine Service, Inc., and made an
equity investment in EarthWatch, for a combined total of $101.7.
All acquisitions were 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.
On June 25, 1998 the Company acquired Rule Industries, Inc. ("Rule") from
Kennametal, Inc. for $62.6. The purchase price exceeded the fair value of the
net assets acquired by $53.1 and the excess was recorded as goodwill, and is
being amortized over a 40 year period. Rule manufactures marine products,
including submersible pumps, anchors and compasses, and has annual sales of
approximately $25. The Company also made three other small acquisitions during
1998: A.G. Johansons Metallfabrik AB, Sinton Engineering Co. Limited and Sinton
(UK) Limited, and The Great American Gumball Corporation.
4. RESTRUCTURING AND OTHER SPECIAL ITEMS
During 1998, the Company recorded restructuring and other special items of
$20.1 in
F-11
<PAGE> 36
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the first quarter, $10.7 in the second quarter and $368.6 in the fourth quarter.
The actions taken affected all four segments. Restructuring and other special
items for the year ended December 31, 1998 are detailed in the following table:
<TABLE>
<CAPTION>
Restructuring Write-offs Other Total
------------- ---------- ----- ------
<S> <C> <C> <C> <C>
Connectors & Switches...................................... $ 61.2 $ 41.2 $ -- $102.4
Defense Products & Services................................ 20.5 49.1 -- 69.6
Pumps & Complementary Products............................. 94.7 52.9 -- 147.6
Specialty Products......................................... 4.2 1.5 3.3 9.0
Corporate and Other........................................ 5.0 35.6 30.2 70.8
------ ------ ----- ------
TOTAL 1998 CHARGES......................................... $185.6 $180.3 $33.5 $399.4
====== ====== ===== ======
</TABLE>
The 1998 charges related to restructuring activities which involved the
closure of facilities, sales offices and distribution centers worldwide;
facility consolidations; the discontinuance of product lines; and reductions in
workforce to reduce cost and improve profitability. In Connectors & Switches,
several labor intensive operations in Europe have, or are being consolidated
into a low wage facility in Eastern Europe and other site consolidations
occurred to eliminate duplication of process and to relocate to lower cost
areas. Defense Products & Services exited two facilities in the United States.
In Pumps & Complementary Products, twenty facilities, including distribution
centers, sales offices and manufacturing locations, have, or are being closed
and eight product lines were discontinued. Costs not directly related to exit
activities and which are expected to benefit future periods, such as costs to
relocate and train employees were expensed as incurred. Estimated severance
costs included in restructuring were $92.5.
Asset write-offs were taken when current events and circumstances indicated
that asset values were impaired using the criteria of SFAS No. 121. Write-offs
of Connectors & Switches related to assets which were idle or taken out of
service, because sales volumes did not materialize, and to assets which were
deemed to be impaired because their net book values exceeded the estimated
future cash flows to be generated by those assets. The majority of the idle
assets had no value because of their specialized nature or because of their poor
condition and have been written off. The impaired assets were written down to
estimated fair values. Write-offs also include certain capitalized software
costs which had no future utility since the business chose to implement a new
software platform. Goodwill in the amount of $6.6 related to two products which
were also written off. Assets in Defense Products & Services that were expected
to be sold were written down to fair value. Pumps & Complementary Products
undertook a review of certain of its operations where current events and
circumstances indicated that asset values may be impaired. It was determined
that goodwill of $22.5 related to operations in Venezuela and Mexico had no
value, and that assets of the Richter business were overvalued by approximately
$9.1. Also included in the charge were write-offs of $11.1 related to
information systems which were no longer used due to migrations to new
information system platforms, and other asset write-downs of $10.2. At
Corporate, the Company wrote the net assets of three non-core businesses down to
fair value.
Other at Corporate of $30.2 included a charge of $44.2, net of expected
future recoveries, for anticipated costs to remediate certain environmental
sites and gains on the sale of two non-core businesses. Additional environmental
charges of $3.3 were recorded in Specialty Products.
As of December 31, 1999, the Company had closed 16 of the planned 25
facilities, discontinued 18 of the planned 19 product lines, and reduced the
workforce by 1,680, or approximately 70% of the planned aggregate reduction of
approximately 2,400 persons. During the fourth quarter of 1999, the Company
assessed its 1998 restructuring reserves, determined that activities related to
those reserves will be completed for $44.8 less than originally estimated, and
reversed the related reserve into income. The $44.8 of excess was primarily the
result of favorable experience in employee separations and asset disposal costs
which were not
F-12
<PAGE> 37
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required. The remaining 1998 restructuring programs will be completed in 2000
and early 2001.
During 1999, in connection with carrying out the aforementioned
restructuring programs, the Company identified other facilities to be shutdown
and relocated to lower cost areas or consolidated into existing facilities. In
the fourth quarter of 1999, the Company also identified asset impairments at two
facilities. Restructuring and other special items for the year ended December
31, 1999 are detailed in the following table:
<TABLE>
<CAPTION>
Restructuring Write-offs Total
------------- ---------- -----
<S> <C> <C> <C>
Connectors & Switches....................................... $ 6.8 $ -- $ 6.8
Defense Products & Services................................. 0.3 4.4 4.7
Pumps & Complementary Products.............................. 9.6 15.6 25.2
Specialty Products.......................................... 3.5 -- 3.5
----- ----- -----
TOTAL 1999 CHARGES.......................................... $20.2 $20.0 $40.2
===== ===== =====
</TABLE>
The projected cash impact to complete these 1999 actions is approximately
$14.8. The projected aggregate future cash savings for the period 2000 to 2004
are approximately $40.6 and consist of decreased facility operating costs and
lower salary and wage expenditures. The projected future non-cash savings for
the same period are $6.1 and consist of decreased depreciation and goodwill
amortization. All of the actions contemplated by the 1999 plans will be
completed in 2000 with some residual payments occurring in 2001.
The 1999 restructuring activities involve the closure of facilities and
sales offices and reduction of workforce. In Connectors & Switches a factory
will be closed with a portion of the business being relocated. In Defense
Products & Services, several positions at two divisions are being eliminated.
Pumps & Complementary Products will close two facilities and related service
offices and also consolidate the operations of one warehouse into existing
facilities. In Specialty Products, a workforce reduction will occur at one
facility. Among the business segments, estimated severance costs are $12.1 and
represent costs to reduce the workforce by an aggregate of 326 persons.
F-13
<PAGE> 38
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pumps & Complementary Products wrote down $15.6 of goodwill at an
unprofitable Far East operation based on the management's future cash flow
projections of the business. Defense Products & Services wrote off $4.4 of
goodwill related to a product line sold in January 2000.
At December 31, 1999 and 1998, reserve balances for restructuring
activities were $44.7 and $138.4, respectively. In 1999, payments for
restructuring totaled $60.0. The following table displays a rollforward of the
restructuring reserves for 1999:
<TABLE>
<CAPTION>
Balance Payments 1999 Balance
December and Cash December
31, 1998 Other Reversals Charges 31,1999
-------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Connectors & Switches..................... $ 42.7 $(13.4) $(16.5) $ 5.7 $18.5
Defense Products & Services............... 15.1 (3.6) (8.6) 0.3 3.2
Pumps & Complementary Products............ 73.8 (43.5) (19.7) 6.4 17.0
Specialty Products........................ 1.8 (0.7) -- 2.4 3.5
Corporate and Other....................... 5.0 (2.5) -- -- 2.5
------ ------ ------ ----- -----
TOTAL..................................... $138.4 $(63.7) $(44.8) $14.8 $44.7
====== ====== ====== ===== =====
</TABLE>
During 1997, the Company recorded charges for restructuring and other
special items of $137.8. The 1997 restructuring charges were taken across the
business segments as follows: Pumps & Complementary Products $44.1; Specialty
Products $12.9; and Corporate and Other $80.8. The charges comprised $64.7 for
the write-down to fair value of the net assets of two non-core businesses
expected to be divested and which have since been sold, $57.0 for asset
write-offs and severance costs associated with the closure and consolidation of
facilities and related workforce reductions of 25 persons, $15.0 to increase
environmental reserves, and $1.1 to recognize the loss on the sale of a non-
core business. All activities associated with the 1997 charges were completed
according to the plan.
5. DISCONTINUED OPERATIONS
On September 28, 1998, the Company closed the sale of its automotive
Electrical Systems business to Valeo, SA of France for approximately $1,700.
This transaction followed the sale of the Company's Brake and Chassis unit to
Continental AG of Germany for approximately $1,930 completed on September 25,
1998. As a result of the sales, these two units, as well as several other small
previously sold automotive units, have been accounted for as discontinued
operations.
The Company received notifications of claims from Valeo, SA and Continental
AG requesting post-closing adjustments to the purchase price under the
provisions of the sales contracts, based upon a number of accounting issues
relating to the calculation of the net worth of the businesses sold. Those
claims have been submitted to arbitration. After a thorough review, the Company
believes that the claims have little merit and intends to vigorously dispute
them. Although it cannot be determined at this time whether or to what extent,
if any, there will be post-closing adjustments of the purchase price as a result
of the arbitration, management does not believe such adjustments would have a
material adverse effect on the cash flow, results of operations or financial
condition of the Company and its subsidiaries on a consolidated basis.
F-14
<PAGE> 39
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
Income tax data from continuing operations is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Pretax income (loss)
U.S. ..................................................... $ 154.4 $(142.0) $ (4.0)
Foreign................................................... 215.3 (18.0) 23.5
------- ------- ------
$ 369.7 $(160.0) $ 19.5
======= ======= ======
(Provision) benefit for income tax
Current
U.S. federal.............................................. $ 3.8 $ 14.8 $(36.6)
State and local........................................... (15.2) (7.3) (2.9)
Foreign................................................... (107.9) 15.7 (38.7)
------- ------- ------
(119.3) 23.2 (78.2)
------- ------- ------
Deferred
U.S. federal.............................................. (52.1) 48.0 40.3
State and local........................................... 6.4 (0.1) 0.7
Foreign................................................... 28.2 (8.7) 29.6
------- ------- ------
(17.5) 39.2 70.6
------- ------- ------
Total income tax (expense) benefit.......................... $(136.8) $ 62.4 $ (7.6)
======= ======= ======
</TABLE>
F-15
<PAGE> 40
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the tax (provision) benefit at the U.S. statutory rate
to the effective income tax (expense) benefit rate as reported is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- -----
<S> <C> <C> <C>
Tax (provision) benefit at U.S. statutory rate.............. (35.0)% 35.0% (35.0)%
Foreign tax rate differential............................... 9.0 2.0 (4.8)
Taxes on repatriation of foreign earnings................... (6.9) 5.7 (4.9)
State income taxes, net of federal benefit.................. (1.5) (3.0) (7.2)
Goodwill.................................................... (4.5) (5.3) (19.0)
Research & development credit............................... 1.3 3.9 18.7
Tax benefit of foreign sales corporation.................... 0.5 0.8 7.9
Other....................................................... 0.1 (0.1) 5.3
----- ---- -----
Effective income tax (expense) benefit rate................. (37.0)% 39.0% (39.0)%
===== ==== =====
</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,
----------------
1999 1998
------ ------
<S> <C> <C>
Employee benefits........................................... $ 30.0 $ 26.9
Accelerated depreciation.................................... (19.6) (92.8)
Reserves.................................................... 285.5 357.8
Long-term contracts......................................... 9.0 7.7
Uniform capitalization...................................... 7.2 11.3
Other....................................................... 44.7 31.7
------ ------
$356.8 $342.6
====== ======
</TABLE>
No provision was made for U.S. taxes payable on accumulated undistributed
foreign earnings of certain subsidiaries amounting to approximately $258.4,
since these amounts are permanently reinvested.
Shareholders' equity at December 31, 1999 and 1998 reflects tax benefits
related to the exercise of stock options of approximately $11.5 and $4.5,
respectively.
7. EARNINGS PER SHARE
A reconciliation of the data used in the calculation of basic and diluted
earnings per
F-16
<PAGE> 41
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share computations for income from continuing operations is as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Basic Earnings (Loss) Per Share
Income (loss) from continuing operations available to
common shareholders..................................... $232.9 $(97.6) $11.9
====== ====== =====
Average common shares outstanding......................... 89.2 113.1 118.4
------ ------ -----
Basic earnings (loss) per share............................. $ 2.61 $ (.86) $ .10
====== ====== =====
Diluted Earnings (Loss) Per Share
Income (loss) from continuing operations available to
common shareholders..................................... $232.9 $(97.6) $11.9
====== ====== =====
Average common shares outstanding......................... 89.2 113.1 118.4
Add: Stock options........................................ 2.8(1) --(2) 2.6(3)
------ ------ -----
Average common shares outstanding on a diluted basis...... 92.0 113.1 121.0
------ ------ -----
Diluted earnings (loss) per share........................... $ 2.53 $ (.86) $ .10
====== ====== =====
</TABLE>
(1) Options to purchase 1,559,201 shares of common stock at an average
price of $39.54 per share were outstanding at December 31, 1999 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 2009,
were outstanding at the end of 1999.
(2) Stock options of 3,291,544 at the end of 1998 were not included in
the computation of diluted earnings per share, because the Company
had a loss from continuing operations and inclusion of the options
would be antidilutive.
(3) Options to purchase 205,900 shares of common stock at $31.94 per
share were outstanding at December 31, 1997 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, were outstanding at the
end of 1997.
8. RECEIVABLES, NET
Receivables consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------ ------
<S> <C> <C>
Trade....................................................... $738.5 $753.5
Accrued for completed work.................................. 32.3 22.3
Other....................................................... 86.0 89.5
Less -- reserves............................................ (22.1) (22.7)
------ ------
$834.7 $842.6
====== ======
</TABLE>
9. INVENTORIES, NET
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------ ------
<S> <C> <C>
Finished goods.............................................. $203.7 $206.2
Work in process............................................. 287.3 511.6
Raw materials............................................... 228.4 209.8
Less -- reserves............................................ (60.7) (115.0)
-- progress payments................................... (112.9) (233.7)
------ ------
$545.8 $578.9
====== ======
</TABLE>
10. OTHER CURRENT ASSETS
At December 31, 1999 and 1998, other current assets consist primarily of
advance payments on contracts and prepaid expenses.
F-17
<PAGE> 42
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. PLANT, PROPERTY AND EQUIPMENT, NET
Plant, property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Land and improvements....................................... $ 66.1 $ 51.5
Buildings and improvements.................................. 343.4 346.7
Machinery and equipment..................................... 1,186.0 1,295.8
Construction work in progress............................... 86.3 103.9
Other....................................................... 368.9 509.1
--------- ---------
2,050.7 2,307.0
Less -- accumulated depreciation and amortization........... (1,203.7) (1,315.4)
--------- ---------
$ 847.0 $ 991.6
========= =========
</TABLE>
12. GOODWILL, NET
Goodwill consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
-------- ------
<S> <C> <C>
Goodwill.................................................... $1,271.1 $916.1
Less -- accumulated amortization............................ 65.1 50.8
-------- ------
$1,206.0 $865.3
======== ======
</TABLE>
13. OTHER ASSETS
At December 31, 1999 and 1998, other assets primarily consists of prepaid
pension and employee benefit plan costs, equity investments, and expected
recoveries from third parties in relation to environmental and other claims.
14. LEASES AND RENTALS
The Company leases certain offices, manufacturing buildings, land,
machinery, automobiles, computers, and other equipment. Such leases expire at
various dates and may include renewals and escalations. The Company often pays
maintenance, insurance, and tax expense related to leased assets. Rental
expenses under operating leases were $51.8, $45.3 and $55.0 for 1999, 1998 and
1997, respectively. Future minimum operating lease payments under long-term
operating leases as of December 31, 1999 are shown below.
<TABLE>
<S> <C>
2000........................................................ $ 47.0
2001........................................................ 39.0
2002........................................................ 29.2
2003........................................................ 19.8
2004........................................................ 17.8
2005 and thereafter......................................... 128.2
------
Total minimum lease payments................................ $281.0
======
</TABLE>
F-18
<PAGE> 43
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
------ ------
<S> <C> <C>
Commercial paper............................................ $512.6 $ --
Short-term loans............................................ 85.1 201.6
Current maturities of long-term debt........................ 11.6 50.0
------ ------
Notes payable and current maturities of long-term debt...... $609.3 $251.6
====== ======
</TABLE>
<TABLE>
<CAPTION>
Interest
Long-term debt Maturity rate 1999 1998
-------------- -------- -------- ---- ----
<S> <C> <C> <C> <C>
Notes and debentures:
4/5/1999 10.125% $ -- $ 30.7
7/1/2001 6.500% 58.6 58.6
8/1/2001 8.250% 13.6 13.6
6/15/2003 8.875% 13.5 13.5
2/1/2008 8.875% 13.2 13.2
5/1/2011 6.500% 31.7 31.7
7/1/2011 7.500% 37.4 37.4
2/15/2021 9.750% 19.1 19.1
4/15/2021 9.500% 13.6 13.6
11/15/2025 7.400% 250.0 250.0
8/25/2048 6.195% 42.7 42.7
Other....................................................... 2000--2014 6.974%(1) 31.2 79.2
------ ------
Subtotal notes and debentures............................... 524.6 603.3
Less -- unamortized discount................................ (36.8) (42.2)
Capital leases.............................................. 2.6 4.4
------ ------
Long-term debt.............................................. 490.4 565.5
Less -- current maturities.................................. (11.6) (50.0)
------ ------
Net long-term debt.......................................... $478.8 $515.5
====== ======
</TABLE>
(1) Weighted average rate
Principal payments required on long-term debt for the next five years are:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
---- ----- ----- ----- -----
<S> <C> <C> <C> <C>
$11.6 $76.9 $ 1.7 $15.7 $1.0
----- ----- ----- ----
</TABLE>
The weighted average interest rate for short-term borrowings was 6.70% and
3.61% at December 31, 1999 and 1998, respectively. The fair value of the
Company's short-term loans approximates carrying value. The fair value of the
Company's long-term debt is estimated based on current rates indicated to the
Company for debt with similar remaining maturities. As of December 31, 1999, the
fair value of the long-term debt was $484.9, compared to the fair value of
$626.8, at December 31, 1998. The year to year decline in fair value reflects
the increase in interest rates experienced during 1999.
On August 1, 1999, the Company redeemed all of its outstanding 9 1/4%
senior debentures with a maturity date of July 15, 2001 and a value at maturity
of $18.9, and it redeemed all of its 8 3/4% senior debentures with a maturity
date of March 1, 2006 and a value at maturity of $7.8.
The Company maintains a revolving credit agreement which expires in
November, 2000 with 61 domestic and foreign banks providing aggregate
commitments of $1.5 billion. These commitments were unused at December 31, 1999.
The interest rate for borrowings under these agreements is generally based on
the London Interbank Offered Rate (LIBOR), plus a
F-19
<PAGE> 44
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Assets pledged to secure indebtedness (including mortgage loans) amount to
approximately $48.9 as of December 31, 1999.
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: The Company
maintains a multi-currency debt portfolio to fund its operations. The Company
and its subsidiaries at times use interest rate swaps to manage the Company's
debt portfolio, the related financing costs, and interest rate structure.
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. At December 31, 1999 and 1998, the
Company had interest rate swaps outstanding with notional values totaling 150
million Deutsche Marks. These swaps were designed to manage the interest
exposure of the Company's short-term debt. The outstanding 150 million Deutsche
Mark interest rate swap agreements maturing in March and April of 2000 require
the Company to pay interest at fixed rates averaging 6.96% and receive interest
at floating rates based on the Frankfurt Interbank Offered Rate (FIBOR) which
averaged 3.40% on December 31, 1999.
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. Changes in the spot rate of debt instruments designated as hedges of
the net investment in a foreign subsidiary are reflected in the cumulative
translation adjustment component of shareholders' equity. The Company regularly
monitors its foreign currency exposures and ensures that hedge contract amounts
do not exceed the amounts of the underlying exposures.
At December 31, 1999, the Company held foreign currency forward contracts
with notional amounts totaling approximately $79.0 million to hedge European and
Asian currency exposures. These contracts mature during 2000.
F-20
<PAGE> 45
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS: The fair values of the
Company's derivative financial instruments are as follows:
<TABLE>
<CAPTION>
(Payable)/Receivable
---------------------------------------
DEC. 31, 1999 Dec. 31, 1998
------------------ -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Interest rate swaps......................................... $(2.3) $ (2.3) $(3.7) $(8.5)
Currency forwards/swaps..................................... 1.9 2.6 (1.9) (2.1)
===== ====== ===== =====
</TABLE>
The following method and assumptions were used to estimate the fair value
of these derivative financial instruments:
INTEREST RATE SWAP AGREEMENTS: The fair value of 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 values 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.
17. EMPLOYEE BENEFIT PLANS
PENSION PLANS: The Company and its subsidiaries sponsor numerous defined
benefit 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. In addition to Company sponsored pension plans,
certain employees of the Company participate in multi-employer pension plans
sponsored by local or national unions. The Company's contribution to such plans
amounted to $1.3, $1.1, and $3.9 for the years ended 1999, 1998, and 1997,
respectively.
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, where such prefunding can be accomplished on a tax effective basis.
The plans' assets are comprised of a broad range of domestic and foreign
securities, fixed income investments, and real estate.
INVESTMENT AND SAVINGS PLANS: The Company sponsors numerous defined
contribution savings plans which allow employees to contribute a portion of
their pretax and/or after-tax income in accordance with specified guidelines.
Several of the plans require the Company to match a percentage of the employee
contributions up to certain limits. Matching contributions charged to income
amounted to $18.2, $17.9, $14.6 for the years ended 1999, 1998, and 1997,
respectively.
F-21
<PAGE> 46
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The first table below contains a reconciliation of the changes in the
benefit obligations, the changes in plan assets, and the weighted average
assumptions for the periods ending December 31, 1999 and 1998, respectively. The
second table below contains the components of net periodic benefit cost for the
years ended 1999, 1998, and 1997, respectively.
<TABLE>
<CAPTION>
Pension Other Benefits
-------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year................... $3,334.1 $3,055.5 $ 469.2 $ 447.7
Service cost.............................................. 70.9 58.4 5.1 4.8
Interest cost............................................. 216.7 215.4 30.6 31.2
Amendments made during the year........................... 4.6 (25.3) -- --
Actuarial (gain) loss..................................... (294.9) 206.3 (40.5) 24.8
Obligations of acquired companies (transferred to
others)................................................. -- 32.4 -- (4.8)
Effect of plan curtailment................................ -- -- (3.1) --
Benefits paid............................................. (229.5) (205.5) (36.2) (34.5)
Effect of currency translation............................ (10.9) (3.1) -- --
-------- -------- ------- -------
Benefit obligation at end of year......................... $3,091.0 $3,334.1 $ 425.1 $ 469.2
======== ======== ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............ $3,382.2 $3,067.7 $ 203.8 $ 187.5
Actual return on plan assets.............................. 692.0 438.9 31.7 20.3
Assets of acquired companies (transferred to others)...... -- 29.6 -- --
Employer contributions.................................... 5.9 55.9 25.5 --
Employee contributions.................................... 0.8 1.0 -- --
Benefits paid............................................. (217.6) (206.0) (5.3) (4.0)
Effect of currency translation............................ (3.8) (4.9) -- --
-------- -------- ------- -------
Fair value of plan assets at end of year.................. $3,859.5 $3,382.2 $ 255.7 $ 203.8
======== ======== ======= =======
Funded status............................................. $ 768.5 $ 48.1 $(169.4) $(265.4)
Unrecognized net transition asset......................... (5.4) (11.3) -- --
Unrecognized net actuarial (gain) loss.................... (779.2) (59.8) (21.5) 22.6
Unrecognized prior service cost........................... 48.8 53.3 (20.4) (25.2)
-------- -------- ------- -------
Prepaid (accrued) benefit cost recognized in the balance
sheet................................................... $ 32.7 $ 30.3 $(211.3) $(268.0)
======== ======== ======= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount rate............................................. 7.60% 6.70% 7.75% 6.75%
Expected return on plan assets............................ 9.62% 9.63% 9.75% 9.75%
Rate of future compensation increase...................... 4.90% 4.91% 5.00% 5.00%
</TABLE>
<TABLE>
<CAPTION>
Pension Other Benefits
----------------------------- --------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost.............................. $ 70.9 $ 58.4 $ 54.2 $ 5.1 $ 4.8 $ 5.0
Interest cost............................. 216.7 215.4 211.5 30.6 31.2 28.7
Expected return on plan assets............ (270.8) (252.4) (230.8) (19.4) (18.1) (15.5)
Amortization of transitional asset........ (5.8) (5.9) (5.9) -- -- --
Amortization of net actuarial (gain)
loss.................................... 9.8 6.4 7.4 0.2 (0.7) (1.4)
Amortization of prior service cost........ 8.3 10.7 11.4 (4.7) (4.7) (4.7)
Effect of plan curtailment................ -- -- -- (3.1) -- --
------- ------- ------- ------ ------ ------
Net periodic benefit cost................. $ 29.1 $ 32.6 $ 47.8 $ 8.7 $ 12.5 $ 12.1
------- ------- ------- ------ ------ ------
</TABLE>
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 7.1% for 1999, decreasing ratably to 6.0% in
the year 2001. Increasing the table of health care trend rates by one percent
per year would have the effect of increasing the benefit obligation by $24.0 and
the aggregate service and interest cost components by $2.3; a decrease of one
percent in the trend rate would reduce the benefit obligation by $21.2 and the
aggregate service and interest cost components by $2.0. To the extent that
actual experience differs from the inherent assumptions, the effect will be
amortized over the average future service of the covered active employees.
18. SHAREHOLDERS' EQUITY
CAPITAL STOCK: The Company has authority to issue an aggregate of
250,000,000 shares of capital stock, of which 200,000,000 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
F-22
<PAGE> 47
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cumulative Preferred Stock" (the "Series A Stock"). Such Series A Stock is
issuable pursuant to the provisions of a Rights Agreement dated as of November
1, 1995 between the Company and The Bank of New York, as Rights Agent (the
"Rights Agreement"). Capitalized terms herein not otherwise defined are as
defined in the Rights Agreement.
The rights issued pursuant to the Rights Agreement (the "Rights") are
currently attached to, and trade with, the Common Stock. The Rights Agreement
provides, among other things, that if any person acquires more than 15% of the
outstanding Common Stock, the Rights will entitle the holders other than the
Acquiring Person (or its Affiliates or Associates) to purchase Series A Stock at
a significant discount to its market value. Rights beneficially owned by the
Acquiring Person, including any of its Affiliates or Associates, become null and
void and 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, 1999 and 1998, 57,243,719 and 49,180,032 shares of
Common Stock were held in treasury, respectively.
STOCK INCENTIVE PLANS: The Company's stock option incentive plans provide
for the awarding of options on common shares to employees, exercisable over
ten-year periods. 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
exercise price per share is the fair market value on the date each option is
granted. In 1999, 1998, and 1997, the Company made shares available for the
exercise of stock options by purchasing shares in the open market.
F-23
<PAGE> 48
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, 1999, 1998, and 1997, and changes during the years then ended is
presented below (shares in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
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.... 12,175 $21.24 11,457 $19.31 11,764 $17.53
Granted................ 1,835 39.22 2,108 31.18 2,367 25.60
Exercised.............. (2,166) 21.06 (1,255) 19.62 (2,324) 16.21
Canceled or expired.... (92) 38.23 (135) 28.11 (350) 22.44
------ ------ ------ ------ ------ ------
Outstanding at end of
year................. 11,752 $23.95 12,175 $21.24 11,457 $19.31
====== ====== ====== ====== ====== ======
Options exercisable at
year-end............. 10,030 $21.34 10,347 $19.47 10,573 $18.92
====== ====== ====== ====== ====== ======
Weighted-average fair
value of options
granted during the
year................. $17.78 $11.68 $ 8.53
====== ====== ======
</TABLE>
The Company accounts for these plans using the intrinsic value method
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>
1999 1998 1997
------ -------- ------
<S> <C> <C> <C>
Net income
As reported............................................... $232.9 $1,532.5 $108.1
Pro forma................................................. 217.2 1,520.1 99.0
Basic earnings per share
As reported............................................... $ 2.61 $ 13.55 $ .91
Pro forma................................................. 2.44 13.44 .84
Diluted earnings per share
As reported............................................... $ 2.53 $ 13.55 $ .89
Pro forma................................................. 2.36 13.44 .82
</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 1999, 1998, and 1997: dividend yield of 2.01%, 2.14%,
and 2.35% respectively; expected volatility of 51%, 38%, and 31%, respectively;
expected life of six years; and risk-free interest rates of 4.82%, 5.66%, and
6.45%, respectively.
F-24
<PAGE> 49
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, 1999 (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............ 774 1.7 years $ 8.61 774 $ 8.61
13.78 -- 17.91............ 3,018 4.4 years 15.74 3,018 15.74
20.32 -- 28.38............ 4,370 6.1 years 23.12 4,369 23.12
31.13 -- 40.00............ 3,590 8.5 years 35.15 1,869 31.47
------ ------------ ----------- ------ ----------
11,752 10,030
------ ------
</TABLE>
As of December 31, 1999, 3,647,495 shares were available for future grants.
Effective January 1, 2000, option shares available for future grants increased
to 5,824,845 as a result of the annual limitation formula established in the ITT
Industries, Inc. 1994 Incentive Stock Plan. The incentive stock plan also
provides for awarding restricted stock subject to a restriction period in which
the stock cannot be sold, exchanged, or pledged. During 1999, 30,000 shares of
restricted stock were awarded under this plan.
During 1999, pursuant to the ITT Industries, Inc. 1996 Restricted Stock
Plan for Non-Employee Directors, the Company awarded 10,248 restricted shares
with five-year restriction periods in payment of the annual retainer for such
directors.
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, the Company is subject to extensive and changing federal, state,
local, and foreign environmental laws and regulations. As of December 31, 1999,
the Company or its subsidiaries are responsible, or are alleged to be
responsible for environmental investigation and remediation at sites in various
countries. The Company has received notice that it is considered a potentially
responsible party (PRP) at a number of those sites by the United States
Environmental Protection Agency (EPA) and/or a similar state agency under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or
SuperFund) or its state equivalent. In many of these proceedings, the Company's
liability is considered de minimis. In Glendale, California, the Company has
been involved in an environmental proceeding relating to the San Fernando Valley
aquifer. The Company is one of numerous PRPs who are alleged by the EPA to have
contributed to the contamination of the aquifer. In January 1999, the EPA filed
a complaint in the United States District Court for the Central District of
California against the Company and Lockheed Martin Corporation, United States v.
ITT Industries, Inc. and Lockheed Martin Corp. CV99-00552 SVW AIJX, to recover
costs it has incurred in connection with the foregoing. In May 1999, the EPA and
the PRPs, including the Company and Lockheed Martin, reached an agreement in
principle on a consent decree settling that case. The consent decree is awaiting
approval from the EPA.
In a suit filed several years ago by the Company, in the California
Superior Court, Los Angeles County, ITT Corporation, et al. v. Pacific Indemnity
Corporation et al. against its insurers, the Company is seeking recovery of
costs it incurred in connection with this and other environmental matters. In
April 1999, the Superior Court granted partial summary judgment under California
law, dismissing certain claims in
F-25
<PAGE> 50
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the California action. The California Court of
Appeals has accepted the Company's petition for review of the Superior Court's
order. Argument was scheduled for August 1999; however, it has now been
continued to an indefinite date pending further developments in other similar
cases in California to which the Company is not a party. In April 1999, the
Company initiated a new coverage action in New Jersey, ITT Industries, Inc. 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. The Company's insurers challenged the convenience of New
Jersey as the forum for this action. In its ruling on the motion, the Court
dismissed the non-New Jersey claims, deferred action on certain New Jersey
claims and retained jurisdiction over one New Jersey claim. The Company 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.
The Company has accrued for environmental remediation costs associated with
identified sites consistent with the policy set forth in Note 1, "Accounting
Policies." In management's opinion, the total amounts accrued and related
receivables are appropriate based on existing facts and circumstances. It is
difficult to estimate the total costs of investigation and remediation due to
various factors, including incomplete information regarding particular sites and
other potentially responsible parties, uncertainty regarding the extent of
contamination and the Company's share, if any, of liability for such problems,
the selection of alternative remedies, and changes in clean-up standards. In the
event that future remediation expenditures are in excess of amounts accrued,
management does not anticipate that they will have a material adverse effect on
the consolidated financial position, results of operations, or liquidity of the
Company.
20. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Defense Pumps & Dispositions,
Connectors & Products & Complementary Specialty Other &
Switches Services Products Products Eliminations(b) Corporate Total
------------ ---------- ------------- --------- --------------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Sales and revenues.......... $516.0 $1,413.9 $1,735.0 $959.5 $ 7.8 $ -- $4,632.2
Operating income:
Before restructuring and
other special items..... 62.1 108.8 164.4 132.9 0.5 (58.1) 410.6
Restructuring and other
special items........... 9.7 3.9 (5.5) (3.5) -- -- 4.6
------ -------- -------- ------ ------ -------- --------
After restructuring and
other special items..... 71.8 112.7 158.9 129.4 0.5 (58.1) 415.2
Earnings (loss) of companies
on an equity basis........ -- 2.1 (0.2) 1.2 -- -- 3.1
------ -------- -------- ------ ------ -------- --------
Total segment profit........ 71.8 114.8 158.7 130.6 0.5 (58.1) 418.3
Net interest expense........ (46.8)
Miscellaneous expense(a).... (1.8)
--------
Income from continuing
operations before income
tax expense............... $ 369.7
========
</TABLE>
()(a) Excludes earnings of companies on an equity basis
()(b) Includes net assets from discontinued operations 1997 -- $931.4.
F-26
<PAGE> 51
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
Defense Pumps & Dispositions,
Connectors & Products & Complementary Specialty Other &
Switches Services Products Products Eliminations(b) Corporate Total
------------ ---------- ------------- --------- --------------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Long-lived assets........... 137.0 146.0 334.7 202.0 1.3 26.0 847.0
Investment in companies on
an equity basis........... 0.5 29.9 8.5 6.2 -- -- 45.1
Total assets................ 463.6 839.1 1,670.3 741.7 24.2 790.9 4,529.8
Gross plant additions....... 55.7 55.7 70.4 45.3 0.4 0.4 227.9
Depreciation................ 28.1 26.0 54.0 33.8 0.3 2.1 144.3
Amortization................ 0.8 3.1 18.2 7.2 2.1 5.4 36.8
------ -------- -------- ------ ------ -------- --------
1998
Sales and revenues.......... $527.9 $1,293.4 $1,770.0 $849.3 $ 52.1 $ -- $4,492.7
Operating income:
Before restructuring and
other special items..... 52.7 97.9 145.5 90.9 5.4 (67.6) 324.8
Restructuring and other
special items........... (102.4) (69.6) (147.6) (9.0) 31.0 (101.8) (399.4)
------ -------- -------- ------ ------ -------- --------
After restructuring and
other special items..... (49.7) 28.3 (2.1) 81.9 36.4 (169.4) (74.6)
Earnings (loss) of companies
on an equity basis........ (0.3) (1.6) 0.5 0.3 -- -- (1.1)
------ -------- -------- ------ ------ -------- --------
Total segment profit........ (50.0) 26.7 (1.6) 82.2 36.4 (169.4) (75.7)
Net interest expense........ (82.4)
Miscellaneous expense(a).... (1.9)
--------
Income from continuing
operations before income
tax....................... $ (160.0)
========
Long-lived assets........... 128.3 122.8 347.3 206.8 156.5 29.9 991.6
Investment in companies on
an equity basis........... 0.1 13.2 11.9 5.1 -- 0.5 30.8
Total assets................ 333.1 644.8 1,741.1 588.3 252.6 1,488.9 5,048.8
Gross plant additions....... 39.2 26.4 75.1 53.5 5.1 13.6 212.9
Depreciation................ 33.9 25.3 56.6 34.3 5.3 2.1 157.5
Amortization................ 1.0 3.1 20.6 7.3 6.1 -- 38.1
1997
Sales and revenues.......... $537.7 $1,095.7 $1,460.2 $823.2 $290.8 $ -- $4,207.6
Operating income:
Before restructuring and
other special items..... 41.9 81.4 130.2 89.6 (4.1) (59.9) 279.1
Restructuring and other
special items........... -- -- (44.1) (12.9) (65.8) (15.0) (137.8)
------ -------- -------- ------ ------ -------- --------
After restructuring and
other special items..... 41.9 81.4 86.1 76.7 (69.9) (74.9) 141.3
Earnings (loss) of companies
on an equity basis........ (0.5) (2.5) 1.0 (0.1) -- -- (2.1)
------ -------- -------- ------ ------ -------- --------
Total segment profit........ 41.4 78.9 87.1 76.6 (69.9) (74.9) 139.2
Net interest expense........ (115.7)
Miscellaneous expense(a).... (4.0)
--------
Income (loss) from
continuing operations
before income tax......... $ 19.5
========
</TABLE>
()(a) Excludes earnings of companies on an equity basis
()(b) Includes net assets from discontinued operations 1997 -- $931.4.
F-27
<PAGE> 52
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
Defense Pumps & Dispositions,
Connectors & Products & Complementary Specialty Other &
Switches Services Products Products Eliminations(b) Corporate Total
------------ ---------- ------------- --------- --------------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Long-lived assets........... 135.1 121.5 355.0 219.2 172.6 27.8 1,031.2
Investment in companies on
an equity basis........... 0.5 13.2 14.4 4.7 -- 1.1 33.9
Total assets................ 323.6 585.1 1,818.7 504.7 1,274.5 551.8 5,058.4
Gross plant additions....... 31.8 35.6 53.9 53.7 30.5 7.0 212.5
Depreciation................ 33.6 24.7 44.3 32.4 29.8 2.1 166.9
Amortization................ 1.5 0.3 16.1 10.1 2.0 -- 30.0
</TABLE>
(a) Excludes earnings of companies on an equity basis
(b) Includes net assets from discontinued operations 1997 -- $931.4.
<TABLE>
<CAPTION>
Net Sales and Revenues Long-Lived Assets
-------------------------------- ----------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GEOGRAPHICAL INFORMATION
United States.......................... $2,696.1 $2,570.4 $2,377.3 $504.1 $639.0 $ 679.1
Western Europe......................... 1,194.7 1,227.8 1,229.6 282.0 312.3 308.2
Asia Pacific........................... 339.7 280.5 260.2 48.5 22.6 25.6
Other.................................. 401.7 414.0 340.5 12.4 17.7 18.3
-------- -------- -------- ------ ------ --------
Total Segments......................... $4,632.2 $4,492.7 $4,207.6 $847.0 $991.6 $1,031.2
======== ======== ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SALES AND REVENUES BY PRODUCT CATEGORY
Pumps & Complementary Products............................ $1,732.0 $1,767.8 $1,457.3
Defense Products.......................................... 844.4 765.7 720.1
Defense Services.......................................... 554.5 527.7 375.6
Connectors & Switches..................................... 550.3 577.7 591.7
Fluid Handling............................................ 442.8 362.2 366.0
Brakes.................................................... 157.4 150.6 146.9
Engineered Valves......................................... 116.2 116.5 108.7
Marine Products........................................... 114.9 87.8 76.9
Shock Absorbers........................................... 90.3 91.5 85.6
Measuring Devices......................................... -- 17.3 78.6
Semiconductors............................................ -- -- 162.3
Other..................................................... 29.4 27.9 37.9
-------- -------- --------
Total..................................................... $4,632.2 $4,492.7 $4,207.6
======== ======== ========
</TABLE>
Combined Defense Products & Services had sales and revenues from the United
States government of $1,054.0, $1,008.6, and $925.2 for 1999, 1998, and 1997,
respectively. Apart from the United States government, no other government or
commercial customer accounted for 10% or more of sales and revenues for the
Company.
CONNECTORS & SWITCHES: This business consists of the Company's products
marketed under the Cannon(R) brand. These products include connectors, switches
and cabling used in telecommunications, computing aerospace and industrial
applications as well as network services. The Connectors & Switches segment
represents about 11% of the Company's sales and revenues and 15% of its
operating income before restructuring and other items for 1999.
DEFENSE PRODUCTS & SERVICES: The businesses in this segment are those that
directly serve the military and government agencies with products and services.
These include air traffic control systems, jamming devices that guard military
planes against radar guided missiles, digital combat radios, night vision
devices and satellite instruments. Approximately 39% of the sales and revenues
in this segment are generated through contracts for technical and support
services which the Company provides for the military and other government
agencies. Approximately 75%, 78% and 85% of 1999, 1998 and 1997 Defense Products
& Services sales and
F-28
<PAGE> 53
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenues, respectively, were to the U.S. government. The Defense Products &
Services segment represents about 31% of the Company's sales and revenues and
27% of its operating income before restructuring and other items in 1999.
PUMPS & COMPLEMENTARY PRODUCTS: This segment contains the Company's pump
businesses, including brands such as Flygt,(R) Goulds,(R) Bell and Gossett,(R)
A-C Pump,(R) Lowara(R) and Vogel,(R) making the Company the world's largest pump
producer. Businesses within this segment also supply mixers, heat exchangers and
related products with brand names such as McDonnell & Miller(R) and ITT
Standard(R) in addition to those mentioned above. This segment represents
approximately 37% of the Company's sales and revenues and approximately 40% of
its operating income before restructuring and other items for 1999.
SPECIALTY PRODUCTS: Businesses in the Specialty Products segment produce
engineered valves and switches for industrial and aerospace applications,
products for the marine and leisure markets, fluid handling materials such as
tubing systems and connectors for various automotive and industrial markets, and
specialty shock absorbers and brake friction materials for the transportation
industry. The Specialty Products segment accounts for approximately 21% of the
Company's sales and revenues and approximately 32% of its operating income
before restructuring and other items for 1999.
DISPOSITIONS AND OTHER: This includes the operating results and assets of
units other than "Discontinued Operations," including other non-core businesses
and other businesses which have been sold.
CORPORATE: This primarily includes the operating results and assets of
corporate headquarters.
F-29
<PAGE> 54
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. QUARTERLY RESULTS FOR 1999 AND 1998
<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>
1999
Sales and revenues............................... $1,091.7 $1,191.7 $1,106.4 $1,242.4 $4,632.2
Costs of sales and revenues(a)................... 840.9 908.5 844.2 936.6 3,530.2
Income from continuing operations(b)............. 42.5 63.3 54.4 72.7 232.9
Net income....................................... 42.5 63.3 54.4 72.7 232.9
Income from continuing operations per share
-- Basic(c).................................... $ .46 $ .72 $ .62 $ .83 $ 2.61
-- Diluted(c).................................. $ .45 $ .70 $ .60 $ .80 $ 2.53
Net income per share
-- Basic....................................... $ .46 $ .72 $ .62 $ .83 $ 2.61
-- Diluted..................................... $ .45 $ .70 $ .60 $ .80 $ 2.53
Common stock information
Price range: High................................ $ 40.88 $ 41.50 $ 40.00 $ 36.25 $ 41.50
Low............................................ $ 35.00 $ 34.88 $ 30.50 $ 31.38 $ 30.50
Close.......................................... $ 35.38 $ 38.13 $ 31.81 $ 33.44 $ 33.44
Dividends per share.............................. $ .15 $ .15 $ .15 $ .15 $ .60
1998
Sales and revenues............................... $1,099.2 $1,125.3 $1,048.0 $1,220.2 $4,492.7
Costs of sales and revenues(a)................... 848.8 850.5 798.5 935.7 3,433.5
Income (loss) from continuing operations(b)...... 8.0 30.2 26.9 (162.7) (97.6)
Net income (loss)................................ 55.6 69.3 1,588.8 (181.2) 1,532.5
Income (loss) from continuing operations per
share
-- Basic....................................... $ .07 $ .25 $ .23 $ (1.59) $ (.86)
-- Diluted..................................... $ .07 $ .25 $ .23 $ (1.59) $ (.86)
Net income (loss) per share
-- Basic(c).................................... $ .47 $ .59 $ 13.82 $ (1.77) $ 13.55
-- Diluted(c).................................. $ .46 $ .57 $ 13.45 $ (1.77) $ 13.55
Common stock information
Price range: High................................ $ 38.94 $ 38.44 $ 38.13 $ 40.88 $ 40.88
Low............................................ $ 28.13 $ 32.88 $ 29.50 $ 30.69 $ 28.13
Close.......................................... $ 38.06 $ 37.38 $ 33.88 $ 39.75 $ 39.75
Dividends per share.............................. $ .15 $ .15 $ .15 $ .15 $ .60
</TABLE>
(a) Includes research, development, and engineering expenses.
(b) 1999 income from continuing operations includes restructuring and other
special income of $2.9 after-tax. Income from continuing operations in 1998
for the quarters ended March 31, June 30 and December 31 includes
restructuring and other special items of $12.3, $6.5 and $224.8,
respectively, as described in Note 4.
(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 repurchase of common stock
in the first quarter 1999 and during 1998, the sum of the four quarters does
not equal the calculation for the full years 1999 and 1998.
The above table reflects the range of market prices of the Company's common
stock for 1999 and 1998. The prices are as reported in the consolidated
transaction reporting system of the New York Stock Exchange, the principal
market in which the Company's common stock is traded, under the symbol "IIN".
The Company's common stock is listed on the following exchanges: Frankfurt,
London, Midwest, New York, Pacific, and Paris.
During the period from January 1, 2000 through February 29, 2000, the high
and low reported market prices of the Company's common stock were $34.94 and
$22.38. The Company declared dividends of $.15 per common share in the first
quarter of 2000. There were approximately 38,871 holders of record of the
Company's common stock on February 29, 2000.
F-30
<PAGE> 55
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE CHARGED TO WRITE-OFF/
AT COSTS AND TRANSLATION PAYMENTS BALANCE AT
JANUARY 1 EXPENSES ADJUSTMENT OTHER DECEMBER 31
--------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Trade Receivables -- Allowance for
doubtful accounts................ $ 22.7 $ 5.0 $ (1.3) $ (4.3) $ 22.1
Restructuring...................... 138.4 (4.6) -- (89.1) 44.7
YEAR ENDED DECEMBER 31, 1998
Trade Receivables -- Allowance for
doubtful accounts................ $ 19.0 $ 9.5 $ 0.2 $ (6.0) $ 22.7
Restructuring...................... 22.2 185.6 (69.4) 138.4
YEAR ENDED DECEMBER 31, 1997
Trade Receivables -- Allowance for
doubtful accounts................ $ 14.6 $ 7.9 $ (0.4) $ (3.1) $ 19.0
Restructuring...................... -- 57.0 (34.8) 22.2
</TABLE>
S-1
<PAGE> 56
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 /s/ EDWARD W. WILLIAMS
-----------------------------------
EDWARD W. WILLIAMS
VICE PRESIDENT AND CORPORATE
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
March 28, 2000
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ TRAVIS ENGEN Chairman and Chief Executive and March 14, 2000
- ------------------------------------------ Director
TRAVIS ENGEN
(PRINCIPAL EXECUTIVE OFFICER)
/s/ DAVID J. ANDERSON Senior Vice President and Chief March 14, 2000
- ------------------------------------------ Financial Officer
DAVID J. ANDERSON
(PRINCIPAL FINANCIAL OFFICER)
/s/ ROBERT A. BURNETT Director March 14, 2000
- ------------------------------------------
ROBERT A. BURNETT
/s/ CURTIS J. CRAWFORD Director March 14, 2000
- ------------------------------------------
CURTIS J. CRAWFORD
/s/ MICHEL DAVID-WEILL Director March 14, 2000
- ------------------------------------------
MICHEL DAVID-WEILL
/s/ EDWARD C. MEYER Director March 14, 2000
- ------------------------------------------
EDWARD C. MEYER
/s/ LINDA S. SANFORD Director March 14, 2000
- ------------------------------------------
LINDA S. SANFORD
/s/ SIDNEY TAUREL Director March 14, 2000
- ------------------------------------------
SIDNEY TAUREL
</TABLE>
II-1
<PAGE> 57
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............................. Filed herewith.
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 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).
(d) 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).
(e) 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).
(f) 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).
</TABLE>
II-2
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
<C> <C> <S> <C>
(g) 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).
(h) 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).
(i) ITT Industries, Inc. 1996 Restricted
Stock Plan for Non-Employee
Directors, as amended............... Incorporated by reference to Exhibit
10(k) to ITT Industries' Form 10-Q
for the quarterly period ended
September 30, 1999.
(j) 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).
(k) 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).
(l) 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).
(m) 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).
(n) 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).
(o) 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).
(p) Agreement with Valeo SA with respect
to the sale of the Automotive
Electrical Systems Business......... Incorporated by reference to Exhibit
10(b) to ITT Industries' Form 10-Q
Quarterly Report for the quarterly
period ended June 30, 1998 (CIK No.
216228, File No. 1-5627).
</TABLE>
II-3
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
<C> <C> <S> <C>
(q) Agreement with Continental AG with
respect to the sale of the
Automotive Brakes and Chassis
Business............................ Incorporated by reference to Exhibit
2.1 to ITT Industries' Form 8-K
Current Report dated October 13,
1998 (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 3 (C)
[ITT INDUSTRIES LOGO]
BY-LAWS
<PAGE> 2
BY-LAWS
OF
ITT INDUSTRIES, INC.
1. SHAREHOLDERS.
1.1 Place of Shareholders' Meetings. All meetings of the shareholders of
the Corporation shall be held at such place or places, within or outside the
state of Indiana, as may be fixed by the Corporation's Board of Directors (the
"Board", and each member thereof a "Director") from time to time or as shall be
specified in the respective notices thereof.
1.2 Day and Time of Annual Meetings of Shareholders. An annual meeting of
shareholders shall be held at such place (within or outside the state of
Indiana), date and hour as shall be determined by the Board and designated in
the notice thereof. Failure to hold an annual meeting of shareholders at such
designated time shall not affect otherwise valid corporate acts or work a
forfeiture or dissolution of the Corporation.
1.3 Purposes of Annual Meetings. (a) At each annual meeting, the
shareholders shall elect the members of the Board for the succeeding term. At
any such annual meeting any business properly brought before the meeting may be
transacted.
(b) To be properly brought before an annual meeting, business must be
(i) specified in the notice of the meeting (or any supplement thereto) given by
or at the direction of the Board, (ii) otherwise properly brought before the
meeting by or at the direction of the Board or (iii) otherwise properly brought
before the meeting by a shareholder. For business to be properly brought before
an annual meeting by a shareholder, the shareholder must have given written
notice thereof, either by personal delivery or by United States mail, postage
prepaid, to the Secretary, received at the principal executive offices of the
Corporation, not less than 120 calendar days prior to the date of the
Corporation's proxy statement released to shareholders in connection with the
previous year's annual meeting; provided, however, that in the event that no
annual meeting was held in the previous year or the date of the annual meeting
was changed by more than 30 days from the anniversary date of the previous
year's annual meeting, notice by the shareholder must be so received not later
than 120 calendar days prior to such annual meeting or 10 calendar days
following the date on which public announcement of the date of the meeting is
first made. Any such notice shall set forth as to each matter the shareholder
proposes to bring before the annual meeting (i) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting and, in the event that such business includes a
proposal to amend either the Articles of Incorporation or By-laws of the
Corporation, the language of the proposed amendment, (ii) the name and address
of the shareholder proposing such business, (iii) a representation that the
shareholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
propose such business, (iv) any material interest of the shareholder in such
business and (v) if the shareholder intends to solicit proxies in support of
such shareholder's proposal, a representation to that effect. The foregoing
notice requirements shall be deemed satisfied by a shareholder if the
shareholder has notified the Corporation of his or her intention to present a
proposal at an annual meeting and such shareholder's proposal has been included
in a proxy statement that has been prepared by management of the Corporation to
solicit proxies for such annual meeting; provided, however, that, if such
shareholder does not appear or send a qualified representative to present such
proposal at such annual meeting, the Corporation need not present such proposal
for a vote at such meeting, notwithstanding that proxies in respect of such vote
may have been received by the Corporation. No business shall be conducted at an
annual meeting of shareholders except in accordance with this Section 1.3(b),
and the chairman of any annual meeting of shareholders may refuse to permit any
business to be brought before an annual meeting without compliance with the
foregoing procedures or if the shareholder solicits proxies in support of such
shareholder's proposal without such shareholder having made the representation
required by clause (v) of the preceding sentence.
1
<PAGE> 3
1.4 Special Meetings of Shareholders. Except as otherwise expressly
required by applicable law, special meetings of the shareholders or of any class
or series entitled to vote may be called for any purpose or purposes by the
Chairman or by a majority vote of the entire Board, to be held at such place
(within or outside the state of Indiana), date and hour as shall be determined
by the Board and designated in the notice thereof. Only such business as is
specified in the notice of any special meeting of the shareholders shall come
before such meeting.
1.5 Notice of Meetings of Shareholders. Except as otherwise expressly
required or permitted by applicable law, not less than ten days nor more than
sixty days before the date of every shareholders' meeting the Secretary shall
give to each shareholder of record entitled to vote at such meeting written
notice stating the place, day and time of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. Except
as provided in Section 1.6(d) or as otherwise expressly required by applicable
law, notice of any adjourned meeting of shareholders need not be given if the
time and place thereof are announced at the meeting at which the adjournment is
taken. Any notice, if mailed, shall be deemed to be given when deposited in the
United States mail, postage prepaid, addressed to the shareholder at the address
for notices to such shareholder as it appears on the records of the Corporation.
1.6 Quorum of Shareholders. (a) Unless otherwise expressly required by
applicable law, at any meeting of the shareholders, the presence in person or by
proxy of shareholders entitled to cast a majority of votes thereat shall
constitute a quorum. Shares of the Corporation's stock belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in an election of the directors of such other corporation is held by the
Corporation, shall neither be counted for the purpose of determining the
presence of a quorum nor entitled to vote at any meeting of the shareholders.
(b) At any meeting of the shareholders at which a quorum shall be present,
a majority of those present in person or by proxy may adjourn the meeting from
time to time without notice other than announcement at the meeting. In the
absence of a quorum, the officer presiding thereat shall have power to adjourn
the meeting from time to time until a quorum shall be present. Notice of any
adjourned meeting other than announcement at the meeting shall not be required
to be given, except as provided in Section 1.6(d) below and except where
expressly required by applicable law.
(c) At any adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting
originally called, but only those shareholders entitled to vote at the meeting
as originally noticed shall be entitled to vote at any adjournment or
adjournments thereof unless a new record date is fixed by the Board.
(d) If a new date, time and place of an adjourned meeting is not announced
at the original meeting before adjournment, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given in the manner specified in Section 1.5 to each
shareholder of record entitled to vote at the meeting.
1.7 Chairman and Secretary of Meeting. The Chairman or, in his or her
absence, another officer of the Corporation designated by the Chairman, shall
preside at meetings of the shareholders. The Secretary shall act as secretary of
the meeting, or in the absence of the Secretary, an Assistant Secretary shall so
act, or if neither is present, then the presiding officer may appoint a person
to act as secretary of the meeting.
1.8 Voting by Shareholders. (a) Except as otherwise expressly required by
applicable law, at every meeting of the shareholders each shareholder shall be
entitled to the number of votes specified in the Articles of Incorporation, in
person or by proxy, for each share of stock standing in his or her name on the
books of the Corporation on the date fixed pursuant to the provisions of Section
5.6 of these By-laws as the record date for the determination of the
shareholders who shall be entitled to receive notice of and to vote at such
meeting.
(b) When a quorum is present at any meeting of the shareholders, action on
a matter (other than the election of directors) by a voting group is approved if
the votes cast within the voting group favoring the action exceed the votes cast
opposing the action, unless express provision of law or the Articles of
Incorporation require a greater number of affirmative votes.
2
<PAGE> 4
(c) Except as required by applicable law, the vote at any meeting of
shareholders on any question need not be by ballot, unless so directed by the
chairman of the meeting. On a vote by ballot, each ballot shall be signed by the
shareholder voting, or by his or her proxy, if there be such proxy, and shall
state the number of shares voted.
1.9 Proxies. Any shareholder entitled to vote at any meeting of
shareholders may vote either in person or by proxy. A shareholder may authorize
a person or persons to act for the shareholder as proxy by (i) the shareholder
or the shareholder's designated officer, director, employee or agent executing a
writing by signing it or by causing the shareholder's signature or the signature
of the designated officer, director, employee or agent of the shareholder to be
affixed to the writing by any reasonable means, including by facsimile
signature; (ii) the shareholder transmitting or authorizing the transmission of
an electronic submission which may be by any electronic means, including data
and voice telephonic communications and computer network to (a) the person who
will be the holder of the proxy; (b) a proxy solicitation firm; or (c) a proxy
support service organization or similar agency authorized by the person who will
be the holder of the proxy to receive the electronic submission, which
electronic submission must either contain or be accompanied by information from
which it can be determined that the electronic submission was transmitted by or
authorized by the shareholder; or (iii) any other method allowed by law.
1.10 Inspectors. (a) The election of Directors and any other vote by
ballot at any meeting of the shareholders shall be supervised by at least two
inspectors. Such inspectors may be appointed by the Chairman before or at the
meeting. If the Chairman shall not have so appointed such inspectors or if one
or both inspectors so appointed shall refuse to serve or shall not be present,
such appointment shall be made by the officer presiding at the meeting. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability.
(b) The inspectors shall (i) ascertain the number of shares of the
Corporation outstanding and the voting power of each, (ii) determine the shares
represented at any meeting of shareholders and the validity of the proxies and
ballots, (iii) count all proxies and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, and (v) certify their determination of the
number of shares represented at the meeting, and their count of all proxies and
ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of their duties.
1.11 List of Shareholders. (a) At least five business days before every
meeting of shareholders, the Corporation shall cause to be prepared and made a
complete list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order by voting group, if any, and showing the address of each
shareholder and the number of shares registered in the name of each shareholder.
(b) During ordinary business hours for a period of at least five business
days prior to the meeting, such list shall be open to examination by any
shareholder for any purpose germane to the meeting, either at the Corporation's
principal office or a place identified in the meeting notice in the city where
the meeting will be held.
(c) The list shall also be produced and kept at the time and place of the
meeting, and it may be inspected during the meeting by any shareholder or the
shareholder's agent or attorney authorized in writing.
(d) The stock ledger shall be the only evidence as to who are the
shareholders entitled to examine the stock ledger, the list required by this
Section 1.11 or the books of the Corporation, or to vote in person or by proxy
at any meeting of shareholders.
1.12 Confidential Voting. (a) Proxies and ballots that identify the votes
of specific shareholders shall be kept in confidence by the tabulators and the
inspectors of election unless (i) there is an opposing solicitation with respect
to the election or removal of Directors, (ii) disclosure is required by
applicable law, (iii) a shareholder expressly requests or otherwise authorizes
disclosure, or (iv) the Corporation concludes in good faith that a bona fide
dispute exists as to the
3
<PAGE> 5
authenticity of one or more proxies, ballots or votes, or as to the accuracy of
any tabulation of such proxies, ballots or votes.
(b) The tabulators and inspectors of election and any authorized agents or
other persons engaged in the receipt, count and tabulation of proxies and
ballots shall be advised of this By-law and instructed to comply herewith.
(c) The inspectors of election shall certify, to the best of their
knowledge based on due inquiry, that proxies and ballots have been kept in
confidence as required by this Section 1.12.
2. DIRECTORS.
2.1 Powers of Directors. The business and affairs of the Corporation
shall be managed by or under the direction of the Board, which may exercise all
the powers of the Corporation except such as are by applicable law, the Articles
of Incorporation or these By-laws required to be exercised or performed by the
shareholders.
2.2 Number, Method of Election, Terms of Office of Directors. The number
of Directors which shall constitute the whole Board shall be such as from time
to time shall be determined by resolution adopted by a majority of the entire
Board, but the number shall not be less than three nor more than twenty-five,
provided that the tenure of a Director shall not be affected by any decrease in
the number of Directors so made by the Board. Each Director shall hold office
until the next annual meeting of shareholders and until his or her successor is
elected and qualified or until his or her earlier death, retirement, resignation
or removal. Directors need not be shareholders of the Corporation or citizens of
the United States of America.
Nominations of persons for election as Directors may be made by the Board
or by any shareholder who is a shareholder of record at the time of giving of
the notice of nomination provided for in this Section 2.2 and who is entitled to
vote for the election of Directors. Any shareholder of record entitled to vote
for the election of Directors at a meeting may nominate a person or persons for
election as Directors only if written notice of such shareholder's intent to
make such nomination is given in accordance with the procedures for bringing
business before the meeting set forth in Section 1.3(b) of these By-Laws, either
by personal delivery or by United States mail, postage prepaid, to the
Secretary, received at the principal executive offices of the Corporation, not
later than (i) with respect to an election to be held at an annual meeting of
shareholders, not less than 120 calendar days prior to the date of the
Corporation's proxy statement released to shareholders in connection with the
previous year's annual meeting; provided, however, that in the event that no
annual meeting was held in the previous year or the date of the annual meeting
was changed by more than 30 days from the anniversary date of the previous
year's annual meeting, notice by the shareholder must be so received not later
than 120 calendar days prior to such annual meeting or 10 calendar days
following the date on which public announcement of the date of the meeting is
first made, and (ii) with respect to an election to be held at a special meeting
of shareholders for the election of Directors, not later than 120 calendar days
prior to such special meeting or 10 calendar days following the date on which
public announcement of the date of the special meeting is first made and of the
nominees to be elected at such meeting. Each such notice shall set forth: (a)
the name and address of the shareholder who intends to make the nomination and
of the person or persons to be nominated; (b) a representation that the
shareholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (d) such other
information regarding each nominee proposed by such shareholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had each nominee been nominated,
or intended to be nominated, by the Board; (e) the consent of each nominee to
serve as a Director if so elected and (f) if the shareholder intends to solicit
proxies in support of such shareholder's nominee(s), a representation to that
effect. The chairman of any meeting of shareholders to elect Directors and the
Board may refuse to acknowledge the nomination of any person not made in
4
<PAGE> 6
compliance with the foregoing procedure or if the shareholder solicits proxies
in support of such shareholder's nominee(s) without such shareholder having made
the representation required by (f) of the preceding sentence.
At each meeting of the shareholders for the election of Directors at which
a quorum is present, the persons receiving the greatest number of votes, up to
the number of Directors to be elected, shall be the Directors.
2.3 Vacancies on Board. (a) Any Director may resign from office at any
time by delivering a written resignation to the Chairman or the Secretary. The
resignation will take effect at the time specified therein, or, if no time is
specified, at the time of its receipt by the Corporation. The acceptance of a
resignation shall not be necessary to make it effective, unless expressly so
provided in the resignation.
(b) Any vacancy and any newly created Directorship resulting from any
increase in the authorized number of Directors may be filled by vote of a
majority of the Directors then in office, though less than a quorum, and any
Director so chosen shall hold office until the next annual election of Directors
by the shareholders and until a successor is duly elected and qualified or until
his or her earlier death, retirement, resignation or removal. If there are no
Directors in office, then an election of Directors may be held in the manner
provided by applicable law.
2.4 Meetings of the Board. (a) The Board may hold its meetings, both
regular and special, either within or outside the state of Indiana, at such
places as from time to time may be determined by the Board or as may be
designated in the respective notices or waivers of notice thereof.
(b) Regular meetings of the Board shall be held at such times and at such
places as from time to time shall be determined by the Board.
(c) The first meeting of each newly elected Board shall be held as soon as
practicable after the annual meeting of the shareholders and shall be for the
election of officers and the transaction of such other business as may come
before it.
(d) Special meetings of the Board shall be held whenever called by
direction of the Chairman or at the request of Directors constituting one-third
of the number of Directors then in office.
(e) Members of the Board or any Committee of the Board may participate in a
meeting by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
such participation shall constitute presence in person at such meeting.
(f) The Secretary shall give notice to each Director of any meeting of the
Board by mailing the same at least two days before the meeting or by
telegraphing or delivering the same not later than the day before the meeting.
Such notice need not include a statement of the business to be transacted at, or
the purpose of, any such meeting. Any and all business may be transacted at any
meeting of the Board. No notice of any adjourned meeting need be given. No
notice to or waiver by any Director shall be required with respect to any
meeting at which the Director is present.
2.5 Quorum and Action. Except as otherwise expressly required by
applicable law, the Articles of Incorporation or these By-laws, at any meeting
of the Board, the presence of at least one-third of the entire Board shall
constitute a quorum for the transaction of business; but if there shall be less
than a quorum at any meeting of the Board, a majority of those present may
adjourn the meeting from time to time. Unless otherwise provided by applicable
law, the Articles of Incorporation or these By-laws, the vote of a majority of
the Directors present (and not abstaining) at any meeting at which a quorum is
present shall be necessary for the approval and adoption of any resolution or
the approval of any act of the Board.
2.6 Presiding Officer and Secretary of Meeting. The Chairman or, in the
absence of the Chairman, a member of the Board selected by the members present,
shall preside at meetings of the Board. The Secretary shall act as secretary of
the meeting, but in the Secretary's absence the presiding officer may appoint a
secretary of the meeting.
5
<PAGE> 7
2.7 Action by Consent without Meeting. Any action required or permitted
to be taken at any meeting of the Board or of any Committee thereof may be taken
without a meeting if all members of the Board or Committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of their proceedings.
2.8 Standing Committees. By resolution adopted by a majority of the
entire Board, the Board shall elect, from among its members, individuals to
serve on the Standing Committees established by this Section 2.8. Each Standing
Committee shall be comprised of such number of Directors, not less than three,
as shall be elected to such Committee. Each Committee shall keep a record of all
its proceedings and report the same to the Board. One-third of the members of a
Committee, but not less than two, shall constitute a quorum, and the act of a
majority of the members of a Committee present at any meeting at which a quorum
is present shall be the act of the Committee. Each Standing Committee shall meet
at the call of its chairman or any two of its members. The chairmen of the
various Committees shall preside, when present, at all meetings of such
Committees, and shall have such powers and perform such duties as the Board may
from time to time prescribe. The Standing Committees of the Board, and functions
of each, are as follows:
(a) Compensation and Personnel Committee. The Compensation and Personnel
Committee shall exercise the power of oversight of the compensation and benefits
of the employees of the Corporation, and shall be charged with evaluating
management performance, and establishing executive compensation. This Committee
shall have access to its own independent outside compensation counsel and shall
consist of a majority of independent directors. For purposes of this Section
2.8(a), "independent director" shall mean a Director who: (i) has not been
employed by the Corporation in an executive capacity within the past five years;
(ii) is not, and is not affiliated with a company or firm that is, an advisor or
consultant to the Corporation; (iii) is not affiliated with a significant
customer or supplier of the Corporation; (iv) has no personal services
contract(s) with the Corporation; (v) is not affiliated with a tax-exempt entity
that receives significant contributions from the Corporation; and (vi) is not a
familial relative of any person described by Clauses (i) through (v). This
By-law shall not be amended or repealed except by a majority of the voting power
of the shareholders present in person or by proxy and entitled to vote at any
meeting at which a quorum is present.
(b) Audit Committee. The Audit Committee and the Board shall be the bodies
to whom the independent auditors of the Corporation shall be ultimately
accountable and shall have ultimate authority and responsibility to select,
evaluate and, where appropriate, replace the independent auditors (or to
nominate the independent auditors to be proposed for shareholder approval). The
Audit Committee shall be responsible for assessing the objectivity and
independence of said auditors; confirming the scope of audits to be performed by
said auditors; reviewing audit results, internal accounting and control
procedures and policies, fees paid to said auditors, and expense accounts of
senior executives; reviewing and recommending approval of the audited financial
statements of the Corporation and the annual reports to shareholders; and
otherwise complying with the responsibilities and obligations of the Securities
and Exchange Commission and the New York Stock Exchange applicable from time to
time to audit committees. The Audit Committee shall consist entirely of
"independent directors" as provided for in Section 2.12 of these By-Laws and
shall be in compliance with the requirements of the Securities and Exchange
Commission and the New York Stock Exchange applicable from time to time to audit
committee members.
(c) Capital Committee. The Capital Committee shall have the responsibility
for maximizing the effective use of the assets of the Corporation and its
subsidiaries and reviewing capital expenditures and appropriations.
(d) Corporate Responsibility Committee. The Corporate Responsibility
Committee shall review and define social responsibilities and shall review and
consider major claims and litigation and legal, regulatory, intellectual
property and related governmental policy matters affecting the Corporation and
its subsidiaries. The Corporate Responsibility Committee shall also review and
approve management policies and programs relating to compliance with legal and
regulatory requirements and business ethics.
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(e) Nominating and Governance Committee. The Nominating and Governance
Committee shall consider and make recommendations as to the composition,
structure, organization and future requirements of the Board and Committees
thereof and as to other corporate governance issues relating to the Corporation;
administer the Board evaluation process; propose nominees for election to the
Board and Committees thereof; consider shareholder nominees for election to the
Board; and consider matters concerning the qualifications, compensation and
retirement of Directors. The Nominating and Governance Committee shall consist
entirely of "independent directors" as provided for in Section 2.12 of these
By-Laws.
2.9 Other Committees. By resolution passed by a majority of the entire
Board, the Board may also appoint from among its members such other Committees,
Standing or otherwise, as it may from time to time deem desirable and may
delegate to such Committees such powers of the Board as it may consider
appropriate, consistent with applicable law, the Articles of Incorporation and
these By-laws.
2.10 Limitations on Committees. (a) Notwithstanding any other provision
of these By-laws, and except as otherwise expressly required by applicable law,
no Standing Committee created by Section 2.8, nor any other committee hereafter
established, may:
(1) authorize dividends or other distributions, except a committee may
authorize or approve a reacquisition of shares if done according to a
formula or method prescribed by the Board of Directors;
(2) approve or propose to shareholders action that is required to be
approved by shareholders;
(3) fill vacancies on the Board of Directors or on any of its
committees;
(4) except as permitted under Section 2.10(a)(7) below, amend the
Corporation's Articles of Incorporation under IC 23-1-38-2;
(5) adopt, amend, repeal or waive provisions of these By-laws;
(6) approve a plan of merger not requiring shareholder approval; or
(7) authorize or approve the issuance or sale or a contract for sale
of shares, or determine the designation and relative rights, preferences,
and limitations of a class or series of shares, except the Board of
Directors may authorize a committee (or an executive officer of the
Corporation designated by the Board of Directors) to take action described
in this Section 2.10(a)(7) within limits prescribed by the Board of
Directors.
(b) Except to the extent inconsistent with the resolutions creating a
Standing Committee, Sections 2.2 to 2.7 and Section 10 of these By-laws, which
govern meetings, action without meetings, notice and waiver of notice, quorum
and voting requirements and telephone participation in meetings of the Board of
Directors, apply to each committee and its members as well.
2.11 Compensation of Directors. Unless otherwise restricted by the
Articles of Incorporation or these By-laws, Directors shall receive for their
services on the Board or any Committee thereof such compensation and benefits,
including the granting of options, together with expenses, if any, as the Board
may from time to time determine. The Directors may be paid a fixed sum for
attendance at each meeting of the Board or Committee thereof and/or a stated
annual sum as a Director, together with expenses, if any, of attendance at each
meeting of the Board or Committee thereof. Nothing herein contained shall be
construed to preclude any Director from serving the Corporation in any other
capacity and receiving compensation therefor.
2.12 Independent Directors. (a) Independence of Nominees for Election as
Directors at the Annual Meeting. The persons nominated by the Board for
election as Directors at any annual meeting of the shareholders of the
Corporation shall include a sufficient number of persons who have been, on the
date of their nomination, determined by the Board to be eligible to be
classified as independent directors such that if all such nominees are elected,
the majority of all Directors holding office would be independent directors.
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(b) Directors Elected to Fill Vacancies on the Board. If the Board elects
Directors between annual meetings of shareholders to fill vacancies or newly
created Directorships, the majority of all Directors holding office immediately
after such elections shall be independent directors.
(c) Definition of Independent Director. For purposes of this Section 2.12,
"independent director" shall mean a Director who: (i) has not been employed by
the Corporation in an executive capacity within the past five years; (ii) is
not, and is not affiliated with a company or a firm that is, an adviser or
consultant to the Corporation; (iii) is not affiliated with a significant
customer or supplier of the Corporation; (iv) has no personal services
contract(s) with the Corporation; (v) is not affiliated with a tax-exempt entity
that receives significant contributions from the Corporation; (vi) is not a
familial relative of any person described by Clauses (i) through (v); and (vii)
is free of any other relationship which would interfere with the exercise of
independent judgment by such Director.
3. OFFICERS.
3.1 Officers, Titles, Elections, Terms. (a) The Board may from time to
time elect a Chairman, a Vice Chairman, a President, one or more Executive Vice
Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a
Chief Financial Officer, a Controller, a Treasurer, a Secretary, a General
Counsel, one or more Assistant Controllers, one or more Assistant Treasurers,
one or more Assistant Secretaries, and one or more Associate or Assistant
General Counsels, to serve at the pleasure of the Board or otherwise as shall be
specified by the Board at the time of such election and until their successors
are elected and qualified or until their earlier death, retirement, resignation
or removal.
(b) The Board may elect or appoint at any time such other officers or
agents with such duties as it may deem necessary or desirable. Such other
officers or agents shall serve at the pleasure of the Board or otherwise as
shall be specified by the Board at the time of such election or appointment and,
in the case of such other officers, until their successors are elected and
qualified or until their earlier death, retirement, resignation or removal. Each
such officer or agent shall have such authority and shall perform such duties as
may be provided herein or as the Board may prescribe. The Board may from time to
time authorize any officer or agent to appoint and remove any other such officer
or agent and to prescribe such person's authority and duties.
(c) No person may be elected or appointed an officer who is not a citizen
of the United States of America if such election or appointment is prohibited by
applicable law or regulation.
(d) Any vacancy in any office may be filled for the unexpired portion of
the term by the Board. Each officer elected or appointed during the year shall
hold office until the next annual meeting of the Board at which officers are
regularly elected or appointed and until his or her successor is elected or
appointed and qualified or until his or her earlier death, retirement,
resignation or removal.
(e) Any officer or agent elected or appointed by the Board may be removed
at any time by the affirmative vote of a majority of the entire Board.
(f) Any officer may resign from office at any time. Such resignation shall
be made in writing and given to the President or the Secretary. Any such
resignation shall take effect at the time specified therein, or, if no time is
specified, at the time of its receipt by the Corporation. The acceptance of a
resignation shall not be necessary to make it effective, unless expressly so
provided in the resignation.
3.2 General Powers of Officers. Except as may be otherwise provided by
applicable law or in Article 6 or Article 7 of these By-laws, the Chairman, any
Vice Chairman, the President, any Executive Vice President, any Senior Vice
President, any Vice President, the Chief Financial Officer, the General Counsel,
the Controller, the Treasurer and the Secretary, or any of them, may (i) execute
and deliver in the name of the Corporation, in the name of any Division of the
Corporation or in both names any agreement, contract, instrument, power of
attorney or other document pertaining to the business or affairs of the
Corporation or any Division of the Corporation, including without limitation
agreements or contracts with any government or governmental department, agency
or instrumentality, and (ii) delegate to any employee or agent the power to
execute and deliver any such agreement, contract, instrument, power of attorney
or other document.
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3.3 Powers and Duties of the Chairman. The Chairman shall be the Chief
Executive of the Corporation and shall report directly to the Board. Except in
such instances as the Board may confer powers in particular transactions upon
any other officer, and subject to the control and direction of the Board, the
Chairman shall manage and direct the business and affairs of the Corporation and
shall communicate to the Board and any Committee thereof reports, proposals and
recommendations for their respective consideration or action. He or she may do
and perform all acts on behalf of the Corporation and shall preside at meetings
of the Board and the shareholders.
3.4 Powers and Duties of a Vice Chairman. A Vice Chairman shall have such
powers and perform such duties as the Board or the Chairman may from time to
time prescribe or as may be prescribed in these By-laws.
3.5 Powers and Duties of the President. The President shall have such
powers and perform such duties as the Board or the Chairman may from time to
time prescribe or as may be prescribed in these By-laws.
3.6 Powers and Duties of Executive Vice Presidents, Senior Vice Presidents
and Vice Presidents. Executive Vice Presidents, Senior Vice Presidents and Vice
Presidents shall have such powers and perform such duties as the Board or the
Chairman may from time to time prescribe or as may be prescribed in these
By-laws.
3.7 Powers and Duties of the Chief Financial Officer. The Chief Financial
Officer shall have such powers and perform such duties as the Board, the
Chairman or any Vice Chairman may from time to time prescribe or as may be
prescribed in these By-laws. The Chief Financial Officer shall cause to be
prepared and maintained (i) a stock ledger containing the names and addresses of
all shareholders and the number of shares of each class and series held by each
and (ii) the list of shareholders for each meeting of the shareholders as
required by Section 1.11 of these By-laws. The Chief Financial Officer shall be
responsible for the custody of all stock books and of all unissued stock
certificates.
3.8 Powers and Duties of the Controller and Assistant Controllers. (a)
The Controller shall be responsible for the maintenance of adequate accounting
records of all assets, liabilities, capital and transactions of the Corporation.
The Controller shall prepare and render such balance sheets, income statements,
budgets and other financial statements and reports as the Board or the Chairman
may require, and shall perform such other duties as may be prescribed or
assigned pursuant to these By-laws and all other acts incident to the position
of Controller.
(b) Each Assistant Controller shall perform such duties as from time to
time may be assigned by the Controller or by the Board. In the event of the
absence, incapacity or inability to act of the Controller, then any Assistant
Controller may perform any of the duties and may exercise any of the powers of
the Controller.
3.9 Powers and Duties of the Treasurer and Assistant Treasurers. (a) The
Treasurer shall have the care and custody of all the funds and securities of the
Corporation except as may be otherwise ordered by the Board, and shall cause
such funds (i) to be invested or reinvested from time to time for the benefit of
the Corporation as may be designated by the Board, the Chairman, any Vice
Chairman, the President, the Chief Financial Officer or the Treasurer or (ii) to
be deposited to the credit of the Corporation in such banks or depositories as
may be designated by the Board, the Chairman, any Vice Chairman, the President,
the Chief Financial Officer or the Treasurer, and shall cause such securities to
be placed in safekeeping in such manner as may be designated by the Board, the
Chairman, any Vice Chairman, the President, the Chief Financial Officer or the
Treasurer.
(b) The Treasurer, any Assistant Treasurer or such other person or persons
as may be designated for such purpose by the Board, the Chairman, any Vice
Chairman, the President, the Chief Financial Officer or the Treasurer may
endorse in the name and on behalf of the Corporation all instruments for the
payment of money, bills of lading, warehouse receipts, insurance policies and
other commercial documents requiring such endorsement.
(c) The Treasurer, any Assistant Treasurer or such other person or persons
as may be designated for such purpose by the Board, the Chairman, any Vice
Chairman, the President, the Chief
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Financial Officer or the Treasurer (i) may sign all receipts and vouchers for
payments made to the Corporation, (ii) shall render a statement of the cash
account of the Corporation to the Board as often as it shall require the same;
and (iii) shall enter regularly in books to be kept for that purpose full and
accurate account of all moneys received and paid on account of the Corporation
and of all securities received and delivered by the Corporation.
(d) The Treasurer shall perform such other duties as may be prescribed or
assigned pursuant to these By-laws and all other acts incident to the position
of Treasurer. Each Assistant Treasurer shall perform such duties as may from
time to time be assigned by the Treasurer or by the Board. In the event of the
absence, incapacity or inability to act of the Treasurer, then any Assistant
Treasurer may perform any of the duties and may exercise any of the powers of
the Treasurer.
3.10 Powers and Duties of the Secretary and Assistant Secretaries. (a)
The Secretary shall keep the minutes of all proceedings of the shareholders, the
Board and the Committees of the Board. The Secretary shall attend to the giving
and serving of all notices of the Corporation, in accordance with the provisions
of these By-laws and as required by applicable law. The Secretary shall be the
custodian of the seal of the Corporation. The Secretary shall affix or cause to
be affixed the seal of the Corporation to such contracts, instruments and other
documents requiring the seal of the Corporation, and when so affixed may attest
the same and shall perform such other duties as may be prescribed or assigned
pursuant to these By-laws and all other acts incident to the position of
Secretary.
(b) Each Assistant Secretary shall perform such duties as may from time to
time be assigned by the Secretary or by the Board. In the event of the absence,
incapacity or inability to act of the Secretary, then any Assistant Secretary
may perform any of the duties and may exercise any of the powers of the
Secretary.
4. INDEMNIFICATION.
4.1(a) Right to Indemnification. The Corporation, to the fullest extent
permitted by applicable law as then in effect, shall indemnify any person who is
or was a Director or officer of the Corporation and who is or was involved in
any manner (including, without limitation, as a party or a witness) or is
threatened to be made so involved in any threatened, pending or completed
investigation, claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative (including, without limitation, any action, suit
or proceeding by or in the right of the Corporation to procure a judgment in its
favor) (a "Proceeding") by reason of the fact that such person is or was a
Director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee, fiduciary or
agent of another corporation, partnership, joint venture, trust or other
enterprise (including, without limitation, any employee benefit plan) (a
"Covered Entity"), against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such Proceeding; provided, however, that the foregoing
shall not apply to a Director or officer of the Corporation with respect to a
Proceeding that was commenced by such Director or officer prior to a Change in
Control (as defined in Section 4.4(e)(i) of this Article 4). Any Director or
officer of the Corporation entitled to indemnification as provided in this
Section 4.1(a) is hereinafter called an "Indemnitee". Any right of an Indemnitee
to indemnification shall be a contract right and shall include the right to
receive, prior to the conclusion of any Proceeding, payment of any expenses
incurred by the Indemnitee in connection with such Proceeding, consistent with
the provisions of applicable law as then in effect and the other provisions of
this Article 4.
(b) Effect of Amendments. Neither the amendment or repeal of, nor the
adoption of a provision inconsistent with, any provision of this Article 4
(including, without limitation, this Section 4.1(b)) shall adversely affect the
rights of any Director or officer under this Article 4 (i) with respect to any
Proceeding commenced or threatened prior to such amendment, repeal or adoption
of an inconsistent provision or (ii) after the occurrence of a Change in
Control, with respect to any Proceeding arising out of any action or omission
occurring prior to such amendment, repeal or adoption of an inconsistent
provision, in either case without the written consent of such Director or
officer.
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4.2 Insurance, Contracts and Funding. The Corporation may purchase and
maintain insurance to protect itself and any indemnified person against any
expenses, judgments, fines and amounts paid in settlement as specified in
Section 4.1(a) or Section 4.5 of this Article 4 or incurred by any indemnified
person in connection with any Proceeding referred to in such Sections, to the
fullest extent permitted by applicable law as then in effect. The Corporation
may enter into contracts with any Director, officer, employee or agent of the
Corporation or any director, officer, employee, fiduciary or agent of any
Covered Entity in furtherance of the provisions of this Article 4 and may create
a trust fund or use other means (including, without limitation, a letter of
credit) to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Article 4.
4.3 Indemnification; Not Exclusive Right. The right of indemnification
provided in this Article 4 shall not be exclusive of any other rights to which
any indemnified person may otherwise be entitled, and the provisions of this
Article 4 shall inure to the benefit of the heirs and legal representatives of
any indemnified person under this Article 4 and shall be applicable to
Proceedings commenced or continuing after the adoption of this Article 4,
whether arising from acts or omissions occurring before or after such adoption.
4.4 Advancement of Expenses; Procedures; Presumptions and Effect of
Certain Proceedings; Remedies. In furtherance, but not in limitation, of the
foregoing provisions, the following procedures, presumptions and remedies shall
apply with respect to the advancement of expenses and the right to
indemnification under this Article 4:
(a) Advancement of Expenses. All reasonable expenses incurred by or on
behalf of the Indemnitee in connection with any Proceeding shall be advanced to
the Indemnitee by the Corporation within 20 days after the receipt by the
Corporation of a statement or statements from the Indemnitee requesting such
advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Any such statement or statements shall
reasonably evidence the expenses incurred by the Indemnitee and shall include
any written affirmation or undertaking required by applicable law in effect at
the time of such advance.
(b) Procedures for Determination of Entitlement to Indemnification. (i) To
obtain indemnification under this Article 4, an Indemnitee shall submit to the
Secretary of the Corporation a written request, including such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification (the "Supporting Documentation"). The determination of the
Indemnitee's entitlement to indemnification shall be made not later than 60 days
after receipt by the Corporation of the written request for indemnification
together with the Supporting Documentation. The Secretary of the Corporation
shall, promptly upon receipt of such a request for indemnification, advise the
Board in writing that the Indemnitee has requested indemnification.
(ii) The Indemnitee's entitlement to indemnification under this Article 4
shall be determined in one of the following ways: (A) by a majority vote of the
Disinterested Directors (as hereinafter defined), if they constitute a quorum of
the Board; (B) by a written opinion of Independent Counsel as hereinafter
defined) if (x) a Change in Control (as hereinafter defined) shall have occurred
and the Indemnitee so requests or (y) a quorum of the Board consisting of
Disinterested Directors is not obtainable or, even if obtainable, a majority of
such Disinterested Directors so directs; (C) by the shareholders of the
Corporation (but only if a majority of the Disinterested Directors, if they
constitute a quorum of the Board, presents the issue of entitlement to
indemnification to the shareholders for their determination); or (D) as provided
in Section 4.4(c) of this Article 4.
(iii) In the event the determination of entitlement to indemnification is
to be made by Independent Counsel pursuant to Section 4.4(b)(ii), a majority of
the Disinterested Directors shall select the Independent Counsel, but only an
Independent Counsel to which the Indemnitee does not reasonably object;
provided, however, that if a Change in Control shall have occurred, the
Indemnitee shall select such Independent Counsel, but only an Independent
Counsel to which a majority of the Disinterested Directors does not reasonably
object.
(c) Presumptions and Effect of Certain Proceedings. Except as otherwise
expressly provided in this Article 4, if a Change in Control shall have
occurred, the Indemnitee shall be presumed to be
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entitled to indemnification under this Article 4 (with respect to actions or
failures to act occurring prior to such Change in Control) upon submission of a
request for indemnification together with the Supporting Documentation in
accordance with Section 4.4(b) of this Article 4, and thereafter the Corporation
shall have the burden of proof to overcome that presumption in reaching a
contrary determination. In any event, if the person or persons empowered under
Section 4.4(b) of this Article 4 to determine entitlement to indemnification
shall not have been appointed or shall not have made a determination within 60
days after receipt by the Corporation of the request therefor together with the
Supporting Documentation, the Indemnitee shall be deemed to be, and shall be,
entitled to indemnification unless (A) the Indemnitee misrepresented or failed
to disclose a material fact in making the request for indemnification or in the
Supporting Documentation or (B) such indemnification is prohibited by law. The
termination of any Proceeding described in Section 4.1 of this Article 4, or of
any claim, issue or matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, adversely affect the right of the Indemnitee to indemnification or
create a presumption that the Indemnitee did not act in good faith and in a
manner which the Indemnitee reasonably believed to be in or not opposed to the
best interests of the Corporation or, with respect to any criminal Proceeding,
that the Indemnitee had reasonable cause to believe that his or her conduct was
unlawful.
(d) Remedies of Indemnitee. (i) In the event that a determination is made
pursuant to Section 4.4(b) of this Article 4 that the Indemnitee is not entitled
to indemnification under this Article 4, (A) the Indemnitee shall be entitled to
seek an adjudication of his or her entitlement to such indemnification either,
at the Indemnitee's sole option, in (x) an appropriate court of the state of
Indiana or any other court of competent jurisdiction or (y) an arbitration to be
conducted by a single arbitrator pursuant to the rules of the American
Arbitration Association; (B) any such judicial proceeding or arbitration shall
be de novo and the Indemnitee shall not be prejudiced by reason of such adverse
determination; and (C) if a Change in Control shall have occurred, in any such
judicial proceeding or arbitration the Corporation shall have the burden of
proving that the Indemnitee is not entitled to indemnification under this
Article 4 (with respect to actions or failures to act occurring prior to such
Change in Control).
(ii) If a determination shall have been made or deemed to have been made,
pursuant to Section 4.4(b) or (c) of this Article 4, that the Indemnitee is
entitled to indemnification, the Corporation shall be obligated to pay the
amounts constituting such indemnification within five days after such
determination has been made or deemed to have been made and shall be
conclusively bound by such determination unless (A) the Indemnitee
misrepresented or failed to disclose a material fact in making the request for
indemnification or in the Supporting Documentation or (B) such indemnification
is prohibited by law. In the event that (x) advancement of expenses is not
timely made pursuant to Section 4.4(a) of this Article 4 or (y) payment of
indemnification is not made within five days after a determination of
entitlement to indemnification has been made or deemed to have been made
pursuant to Section 4.4(b) or (c) of this Article 4, the Indemnitee shall be
entitled to seek judicial enforcement of the Corporation's obligation to pay to
the Indemnitee such advancement of expenses or indemnification. Notwithstanding
the foregoing, the Corporation may bring an action, in an appropriate court in
the state of Indiana or any other court of competent jurisdiction, contesting
the right of the Indemnitee to receive indemnification hereunder due to the
occurrence of an event described in Subclause (A) or (B) of this Clause (ii) (a
"Disqualifying Event"); provided, however, that in any such action the
Corporation shall have the burden of proving the occurrence of such
Disqualifying Event.
(iii) The Corporation shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section 4.4(d) that the
procedures and presumptions of this Article 4 are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Corporation is bound by all the provisions of this Article 4.
(iv) In the event that the Indemnitee, pursuant to this Section 4.4(d),
seeks a judicial adjudication of or an award in arbitration to enforce his or
her rights under, or to recover damages for breach of, this Article 4, the
Indemnitee shall be entitled to recover from the Corporation, and shall be
indemnified by the Corporation against, any expenses actually and reasonably
incurred by the Indemnitee if the Indemnitee prevails in such judicial
adjudication or arbitration. If it shall be
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determined in such judicial adjudication or arbitration that the Indemnitee is
entitled to receive part but not all of the indemnification or advancement of
expenses sought, the expenses incurred by the Indemnitee in connection with such
judicial adjudication or arbitration shall be prorated accordingly.
(e) Definitions. For purposes of this Article 4:
(i) "Change in Control" means a change in control of the Corporation of a
nature that would be required to be reported in response to Item 6(e) (or any
successor provision) of Schedule 14A of Regulation 14A (or any amendment or
successor provision thereto) promulgated under the Securities Exchange Act of
1934 (the "Act"), whether or not the Corporation is then subject to such
reporting requirement; provided that, without limitation, such a change in
control shall be deemed to have occurred if (A) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of
securities of the Corporation representing 20% or more of the voting power of
all outstanding shares of stock of the Corporation entitled to vote generally in
an election of Directors without the prior approval of at least two-thirds of
the members of the Board in office immediately prior to such acquisition; (B)
the Corporation is a party to any merger or consolidation in which the
Corporation is not the continuing or surviving corporation or pursuant to which
shares of the Corporation's common stock would be converted into cash,
securities or other property, other than a merger of the Corporation in which
the holders of the Corporation's common stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, (C) there is a sale, lease, exchange
or other transfer (in one transaction or a series of related transactions) of
all, or substantially all, the assets of the Corporation, or liquidation or
dissolution of the Corporation; (D) the Corporation is a party to a merger,
consolidation, sale of assets or other reorganization, or a proxy contest, as a
consequence of which members of the Board in office immediately prior to such
transaction or event constitute less than a majority of the Board thereafter; or
(E) during any period of two consecutive years, individuals who at the beginning
of such period constituted the Board (including for this purpose any new
Director whose election or nomination for election by the shareholders was
approved by a vote of at least two-thirds of the Directors then still in office
who were Directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Board.
(ii) "Disinterested Director" means a Director who is not or was not a
party to the proceeding in respect of which indemnification is sought by the
Indemnitee.
(iii) "Independent Counsel" means a law firm or a member of a law firm that
neither presently is, nor in the past five years has been, retained to
represent: (a) the Corporation or the Indemnitee in any matter material to
either such party or (b) any other party to the Proceeding giving rise to a
claim for indemnification under this Article 4. Notwithstanding the foregoing,
the term "Independent Counsel" shall not include any person who, under
applicable standards of professional conduct, would have a conflict of interest
in representing either the Corporation or the Indemnitee in an action to
determine the Indemnitee's rights under this Article 4.
4.5 Indemnification of Employees and Agents. Notwithstanding any other
provision of this Article 4, the Corporation, to the fullest extent permitted by
applicable law as then in effect, may indemnify any person other than a Director
or officer of the Corporation who is or was an employee or agent of the
Corporation and who is or was involved in any manner (including, without
limitation, as a party or a witness) or is threatened to be made so involved in
any threatened, pending or completed Proceeding by reasons of the fact that such
person is or was an employee or agent of the Corporation or, at the request of
the Corporation, a director, officer, employee, fiduciary or agent of a Covered
Entity against all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such Proceeding. The Corporation may also advance expenses
incurred by such employee, fiduciary or agent in connection with any such
Proceeding, consistent with the provisions of applicable law as then in effect.
4.6 Severability. If any of this Article 4 shall be held to be invalid,
illegal or unenforceable for any reason whatsoever: (i) the validity, legality
and enforceability of the remaining provisions of this Article 4 (including,
without limitation, all portions of any Section of this Article 4 containing any
such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or
13
<PAGE> 15
unenforceable) shall not in any way be affected or impaired thereby; and (ii) to
the fullest extent possible, the provisions of this Article 4 (including,
without limitation, all portions of any Section of this Article 4 containing any
such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
5. CAPITAL STOCK.
5.1 Stock Certificates. (a) Every holder of stock in the Corporation
shall be entitled to have a certificate, which shall state on its face the name
of the Corporation and that it is organized under the laws of the State of
Indiana, the name of the person to whom the certificate was issued, and the
number and class of shares and the designation of the series, if any, the
certificate represents, and shall state conspicuously on its front or back that
the Corporation will furnish the shareholder, upon his written request and
without charge, a summary of the designations, relative rights, preferences, and
limitations applicable to each class and the variations in rights, preferences,
and limitations determined for each series (and the authority of the Board of
Directors to determine variations for future series), which certificate shall
otherwise be in such form as the Board shall prescribe and as provided in
Section 5.1(d). Each such certificate shall be signed by, or in the name of, the
Corporation by the Chairman or any Vice Chairman or the President or any Vice
President, and by the Treasurer or any Assistant Treasurer or the Secretary or
any Assistant Secretary.
(b) If such certificate is countersigned by a transfer agent other than the
Corporation or its employee, or by a registrar other than the Corporation or its
employee, the signatures of the officers of the Corporation may be facsimiles,
and, if permitted by applicable law, any other signature on the certificate may
be a facsimile.
(c) In case any officer who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer at the date of issue.
(d) Certificates of stock shall be issued in such form not inconsistent
with the Articles of Incorporation. They shall be numbered and registered in the
order in which they are issued. No certificate shall be issued until fully paid.
(e) All certificates surrendered to the Corporation shall be cancelled
(other than treasury shares) with the date of cancellation and shall be retained
by or under the control of the Chief Financial Officer, together with the powers
of attorney to transfer and the assignments of the shares represented by such
certificates, for such period of time as such officer shall designate.
5.2 Record Ownership. A record of the name of the person, firm or
corporation and address of such holder of each certificate, the number of shares
of each class and series represented thereby and the date of issue thereof shall
be made on the Corporation's books. The Corporation shall be entitled to treat
the holder of record of any share of stock as the holder in fact thereof, and
accordingly shall not be bound to recognize any equitable or other claim to or
interest in any share on the part of any person, whether or not it shall have
express or other notice thereof, except as required by applicable law.
5.3 Transfer of Record Ownership. Transfers of stock shall be made on the
books of the Corporation only by direction of the person named in the
certificate or such person's attorney, lawfully constituted in writing, and only
upon the surrender of the certificate therefor and a written assignment of the
shares evidenced thereby. Whenever any transfer of stock shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer if, when the certificates are presented to the Corporation for
transfer, both the transferor and transferee request the Corporation to do so.
5.4 Lost, Stolen or Destroyed Certificates. Certificates representing
shares of the stock of the Corporation shall be issued in place of any
certificate alleged to have been lost, stolen or destroyed in such manner and on
such terms and conditions as the Board from time to time may authorize in
accordance with applicable law.
5.5 Transfer Agent; Registrar; Rules Respecting Certificates. The
Corporation shall maintain one or more transfer offices or agencies where stock
of the Corporation shall be transferable. The
14
<PAGE> 16
Corporation shall also maintain one or more registry offices where such stock
shall be registered. The Board may make such rules and regulations as it may
deem expedient concerning the issue, transfer and registration of stock
certificates in accordance with applicable law.
5.6 Fixing Record Date for Determination of Shareholders of Record. (a)
The Board may fix, in advance, a date as the record date for the purpose of
determining the shareholders entitled to notice of, or to vote at, any meeting
of the shareholders or any adjournment thereof, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board, and which record date shall not be more than sixty days nor less than
ten days before the date of a meeting of the shareholders. If no record date is
fixed by the Board, the record date for determining the shareholders entitled to
notice of or to vote at a shareholders' meeting shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of shareholders of record entitled to
notice of or to vote at a meeting of shareholders shall apply to any adjournment
of the meeting; provided, however, that the Board may fix a new record date for
the adjourned meeting and shall fix a new record date if such adjourned meeting
is more than 120 days after the date of the original meeting.
(b) The Board may fix, in advance, a date as the record date for the
purpose of determining the shareholders entitled to receive payment of any
dividend or other distribution or the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or in order to make a determination of the shareholders for the purpose of any
other lawful action, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board, and which record date
shall not be more than sixty calendar days prior to such action. If no record
date is fixed by the Board, the record date for determining the shareholders for
any such purpose shall be at the close of business on the day on which the Board
adopts the resolution relating thereto.
6. SECURITIES HELD BY THE CORPORATION.
6.1 Voting. Unless the Board shall otherwise order, the Chairman, any
Vice Chairman, the President, any Executive Vice President, any Senior Vice
President, any Vice President, the Chief Financial Officer, the Controller, the
Treasurer or the Secretary shall have full power and authority, on behalf of the
Corporation, (i) to attend, act and vote at any meeting of the shareholders of
any corporation in which the Corporation may hold stock and at such meeting to
exercise any or all rights and powers incident to the ownership of such stock,
and to execute on behalf of the Corporation a proxy or proxies empowering
another or others to act as aforesaid, and (ii) to delegate to any employee or
agent such power and authority.
6.2 General Authorization to Transfer Securities Held by the
Corporation. (a) Any of the following officers, to wit: the Chairman, any Vice
Chairman, the President, any Executive Vice President, any Senior Vice
President, any Vice President, the Chief Financial Officer, the Controller, the
Treasurer, any Assistant Controller, any Assistant Treasurer, and each of them,
hereby is authorized and empowered (i) to transfer, convert, endorse, sell,
assign, set over and deliver any and all shares of stock, bonds, debentures,
notes, subscription warrants, stock purchase warrants, evidences of
indebtedness, or other securities now or hereafter standing in the name of or
owned by the Corporation and to make, execute and deliver any and all written
instruments of assignment and transfer necessary or proper to effectuate the
authority hereby conferred, and (ii) to delegate to any employee or agent such
power and authority.
(b) Whenever there shall be annexed to any instrument of assignment and
transfer executed pursuant to and in accordance with the foregoing Section
6.2(a), a certificate of the Secretary or any Assistant Secretary in office at
the date of such certificate setting forth the provisions hereof, stating that
they are in full force and effect, setting forth the names of persons who are
then officers of the corporation, and certifying as to the employees or agents,
if any, to whom any such power and authority have been delegated, all persons to
whom such instrument and annexed certificate shall thereafter come shall be
entitled, without further inquiry or investigation and regardless of the date of
such certificate, to assume and to act in reliance upon the assumption that (i)
the shares of stock or other securities named in such instrument were
theretofore duly and properly transferred, endorsed, sold, assigned, set over
and delivered by the Corporation, and (ii) with respect to such securities,
15
<PAGE> 17
the authority of these provisions of these By-laws and of such officers,
employees and agents is still in full force and effect.
7. DEPOSITARIES AND SIGNATORIES.
7.1 Depositaries. The Chairman, any Vice Chairman, the President, the
Chief Financial Officer, and the Treasurer are each authorized to designate
depositaries for the funds of the Corporation deposited in its name or that of a
Division of the Corporation, or both, and the signatories with respect thereto
in each case, and from time to time, to change such depositaries and
signatories, with the same force and effect as if each such depositary and the
signatories with respect thereto and changes therein had been specifically
designated or authorized by the Board; and each depositary designated by the
Board or by the Chairman, any Vice Chairman, the President, the Chief Financial
Officer, or the Treasurer shall be entitled to rely upon the certificate of the
Secretary or any Assistant Secretary of the Corporation or of a Division of the
Corporation setting forth the fact of such designation and of the appointment of
the officers of the Corporation or of the Division or of both or of other
persons who are to be signatories with respect to the withdrawal of funds
deposited with such depositary, or from time to time the fact of any change in
any depositary or in the signatories with respect thereto.
7.2 Signatories. Unless otherwise designated by the Board or by the
Chairman, any Vice Chairman, the President, the Chief Financial Officer or the
Treasurer, each of whom is authorized to execute any of such items individually,
all notes, drafts, checks, acceptances, orders for the payment of money and all
other negotiable instruments obligating the Corporation for the payment of
money, including any form of guaranty by the Corporation with respect to any
such item entered into by any direct or indirect subsidiary of the Corporation,
shall be (a) signed by any Assistant Treasurer and (b) countersigned by the
Controller or any Assistant Controller, or (c) either signed or countersigned by
any Executive Vice President, any Senior Vice President or any Vice President in
lieu of either the officers designated in Clause (a) or the officers designated
in Clause (b) of this Section 7.2.
8. SEAL.
The seal of the Corporation shall be in such form and shall have such
content as the Board shall from time to time determine.
9. FISCAL YEAR.
The fiscal year of the Corporation shall end on December 31 in each year,
or on such other date as the Board shall determine.
10. WAIVER OF OR DISPENSING WITH NOTICE.
(a) Whenever any notice of the time, place or purpose of any meeting of the
shareholders is required to be given by applicable law, the Articles of
Incorporation or these By-laws, a written waiver of notice, signed by a
shareholder entitled to notice of a shareholders' meeting, whether by telegraph,
cable or other form of recorded communication, whether signed before or after
the time set for a given meeting, shall be deemed equivalent to notice of such
meeting. The waiver must be included in the minutes or filed with the corporate
records. Attendance of a shareholder in person or by proxy at a shareholders'
meeting shall constitute a waiver of notice to such shareholder of such meeting,
except when (i) the shareholder attends the meeting for the express purpose of
objecting at the beginning of the meeting to the transaction of any business
because the meeting was not lawfully called or convened, or (ii) the shareholder
objects to consideration of a particular matter at the meeting at the time such
matter is presented because it is not within the purpose or purposes described
in the meeting notice.
(b) Whenever any notice of the time or place of any meeting of the Board or
Committee of the Board is required to be given by applicable law, the Articles
of Incorporation or these By-laws, a written waiver of notice signed by a
Director, whether by telegraph, cable or other form of recorded communication,
whether signed before or after the time set for a given meeting, shall be deemed
equivalent to notice of such meeting. Unless the Director is deemed to have
waived notice by attending the meeting, the waiver must be in writing, signed by
the Director entitled to the notice and filed with the minutes or corporate
records. Attendance of a Director at a meeting shall constitute a
16
<PAGE> 18
waiver of notice to such Director of such meeting, unless the Director at the
beginning of the meeting (or promptly upon the Director's arrival) objects to
holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting.
(c) No notice need be given to any person with whom communication is made
unlawful by any law of the United States or any rule, regulation, proclamation
or executive order issued under any such law.
11. POLITICAL NONPARTISANSHIP OF THE CORPORATION.
The Corporation shall not make, directly or indirectly, any contributions
or expenditures in connection with the election of any candidate for federal,
state or local political office, or any committee campaigning for such a
candidate, except to the extent necessary to permit in the United States the
expenditure of corporate assets for the payment of expenses for establishing,
registering and administering any political action committee and of soliciting
contributions thereto, all as may be authorized by federal or state laws.
12. AMENDMENT OF BY-LAWS.
Except as otherwise provided in Section 2.8(a) of these By-laws, these
By-laws, or any of them, may from time to time be supplemented, amended or
repealed, or new By-laws may be adopted, by the Board at any regular or special
meeting of the Board, if such supplement, amendment, repeal or adoption is
approved by a majority of the entire Board. These By-laws, or any of them, may
from time to time be supplemented, amended or repealed, or new By-laws may be
adopted, by the shareholders at any regular or special meeting of the
shareholders at which a quorum is present, if such supplement, amendment, repeal
or adoption is approved by the affirmative vote of the holders of at least a
majority of the voting power of all outstanding shares of stock of the
Corporation entitled to vote generally in an election of directors.
13. OFFICES AND AGENT.
(a) Registered Office and Agent. The registered office of the Corporation
in the State of Indiana shall be One North Capitol Avenue, Suite 1180,
Indianapolis, Indiana 46204. The name of the registered agent is The Corporation
Trust Company. Such registered agent has a business office identical with such
registered office.
(b) Other Offices. The Corporation may also have offices at other places,
either within or outside the State of Indiana, as the Board of Directors may
from time to time determine or as the business of the Corporation may require.
17
<PAGE> 19
CERTIFICATION
I hereby certify that the foregoing is a true and complete copy of the
By-laws of ITT Industries, Inc., an Indiana corporation, as in effect on the
date hereof.
WITNESS my hand and the seal of the Corporation.
Dated: , 200 .
--------------------------------------
Assistant Secretary
ADOPTED
2/8/00
18
<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,
------------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) from continuing
operations............................. $ 232.9 $(97.6) $ 11.9 $ 66.4 $(130.7)
Add (deduct):
Adjustment for distributions in excess
of (less than) undistributed equity
earnings and losses(a).............. (3.1) 1.1 2.1 (0.8) (0.7)
Income taxes (benefits)................ 136.8 (62.4) 7.6 44.3 (46.6)
------- ------ ------ ------- ------
366.6 (158.9) 21.6 109.9 (178.0)
------- ------ ------ ------- ------
Fixed Charges:
Interest and other financial charges... 84.8 125.8 133.2 169.0 175.2
Interest factor attributable to
rentals(b).......................... 17.3 15.1 17.7 15.8 16.0
------- ------ ------ ------- ------
102.1 140.9 150.9 184.8 191.2
------- ------ ------ ------- ------
Earnings, as adjusted, from continuing
operations............................. $ 468.7 $(18.0) $172.5 $ 294.7 $ 13.2
======= ====== ====== ======= ======
Fixed Charges:
Fixed charges above.................... $ 102.1 $140.9 $150.9 $ 184.8 $191.2
Interest capitalized................... -- -- 1.1 1.1 2.9
------- ------ ------ ------- ------
Total fixed charges................. 102.1 140.9 152.0 185.9 194.1
Dividends on preferred stock
(pre-income tax basis)(c).............. -- -- -- -- 23.4
------- ------ ------ ------- ------
Total fixed charges and preferred
dividend requirements............. $ 102.1 $140.9 $152.0 $ 185.9 $217.5
======= ====== ====== ======= ======
Ratios:
Earnings, as adjusted, from continuing
operations to total fixed
charges(d).......................... 4.59 -- 1.13 1.59 --
======= ====== ====== ======= ======
Earnings, as adjusted, from continuing
operations to total fixed charges
and preferred dividend
requirements(d)..................... 4.59 -- 1.13 1.59 --
======= ====== ====== ======= ======
</TABLE>
- ---------------
Notes:
a) The adjustment for distributions in excess of (less than) undistributed
equity earnings and losses represents the adjustment to income for 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 the 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.
d) No ratios are shown for those periods in which earnings were insufficient to
cover fixed charges and combined fixed charges and preferred stock dividends.
As a result of the net loss incurred for the year ended December 31, 1998,
earnings were inadequate to cover fixed charges and preferred stock dividends
by $158.9 million. As a result of the net loss incurred for the year ended
December 31, 1995, earnings were inadequate to cover fixed charges and
combined fixed charges and preferred stock dividends by $180.9 million and
$204.3 million, respectively.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Set forth below are the names of subsidiaries, divisions and related
organizations of ITT Industries, Inc., the respective jurisdiction in which each
was organized (in the case of subsidiaries), and the name under which each does
business (if other than the name of the entity itself).
<TABLE>
<CAPTION>
JURISDICTION IN NAME UNDER WHICH
NAME WHICH ORGANIZED DOING BUSINESS
---- --------------- ----------------
<S> <C> <C>
ITT Industries, Inc. .......................... Indiana
CONNECTORS & SWITCHES
CableCom Electronics (Shenzhen)Co., Ltd. ...... China
CableCom International Limited................. Hong Kong
Great American Gumball Corporation............. California ITT Cannon Santa Clara
ITT Cannon Division............................ N/A ITT Cannon/MobileCom,
ITT Cannon RF Products,
ITT Cannon Switch Products
and Cannon SanTeh
ITT Cannon GmbH................................ Germany
ITT Cannon (Hong Kong) Limited................. Hong Kong
ITT Cannon International, Inc. ................ Delaware ITT Cannon/Network
Systems & Services
ITT Cannon Italy S.p.A. ....................... Italy
ITT Cannon Korea............................... Korea
ITT Cannon, Ltd. .............................. Japan
ITT Cannon Mexico, Inc. ....................... Delaware
ITT Cannon de Mexico S.A. de C.V. ............. Mexico
ITT Cannon (Zhenjiang) Electronics Ltd. ....... China
ITT Composants et Instruments.................. France
ITT Datacommunications Limited................. England ITT Cannon Network Systems
& Services
ITT Industriebeteiligungsgesellschaft mbH...... Germany
ITT Industries Hungary Manufacturing and
Trading Limited Liability Company............ Hungary
ITT Schadow Division........................... N/A
Rudolf Schadow GmbH............................ Germany
Sealectro International, Inc. ................. New York
STX PTE. LTD. ................................. Singapore
Nantong San Teh Coating Technology Co. Ltd. ... China
Nantong San Teh Xing Electronic Industry Co.
Ltd. ........................................ China
Nantong San Teh Xing Precision Mechanical
Engineering Co. Ltd. ........................ China
San Teh Precision Engineering Pte. Ltd. ....... Singapore
San Teh Products Co. Ltd. ..................... Hong Kong
San Teh Xing (China) Group Co. Ltd. ........... China
San Teh Xing (Tianjin) Industrial Co. Ltd. .... China
Xiamen San Teh Precision Mechanical Engineering
Co. Ltd. .................................... China
Xiamen San Teh Xing Electronic & Science
Technology Industry Co. ..................... China
DEFENSE PRODUCTS & SERVICES
Advanced Engineering & Sciences Division....... N/A
Felec Services, Inc. .......................... Delaware
GaAsTEK Division............................... N/A
Gilcron Corporation............................ Delaware
ITT Aerospace/Communications Division.......... N/A
ITT Antarctic Services, Inc. .................. Delaware
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
JURISDICTION IN NAME UNDER WHICH
NAME WHICH ORGANIZED DOING BUSINESS
---- --------------- ----------------
<S> <C> <C>
ITT Arctic Services, Inc. ..................... Delaware
ITT Avionics Division.......................... N/A
ITT Avionics Systems International, Inc. ...... Delaware
ITT Commercial Services, Inc. ................. Delaware
ITT DCD Saudi Arabia, Inc. .................... Delaware
ITT Defence Ltd. .............................. England
ITT Defense.................................... N/A
ITT Defense & Electronics...................... N/A
ITT Defense International, Inc. ............... Delaware
ITT Employment and Training Systems, Inc. ..... Delaware
ITT Federal Services Arabia Ltd. .............. Saudi Arabia
ITT Federal Services Corporation............... Delaware
ITT Federal Services International
Corporation.................................. Delaware
ITT Federal Services International, Ltd. ...... Cayman Islands
ITT FSC Investment Corporation................. Delaware
ITT FSC Management Corporation................. Delaware
ITT Gilfillan.................................. N/A
ITT Gilfillan Inc. ............................ Delaware
ITT Job Training Services, Inc. ............... Delaware
ITT Night Vision............................... N/A
ITT Systems Division........................... N/A
ITT Systems & Sciences Corporation............. Delaware
K and M Electronics, Inc. ..................... Massachusetts
PUMPS AND COMPLEMENTARY PRODUCTS
A.G. Johansons Metallfabrik AB................. Sweden
Anadolu Flygt Pompa Sanayi Ve Ticaret.......... Turkey
Avis Werberg GmbH.............................. Austria
Bombas Goulds de Mexico........................ Mexico Goulds
Bombas Goulds de Venezuela C.A. ............... Venezuela Goulds
Flygt Argentina SA............................. Argentina Flygt
Flygt do Brazil................................ Brazil Flygt
Flygt Chile.................................... Chile Flygt
Float Control Supplies (PTY) Ltd. ............. S. Africa Flygt
Flygt Hellas SA................................ Greece Flygt
Flygt Huolto OY................................ Finland Flygt
Flygt Korea.................................... Korea Flygt
Flygt Portugal Technologia Agua do Ambiente.... Portugal Flygt
Flygt Pumpet OY................................ Finland Flygt
Goulds Pumps, Incorporated..................... Delaware Goulds
Goulds Pumps Canada, Inc. ..................... Canada Goulds
Goulds Pumps Delaware, Inc. ................... Delaware Goulds
Goulds Pumps Europe BV......................... The Netherlands Goulds
Goulds Pumps Financial Services................ Ireland Goulds
Goulds Pumps Holdings, Inc. ................... Delaware Goulds
Goulds Pumps Investments....................... Canada Goulds
Goulds Pumps (IPG), Inc. ...................... Delaware Goulds
Goulds Pumps (Ireland) Limited................. Ireland Goulds
Goulds Pumps Korea Co., Ltd. .................. Korea Goulds
Goulds Pumps (NY), Inc. ....................... New York Goulds
Goulds Pumps (PA), Inc. ....................... Pennsylvania Goulds
Goulds Pumps (Philippines), Inc. .............. Philippines Goulds
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
JURISDICTION IN NAME UNDER WHICH
NAME WHICH ORGANIZED DOING BUSINESS
---- --------------- ----------------
<S> <C> <C>
Goulds Pumps Polska............................ Poland Goulds
Grindex AB..................................... Sweden
ITT Controls and Instruments Division.......... N/A
ITT Fluid Technology Asia...................... Singapore
ITT Fluid Technology Division.................. N/A
ITT Fluid Technology International............. Delaware
ITT Fluid Technology International Asia
Pacific...................................... Singapore
ITT Fluid Technology International
(Australia).................................. Australia
ITT Fluid Technology International Hong Kong... Hong Kong
ITT Fluid Technology International (Thailand)
Ltd. ........................................ Thailand
ITT Fluid Transfer Division.................... N/A
ITT Flygt AB................................... Sweden Flygt
ITT Flygt AB................................... Russia Flygt
ITT Flygt AS................................... Denmark Flygt
ITT Flygt AS................................... Norway Flygt
ITT Flygt BV................................... The Netherlands Flygt
ITT Flygt Corporation.......................... Delaware Flygt
ITT Flygt GmbH................................. Germany Flygt
ITT Flygt HK Ltd. ............................. Hong Kong Flygt
ITT Flygt Kft.................................. Hungary Flygt
ITT Flygt Limited.............................. Australia Flygt
ITT Flygt Limited.............................. Ireland Flygt
ITT Flygt Limited.............................. Japan Flygt
ITT Flygt Lituanica............................ Lithuania Flygt
ITT Flygt Ltd. ................................ United Kingdom Flygt
ITT Flygt NV/SA................................ Belgium Flygt
ITT Flygt Pumpen GmbH.......................... Germany Flygt
ITT Flygt (PTY) Ltd. .......................... S. Africa Flygt
ITT Flygt SA................................... France Flygt
ITT Flygt SDC SA............................... France Flygt
ITT Flygt SPA.................................. Italy Flygt
ITT Flygt sp zoo............................... Poland Flygt
ITT Flygt (Shenyang) Pumps Ltd................. China Flygt
ITT Flygt Werk GmbH............................ Germany Flygt
ITT FTC Manufacturing Division................. N/A
ITT Goulds Benelux BV.......................... The Netherlands Goulds
ITT Grindex Pump Division...................... N/A
ITT Richter Chemie-Technik GmbH................ Germany Richter
Lowara Deutschland GmbH........................ Germany Lowara
Lowara France S.A. ............................ France Lowara
Lowara (Ireland) Limited....................... Ireland Lowara
Lowara Nederland B.V. ......................... The Netherlands Lowara
Lowara Portugal................................ Portugal Lowara
Lowara SpA .................................... Italy Lowara
Lowara UK Limited.............................. England Lowara
Nanjing Goulds Pumps Ltd. ..................... China Goulds
OY Flygt Nova AB............................... Finland Flygt
PT Sam McCoy................................... Indonesia
Pumpenfabrik Ernst Vogel GmbH.................. Austria Vogel
Sagri AB....................................... Sweden
Sam McCoy Engineering Pte Ltd. ................ Singapore
Sam McCoy Engineering SDN BHD.................. Malaysia
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
JURISDICTION IN NAME UNDER WHICH
NAME WHICH ORGANIZED DOING BUSINESS
---- --------------- ----------------
<S> <C> <C>
Sam McCoy Manufacturing SDN BHD................ Malaysia
Sanitaire Corporation.......................... Delaware Sanitaire
Sebenza-Pump Services (PTY) Ltd. .............. S. Africa
Shanghai Goulds Pumps Co. Ltd. ................ China
Tecnicas de Filtracion Bombeo SA............... Spain
Trimate Industries Ltd. ....................... New Zealand
Vogel Pumpen Drv............................... Hungary
SPECIALTY PRODUCTS
Flojet Corp.................................... California
Flojet (Europe) Limited........................ England
Fulton-Rohr GmbH & Co. ........................ Germany
Hisan do Brasil LTDA........................... Brazil
Hisan, Inc. ................................... Michigan
Hydro Air Industries Division.................. N/A
ITT Aerospace Controls Division................ N/A
ITT Automotive Division........................ N/A
ITT Automotive Europe Beteiligungs GmbH........ Germany
ITT Automotive Europe GmbH & Co. KG............ Germany
ITT Automotive Fluid Handling Systems, S.A. de C.V... Mexico
ITT Automotive, Inc............................ Delaware
ITT Automotive Italy S.r.l..................... Italy
ITT Conoflow Division.......................... N/A
ITT Engineered Valves Division................. N/A
ITT Industries Fluid Handling Do Brasil
Limitada..................................... Brazil
ITT Industries Galfer S.r.l.................... Italy
ITT Industries Italia S.r.l.................... Italy
ITT Industries Vermoegensverwaltungs GmbH...... Germany
ITT Jabsco Division............................ N/A Jabsco
ITT Marlow Division............................ N/A
ITT North American Aftermarket Division........ N/A
ITT Pure-Flo (UK) Ltd. ........................ England
Jabsco GmbH.................................... Germany Jabsco
Koni BV........................................ The Netherlands Koni
Koni France SARL............................... France Koni
NHK Jabsco..................................... Japan Jabsco
Rule Industries, Inc. ......................... Massachusetts Rule
S.S.L. S.r.l................................... Italy
OTHER
Admiral Corporation............................ Florida Admiral
Carbon Industries, Inc. ....................... West Virginia Carbon
Computer & Equipment Leasing Corporation....... Wisconsin
Corporp A&F Inc. .............................. Delaware
International Standard Electric Corporation.... Delaware
ITT Automotive Enterprises, Inc................ Delaware
ITT AES Enterprises, Inc. ..................... Delaware
ITT Benefits Management, Inc................... Delaware
ITT Canada Company............................. Nova Scotia
ITT Community Development Corporation.......... Delaware
ITT Delaware Investments, Inc. ................ Delaware
ITT Gesellschaft fur Beteiligungen mbH......... Germany
ITT Industries (China) Investment Company, Limited.. China
ITT Industries Limited......................... England
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
JURISDICTION IN NAME UNDER WHICH
NAME WHICH ORGANIZED DOING BUSINESS
---- --------------- ----------------
<S> <C> <C>
ITT Industries NV.............................. Belgium
ITT Industries of Canada, Ltd. ................ Canada
ITT Manufacturing Enterprises, Inc. ........... Delaware
ITT Remediation Management, Inc................ Delaware
ITT Resource Development Corporation........... Delaware
ITT Transportation Distribution Services
Division..................................... N/A
Palm Coast Construction Company................ Florida
Palm Coast Engineering & Design Services,
Inc. ........................................ Florida
Palm Coast Home Realty, Inc. .................. Florida
Plam Coast, Inc. .............................. Florida
PCU Inc. ...................................... Florida
Sunsport Recreation, Inc. ..................... Florida
Winifrede Railroad Corporation................. West Virginia
</TABLE>
- ---------------
Note: The names of certain subsidiaries have been omitted since, considered in
the aggregate, they would not constitute a "significant subsidiary" as of
the end of the year covered by this report.
<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. 33-53771, 333-1109, 333-64161, 333-66293 and 333-84917).
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the December
31, 1999 Financial Statements included in Form 10-K and is qualified in its
entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 132
<SECURITIES> 50
<RECEIVABLES> 857
<ALLOWANCES> 22
<INVENTORY> 546
<CURRENT-ASSETS> 1,628
<PP&E> 2,051
<DEPRECIATION> 1,204
<TOTAL-ASSETS> 4,530
<CURRENT-LIABILITIES> 2,110
<BONDS> 479
0
0
<COMMON> 88
<OTHER-SE> 1,011
<TOTAL-LIABILITY-AND-EQUITY> 4,530
<SALES> 4,632
<TOTAL-REVENUES> 4,632
<CGS> 3,266
<TOTAL-COSTS> 3,530
<OTHER-EXPENSES> 687
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> 370
<INCOME-TAX> 137
<INCOME-CONTINUING> 233
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233
<EPS-BASIC> 2.61
<EPS-DILUTED> 2.53
</TABLE>
