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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950123-02-002927.txt : 20020415
<SEC-HEADER>0000950123-02-002927.hdr.sgml : 20020415
ACCESSION NUMBER: 0000950123-02-002927
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020326
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ITT INDUSTRIES INC
CENTRAL INDEX KEY: 0000216228
STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590]
IRS NUMBER: 135158950
STATE OF INCORPORATION: IN
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-05627
FILM NUMBER: 02585999
BUSINESS ADDRESS:
STREET 1: FOUR W RED OAK LANE
CITY: WHITE PLAINS
STATE: NY
ZIP: 10604
BUSINESS PHONE: 9146412058
MAIL ADDRESS:
STREET 1: FOUR W RED OAK LANE
CITY: WHITE PLAINS
STATE: NY
ZIP: 10604
FORMER COMPANY:
FORMER CONFORMED NAME: ITT CORP
DATE OF NAME CHANGE: 19920703
FORMER COMPANY:
FORMER CONFORMED NAME: INTERNATIONAL TELEPHONE & TELEGRAPH CORP
DATE OF NAME CHANGE: 19840321
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>y55533e10-k405.txt
<DESCRIPTION>ITT INDUSTRIES, INC.
<TEXT>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
---------- ----------
COMMISSION FILE NO. 1-5627
------------------
ITT INDUSTRIES, INC.
<Table>
<S> <C>
INCORPORATED IN THE STATE OF INDIANA 13-5158950
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
</Table>
4 WEST RED OAK LANE, WHITE PLAINS, NY 10604
(PRINCIPAL EXECUTIVE OFFICE)
TELEPHONE NUMBER: (914) 641-2000
------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT, ALL OF WHICH ARE
REGISTERED ON THE NEW YORK STOCK EXCHANGE, INC.:
COMMON STOCK, $1 PAR VALUE (ALSO REGISTERED ON PACIFIC STOCK EXCHANGE)
SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK PURCHASE RIGHTS (ALSO
REGISTERED ON PACIFIC STOCK EXCHANGE)
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, 2002 was approximately $4.7
billion.
As of February 28, 2002, there were outstanding 90,080,872 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 7, 2002, is incorporated by reference in
Part III of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<Table>
<Caption>
ITEM PAGE
<C> <C> <S> <C>
PART 1 Business.................................................... 1
I 2 Properties.................................................. 12
3 Legal Proceedings........................................... 12
4 Submission of Matters to a Vote of Security Holders......... 13
* Executive Officers of the Registrant........................ 13
PART 5 Market for Registrant's Common Equity and Related
II Stockholder Matters....................................... 14
6 Selected Financial Data..................................... 15
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 26
8 Financial Statements and Supplementary Data................. 26
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 26
PART 10 Directors and Executive Officers of the Registrant.......... 26
III 11 Executive Compensation...................................... 26
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 26
13 Certain Relationships and Related Transactions.............. 26
PART 14 Exhibits, Financial Statement Schedules, and Reports on Form
IV 8-K....................................................... 26
Signatures........................................................... II-1
Exhibit Index........................................................ II-2
</Table>
- ------------
* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
PART I
ITEM 1. BUSINESS
ITT Industries, Inc., with 2001 sales of approximately $4.7 billion, is a
global multi-industry company engaged directly and through its subsidiaries in
the design and manufacture of a wide range of engineered products and the
provision of related services. Our four principal business segments were
previously named Pumps & Complementary Products, Defense Products & Services,
Specialty Products, and Connectors & Switches. Effective January 1, 2002, we
renamed our segments to Fluid Technology, Defense Electronics & Services, Motion
& Flow Control, and Electronic Components, respectively. Also, Engineered
Valves, previously a part of our Specialty Products (now, Motion & Flow Control)
segment, now reports into our Fluid Technology segment. Material herein is on a
basis consistent with such changes.
Our World Headquarters is located at 4 West Red Oak Lane, White Plains, NY
10604. We have approximately 38,000 employees based in 48 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.
1
<PAGE>
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,
--------------------
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
SALES AND REVENUES
Fluid Technology................ 39% 38% 39%
Defense Electronics &
Services...................... 28 28 31
Motion & Flow Control........... 19 18 19
Electronic Components........... 14 16 11
Other........................... -- -- --
--- --- ---
100% 100% 100%
=== === ===
OPERATING INCOME
Fluid Technology................ 44% 42% 42%
Defense Electronics &
Services...................... 25 24 27
Motion & Flow Control........... 24 25 30
Electronic Components........... 17 20 15
Other........................... (10) (11) (14)
--- --- ---
100% 100% 100%
=== === ===
</Table>
BUSINESS AND PRODUCTS
FLUID TECHNOLOGY
Fluid Technology, with sales and revenues of approximately $1.83 billion,
$1.83 billion, and $1.81 billion for 2001, 2000 and 1999, respectively, is
engaged in the design, development, production, sale, and after-sale support of
products, systems and services used to move, measure, and manage fluids. Fluid
Technology is a leading worldwide supplier of a broad range of pumps, mixers,
heat exchangers, valves, and systems for municipal, industrial, residential,
agricultural, and commercial applications. Major production and assembly
facilities are located in Argentina, Australia, Austria, Canada, China, England,
Germany, Italy, Malaysia, Mexico, the Philippines, South Korea, Sweden, and the
United States. Principal customers are in North America, Europe, the Middle
East, Africa, Latin America, and the Asia/Pacific region. No single customer
accounted for more than 2% of 2001 sales for Fluid Technology. Sales are made
directly and through independent distributors and representatives.
Fluid Technology offers a wide range of product and system solutions for
the water, wastewater, building trades, and industrial and process market areas.
With the addition of Engineered Valves, previously a part of our Specialty
Products (now, Motion & Flow Control) segment, Fluid Technology is now also
serving the biopharm market.
Water
Goulds Pumps ("Goulds") provides pumps and accessories for residential,
agriculture, irrigation, sewage, and drainage. In the residential market, Goulds
offers a wide range of water systems products, including state-of-the-art
submersible and jet pumps, pressure tanks, controls and special use pumps for
the home water well industry. Over one quarter of all well water pumps in North
America are supplied by Goulds.
Other products serving the water market are supplied by Lowara. Its pumps
are used in residential, agriculture, and irrigation applications. Lowara is a
leader in stainless steel manufacturing technology.
Submersible pumps and line shaft turbine pumps provide for the pumping
needs of agriculture, aquaculture, golf courses, and similar applications.
Wastewater
Our Flygt Group is the world's originator and largest manufacturer of
submersible pumps and mixers. These pumps and mixers form the heart of many of
the world's sewage and wastewater treatment facilities. As the world's leading
producer of fluid handling pumps and related products for treating and recycling
wastewater, ITT Industries actively promotes more efficient use and re-use of
water and endeavors to raise the level of awareness of the need to preserve and
protect the earth's water resources.
We are, through our Sanitaire(R) and ABJ(TM) brands, leaders in aeration
products and systems for municipal and industrial wastewater treatment. This
broad range of products includes ceramic and membrane fine bubble diffusers,
stainless steel coarse bubble diffusers, in-place cleaning systems, and complete
activated sludge plants. Combining Flygt's submersible pumps and mixers with
Sanitaire and ABJ products provides a solution to customers' needs for complete
system solutions in wastewater treatment. Dry mount pumps from A-C Pump provide
an alternative technical solution to submersible pumps. Typical application
areas are sewage and sludge handling, circulating water applications for power
plants, desalinization, and flood control.
2
<PAGE>
Building Trades
Through our Fluid Handling Division, which includes leading brands such as
Bell & Gossett(R), McDonnell & Miller(R), Hoffman Specialty(R), and ITT
Standard(R), we provide a broad variety of products for environmental control in
buildings and for building service and utility applications. For our group of
products, we are market leaders in liquid-based heating and air conditioning
systems and in liquid level control and steam trap products for boiler and steam
systems.
Our wide range of submersible drainage pumps from Flygt serves the
construction market by dewatering construction sites on a global basis. A-C Pump
has been in the forefront of developing, designing and custom building a wide
range of fire pump systems, including prefabricated, turnkey fire pump packages,
and house units that meet every fire protection need.
Industrial & Process
In the industrial & process business, Fluid Technology offers a broad line
of industrial pumps for moving abrasives, corrosives, slurries, solids or other
liquids. We are the ANSI standard process pump market leader. Our chemical
process pumps and valves are available in a wide variety of alloys. Other unique
non-metallic pumps and valves provide advantages when handling severe
corrosives. A line of "sealless" magnetic drive pumps from our Goulds and
Richter units is offered for services where leakage cannot be tolerated. In
mining and mineral applications, our pumps and valves provide a wide range of
corrosion and abrasion resistance. The pumps are designed for vertical,
horizontal, and submersible situations for coal prep plants, mine slurries, and
dewatering applications. Vertical turbine pumps, API process pumps, vertical can
pumps for low NPSH, fire pumps and submersibles as well as high performance
valves are available for the oil refining and gas processing industries. Our
heavy duty stock pumps and a complete line of double suction and LoPulse(R) fan
pumps are designed for pulp and paper applications.
BioPharm
The biopharm market and other similar hygienic applications such as food
and cosmetics processing is served entirely by our Engineered Valves Division
with a wide array of valve and turnkey systems that are at the heart of
extremely demanding manufacturing processes, especially of biological and
pharmaceutical compounds.
Engineered Valves designs and manufactures precision valves under the brand
name Pure-Flo(R). The design, engineering, fabrication, and installation of high
purity process piping systems and stainless steel vessels for the biopharm and
hygienic industries are served through Engineered Valves' Pure-Flo Cotter and
Pure-Flo Precision lines. Turnkey systems from Pure-Flo Cotter include process
skid systems for CIP, chromatography, fermentation, and UF, flow transfer
panels.
Life Cycle Costing
Life cycle cost is the total system cost over the life of that system. It
includes installation, energy costs, maintenance, decommissioning, as well as
the original purchase price -- which generally is a small fraction of the
overall life cycle cost. ITT Industries is focused on improving the total life
cycle cost for customers through the application of technology. With energy
conservation becoming increasingly important from a cost control as well as an
environmental perspective, life cycle costing initiatives create another factor
in market differentiation.
Global Service and Customer Care
ITT Fluid Technology is building a global network of service centers for
aftermarket customer care. Our aftermarket capabilities include the repair and
service of all brands of pumps and rotating equipment, engineering upgrades,
contract maintenance, and inventory management services. We offer field service
solutions for troubleshooting, disassembly, on-site repairs, and emergency
service.
3
<PAGE>
ITT Fluid Technology -- On-Line
Electronic commerce at ITT Industries is exemplified by the web site of our
Bell & Gossett unit. On this website, contractors and specifying engineers are
now able to view products, select and quote complex pumping systems, use
software for pipe sizing and pressure drop analysis, as well as engage in
helpful on-line engineering dialogue.
The following table illustrates the percentage of sales and revenues for
the listed categories for the periods specified:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
----------------------
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Flygt........................ 31% 31% 32%
Fluid Handling Division...... 17 17 16
Water Technology Group....... 23 23 22
Sanitaire.................... 3 2 2
Industrial Pump Group........ 19 21 22
Engineered Valves............ 7 6 6
--- --- ---
100% 100% 100%
=== === ===
</Table>
Our management believes that Fluid Technology 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
Fluid Technology to maintain and build market leadership positions in served
markets.
Order backlog for Fluid Technology was $297.6 million in 2001, compared
with $278.0 million in 2000 and $287.3 million in 1999.
Brand names include ABJ(TM), A-C(TM) Pump, Bell & Gossett(R), Flygt(R),
Goulds Pumps(R), Hoffman Specialty(R), ITT Standard(R), Lowara(R), McDonnell &
Miller(R), Richter(R), Sanitaire(R), and Vogel(R).
The level of activity in Fluid Technology 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."
Fluid Technology companies have an aggregate of approximately 11,000
employees and have 310 facilities in 137 countries.
DEFENSE ELECTRONICS & SERVICES
Defense Electronics & Services, with sales and revenues of approximately
$1.30 billion, $1.33 billion, and $1.41 billion for 2001, 2000, and 1999,
respectively, develops, manufactures, and supports high technology electronic
systems and components for worldwide defense and commercial markets as well as
provides communications systems and engineering and applied research. Operations
are in North America, Europe, and the Middle East.
Defense Electronics & Services consists of the two major areas of (i)
systems and services and (ii) defense electronics. Systems and services consists
of our systems business and our advanced engineering and sciences business.
Defense electronics consists of our aerospace and communications business, our
night vision business, our radar business, and our avionics business.
Systems and Services
The Systems Division is involved in support services and systems
engineering. The business provides operations and maintenance services for
surveillance systems, communications electronics, combat service support, base
support and range support for government sites around the world.
The Advanced Engineering & Sciences Division is involved in the design and
manufacture of advanced digital communications products and systems, as well as
in engineering and applied research. This business provides advanced technology
services and customized products to governmental, industrial, and commercial
customers in the areas of information technology, consulting and technical
assistance, military systems effects and analysis, and hardware design, test,
and evaluation.
Systems and Services also produces and installs ship and air defense radar
and air traffic control systems both in the United States and internationally.
Defense Electronics
The ITT Aerospace/Communications Division ("A/CD") manufactures products,
including voice and data systems, that facilitate communications in the forward
area battlefield. A/CD 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. A/CD is the provider of the combat net radio
4
<PAGE>
and the high capacity data radio for the UK Bowman program. A/CD is also
developing air traffic control radios for the Federal Aviation Administration.
A/CD also produces sophisticated sounding and imaging instruments such as those
used by the National Oceanographic and Atmospheric Agency in remote sensing
space payloads to track hurricanes, tornadoes, and other weather patterns. In
addition, A/CD provides navigation payloads for the Global Positioning System
("GPS") navigation satellite.
The Night Vision Division provides advanced goggles for airborne and ground
applications which give United States and allied soldiers the capability to
conduct night combat operations. Night Vision is the leading full service
supplier of Generation III night vision products to the United States and allied
military forces. Night Vision also produces a commercial line of night vision
products for law enforcement, marine, and recreational applications.
The Avionics Division produces airborne electronic warfare systems, such as
the Airborne Self-Protection Jammer ("ASPJ"), to help protect aircraft from
radar-guided weapons. 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"). Avionics, teamed with BAE Systems, 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. The Avionics Division is a
co-developer of the integrated communications, navigation and identification
system for the U.S. Air Force F-22 Raptor.
The following table illustrates the percentage of sales and revenues for
the listed categories for the periods specified:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
----------------------
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Systems and Services
Systems....................... 34% 32% 37%
Advanced Engineering &
Sciences.................... 16 13 --
Defense Electronics
A/CD.......................... 26 32 37
Night Vision.................. 13 15 14
Avionics...................... 11 8 12
--- --- ---
100% 100% 100%
=== === ===
</Table>
Defense Electronics & Services sells its products to a wide variety of
governmental and non-governmental entities located throughout the world.
Approximately 96% of 2001 sales and revenues of Defense Electronics & Services
was to governmental and international entities, of which approximately 85% was
to the United States Government (principally in defense programs).
A substantial portion of the work of Defense Electronics & 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, international customers and commercial customers accounted for
approximately 11% and 4%, respectively, of 2001 sales and revenues for Defense
Electronics & Services.
Sales and revenues to non-governmental entities as a percentage of total
sales and revenues for Defense Electronics & Services were 4% in 2001, 3% in
2000, and 4% in 1999. Certain products sold by Defense Electronics & Services
have particular commercial application, including night vision devices and radar
systems. In addition, Defense Electronics & 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 small to medium satellite systems in low polar earth orbits.
Funded order backlog for Defense Electronics & Services was $2.58 billion
in 2001, compared with $2.41 billion in 2000 and $1.84 billion in 1999.
The level of activity in Defense Electronics & Services is affected by
overall defense budgets, the portion of those budgets devoted to products and
services of the type provided by Defense Electronics & Services, demand and
budget availability for such products and services in areas other than defense,
and other factors. See "-- COMPETITION."
Defense Electronics & Services companies have an aggregate of approximately
10,000 employees and are present in 151 facilities in 15 countries.
5
<PAGE>
MOTION & FLOW CONTROL
Motion & Flow Control, with sales and revenues of approximately $898.7
million, $888.9 million, and $877.9 million for 2001, 2000, and 1999,
respectively, comprises a group of units operating in the motion control and
flow control 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. Motion & Flow Control consists of the
areas of Fluid Handling Systems, Galfer, Jabsco, Koni, Aerospace Controls,
HydroAir, and Conoflow.
ITT Fluid Handling Systems 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 Systems' principle customers are the major North American and European
automotive makers, their key Tier 1 suppliers, and other similar customers.
Ford, General Motors, and Chrysler, with their respective affiliates, account
for approximately 29%, 16%, and 11%, respectively, of the 2001 sales of this
unit. Fluid Handling Systems also owns 50% of a joint venture with Sanoh
Industrial Co. of Japan that supplies similar products to the major Japanese
transplant manufacturers in the United States.
Galfer designs and manufactures quality friction pads and backplates 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 28% of Galfer's 2001
business is in aftermarket activity.
The 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 applications. Both Jabsco
and Flojet also produce pumps for other specialty industrial fluid dispensing
applications.
Koni 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 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 service
applications.
The HydroAir Division designs and manufacturers jets, pumps and other
components for manufacturers of whirlpool baths and hot tub spas.
ITT Conoflow markets pressure regulators and diaphragm seals for industrial
applications and natural gas vehicles.
The following table illustrates the percentage of sales and revenues for
the listed categories for the periods specified:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
----------------------
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Fluid Handling Systems....... 49% 48% 49%
Galfer....................... 16 16 18
Jabsco....................... 14 16 13
Koni......................... 9 9 10
Aerospace Controls........... 7 6 7
HydroAir..................... 4 4 2
Conoflow..................... 1 1 1
--- --- ---
100% 100% 100%
=== === ===
</Table>
The level of activity for Motion & Flow Control depends upon economic
conditions in the served markets, particularly the automotive, airplane, and
marine and leisure markets. See "-- COMPETITION." Order backlog is not a
significant factor in this segment.
Motion & Flow Control companies have an aggregate of approximately 6,400
employees and have 39 facilities located in 11 countries.
ELECTRONIC COMPONENTS
Electronic Components, with sales and revenues of approximately $647.0
million, $774.6 million, and $516.0 million for 2001, 2000, and 1999,
respectively, develops and manufactures connectors, interconnects, cable
assemblies, switches, key pads, multi-function grips, panel switch assemblies,
dome arrays, input/output (I/O) card kits, smart card systems, LAN components,
high-speed/high-bandwidth network systems, and related services.
Electronic Components consists of products and services for the areas of
communications,
6
<PAGE>
industrial, transportation, military/aerospace, commercial aircraft, computer,
and consumer uses.
In the communications area, Electronic Components designs products and
provides services specifically for today's fast-growing transmission and
networking industries. These products and services include connectors,
interconnects, cable assemblies, keypads, switches, panel switch assemblies, I/O
card kits, smart card systems, and LAN components, as well as
high-speed/high-bandwidth network systems and services. They are used in
wireless, carrier networks, enterprise networks, datacommunications,
transmission, and switching applications.
In the industrial area, Electronic Components' products are incorporated in
various industrial equipment and control products, including DL zero insertion
force connectors, cable assemblies, electromechanical switches, and device
control interfaces. They are used in industrial controls, production equipment,
and instrument applications. Medical applications include robotic surgical,
ultrasound, and other diagnostic equipment.
In the transportation area, Electronic Components' products are
incorporated in off-highway, heavy-vehicle, and automotive applications. The
products include high reliability connectors, multi-function control assemblies,
and switches used in powertrain, instrument controls, and chassis applications.
In the military/aerospace area, Electronic Components supplies products for
mission-critical applications ranging from below the ocean to deep in space. The
products include circular, microminiature, fiber optic, and "special" connectors
used in military electronics, missiles, and space applications.
In the commercial aircraft area, Electronic Components supplies highly
reliable light, space-saving products for technically advanced aircraft. The
products include rack and panel, circular, and fiber optic connectors. Their
applications range from avionics (flight control, communications and navigation)
to passenger in-flight entertainment systems.
In the computer area, Electronic Components supplies keypads, connectors,
and switches for computers and computer peripherals.
In the consumer area, Electronic Components primarily supplies keypads for
remote control devices.
The following table illustrates the percentage of sales and revenues for
the listed categories for the periods specified:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
--------------------
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Communications................. 36% 43% 32%
Industrial..................... 19 16 20
Transportation................. 13 10 14
Military/Aerospace............. 12 11 13
Commercial Aircraft............ 8 7 10
Computer....................... 6 7 5
Consumer....................... 6 6 6
--- --- ---
100% 100% 100%
=== === ===
</Table>
Order backlog for Electronic Components was $154.6 million in 2001,
compared with $207.9 million in 2000 and $158.6 million in 1999.
Electronic Components products are marketed primarily under the Cannon(R)
brand name.
The level of activity for Electronic Components 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."
Electronic Components companies have an aggregate of approximately 10,600
employees and have 20 facilities located in 9 countries.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and see Note 20 "BUSINESS SEGMENT INFORMATION" to "NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS" for further details with respect to
business segments.
THE ITT INDUSTRIES MANAGEMENT SYSTEM
We have been making efforts at all levels throughout ITT Industries to
enable the Company to fulfill its aspiration to become a premier multi-industry
company. Those efforts include the development and evolution of what we refer to
as the ITT Industries Management System. This system includes a configuration of
interrelated tools and processes. Those tools and processes, which are being
integrated throughout ITT Industries, include the concepts of portfolio
management, operations excellence, leadership development, innovation and
technology, and achieving consistent results. Value-Base Six-Sigma initiatives
are an integral part of the program. Each of these concepts involves its own
subset of interrelated elements directed toward the fulfillment of our goals.
7
<PAGE>
Although there cannot be a guarantee that the investing community will
perceive and recognize that we will have achieved our ultimate goal, there is a
total commitment on the part of our management that every effort will be made
toward achieving our ultimate goal.
ACQUISITIONS, DIVESTITURES, RESTRUCTURING, AND RELATED MATTERS
We have been involved in an ongoing program of acquiring businesses that
provide a rational fit with businesses we presently conduct and divesting
businesses that do not enhance that fit.
During 2001, we acquired the business and assets of a number of small
companies for our Fluid Technology segment. These include Cotter Corporation,
which manufactures modular processing systems and subsystems; the Water Systems
Division of The Marley Company, which manufactures water pumping equipment;
Production Castings Incorporated, American Alloy Products, Inc., Production
Machine Inc., and Impeller Repair Services, Inc., these last four being in the
business of producing pump parts and cast repair parts. Also for our Fluid
Technology segment, during 2001, we purchased the stock of 1448170 Ontario
Limited, which sells repair parts and repairs pumps, rotating equipment and
other production and factory equipment. In January 2002, also for our Fluid
Technology segment, we purchased certain assets of Royce Instrument Corporation
and Polycast Corporation, which manufacture monitoring and control
instrumentation and sensors for municipal and industrial wastewater treatment.
Also in January 2002, we acquired the business and assets of Precision
Stainless, Inc. for our Fluid Technology segment, which provides process vessels
for the biopharmaceutical companies. In 2001 we purchased the business and
assets of BIW Connector Systems, LLC, a designer and manufacturer of power
connectors for harsh environments, for our Electronic Components segment.
During 2000, we acquired C & K Components, Inc., a designer and
manufacturer of switches for the communications, computer, and electronic
equipment markets. We also acquired the Man Machine Interface business of TRW, a
manufacturer of multi-layer switch components and assemblies for the wireless
mobile handset market. Both acquisitions are for our Electronic Components
segment. In addition, we acquired the business of Aerotherm Corporation, a
company that makes guidance systems for target missiles, and sold our GaAsTEK
business, both with respect to our Defense Electronics & Services segment. In
addition, we acquired the business of HydroAir International for our Motion &
Flow Control segment.
During 1999, we acquired STX Pte. Ltd. for our Electronic Components
segment, the space and defense communications businesses of Stanford
Telecommunications, Inc. and K and M Electronics, Inc. for our Defense
Electronics & Services segment, Water Pollution Control Corp. (now our Sanitaire
Division) and assets of Energy Machine Service, Inc. for our Fluid Technology
segment, and Hydro Air Industries and Flojet Corp. for our Motion & Flow Control
segment. In addition, we made an investment in DigitalGlobe Inc. (previously
known as EarthWatch Incorporated) for our Defense Electronics & Services segment
and divested all, or portions of, our Community Development Corporation, Carbon
Industries, and Palm Coast Utility businesses.
See Note 4 "RESTRUCTURING AND OTHER SPECIAL ITEMS" regarding restructuring
matters. See also "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES -- STATUS OF
RESTRUCTURING ACTIVITIES."
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 information regarding the resolution of certain
disputes relating to the sales of automotive businesses during 1998 and further
information regarding discontinued operations.
GEOGRAPHIC MARKETS
The geographic sales base of Fluid Technology is broad. In 2001,
approximately 57% of the sales and revenues of Fluid Technology was derived from
North America, while approximately 30% was derived from Europe. The geographic
sales mix differs among products and among divisions of Fluid Technology. Our
management anticipates growth opportunities in Eastern Europe, Central Asia,
Africa/Middle East, Latin America, and the Asia/Pacific region. In China,
8
<PAGE>
Fluid Technology 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 Defense Electronics & Services is
predominantly the United States, which accounted for approximately 86% of 2001
sales and revenues. Management of Defense Electronics & 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 Motion & Flow Control is predominantly in
North America and Europe. In 2001, approximately 60% of sales and revenues of
Motion & Flow Control were to customers in North America, and approximately 36%
of sales were to customers in Western Europe. Management of ITT Industries sees
growth opportunities in South America, Mexico, and Asia.
The geographic sales base of Electronic Components in Europe accounted for
39% of 2001 sales and revenues, North America accounted for 41% of 2001 sales
and revenues, and the Asia/Pacific region accounted for 20% of 2001 sales and
revenues. Electronic Components has manufacturing facilities within North
America, Europe, and the Asia/Pacific region. These operations supply connectors
across a broad market spectrum, including carrier networks, wireless,
transportation, military/aerospace, commercial aircraft, computer, industrial
and consumer sectors.
See Note 20 "BUSINESS SEGMENT INFORMATION" to "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 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.
The Fluid Technology 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 Fluid Technology
responds to competitive pressures by utilizing strong distribution networks,
strong brand names, broad product lines focused on market niches, a global
customer base, a continuous stream of new products developed from a strong
technology base, a focus on quality and customer service, and through continuous
cost improvement programs and life cycle cost initiatives.
In Defense Electronics & Services, government defense budgets, particularly
in the United States, generally have begun to increase 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 Electronics &
Services, competition is based primarily upon price, quality, technological
expertise, cycle time, and service.
In Motion & Flow Control, 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.
In Electronic Components, 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.
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.
Accord-
9
<PAGE>
ingly, 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" and Note 16 "FINANCIAL
INSTRUMENTS" to "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS."
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, as well as other industries served by our Electronic Components
business, 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 Electronics & 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 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. In addition, we have
purchased insurance protection against certain unknown risks.
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 $424.7 million in
2001, $391.2 million in 2000, and $264.4
10
<PAGE>
million in 1999. Of those amounts 76.4% in 2001, 74.6% in 2000, and 57.8% in
1999 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 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, 2001, ITT Industries and its subsidiaries employed an
aggregate of approximately 38,000 people. Of this number, approximately 18,500
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.
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 The 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 con-
11
<PAGE>
nection with the Distribution relating to intellectual property, tax, and
employee benefit matters.
One member of the Board of Directors of ITT Industries also serves 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" 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. See also Note 14 "Leases and Rentals" for further
information.
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 102 sites in various countries. Of those sites, ITT Industries
has received notice that it is considered a Potentially Responsible Party
("PRP") at approximately 15 sites by the United States Environmental Protection
Agency ("EPA") and/or a similar state agency under CERCLA or its state
equivalent. 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 Glendale, 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 a
settlement, and a consent decree requiring the PRPs to perform additional
remedial activities was entered in August 2000.
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 had incurred in connection with the Glendale case and other
environmental matters. In April 1999, the California Superior Court granted
partial summary judgment under California law, dismissing certain claims in the
California action. The California Court of Appeals accepted ITT Industries'
petition for review of the California Superior Court's order and in March 2001,
dismissed the petition without prejudice, allowing ITT Industries to reassert
two of its arguments in the California Superior Court. ITT Industries presented
those arguments to the Court and in January 2002, the Court dismissed a number
of sites from the California case. ITT Industries is considering whether to
appeal. 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.
The Company and its subsidiaries from time to time are involved in legal
proceedings that are incidental to the operation of their businesses. Some of
these proceedings allege damages against the Company relating to, environmental
liabilities (including toxic tort, property damage and remediation),
intellectual property matters (including patent, trademark and copyright
infringement, and licensing disputes), personal injury claims (including
injuries due to product failure, design or warnings issues, asbestos exposure,
or other product liability related matters), employment and pension matters, and
commercial or contractual disputes, sometimes related to acquisitions or
divestitures. The Company will continue to vig-
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<PAGE>
orously defend itself against all claims. Although the ultimate outcome of any
legal matter cannot be predicted with certainty, based on present information
including the Company's assessment of the merits of the particular claim, as
well as its current reserves and insurance coverage, the Company does not expect
that such legal proceedings will have any material adverse impact on the cash
flow, results of operations, or financial condition of the Company on a
consolidated basis in the foreseeable future.
Reference is made to "BUSINESS -- COMPANY HISTORY AND CERTAIN
RELATIONSHIPS" for information concerning the allocation of certain liabilities
among the parties to the Distribution Agreement.
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 THE REGISTRANT
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 2002 POSITION AS AN OFFICER POSITION
---- ---- -------- ------------- --------
<S> <C> <C> <C> <C>
David J. Anderson................. 52 Senior Vice President and Chief 1999 12/13/99
Financial Officer
Robert L. Ayers................... 56 Senior Vice President, ITT Industries; 1998 12/4/01
President, Fluid Technology
Henry J. Driesse.................. 58 Senior Vice President, ITT Industries; 2000 12/4/01
President, Defense
Donald E. Foley................... 50 Vice President, Treasurer and Director 1996 6/1/01
of Taxes
James D. Fowler, Jr. ............. 57 Senior Vice President and Director, 2000 11/6/00
Human Resources
Gerard Gendron.................... 49 Senior Vice President, ITT Industries; 1998 12/4/01
President, Cannon Worldwide
Louis J. Giuliano................. 55 Chairman, President and Chief Executive 1988 2/24/01
Officer and Director
Martin Kamber..................... 53 Senior Vice President, Director of 1995 12/19/95
Corporate Development
Vincent A. Maffeo................. 51 Senior Vice President and General 1995 12/19/95
Counsel
Thomas R. Martin.................. 48 Senior Vice President, Director of 1996 3/9/99
Corporate Relations
Brenda L. Reichelderfer........... 43 Vice President, ITT Industries; 2002 1/1/02
President, Motion & Flow Control
Edward W. Williams................ 63 Senior Vice President and Corporate 1998 12/4/01
Controller
</Table>
Each of the above-named officers was elected to his or her present position
to serve at the pleasure of the Board of Directors.
Throughout the past five years, all of the above-named officers have held
executive positions with ITT Industries 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); (ii) Mr. Ayers, prior to his election as Senior Vice
President (2001), was Vice President (1998) and President of Fluid Technology
(1999), and, prior to that, was President of Sulzer Bingham Pumps Inc. (1990);
(iii) Mr. Driesse, prior to his election as Senior Vice President (2001), was
Vice President and President of Defense (2000), and, prior to that, was
President of ITT Avionics (1991); (iv) Mr. Foley was elected to the additional
position of Director of Taxes (2001); (v) Mr. Fowler, prior to his election as
Senior Vice President and Director, Human Resources (2000), was Executive
Director and President of the Executive Leadership Council (1997); (vi) Mr.
Gendron, prior to his election as Senior Vice President (2001), was Vice
President (1998), and President of Cannon Worldwide (1997); (vii) Mr. Giuliano,
prior to his election as Chairman, President, Chief Executive Officer and
Director (2001), was President and Chief Operating Officer (1998), and, prior to
that, was Senior Vice President (1995);
13
<PAGE>
(viii) Mr. Martin, prior to his election as Senior Vice President, Director of
Corporate Relations (1999), was Vice President, Director of Corporate Relations
(1996); (ix) Ms. Reichelderfer, prior to her election as Vice President and
President of Motion & Flow Control (2002), held other executive positions with
ITT Industries; and (x) Mr. Williams, prior to his election as Senior Vice
President (2001), was Vice President and Corporate Controller (1998), and, prior
to that, was Vice President and Controller of our Defense & Electronics
business.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
COMMON STOCK -- MARKET PRICES AND DIVIDENDS
<Table>
<Caption>
2001 2000
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
IN DOLLARS
<S> <C> <C> <C> <C>
Three Months Ended
March 31................................................ $44.25 $35.55 $34.94 $22.38
June 30................................................. 49.00 37.95 36.19 28.63
September 30............................................ 46.20 42.00 34.94 29.63
December 31............................................. 52.00 43.19 39.63 29.75
</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 "ITT"). During the period from January 1, 2002 through February
28, 2002, the high and low reported market prices of our common stock were
$59.85 and $45.80, respectively.
We declared dividends of $.15 per share of common stock in each of the four
quarters of 2000 and 2001 and in the first quarter of 2002.
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 34,869 holders of record of our common stock on February 28,
2002.
ITT Industries common stock is listed on the following exchanges:
Frankfurt, London, Midwest, New York, Pacific, and Paris.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
RESULTS AND POSITION
Sales and revenues................ $4,675.7 $4,829.4 $4,632.2 $4.492.7 $4,207.6
Operating income (loss)(a)........ 396.8 493.1 415.2 (74.6) 141.3
Income (loss) from continuing
operations(a)................... 216.7 264.5 232.9 (97.6) 11.9
Net income........................ 276.7 264.5 232.9 1,532.5 108.1
Income from continuing operations,
as adjusted(b).................. 280.2 264.5 230.0 146.0 95.9
Expenditures on plant additions... 174.0 180.6 227.9 212.9 212.5
Depreciation and amortization..... 212.9 201.8 181.1 195.6 196.9
Total assets...................... 4,508.4 4,611.4 4,459.6 4,978.6 5,058.4
Total assets, excluding
discontinued operations......... 4,508.4 4,611.4 4,459.6 4,978.6 4,127.0
Long-term debt.................... 456.4 408.4 478.8 515.5 531.2
Total debt........................ 973.4 1,038.3 1,088.1 767.1 2,172.6
Cash dividends declared per common
share........................... 0.60 0.60 0.60 0.60 0.60
EARNINGS PER SHARE
Income from continuing operations,
as adjusted(b)
Basic........................... $ 3.18 $ 3.01 $ 2.58 $ 1.29 $ 0.81
Diluted......................... $ 3.09 $ 2.94 $ 2.50 $ 1.29 $ 0.79
Net income
Basic........................... $ 3.14 $ 3.01 $ 2.61 $ 13.55 $ 0.91
Diluted......................... $ 3.05 $ 2.94 $ 2.53 $ 13.55 $ 0.89
</Table>
- ------------
(a) Income from continuing operations in 2001, 1999, 1998 and 1997 includes
(income) charges of $97.7, $(4.6), $399.4 and $137.8 pretax, respectively,
or $63.5, $(2.9), $243.6 and $84.0, after-tax, respectively, for
restructuring and other special items as described in Note 4.
(b) Income from continuing operations, after-tax, in 2001, as adjusted, excludes
restructuring and other special items of $63.5, after-tax; and income from
discontinued operations of $60.0, after-tax. Income from continuing
operations in 1999, as adjusted, excludes restructuring and other special
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.
15
<PAGE>
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" or
"ITT") reported the following (in millions):
<Table>
<Caption>
2001(A) 2000 1999(B)
-------- -------- --------
<S> <C> <C> <C>
Sales and revenues from
continuing
operations............. $4,675.7 $4,829.4 $4,632.2
Operating income from
continuing
operations............. $ 494.5 $ 493.1 $ 410.6
Income from continuing
operations,
after-tax.............. $ 280.2 $ 264.5 $ 230.0
</Table>
- ------------
(a) 2001 figures are adjusted to exclude restructuring and other special items
of $97.7 pretax or $63.5 after-tax. Reported operating income from
continuing operations was $396.8. Reported income from continuing
operations, after-tax, was $216.7.
(b) 1999 figures are adjusted to exclude restructuring and other special items
of $(4.6) pretax or $(2.9) after-tax. Reported operating income from
continuing operations was $415.2. Reported income from continuing
operations, after-tax, was $232.9.
FLUID TECHNOLOGY'S WATER & WASTEWATER BUSINESS:
The Water & Wastewater business of the Company's Fluid Technology segment
grew 5% before the impact of foreign exchange translation (2% after the impact
of foreign exchange), and recorded a number of multi-million dollar
international contracts related to water treatment projects in the United
Kingdom, China and Singapore.
DEFENSE ELECTRONICS & SERVICES' CONTRACT WINS:
The Company's Defense Electronics & Services segment realized several
significant contract wins during 2001 including a contract to provide new
digital communications equipment for the Federal Aviation Administration's air
traffic control for an estimated $580 million, a $143 million contract to build
land based radar systems for Egypt, a network communications system contract for
the U.S. military community for an estimated $125 million, a $77 million
contract to provide operations and maintenance support to the U.S. Military
Command and Control, and a $39 million contract to upgrade the Global
Positioning Satellite System.
MOTION & FLOW CONTROL:
The Company's Fluid Handling Systems business grew 3% despite a 5% decrease
in North American and European build rates.
ELECTRONIC COMPONENTS' NEW PRODUCTS:
The Company's Electronic Components segment continued its pattern of
innovation and increased its proportion of revenues from new products to 36% of
total sales, which supported an increase in operating margin in the year despite
a global downturn in its primary end-markets. ITT defines new products as the
year of introduction plus three years.
CASH FLOW:
Working capital initiatives resulted in a continued reduction in operating
working capital (defined as accounts receivable plus inventory less accounts
payable at year-end) as a percentage of annualized sales from 19.5% in 2000 to
18.5% in 2001. This reduction contributed to record free cash flow (defined as
net cash from operating activities less capital expenditures) of $302.6 million.
VALUE-BASED SIX SIGMA:
ITT expanded its Value-Based Six Sigma ("VBSS") initiative through the year
and now has more than 280 Black Belts and more than 40 Champions trained
worldwide. VBSS is a key component of the ITT Management System and the
overarching discipline under which the Company will drive toward operational
excellence, improve efficiencies and accelerate new product introductions.
NEW CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER:
In March 2001, Louis J. Giuliano assumed the role of Chairman, President
and Chief Executive Officer of the Company.
NEW SEGMENT NAMES AND REALIGNMENT OF ENGINEERED VALVES:
The Company has renamed its segments to better reflect the nature of the
businesses. The former Pumps & Complementary Products segment has been renamed
Fluid Technology; the former Defense Products & Services segment has been
renamed Defense Electronics & Ser-
16
<PAGE>
vices; the former Specialty Products segment has been renamed Motion & Flow
Control; and the former Connectors & Switches segment has been renamed
Electronic Components. In addition, a change was made in the Company's internal
management reporting structure such that the Engineered Valve business ("EV")
now reports into the Fluid Technology segment. The Company believes that the
markets served by EV are more closely aligned with those of the Fluid Technology
businesses. EV was previously part of the former Specialty Products segment
structure. The Company has conformed its segment reporting accordingly and has
reclassified comparative prior period information to reflect this change.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000:
Sales and revenues in 2001 were $4.68 billion, a decrease of $153.7
million, or 3.2%, from 2000 ($93.0 million, or 1.9%, excluding the impact of
foreign exchange). The decrease is primarily attributable to the downturn in the
communications and industrial connectors markets of Electronic Components and
the scheduled wind down of certain Defense Electronics & Services contracts.
These declines were partially offset by new contract revenue at Defense
Electronics & Services and revenues from acquisitions made in 2000.
Operating income of $396.8 million in 2001 was $96.3 million lower than the
prior year due to the $97.7 million restructuring and other special items taken
in 2001. See Status of Restructuring Activities under Liquidity and Capital
Resources. Excluding the restructuring and other special items, 2001 operating
income was $1.4 million higher than the prior year. Operating margin of 10.6%,
adjusted to exclude the restructuring and other special items, was 40 basis
points higher than the margin for 2000. This increase is primarily due to
process improvement efforts, cost control actions taken to address the slowing
economic environment, and improved product mix.
Interest expense of $62.0 million (net of interest income of $6.8 million)
decreased $13.2 million from 2000 due to a favorable change in average interest
rates and increased cash from operations, partially offset by higher average
debt in the first half of 2001 associated with several acquisitions made in
2000.
The effective income tax rate for 2001 was 35% compared to the rate of 37%
for 2000. The decrease in the effective tax rate is due to several initiatives
taken in 2001 and 2000 to reduce the structural rate. The Company expects the
effective tax rate for 2002 to be 32% driven by further initiatives and the
adoption of Statement of Financial Accounting Standards No. 142 "Goodwill and
Other Intangible Assets" ("SFAS No. 142"), which eliminates goodwill
amortization expense. See Accounting Pronouncements for a discussion of SFAS No.
142.
Net income from continuing operations in 2001 was $216.7 million or $2.39
per diluted share. Excluding the $97.7 million ($63.5 million after-tax)
restructuring and other special items in 2001, net income from continuing
operations was $280.2 million, or $3.09 per diluted share, compared to $264.5
million, or $2.94 per diluted share, in 2000. The increase in net income, as
adjusted for the restructuring and other special items, was primarily due to a
decrease in interest expense and the lower effective tax rate.
During the fourth quarter of 2001, the Company reassessed accruals for
discontinued operations, determined that activities related to those accruals
would be completed for $60.0 million less than originally estimated and reversed
the related accruals into income. The excess was primarily related to favorable
experience in the resolution of two automotive arbitration claims in late 2001
and early 2002 (including income tax related claims), legal, environmental and
warranty claims, and other income tax issues. See Sales of Automotive Businesses
under Risks and Uncertainties.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999:
Sales and revenues in 2000 were $4.83 billion, an increase of $197.2
million, or 4.3%, over 1999 ($359.9 million, or 7.8%, excluding the impact of
foreign exchange). The increase is attributable to several acquisitions made in
2000 and the second half of 1999, as well as organic growth, partially offset by
the absence of a defense settlement received in 1999 and the scheduled wind down
of certain Defense contracts.
Operating income of $493.1 million in 2000 was $77.9 million higher than
the prior year. Operating income for 1999 of $415.2 million included a $4.6
million credit related to restruc-
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<PAGE>
turing and other special items. Excluding restructuring and other special items
from 1999, operating income was $82.5 million higher than the 1999 comparative
operating income of $410.6 million. The related operating margin improved to
10.2% from 8.9% in 1999, excluding restructuring and other special items. The
increases in operating income and margin were the result of higher sales
volumes, a significant improvement in productivity, lower pension expense and
the introduction of new, more profitable products.
Interest expense of $75.2 million (net of interest income of $17.9 million)
increased $28.4 million on higher average debt levels due to the repurchase of
shares in the first quarter of 1999, several acquisitions made in 2000 and the
second half of 1999, and higher average interest rates.
Net income from continuing operations in 2000 was $264.5 million, or $2.94
per diluted share, compared to $232.9 million, or $2.53 per diluted share, in
1999 ($230.0 million, or $2.50 per share, excluding restructuring and other
special items recorded in 1999). The Company's effective tax rate was 37% in
both 2000 and 1999.
BUSINESS SEGMENTS
Sales and revenues and operating income for each of the Company's business
segments were as follows (in millions):
<Table>
<Caption>
DEFENSE MOTION CORPORATE,
FLUID ELECTRONICS & FLOW ELECTRONIC ELIMINATION
YEAR ENDED DECEMBER 31, TECHNOLOGY & SERVICES CONTROL COMPONENTS AND OTHER TOTAL
- ----------------------- ---------- ----------- ------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
2001
Sales and revenues.......... $1,829.7 $1,304.8 $898.7 $647.0 $ (4.5) $4,675.7
Operating income (expense):
Before restructuring and
other special items.... 218.4 123.6 117.7 85.9 (51.1) 494.5
Restructuring and other
special items.......... (16.0) -- (8.1) (69.6) (4.0) (97.7)
-------- -------- ------ ------ ------ --------
Total operating income...... $ 202.4 $ 123.6 $109.6 $ 16.3 $(55.1) $ 396.8
======== ======== ====== ====== ====== ========
2000
Sales and revenues.......... $1,834.2 $1,334.6 $888.9 $774.6 $ (2.9) $4,829.4
Operating income............ $ 206.2 $ 117.3 $124.3 $ 99.0 $(53.7) $ 493.1
-------- -------- ------ ------ ------ --------
1999
Sales and revenues.......... $1,814.3 $1,413.9 $877.9 $516.0 $ 10.1 $4,632.2
Operating income (expense):
Before restructuring and
other special items.... 173.6 108.8 123.7 62.1 (57.6) 410.6
Restructuring and other
special items.......... (6.0) 3.9 (3.0) 9.7 -- 4.6
-------- -------- ------ ------ ------ --------
Total operating income...... $ 167.6 $ 112.7 $120.7 $ 71.8 $(57.6) $ 415.2
======== ======== ====== ====== ====== ========
</Table>
Fluid Technology's sales and revenues of $1.83 billion declined $4.5
million, or 0.2%, from 2000. The decrease reflects the impact of foreign
exchange translation and continued weakness in the industrial pump markets
partially offset by higher volume within the water and wastewater markets. 2001
operating income before restructuring and other special items was up $12.2
million compared to 2000 operating income due to improved product mix, continued
process improvements and cost reduction initiatives. Sales for 2000 increased
$19.9 million, or 1.1%, from 1999. The adoption of Emerging Issues Task Force
("EITF") Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs"
("EITF 00-10") resulted in an increase in revenues and cost of sales of
approximately $16 million in 2000 compared to 1999. The Company did not restate
1999 sales for EITF 00-10 as restatement was impracticable. In addition, higher
volume within the construction and water and wastewater businesses were
partially offset by the impact of foreign exchange translation and softness in
industrial
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<PAGE>
pumps markets. Operating income for 2000 was up $32.6 million compared to 1999
operating income, excluding restructuring and other special items, due to higher
prices, higher productivity, a foreign exchange gain recognized upon the
liquidation of foreign businesses and the benefits of restructuring and cost
initiatives.
Defense Electronics & Services' sales and revenues of $1.30 billion
decreased $29.8 million, or 2.2%, compared to 2000. The decline is primarily due
to the scheduled wind down of certain large contracts partially offset by the
contribution of new contract revenue. Operating income for 2001 was $6.3 million
greater than 2000 operating income due to improved margins on certain mature
contracts, higher profitability on new contracts, and cost control actions.
Sales and revenues for 2000 declined $79.3 million, or 5.6%, compared to 1999.
The decrease was due to the scheduled wind down of certain large contracts, the
absence of a $25.6 million claim settlement received in 1999, and lost revenue
from the sale of the GaAsTEK business (sold in the first quarter of 2000)
partially offset by an entire year of revenues from the December 1999
acquisition of Stanford Telecommunications, Inc.'s space and defense
communications businesses (which contributed incremental sales and revenue of
approximately $120 million in 2000). Operating income for 2000 was $8.5 million
greater than 1999 operating income, excluding restructuring and other special
items, primarily due to margin improvements from product/program mix.
Motion & Flow Control recorded sales and revenues of $898.7 million for the
year, representing an increase of $9.8 million, or 1.1%, over 2000. The increase
is due to automotive market share gains in Europe and North America and sales
growth in the Aerospace Controls business partially offset by softness in the
leisure marine market, the impact of the decline in North American automotive
build rates and the impact of foreign exchange translation. Operating income,
before restructuring and other special items, was $6.6 million, or 5.3%, lower
than 2000 operating income due to softness in the leisure marine market and
start-up costs associated with new European programs at Fluid Handling Systems
partially offset by process improvements at North American Fluid Handling
Systems and higher sales volume at Aerospace Controls. Revenues for 2000
represent an increase of $11.0 million, or 1.3%, over 1999. The inclusion of the
1999 acquisitions of Flojet Corporation and HydroAir Industries for an entire
year (which combined added approximately $46 million of sales and revenues in
2000) was partially offset by the impact of foreign exchange translation.
Operating income for 2000 was flat with 1999 operating income, excluding
restructuring and other special items.
Electronic Components' sales and revenues were $647.0 million in 2001,
representing a decrease of $127.6 million, or 16.5%, from 2000. The decrease
reflects a downturn in the communications and industrial markets and the
negative impact of foreign exchange translation partially offset by revenues
from acquisitions made in 2000 (which combined added approximately $64 million
of incremental sales). Operating income, before restructuring and other special
items, was down $13.1 million, or 13.2%, from 2000 due to declines in volume
partially offset by cost reduction actions and continued process improvements.
In 2000, sales and revenues increased $258.6 million, or 50.1%, compared to 1999
primarily due to the 1999 acquisition of STX Pte. Ltd. ("STX") and the 2000
acquisitions of C&K Components, Inc. ("C&K") and Man Machine Interface ("MMI")
(incremental sales and revenues for these three acquisitions combined added
approximately $143 million in 2000). The increase also reflects robust growth in
the communications, industrial and transportation markets partially offset by
the negative impact of foreign exchange translation. Operating income in 2000
was up $36.9 million, or 59.4%, from 1999, excluding restructuring and other
special items. Higher volume, greater contributions from new products with
higher margins, and improvements in manufacturing processes contributed to the
increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to generate substantial cash from operations and
remains in a strong financial position with resources available for reinvestment
in existing businesses, strategic acquisitions and managing the capital
structure on a short and long term basis. The Company plans to fund its
anticipated 2002 cash requirements with future cash from operations
supplemented, as required, by commercial paper borrowings. The Company has a
revolving credit agreement with 20 domestic and foreign banks, which provides
aggregate commitments of $1.0 billion and expires in November 2005. The
revolving credit agreement provides backup
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<PAGE>
for the Company's commercial paper program. Commercial paper borrowings at
December 31, 2001 were $441.3 million. There were no borrowings under the credit
agreement at December 31, 2001. The provisions of this facility require the
Company to maintain an interest coverage ratio, as defined, in excess of 3.75
times. At December 31, 2001, the Company's interest coverage ratio was well in
excess of the minimum requirement.
CASH FLOWS:
Cash flows from operating activities were $476.6 million in 2001, an
increase of $62.0 million, or 15%, from $414.6 million generated in 2000. The
increase is largely attributable to higher cash earnings, lower operating
working capital levels, and the liquidation of non-operating assets resulting
from several management initiatives. These items are partially offset by lower
accrual levels due to various operating payments and the use of cash advances
received in prior years.
ADDITIONS TO PLANT, PROPERTY AND EQUIPMENT:
Capital expenditures during 2001 were $174.0 million, a decrease from
$180.6 million in 2000. Approximately 32% of the 2001 spending occurred at Fluid
Technology primarily related to the expansion of existing product lines, new
product lines and custodial replacement. Approximately 25% was incurred at
Motion & Flow Control for process improvements and the expansion of capacity in
support of new business awards. Approximately 25% was spent at Electronic
Components for new product introductions and manufacturing cost reduction
initiatives. Defense Electronics & Services expended approximately 18% of the
2001 total, primarily related to the expansion of new and existing product
lines, as well as custodial replacements. At December 31, 2001, contractual
commitments have been made for future expenditures totaling approximately $27
million. The Company is targeting 2002 capital expenditures to be approximately
10% less than the amount spent during 2001.
ACQUISITIONS:
During 2001, the Company spent approximately $91 million for several small
acquisitions and investments. 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 net assets acquired of
$72.1 million was recorded as goodwill. Goodwill associated with acquisitions
made in the first half of the year was amortized over periods up to 40 years.
Acquisitions made in the second half of the year had no goodwill amortization in
accordance with SFAS No. 142. The Company also finalized purchase price
allocations related to acquisitions made prior to 2001, which resulted in an
increase in goodwill of $18.3 million. During 2000, the Company acquired C&K,
MMI, and several other small companies for approximately $192 million. The
acquisitions were accounted for as purchases. Goodwill of $173.9 million was
recorded by the Company in 2000 and amortized over a period of 25 to 30 years.
During 1999, the Company acquired Stanford Telecommunications, Inc.'s space and
defense communications businesses, Flojet Corporation, STX, Sanitaire
Corporation, HydroAir Industries, K and M Electronics, the assets of Energy
Machine Service, Inc. and made an equity investment in DigitalGlobe Inc. The
Company paid a total of approximately $545 million for these acquisitions. The
acquisitions were accounted for as purchases. The excess of the purchase prices
over the fair values of the net assets acquired and liabilities assumed of
$416.1 million was recorded as goodwill and was being amortized over periods of
up to 40 years. Effective January 1, 2002, the Company will cease recording
goodwill amortization in accordance with the adoption of SFAS No. 142. See
Accounting Pronouncements for further discussion of the impact of SFAS No. 142.
STATUS OF RESTRUCTURING ACTIVITIES:
On December 14, 2001, the Company announced a restructuring program to
reduce structural costs and improve profitability. The Company recorded a charge
of $97.7 million ($63.5 million after-tax, or $0.70 per diluted share) related
to the closure of five facilities, the discontinuance of 21 products, the
severance of approximately 3,400 persons and other asset impairments. The charge
is primarily attributable to the Electronic Components segment where the
downturn in the communications market has significantly reduced sales volume.
The charge also impacts the Fluid Technology segment, the Motion & Flow Control
20
<PAGE>
segment and the Corporate Headquarters. The cash portion of the charge of $61.0
million primarily relates to severance and lease termination costs. The non-cash
portion of the charge of $36.7 million primarily relates to machinery and
equipment that is impaired as a result of the announced plans or due to the
downturn in the connector and switches market. These actions are expected to
result in savings, net of period expenses, of $65.4 million in 2002 and $82.2
million in 2003. As of December 31, 2001, 1,200 persons or 35% of the planned
reductions had taken place. All of the actions are expected to be complete by
December 31, 2002.
In the fourth quarter of 1999, the Company recorded $20.2 million of
charges related to restructuring activities, primarily for the closure of four
facilities and severance of 324 persons. The Company also recorded $20.0 million
of goodwill write-offs. Additionally, during the fourth quarter of 1999, the
Company assessed its restructuring accruals established in 1998, determined that
activities related to those accruals would be completed for $44.8 million less
than originally estimated, and reversed the related accruals into income. The
excess was primarily the result of favorable experience in employee separations
and asset disposal costs which were not required. The net effect of the reversal
of 1998 accruals and the 1999 restructuring and asset write-offs was an increase
to 1999 operating income of $4.6 million and diluted earnings per share of
$0.03. As of December 31, 2001, all of the prior years' restructuring actions
were substantially complete with $2.5 million remaining primarily associated
with severance run-off in Europe and remaining lease payments.
See Note 4, Restructuring and Other Special Items, in the Notes to
Consolidated Financial Statements for a detailed discussion.
SALE OF ASSETS AND BUSINESSES:
In the second quarter of 2001, the Company sold two corporate planes for
$30.7 million and other plant, property, and equipment across all businesses for
$11.8 million. The planes are being leased by the Company in the form of
operating leases. In 2000, the Company generated divestiture proceeds of $47.6
million. In the first quarter of 2000, the Company sold the net assets of
GaAsTEK, a business in the Defense Electronics & Services segment, for $28.3
million. The remaining $19.3 million of cash proceeds from the sale of assets
represents plant, property, and equipment sales across all businesses. 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. In addition,
the Company generated $11.2 million of proceeds from plant, property, and
equipment sales across all businesses.
SHARE REPURCHASE:
In 2001, 2000, and 1999, 3.5 million, 1.7 million, and 2.2 million shares,
respectively, were repurchased to offset the dilutive effect of exercised stock
options. During 1999, the Company repurchased an additional 8.1 million shares.
DEBT AND CREDIT FACILITIES:
Debt at December 31, 2001 was $973.4 million, compared to $1.04 billion at
December 31, 2000. Cash and cash equivalents were $121.3 million at December 31,
2001 compared to $88.7 million at December 31, 2000. The decrease in net debt
(defined as total debt less cash and cash equivalents) of $97.5 million was due
to strong free cash flow partially offset by the adoption of SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
which raised long-term debt by $42.5 million for the value of interest rate
swaps at December 31, 2001.
CONTRACTUAL OBLIGATIONS:
For disclosure of the Company's contractual obligations and commercial
commitments, including long-term debt, capital and operating lease obligations,
and lines of credit, see Note 14, Leases and Rentals, and Note 15, Debt, in the
Notes to the Consolidated Financial Statements.
MARKET RISK EXPOSURES
The Company, in the normal course of doing business, is exposed to the
risks associated with changes in interest rates, currency exchange rates, and
commodity prices. To limit the risks from such fluctuations, the Company enters
into various hedging transactions that have been authorized pursuant to the Com-
21
<PAGE>
pany'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 uses interest rate swaps. The Company has several fixed to floating interest
rate swap agreements for a notional amount of $349.4 million. As a result of the
swaps, the interest expense on substantially all of the Company's long-term debt
is calculated on a variable, rather than fixed rate, basis. Terms of the
agreements match the terms of the fixed debt and reference 3-month LIBOR. The
carrying value of these swaps at December 31, 2001 was $46.2 million, including
$3.7 million of accrued interest.
At December 31, 2001 and 2000, the Company's short-term and long-term debt
obligations, net of cash, were $852.1 million and $949.6 million, respectively.
Based on these positions and the Company's overall exposure to interest rates,
changes of 21 and 71 basis points (equivalent to 10% of the Company's weighted
average short-term interest rates at December 31, 2001 and 2000, respectively)
on the Company's cash and marketable securities, and on its floating rate debt
obligations and related interest rate derivatives, would have a $1.7 million and
$6.4 million effect on the Company's pretax earnings for the years ended
December 31, 2001 and 2000, respectively. Increases of 79 and 85 basis points in
long-term interest rates (equivalent to 10% of the Company's weighted average
long-term interest rates at December 31, 2001 and 2000, respectively) would have
a $3.6 million effect on the fair value of the Company's fixed rate debt for
each of the years ended December 31, 2001 and 2000.
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
utilized foreign currency denominated derivative instruments to selectively
hedge its net long-term investments in foreign countries. During 2001, the
Company's largest exposures to foreign exchange rates exist primarily with the
Euro, Swedish Krona, and British Pound against the U.S. Dollar. At December 31,
2001, the Company had seven foreign currency derivatives outstanding for a total
notional amount of $50.3 million. 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, 2001, would have an
impact of approximately $1.2 million on the fair value of such instruments.
During 2000, the Company's largest exposures to foreign exchange rates existed
primarily with the Deutsche Mark, Belgian Franc, Swedish Krona and Italian Lira
against the U.S. Dollar. At December 31, 2000, the Company had nine foreign
currency derivatives outstanding for a total notional value of $60.0 million. 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, 2000, would have had an impact of approximately $0.4 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
United States. The Company expects to fully utilize credits generated through
December 31, 2001 for income taxes paid in foreign jurisdictions.
DEFERRED TAX ASSETS:
The Company had net deferred tax assets of $297.6 million and $367.6
million at December 31, 2001 and 2000, respectively. The deferred tax assets for
both periods are composed of U.S., foreign, state and local deferred tax assets.
These net deferred tax assets arise from temporary differences between assets
and liabilities for financial reporting and tax purposes and primarily relate to
nondeductible accruals,
22
<PAGE>
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.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, which changes the accounting for goodwill from an amortization method
to an impairment only approach. The amortization of goodwill from past business
combinations will cease upon adoption of this statement on January 1, 2002. In
connection with the adoption of SFAS No. 142, the Company completed a
transitional goodwill impairment test that compared the fair value of each
reporting unit to its carrying value and determined that no impairment will be
recognized. Due to the elimination of goodwill amortization expense, the
adoption of SFAS No. 142 is expected to increase operating income by
approximately $41 million, decrease the effective tax rate by approximately 200
basis points and increase earnings per share by an estimated $0.39 in 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). The standard requires that legal
obligations associated with the retirement of tangible long-lived assets be
recorded at fair value when incurred and is effective for the Company on January
1, 2003. The Company is currently reviewing the provisions of SFAS No. 143 to
determine the standard's impact upon adoption.
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), effective January 1, 2002. SFAS
No. 144 outlines accounting and financial reporting guidelines for the sale or
disposal of long-lived assets and discontinued operations. The adoption of the
pronouncement did not have a material impact on the Company's results of
operations or financial position.
RISKS AND UNCERTAINTIES
SALES OF AUTOMOTIVE BUSINESSES:
In 1998, the Company received notifications of claims from the buyers of
the automotive businesses (that ITT sold in September 1998) requesting
post-closing adjustments to the purchase price under the provisions of the sales
agreements. In 1999, those claims were submitted to arbitration. In late 2001
and early 2002, both claims were favorably resolved. See Note 5, Discounted
Operations, in the Notes to Consolidated Financial Statements for a detailed
discussion.
DEFENSE BACKLOG:
The Defense Electronics & Services segment's total backlog was $2.6 billion
at December 31, 2001. The Company generally records new contract awards into
backlog when funding has been authorized and appropriated by the customer.
ENVIRONMENTAL MATTERS:
The Company is subject to stringent environmental laws and regulations that
affect its operating facilities and impose liability for the cleanup 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 cleanup standards. When it is possible to create
reasonable estimates of liability with respect to environmental matters, the
Company establishes accruals 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
23
<PAGE>
expect that these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows. For
disclosure of the Company's commitments and contingencies, see Note 19.
EURO CONVERSION ISSUE:
The Company successfully implemented its Euro conversion plans and has not
experienced any problems related to the conversion.
2002 OUTLOOK:
Overall, the Company expects 2002 to be a challenging year and does not
expect a significant economic recovery. The Company believes that low growth
coupled with overcapacity will continue to dampen capital spending, translate
into continued pricing pressure and restrain discretionary consumer spending.
Conversely, the Company believes that Defense spending in the United States will
increase. Overall, the Company expects 2002 revenue to be flat to 3% below 2001
revenue. Operating margin improvements (driven by process improvements, the
benefits of the fourth quarter 2001 restructuring program and other cost control
actions) and lower interest expense should result in modest EPS growth. The
Company further expects free cash flow, as defined above, to be at least $265
million.
In the Fluid Technology business, the Company expects that a slower growth
rate in its Water & Wastewater businesses and no recovery in Industrial Pumps
will translate to revenue growth of -2% to +2% over 2001. In the Defense
Electronics & Services business, the Company believes that its record backlog
and program ramp-up at Electronic Warfare, Space and Communications will
translate into revenue growth of 4% to 6% over 2001. In the Motion & Flow
Control business, the Company expects that declines in worldwide automotive and
airplane build rates and weakness in the leisure marine market will translate
into a revenue decline of 3% to 5% from 2001. In the Electronic Components
business, the Company believes that there will be stabilization in the wireless
handset market and near-term declines in the communications market and the
industrial and commercial aircraft markets, which will translate into a revenue
decline of 10% to 15% from 2001.
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 "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
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; foreign currency exchange rates; 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 some areas the
availability of energy sources may affect our production processes or customer
demand for our products or services. In addition to these factors, our business
segments may be affected by the more specific factors referred to below.
The Fluid Technology business will be affected by factors including global
economic conditions; governmental funding levels; international demand for fluid
management products;
24
<PAGE>
the ability to successfully expand into new geographic markets; weather
conditions; and continued demand for replacement parts and servicing.
The Defense Electronics & 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.
The Motion & Flow Control business will be affected by the cyclical nature
of the transportation industries; strikes at major auto producers; and
international demand for marine and leisure products.
The Electronic Components 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, and the cyclical nature of the industry.
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.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
On March 22, 2002, upon the recommendation of the Audit Committee, the
Board of Directors of the Company approved the dismissal of Arthur Andersen LLP
("Arthur Andersen") as the Company's independent auditors following the 2001
audit and the selection of Deloitte & Touche LLP as independent auditors for
2002. In order to ensure an orderly transition of auditors, the Company intends
to continue to use Arthur Andersen for certain services during the remainder of
2002.
In connection with the audits for the two most recent fiscal years and
through March 22, 2002, there have been no disagreements with Arthur Andersen on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Arthur Andersen, would have caused Arthur Andersen to
make reference thereto in its report on the financial statements of the Company
for such time periods. Also, during those time periods, there have been no
"reportable events," as such term is used in Item 304 (a)(1)(v) of Regulation
S-K.
Arthur Andersen's reports on the financial statements of the Company for
the last two years neither contained an adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
We have provided Arthur Andersen a copy of the Company's Form 8-K prior to
its filing with the Securities and Exchange Commission ("Commission"). Arthur
Andersen has provided us with a letter, addressed to the Commission, which is
filed as an Exhibit to the Company's Form 8-K, as filed with the Commission.
During the Company's two most recent fiscal years ended December 31, 2001,
and the subsequent interim period through March 22, 2002, the Company did not
consult with Deloitte & Touche LLP regarding any of the matters or events set
forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
25
<PAGE>
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", to
"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
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Change in Independent Public Accountants" herein.
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 the
registrant."
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.
26
<PAGE>
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, 2001......................................... F-4
Consolidated Statements of Comprehensive Income for the
three years ended December 31, 2001....................... F-5
Consolidated Balance Sheets as of December 31, 2001 and
2000...................................................... F-6
Consolidated Statements of Cash Flows for the three years
ended December 31, 2001................................... F-7
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 2001............... F-8
Notes to Consolidated Financial Statements.................. F-9
Business Segment Information................................ F-27
Geographical Information.................................... F-28
Sales and Revenues by Product Category...................... F-28
Quarterly Results for 2001 and 2000......................... F-30
Valuation and Qualifying Accounts........................... S-1
</Table>
F-1
<PAGE>
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, also separately and
privately, with the independent public accountants and contracted auditors to
evaluate the effectiveness of the work performed by them in discharging their
respective responsibilities.
/s/ LOUIS J. GIULIANO
- ------------------------------------------------------
Louis J. Giuliano
Chairman, President and
Chief Executive Officer
/s/ DAVID J. ANDERSON
- ------------------------------------------------------
David J. Anderson
Senior Vice President and
Chief Financial Officer
F-2
<PAGE>
ITT INDUSTRIES, INC AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ITT Industries, Inc.:
We have audited the accompanying consolidated financial statements of ITT
Industries, Inc. (an Indiana corporation) and subsidiaries as of December 31,
2001 and 2000, and for each of the three years in the period ended December 31,
2001, as set forth on the accompanying Index to Consolidated Financial
Statements and Schedule. These 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of ITT Industries, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
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 23, 2002
F-3
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<Table>
<Caption>
Year ended December 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
(in millions, except per share amounts)
<S> <C> <C> <C>
Sales and revenues................................ $4,675.7 $4,829.4 $4,632.2
Costs of sales and revenues....................... 3,044.5 3,195.3 3,265.8
Selling, general and administrative expenses...... 671.3 713.6 666.2
Research, development and engineering expenses.... 424.7 391.2 264.4
Goodwill amortization expense..................... 40.7 36.2 25.2
Restructuring and other special items............. 97.7 -- (4.6)
-------- -------- --------
Total costs and expenses.......................... 4,278.9 4,336.3 4,217.0
-------- -------- --------
Operating income.................................. 396.8 493.1 415.2
Interest expense, net............................. (62.0) (75.2) (46.8)
Miscellaneous (expense) income.................... (1.4) 2.0 1.3
-------- -------- --------
Income from continuing operations before income
taxes........................................... 333.4 419.9 369.7
Income tax expense................................ (116.7) (155.4) (136.8)
-------- -------- --------
Income from continuing operations................. 216.7 264.5 232.9
Discontinued operations:
Income from discontinued operations, including
tax benefit of $50.7......................... 60.0 -- --
-------- -------- --------
Net income........................................ $ 276.7 $ 264.5 $ 232.9
======== ======== ========
EARNINGS PER SHARE
Income from continuing operations:
Basic........................................... $ 2.46 $ 3.01 $ 2.61
Diluted......................................... $ 2.39 $ 2.94 $ 2.53
Discontinued operations:
Basic........................................... $ 0.68 $ -- $ --
Diluted......................................... $ 0.66 $ -- $ --
Net income:
Basic........................................... $ 3.14 $ 3.01 $ 2.61
Diluted......................................... $ 3.05 $ 2.94 $ 2.53
AVERAGE COMMON SHARES -- BASIC.................... 88.1 87.9 89.2
AVERAGE COMMON SHARES -- DILUTED.................. 90.6 90.0 92.0
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-4
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<Table>
<Caption>
Year ended December 31, 2001
-----------------------------------
(in millions)
PRETAX TAX
INCOME (EXPENSE) AFTER-TAX
(EXPENSE) BENEFIT AMOUNT
--------- --------- ---------
<S> <C> <C> <C>
Net income................................................ $276.7
Other income (loss):
Foreign currency translation:
Adjustments arising during period.................... $(36.8) $(1.0) (37.8)
Unrealized gain (loss) on investment securities......... 0.7 -- 0.7
Minimum pension liability............................... (9.6) 3.3 (6.3)
------ ----- ------
Total other loss................................ $(45.7) $ 2.3 (43.4)
------
Comprehensive income...................................... $233.3
======
</Table>
<Table>
<Caption>
Year ended December 31, 2000
-----------------------------------
(in millions)
Pretax Tax
Income (Expense) After-Tax
(Expense) Benefit Amount
--------- --------- ---------
<S> <C> <C> <C>
Net income................................................ $264.5
Other income (loss):
Foreign currency translation:
Adjustments arising during period.................... $(69.1) $ 8.2 (60.9)
Reclassifications included in net income............. (5.6) -- (5.6)
Unrealized gain (loss) on investment securities......... (1.6) -- (1.6)
Minimum pension liability............................... (20.4) 7.5 (12.9)
------ ----- ------
Total other loss................................ $(96.7) $15.7 (81.0)
------
Comprehensive income...................................... $183.5
======
</Table>
<Table>
<Caption>
Year ended December 31, 1999
-----------------------------------
(in millions)
Pretax Tax
Income (Expense) After-Tax
(Expense) Benefit Amount
--------- --------- ---------
<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 loss................................ $(23.5) $(11.6) (35.1)
------
Comprehensive income...................................... $197.8
======
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-5
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
December 31,
------------------------
2001 2000
---------- ----------
(in millions, except per
share amounts)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 121.3 $ 88.7
Receivables, net.......................................... 741.7 814.9
Inventories, net.......................................... 528.9 531.3
Other current assets...................................... 66.9 71.4
-------- --------
Total current assets................................... 1,458.8 1,506.3
Plant, property and equipment, net.......................... 791.0 865.4
Deferred income taxes....................................... 310.9 384.4
Goodwill, net............................................... 1,410.0 1,373.0
Other assets................................................ 537.7 482.3
-------- --------
Total non-current assets............................... 3,049.6 3,105.1
-------- --------
TOTAL ASSETS........................................... $4,508.4 $4,611.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 400.5 $ 386.0
Accrued expenses.......................................... 727.9 823.9
Accrued taxes............................................. 251.2 392.9
Notes payable and current maturities of long-term debt.... 517.0 629.9
-------- --------
Total current liabilities.............................. 1,896.6 2,232.7
Pension benefits............................................ 199.0 195.8
Postretirement benefits other than pensions................. 195.9 195.4
Long-term debt.............................................. 456.4 408.4
Other liabilities........................................... 384.7 367.9
-------- --------
Total non-current liabilities.......................... 1,236.0 1,167.5
-------- --------
TOTAL LIABILITIES...................................... 3,132.6 3,400.2
Shareholders' Equity:
Common stock: Authorized -- 200,000,000 shares, $1 par
value per share
Outstanding -- 88,786,701 shares and 87,914,595 shares.... 88.8 87.9
Retained earnings......................................... 1,514.0 1,306.9
Accumulated other comprehensive loss...................... (227.0) (183.6)
-------- --------
Total shareholders' equity............................. 1,375.8 1,211.2
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $4,508.4 $4,611.4
======== ========
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-6
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
Year ended December 31,
-----------------------------
2001 2000 1999
------- ------- -------
(in millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 276.7 $ 264.5 $ 232.9
Income from discontinued operations......................... (60.0) -- --
------- ------- -------
Income from continuing operations........................... 216.7 264.5 232.9
Adjustments to income from continuing operations:
Depreciation and amortization............................. 212.9 201.8 181.1
Restructuring and other special items..................... 97.7 -- (4.6)
Payments for restructuring and other special items.......... (27.1) (25.9) (60.0)
Change in receivables, inventories, accounts payable, and
accrued expenses.......................................... (68.5) (26.9) 4.5
Change in accrued and deferred taxes........................ 27.3 44.2 43.4
Change in other current and non-current assets.............. 20.7 (2.0) 12.0
Change in other non-current liabilities..................... (5.1) (34.2) (63.5)
Other, net.................................................. 2.0 (6.9) (2.6)
------- ------- -------
Net Cash -- operating activities.......................... 476.6 414.6 343.2
------- ------- -------
INVESTING ACTIVITIES
Additions to plant, property and equipment.................. (174.0) (180.6) (227.9)
Acquisitions................................................ (90.9) (192.0) (544.8)
Proceeds from sale of assets and businesses................. 42.5 47.6 107.7
Other, net.................................................. 2.4 (1.3) 4.5
------- ------- -------
Net Cash -- investing activities.......................... (220.0) (326.3) (660.5)
------- ------- -------
FINANCING ACTIVITIES
Short-term debt, net........................................ (32.4) (43.5) 426.0
Long-term debt repaid....................................... (77.2) (21.1) (83.8)
Long-term debt issued....................................... 6.4 0.9 3.1
Repurchase of common stock.................................. (150.9) (54.0) (402.6)
Proceeds from issuance of common stock...................... 104.3 27.4 45.8
Dividends paid.............................................. (52.9) (52.9) (55.5)
Other, net.................................................. 0.9 (0.8) (16.0)
------- ------- -------
Net Cash -- financing activities.......................... (201.8) (144.0) (83.0)
------- ------- -------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS.......... (3.8) (28.0) (14.5)
NET CASH -- DISCONTINUED OPERATIONS......................... (18.4) (9.3) (284.4)
------- ------- -------
Net change in cash and cash equivalents..................... 32.6 (93.0) (699.2)
Cash and cash equivalents -- beginning of year.............. 88.7 181.7 880.9
------- ------- -------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $ 121.3 $ 88.7 $ 181.7
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.................................................. $ 77.6 $ 82.3 $ 76.4
Income taxes.............................................. $ 84.6 $ 108.6 $ 42.1
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-7
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<Table>
<Caption>
Shares Outstanding Dollars
------------------ ------------------------------
YEAR ENDED DECEMBER 31, 2001 2000 1999 2001 2000 1999
- ----------------------- ---- ---- ---- -------- -------- --------
(amounts in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Beginning balance........................... 87.9 87.9 96.0 $ 87.9 $ 87.9 $ 96.0
Stock incentive plans..................... 4.4 1.7 2.2 4.4 1.7 2.2
Repurchases............................... (3.5) (1.7) (2.2) (3.5) (1.7) (2.2)
Stock repurchase program.................. -- -- (8.1) -- -- (8.1)
---- ---- ---- -------- -------- --------
Ending balance............................ 88.8 87.9 87.9 $ 88.8 $ 87.9 $ 87.9
---- ---- ---- -------- -------- --------
RETAINED EARNINGS
Beginning balance........................... $1,306.9 $1,113.8 $1,271.5
Net income................................ 276.7 264.5 232.9
Common stock dividend declared -- $.60,
$.60 and $.60.......................... (52.9) (52.9) (53.4)
Repurchases............................... (16.7) (18.5) (337.2)
-------- -------- --------
Ending balance............................ $1,514.0 $1,306.9 $1,113.8
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
Unrealized Loss on Investment Securities:
Beginning balance...................... $ (2.3) $ (0.7) $ (0.5)
Unrealized gain (loss)................. 0.7 (1.6) (0.2)
-------- -------- --------
Ending balance......................... $ (1.6) $ (2.3) $ (0.7)
-------- -------- --------
Minimum Pension Liability:
Beginning balance...................... $ (12.9) $ -- $ --
Recognition of minimum pension
liability............................ (6.3) (12.9) --
-------- -------- --------
Ending balance......................... $ (19.2) $ (12.9) $ --
-------- -------- --------
Cumulative Translation Adjustments:
Beginning balance...................... $ (168.4) $ (101.9) $ (67.0)
Translation of foreign currency
financial statements................. (37.8) (66.5) (34.9)
-------- -------- --------
Ending balance......................... $ (206.2) $ (168.4) $ (101.9)
-------- -------- --------
Total accumulated other comprehensive
loss................................... $ (227.0) $ (183.6) $ (102.6)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY.................. $1,375.8 $1,211.2 $1,099.1
======== ======== ========
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-8
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 1
ACCOUNTING POLICIES
CONSOLIDATION PRINCIPLES:
The consolidated financial statements include the accounts of ITT
Industries, Inc. and all majority owned subsidiaries (the "Company"). The
Company consolidates companies in which it owns more than 50% of the voting
shares unless control is likely to be temporary. The results of companies
acquired or disposed of during the fiscal year are included in the consolidated
financial statements from the effective date of acquisition or up to the date of
disposal. All significant intercompany transactions have been eliminated. See
Note 20, Business Segment Information, for a description of the Company's
segments.
SALES AND REVENUE RECOGNITION:
The Company recognizes revenues as services are rendered and recognizes
sales as products are shipped to customers. Our Defense Electronics & Services
segment generally recognizes sales and anticipated profits under long-term
fixed-price contracts based on the units of delivery or the completion of
scheduled performance milestones. Estimated contract profits are recorded into
earnings in proportion to recorded sales. During the performance of such
contracts, estimated final contract prices and costs are periodically reviewed
and revisions are made as required. The effect of these revisions to estimates
is included in earnings in the period in which the revisions are made. Sales
under cost-reimbursement contracts are recorded as costs are incurred and
include estimated earned fees or profits calculated on the basis of the
relationship between costs incurred and total estimated costs. On time-and-
material contracts, revenue is recognized to the extent of billable rates times
hours incurred plus material and other reimbursable costs incurred. Anticipated
losses on contracts are recognized when first identified by the Company. Revenue
arising from the claims process is not recognized either as income or as an
offset against a potential loss until it can be reliably estimated and
realization is probable.
RESEARCH, DEVELOPMENT AND ENGINEERING:
Significant costs are incurred each year in connection with research,
development, and engineering ("RD&E") programs that are expected to contribute
to future earnings. Such costs are charged to income as incurred, except to the
extent recoverable under existing contracts. Approximately 76.4%, 74.6%, and
57.8% of total RD&E costs were expended pursuant to customer contracts for each
of the three years ended December 31, 2001, 2000, and 1999, 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 12.4% and 13.0% of total 2001 and 2000 inventories, respectively.
There would not have been a material difference in the value of inventories if
the FIFO method had been used by the Company to value all inventories.
LONG-LIVED ASSET IMPAIRMENT LOSSES:
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets may be
impaired and the undiscounted net cash flows estimated to be generated by those
assets are less than their carrying amounts. When the undiscounted net cash
flows are less than the carrying amount, losses are recorded for the difference
between the discounted net cash flows of the assets and the carrying amount.
Losses recognized in 2001 and 1999 were recorded in restructuring and other
special items. See Note 4, Restructuring
F-9
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and Other Special Items, for further discussions on these losses.
PLANT, PROPERTY AND EQUIPMENT:
Plant, property and equipment, including capitalized interest applicable to
major project expenditures, are recorded at cost. 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 economic useful 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 selling, general and administrative expenses.
GOODWILL AND OTHER INTANGIBLE ASSETS:
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. Purchased
intangible assets, including patents, trademarks and non-compete agreements are
amortized on a straight-line basis over their economic useful lives not to
exceed 40 years. Goodwill and other intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. See Note 2, Changes in Accounting
Pronouncements, for the impact of changes in accounting pronouncements on
goodwill amortization.
INVESTMENTS:
Investments for which the Company does not have the ability to exercise
significant influence and for which there is not a readily determinable market
value are accounted for under the cost method of accounting. The Company
periodically evaluates the carrying value of its investments accounted for under
the cost method of accounting. Such investments were recorded at the lower of
cost or estimated net realizable value as of year-end. For investments in which
the Company owns or controls 20% or more of the voting shares, or over which it
exerts significant influence over operating and financial policies, the equity
method is used. The Company's share of net income or losses of equity
investments is included in miscellaneous (expense) income in the Consolidated
Income Statements and was not material in any period presented. Investments are
included in other assets in the Consolidated Balance Sheets.
FOREIGN CURRENCY TRANSLATION:
Balance sheet accounts are translated at the exchange rate in effect at
each year-end; income accounts are translated at the average rates of exchange
prevailing during the year. Gains and losses on foreign currency translations
are reflected in the cumulative translation adjustments component of
shareholders' equity. The national currencies of the foreign companies are
generally the functional currencies. Gains from foreign currency transactions
are reported currently in selling, general and administrative expenses and were
$2.9, $2.5 and $2.8 in 2001, 2000, and 1999, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS:
The Company uses a variety of derivative financial instruments, including
interest rate swaps and foreign currency forward contracts and/or swaps, as a
means of hedging exposure to interest rate and foreign currency risks. Changes
in the spot rate of instruments designated as hedges of the net investment in a
foreign subsidiary are reflected in the cumulative translation adjustments
component of shareholders' equity. The Company and its subsidiaries are
end-users and do not utilize these instruments for speculative purposes. The
Company has rigorous standards regarding the financial stability and credit
standing of its major counterparties.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net payments are
recognized as an adjustment to interest. If the swaps were terminated,
unrealized gains or losses would be deferred and amortized over the shorter of
the remaining original term of the hedging instrument or the remaining life of
the underlying debt instrument. Such gains or losses would be reflected in net
interest expense.
F-10
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ENVIRONMENTAL REMEDIATION COSTS:
Accruals for environmental matters are recorded on a site by site basis
when it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated, based on current law and existing
technologies. The Company's estimated liability is reduced to reflect the
anticipated participation of other potentially responsible parties in those
instances where it is probable that such parties are legally responsible and
financially capable of paying their respective shares of the relevant costs.
These accruals are adjusted periodically as assessment and remediation efforts
progress or as additional technical or legal information becomes available.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. Accruals for environmental liabilities are generally included in
other liabilities in the Consolidated Balance Sheets at undiscounted amounts and
exclude claims for recoveries from insurance companies or other third parties.
Recoveries from insurance companies or other third parties are included in other
assets when it is probable that a claim will be realized.
EARNINGS PER SHARE:
Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted average
number of common shares outstanding and potentially dilutive common shares,
which include stock options.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Estimates are revised as additional information
becomes available. Actual results could differ from those estimates.
RECLASSIFICATIONS:
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the current year presentation.
NOTE 2
CHANGES IN ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities"("SFAS No. 133"),
as amended, effective January 1, 2001. The adoption of SFAS No. 133 required the
Company to record the total fair value of its interest rate swaps ("the Swaps")
in the financial statements, which caused an increase to other assets and
long-term debt of $39.7, bringing the carrying value of the Swaps to $42.5 at
January 1, 2001. The carrying value of the Swaps at December 31, 2001 was $46.2
of which $42.5 was included in other assets and long-term debt and the remaining
amount represents accrued interest. The adoption of SFAS No. 133 did not have a
material impact on the consolidated results of operations or cash flows of the
Company.
Effective October 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on the recognition, presentation, and disclosure of revenue in
the financial statements. The adoption of SAB 101 did not have a material impact
on the Company's consolidated results of operations, financial condition, or
cash flows.
Effective January 1, 2000, the Company adopted Emerging Issues Task Force
Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs" ("EITF
00-10"). EITF 00-10 requires that all shipping and handling costs billed to
customers be recorded as sales. Sales and cost of sales in 2000 increased by
approximately $16 due to the adoption of EITF 00-10. The adoption of EITF 00-10
had no effect on operating income, net income, EPS, financial condition or cash
flow of the Company. The Company did not restate sales and cost of
F-11
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sales for years prior to 2000, since it was impracticable to do so.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 "Business Combinations" ("SFAS No. 141") and SFAS No. 142 "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 and prohibits the use of the pooling-of-interests method. In
addition, SFAS No. 141 requires intangible assets other than goodwill be
identified. Such intangible assets will be required to be amortized over their
economic useful lives. The adoption of SFAS No. 141, in 2001, did not have a
significant impact on the Company's results of operations or financial position.
SFAS No. 142 changes the accounting for goodwill from an amortization method to
an impairment only approach. In accordance with SFAS No. 142, goodwill
associated with acquisitions consummated after June 30, 2001 is not amortized
and the amortization of goodwill from business combinations consummated before
June 30, 2001, which totaled approximately $41 in 2001, will cease on January 1,
2002. In connection with the adoption, the Company completed a transitional
goodwill impairment test that compared the fair value of each reporting unit to
its carrying value and determined that no impairment will be recognized.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). The standard requires that legal
obligations associated with the retirement of tangible long-lived assets be
recorded at fair value when incurred and is effective for the Company on January
1, 2003. The Company is currently reviewing the provisions of SFAS No. 143 to
determine the standard's impact upon adoption.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
requires that one accounting model be used for long-lived assets to be disposed
of by sale. Discontinued operations will be measured, similar to other long-
lived assets classified as held for sale, at the lower of its carrying amount or
fair value less cost to sell. Future operating losses will no longer be
recognized before they occur. SFAS No. 144 also broadens the definition of
discontinued operations to include a component of an entity when operations and
cash flows can clearly be distinguished and establishes criteria to determine
when a long-lived asset is held for sale. The provisions of this Statement were
effective for the Company on January 1, 2002. There was no transition impact for
this Statement.
NOTE 3
ACQUISITIONS
During 2001, the Company completed several small acquisitions for a total
of $90.9, none of which exceeded $50. The aggregate acquisition costs exceeded
the fair value of the net assets acquired by $72.1 and this excess has been
recorded as goodwill. Goodwill related to acquisitions made before June 30, 2001
was amortized over periods up to 40 years. Goodwill related to acquisitions made
after June 30, 2001 was not amortized in accordance with SFAS No. 142.
In 2001, the Company also finalized purchase price allocations related to
acquisitions made prior to 2001, which resulted in an increase to goodwill of
$18.3.
During 2000 and 1999, the Company completed acquisitions for a combined
total of $192.0 and $544.8, respectively. The significant acquisitions were as
follows:
On November 3, 2000, the Company acquired Man-Machine Interface
("MMI"), a mobile phone switch producer, from TRW Inc. for $61.9. The
purchase price exceeded the fair value of the net assets acquired by $43.5
and the excess has been recorded as goodwill, which was amortized over a
period of 25 years. MMI is a manufacturer of multilayer switch components
and assemblies for the wireless mobile handset market. Annual sales of MMI
approximated $53 in 2000.
F-12
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 26, 2000, the Company acquired C&K Components Inc. ("C&K"), a
privately held company, for $106.9, net of cash acquired. The purchase
price exceeded the fair value of net assets acquired by $116.2 and the
excess has been recorded as goodwill, which was amortized over a period of
30 years. C&K had annual sales of approximately $113 in 2000 and is a
worldwide leader in the design and manufacture of switches for the
communications, computer and electronic equipment markets.
On December 14, 1999, the Company completed the purchase of Stanford
Telecommunications Inc.'s ("Stel") space and defense communication
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 was amortized over a period of 40 years. The units of Stel had annual
sales of approximately $142 in 1999 and are leading designers,
manufacturers and marketers of advanced digital communication products and
systems.
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 was amortized over a period of
40 years. STX manufactures conductive rubber switches used in keypads for
mobile telephones, high end remote control units, and keyless entry
systems. STX had annual sales of approximately $64 in 1999.
On September 10, 1999, the Company acquired Flojet Corporation
("Flojet"), a privately held company, for $141. The purchase price exceeded
the fair value of the net assets acquired by $103.3 and the excess has been
recorded as goodwill, which was amortized over a period of 40 years. 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 had annual sales of
approximately $50 in 1999.
All acquisitions were accounted for using the purchase method. The purchase
price allocations for the 2001 acquisitions have been prepared on a preliminary
basis and changes are expected as evaluations of assets and liabilities are
completed and as additional information becomes available. The pro forma effect
on the Company's net income and earnings per share for these acquisitions, as
though the acquisitions occurred as of January 1 of each year, is not material
and therefore has not been disclosed herein.
NOTE 4
RESTRUCTURING AND OTHER SPECIAL ITEMS
Restructuring and other special items for the year ended December 31, 2001
are detailed in the following table:
<Table>
<Caption>
CASH NON-CASH ASSET
RESTRUCTURING RESTRUCTURING IMPAIRMENTS TOTAL
------------- ------------- ----------- -----
<S> <C> <C> <C> <C>
Electronic
Components........ $37.0 $18.2 $14.4 $69.6
Fluid Technology... 13.1 2.9 -- 16.0
Motion & Flow
Control........... 7.3 0.8 -- 8.1
Corporate and
Other............. 3.6 0.4 -- 4.0
----- ----- ----- -----
TOTAL 2001
CHARGES........... $61.0 $22.3 $14.4 $97.7
===== ===== ===== =====
</Table>
On December 14, 2001, the Company announced a restructuring program to
reduce structural costs and improve profitability. The actions primarily
occurred at the Electronic Components segment where a significant decline in
sales volume occurred from 2000 to 2001 and where management expects a further
sales decline in 2002. The actions at the other locations primarily related to
process improvements. The restructuring activities involve the closure of five
facilities, the discontinuance of 21 products and the termination of
approximately 3,400 persons. In the Electronic Components segment, two
facilities will be closed, 21 older products will be discontinued and the
workforce will be reduced by 2,753 persons
F-13
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through the consolidation and outsourcing of functions. In the Fluid Technology
segment, one facility will be closed and the workforce will be reduced by 436
persons through the consolidation and outsourcing of functions. In the Motion &
Flow Control segment, two facilities will be closed and the workforce will be
reduced by 183 through the consolidation of functions. In addition, 28 Corporate
and shared services positions will be eliminated.
Also in the fourth quarter of 2001, the Company recorded asset impairments
amounting to $14.4 for machinery and equipment and a cost based investment.
These assets were written down to their fair values based on management's
projections of the individual future cash flows to be generated by each of the
assets. These assets were reviewed for impairment in the fourth quarter of 2001,
because at that time business events indicated that the carrying amounts of the
assets may not be recovered. Management deemed the market decline experienced in
2001 for certain products to be other than temporary and recognized that there
exists significant pricing pressure in the Electronic Components segment that is
expected to continue.
The cash portion of the charge includes approximately $52 for severance and
$9 of other, primarily for facility carrying costs to be incurred after the
operations cease at the facilities. The non-cash portion of the restructuring
charge represents asset impairments that were recorded based on management's
projection of the cash flows to be generated by the assets until operations
cease. The projected aggregate future cash savings for the period 2002 to 2006
are approximately $360 and consist of decreased facility operating costs and
lower salary and wage expenditures. The projected future non-cash savings for
the same period are approximately $36 and primarily consist of decreased
depreciation and amortization expense. All of the actions contemplated by the
2001 plans will be completed in 2002. Some severance run-off payments will occur
in 2003; and closed facility expenditures will continue to be incurred in 2002
through 2006.
Restructuring and other special items for the year ended December 31, 1999
are detailed in the following table:
<Table>
<Caption>
CASH NON-CASH
RESTRUCTURING RESTRUCTURING GOODWILL TOTAL
------------- ------------- -------- -----
<S> <C> <C> <C> <C>
Fluid Technology..... $ 6.9 $3.2 $15.6 $25.7
Electronic
Components.......... 5.7 1.1 -- 6.8
Defense Electronics &
Services............ 0.3 -- 4.4 4.7
Motion & Flow
Control............. 1.9 1.1 -- 3.0
----- ---- ----- -----
Total 1999 charges... $14.8 $5.4 $20.0 $40.2
===== ==== ===== =====
</Table>
During 1999, the Company identified facilities to be shut down 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. The 1999 restructuring activities involved the closure of facilities
and sales offices and reduction of workforce. In the Electronic Components
segment, a factory was closed with a portion of the business being relocated. In
the Defense Electronics & Services segment, several positions at two divisions
were eliminated. The Fluid Technology segment closed two facilities and related
service offices and also consolidated the operations of one warehouse into
existing facilities. In the Motion & Flow Control segment, a workforce reduction
occurred at one facility and certain assets were deemed impaired. The goodwill
write-off at the Fluid Technology segment related to an unprofitable Far East
operation and was calculated based on management's future cash flow projections
of the business. The goodwill write-off at the Defense Electronics & Services
segment related to a product line sold in January 2000.
During the fourth quarter of 1999, the Company also assessed its 1998
restructuring accruals, determined that activities related to those accruals
would be completed for $44.8 less than originally estimated, and reversed the
related accruals into income. The excess was primarily the result of favorable
experience in employee separations and asset disposal costs that were not
required.
F-14
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table displays a rollforward of the restructuring accruals:
<Table>
<Caption>
DEFENSE MOTION
FLUID ELECTRONICS & FLOW ELECTRONIC CORPORATE
YEAR ENDED DECEMBER 31, TECHNOLOGY & SERVICES CONTROL COMPONENTS AND OTHER TOTAL
- ----------------------- ---------- ----------- ------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998.......... $ 73.8 $15.1 $ 1.8 $ 42.7 $ 5.0 $138.4
Payments and other................. (43.5) (3.6) (0.7) (13.4) (2.5) (63.7)
Reversals.......................... (19.7) (8.6) -- (16.5) -- (44.8)
1999 charge........................ 6.9 0.3 1.9 5.7 -- 14.8
------ ----- ----- ------ ----- ------
Balance December 31, 1999.......... $ 17.5 $ 3.2 $ 3.0 $ 18.5 $ 2.5 $ 44.7
Payments and other................. (15.0) (1.3) (2.7) (5.7) (1.5) (26.2)
------ ----- ----- ------ ----- ------
Balance December 31, 2000.......... $ 2.5 $ 1.9 $ 0.3 $ 12.8 $ 1.0 $ 18.5
Payments and other related to prior
charges.......................... (1.4) (0.9) (0.3) (12.4) (1.0) (16.0)
2001 charge........................ 13.1 -- 7.3 37.0 3.6 61.0
Payments related to the 2001
charge........................... (2.7) -- (0.2) (8.7) -- (11.6)
------ ----- ----- ------ ----- ------
Balance December 31, 2001.......... $ 11.5 $ 1.0 $ 7.1 $ 28.7 $ 3.6 $ 51.9
====== ===== ===== ====== ===== ======
</Table>
As of December 31, 2001, the restructuring actions announced in 1998 and
1999 were substantially complete. The remaining accruals of $2.5 relate to
contractual commitments for severance run-off in Europe and remaining lease
payments.
NOTE 5
DISCONTINUED OPERATIONS
In September 1998, the Company closed the sales of its automotive
Electrical Systems business to Valeo SA for approximately $1,700 and its Brake
and Chassis unit to Continental AG of Germany for approximately $1,930. These
businesses were treated as discontinued operations. In connection with the sale
of these businesses, the Company established accruals for the pending litigation
and other retained obligations. In 1998, the Company received notifications of
claims from the buyers of the automotive businesses requesting post-closing
adjustments to the purchase prices under the provisions of the sales agreements.
In 1999, those claims were submitted to arbitration. In late 2001 and early
2002, both claims were favorably resolved.
During the fourth quarter of 2001, the Company reassessed accruals for
discontinued operations, determined that activities related to those accruals
would be completed for $60.0 less than originally estimated and reversed the
related accruals into income. The excess was primarily related to favorable
experience in the resolution of the automotive arbitration claims (including
income tax related claims), legal, environmental and warranty claims, and other
income tax issues. The Company believes its remaining accruals for discontinued
operations are adequate.
F-15
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6
INCOME TAXES
Income tax data from continuing operations is as follows:
<Table>
<Caption>
For the years ended
December 31,
---------------------------
2001 2000 1999
------- ------- -------
<S> <C> <C> <C>
Pretax income
U.S. .......................... $ 190.0 $ 171.2 $ 154.4
Foreign........................ 143.4 248.7 215.3
------- ------- -------
$ 333.4 $ 419.9 $ 369.7
======= ======= =======
(Provision) benefit for income
tax
Current
U.S. federal................... $ 9.8 $ (58.1) $ 3.8
State and local................ (5.2) (8.3) (15.2)
Foreign........................ (32.7) (93.2) (107.9)
------- ------- -------
(28.1) (159.6) (119.3)
------- ------- -------
Deferred
U.S. federal................... (71.1) 3.1 (52.1)
State and local................ -- -- 6.4
Foreign........................ (17.5) 1.1 28.2
------- ------- -------
(88.6) 4.2 (17.5)
------- ------- -------
Total income tax expense........ $(116.7) $(155.4) $(136.8)
======= ======= =======
</Table>
A reconciliation of the tax provision at the U.S. statutory rate to the
effective income tax expense rate as reported is as follows:
<Table>
<Caption>
For the years ended
December 31,
-------------------
2001 2000 1999
----- ----- -----
<S> <C> <C> <C>
Tax provision at U.S. statutory
rate................................. (35.0)% (35.0)% (35.0)%
Foreign tax rate differential......... (2.1) (1.5) 9.0
Effect of repatriation of foreign
earnings............................. 4.6 0.3 (6.9)
State income taxes, net of federal
benefit.............................. (1.0) (1.3) (1.5)
Goodwill.............................. (2.7) (1.9) (4.5)
Research & development credit......... 0.9 1.5 1.3
Tax benefit of foreign sales
corporation.......................... 1.7 0.6 0.5
Other................................. (1.4) 0.3 0.1
----- ----- -----
Effective income tax expense rate..... (35.0)% (37.0)% (37.0)%
===== ===== =====
</Table>
Deferred income taxes are established for temporary differences between the
amount of assets and liabilities recognized for financial reporting purposes and
for tax reporting purposes.
Deferred tax assets (liabilities), for which no valuation allowances have
been provided, include the following:
<Table>
<Caption>
December 31,
---------------
2001 2000
------ ------
<S> <C> <C>
Employee benefits.................... $ 26.0 $ 32.5
Accelerated depreciation............. (31.2) (13.3)
Nondeductible accruals............... 250.3 298.7
Long-term contracts.................. 6.8 4.6
Uniform capitalization............... 9.3 12.3
Loss carryforward.................... 13.6 14.4
Other................................ 22.8 18.4
------ ------
$297.6 $367.6
====== ======
</Table>
No provision was made for U.S. taxes payable on accumulated undistributed
foreign earnings of certain subsidiaries amounting to approximately $42.4, since
these amounts are permanently reinvested.
As of December 31, 2001, the Company had approximately $13.2 of foreign tax
credit carryforwards available to reduce future tax liabilities. The credit
carryforwards will expire as follows: $0.3 on December 31, 2003, $0.2 on
December 31, 2004, $0.2 on December 31, 2005 and $12.5 on December 31, 2006. The
Company expects to fully utilize credits generated through December 31, 2001 for
income taxes paid in foreign jurisdictions.
Shareholders' equity at December 31, 2001 and 2000 reflects tax benefits
related to the stock options exercised in 2001 and 2000 of approximately $30.8
and $8.1, respectively.
NOTE 7
EARNINGS PER SHARE
A reconciliation of the data used in the calculation of basic and diluted
earnings per
F-16
<PAGE>
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,
-------------------
2001 2000 1999
------ ------ ------
<S> <C> <C> <C>
Basic Earnings Per Share
Income from continuing
operations available to
common shareholders..... $216.7 $264.5 $232.9
Average common shares
outstanding............. 88.1 87.9 89.2
------ ------ ------
Basic earnings per share.... $ 2.46 $ 3.01 $ 2.61
====== ====== ======
Diluted Earnings Per Share
Income from continuing
operations available to
common shareholders..... $216.7 $264.5 $232.9
Average common shares
outstanding............. 88.1 87.9 89.2
Add: Impact of stock
options................. 2.5(1) 2.1(2) 2.8(3)
------ ------ ------
Average common shares
outstanding on a diluted
basis................... 90.6 90.0 92.0
------ ------ ------
Diluted earnings per
share..................... $ 2.39 $ 2.94 $ 2.53
====== ====== ======
</Table>
- ------------
(1) Options to purchase 12,923 shares of common stock at an average price of
$45.87 per share were outstanding at December 31, 2001 but were not included
in the computation of diluted EPS, because the options' exercise prices were
greater than the annual average market price of the common shares. These
options expire in 2011.
(2) Options to purchase 3,429,883 shares of common stock at an average price of
$36.34 per share were outstanding at December 31, 2000 but were not included
in the computation of diluted EPS, because the options' exercise prices were
greater than the annual average market price of the common shares. These
options expire between 2008 and 2010.
(3) 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 prices were
greater than the annual average market price of the common shares. These
options expire in 2009.
NOTE 8
RECEIVABLES, NET
Receivables consist of the following:
<Table>
<Caption>
December 31,
---------------
2001 2000
------ ------
<S> <C> <C>
Trade................................ $735.8 $820.0
Other................................ 27.6 15.9
Less -- allowance for doubtful
accounts........................... (21.7) (21.0)
------ ------
$741.7 $814.9
====== ======
</Table>
NOTE 9
INVENTORIES, NET
Inventories consist of the following:
<Table>
<Caption>
December 31,
---------------
2001 2000
------ ------
<S> <C> <C>
Finished goods....................... $152.0 $153.2
Work in process...................... 172.3 169.7
Raw materials........................ 272.0 252.2
Less -- progress payments............ (67.4) (43.8)
------ ------
$528.9 $531.3
====== ======
</Table>
In the Defense Electronics & Services segment, work in process includes
recoverable direct costs and allocable overhead, including general and
administrative expenses where appropriate. Work in process also includes
unbilled receivables representing accumulated recoverable costs and earned
profits on contracts in process which have been recorded as sales, but have not
yet been billed to customers. The unbilled balances were approximately $33 and
$27 at December 31, 2001 and 2000, respectively.
Advances from customers representing amounts in excess of costs incurred
are included in accounts payable for reporting purposes. Management estimates
that work in process will be substantially realized within one year.
F-17
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10
OTHER CURRENT ASSETS
At December 31, 2001 and 2000, other current assets consist primarily of
advance payments on contracts, prepaid expenses and capitalized tooling costs.
NOTE 11
PLANT, PROPERTY AND EQUIPMENT, NET
Plant, property and equipment consists of the following:
<Table>
<Caption>
December 31,
---------------------
2001 2000
--------- ---------
<S> <C> <C>
Land and improvements........... $ 55.3 $ 59.3
Buildings and improvements...... 370.1 370.8
Machinery and equipment......... 1,211.3 1,202.0
Construction work in progress... 91.8 99.8
Other........................... 373.0 393.7
--------- ---------
2,101.5 2,125.6
Less -- accumulated depreciation
and amortization.............. (1,310.5) (1,260.2)
--------- ---------
$ 791.0 $ 865.4
========= =========
</Table>
NOTE 12
GOODWILL, NET
Goodwill consists of the following:
<Table>
<Caption>
December 31,
--------------------
2001 2000
-------- --------
<S> <C> <C>
Goodwill......................... $1,551.1 $1,474.7
Less -- accumulated
amortization................... (141.1) (101.7)
-------- --------
$1,410.0 $1,373.0
======== ========
</Table>
NOTE 13
OTHER ASSETS
At December 31, 2001 and 2000, other assets primarily consist of prepaid
pension and employee benefit plan costs, investments in unconsolidated
companies, assets held in trusts, other receivables, and other intangible
assets. Assets held in trusts are restricted for specified reasons, primarily
environmental remediation costs and employee benefits, and totaled $57.1 and
$67.8 at December 31, 2001 and 2000, respectively.
Investments in unconsolidated companies consist of the following:
<Table>
<Caption>
December 31,
--------------
2001 2000
----- -----
<S> <C> <C>
Investments accounted for under the
equity method:
Motion & Flow Control 50% ownership
of HISAN joint venture............ $ 8.5 $ 7.6
Fluid Technology 40% ownership in
Sam McCoy, Malaysia............... 3.1 3.1
Fluid Technology other
investments....................... 2.6 2.5
Investments accounted for under the
cost method:
Defense Electronics & Services
investment in DigitalGlobe Inc.
convertible preferred stock....... 25.0 25.0
Defense Electronics & Services
investment in DigitalGlobe Inc.
13% debentures.................... 13.7 --
Defense Electronics & Services
investment in Mesh Networks....... 5.9 5.9
Other............................... 4.0 8.0
----- -----
$62.8 $52.1
===== =====
</Table>
During 2001, 2000 and 1999, the Company recorded sales to unconsolidated
affiliates totaling $22.6, $23.4 and $20.4, respectively. In addition, the
Company provided services to unconsolidated affiliate companies in 2001, 2000
and 1999 and received $0.4, $0.4 and $0.5, respectively, in exchange for these
services. For all investments in unconsolidated companies, the Company's
exposure is limited to the amount of the investment. All investments accounted
for under the cost method represent voting right interests of less than 20%.
The HISAN joint venture is a brake and fuel line supplier to Japanese
transplant OEM's in the United States. Annual sales of HISAN are approximately
$100. DigitalGlobe Inc. (formerly known as EarthWatch, Inc.) is a developmental
stage company that recently launched a satellite capable of collecting
high-resolution digital imagery of the earth's surface, as well as a
comprehensive image collection, enhancement and digital archive system.
NOTE 14
LEASES AND RENTALS
The Company leases certain offices, manufacturing buildings, land,
machinery, automobiles, aircraft, computers, and other equipment.
F-18
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $50.1, $55.5 and $51.8 for
2001, 2000 and 1999, respectively. Future minimum operating lease payments under
long-term operating leases as of December 31, 2001 are shown below.
<Table>
<S> <C>
2002................................ $ 55.3
2003................................ 43.6
2004................................ 38.6
2005................................ 30.3
2006................................ 26.5
2007 and thereafter................. 166.4
------
Total minimum lease payments........ $360.7
======
</Table>
NOTE 15
DEBT
Debt consists of the following:
<Table>
<Caption>
December 31,
----------------
2001 2000
------ ------
<S> <C> <C>
Commercial paper.................... $441.3 $445.3
Short-term loans.................... 73.0 110.8
Current maturities of long-term
debt.............................. 2.7 73.8
------ ------
Notes payable and current maturities
of long-term debt................. $517.0 $629.9
====== ======
</Table>
<Table>
<Caption>
INTEREST
LONG-TERM DEBT MATURITY RATE 2001 2000
- -------------- -------- -------- ------ ------
<S> <C> <C> <C> <C>
Notes and
debentures:........ 7/1/2001 6.500% $ -- $ 58.6
8/1/2001 8.250% -- 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 (1) 41.0 41.0
Other................ 2001 - 2014 (2) 23.6 21.3
Interest rate swaps.......................... 42.5 --
------ ------
Subtotal notes and debentures................ 485.6 513.0
Less -- unamortized discount................. (26.5) (30.8)
------ ------
Long-term debt............................... 459.1 482.2
Less -- current maturities................... (2.7) (73.8)
------ ------
Net long-term debt........................... $456.4 $408.4
====== ======
</Table>
- ------------
(1) The interest rate for the note/debenture was 2.04% and 6.60% at December 31,
2001 and 2000, respectively.
(2) The weighted average interest rate was 5.50% and 6.80% at December 31, 2001
and 2000, respectively.
Principal payments required on long-term debt for the next five years are:
<Table>
<Caption>
2002 2003 2004 2005 2006
---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$2.7 $17.3 $1.3 $3.4 $3.4
==== ===== ==== ==== ====
</Table>
The weighted average interest rate for short-term borrowings was 2.69% and
7.10% at December 31, 2001 and 2000, respectively. The fair value of the
Company's short-term loans approximates carrying value. The fair value of the
Company's long-term debt is estimated based on comparable Corporate debt with
similar remaining maturities. As of December 31, 2001, the fair value of the
long-term debt was $493.1, compared to the fair value of $560.0 at December 31,
2000. The year to year decrease in fair value reflects the repayment of two
notes with notional amounts totaling $72.2 partially
F-19
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
offset by the impact of the decline in interest rates experienced during 2001.
In November 2000, the Company entered into a revolving credit agreement,
which expires in November 2005, with 20 domestic and foreign banks providing
aggregate commitments of $1.0 billion. The interest rate for borrowings under
these agreements is generally based on the London Interbank Offered Rate
("LIBOR"), plus a spread, which reflects the Company's debt rating. The
provisions of these agreements require that the Company maintain an interest
coverage ratio, as defined, of 3.75 times. At December 31, 2001, the Company's
coverage ratio was well in excess of the minimum requirement. The commitment fee
on the revolving credit agreement is .125% of the total commitment, based on the
Company's current debt ratings. The revolving credit agreement serves as backup
for the commercial paper program and is not otherwise restricted.
Assets pledged to secure indebtedness (including mortgage loans) amounted
to approximately $37.0 as of December 31, 2001.
NOTE 16
FINANCIAL INSTRUMENTS
The Company uses a variety of derivative financial instruments, including
interest rate swaps, foreign currency forward contracts and/ or swaps, and on a
limited basis, commodity collar contracts, as a means of hedging exposure to
interest rate, foreign currency, and commodity price risks.
The Company's credit risk associated with these derivative contracts is
generally limited to the unrealized gain on those contracts with a positive fair
market value, reduced by the effects of master netting agreements, should any
counterparty fail to perform as contracted. The counterparties to the Company's
derivative contracts consist of a number of major, international financial
institutions. The Company continually monitors the credit quality of these
financial institutions and does not expect non-performance by any counterparty.
FINANCING STRATEGIES AND INTEREST RATE
RISK MANAGEMENT:
The Company maintains a multi-currency debt portfolio to fund its
operations. The Company at times uses interest rate swaps to manage the
Company's debt portfolio, the related financing costs, and interest rate
structure.
At December 31, 2001, the Company had interest rate swaps outstanding with
notional values totaling $349.4. The carrying value of the swaps at December 31,
2001 was $46.2, including $3.7 of accrued interest. The swaps were designed to
manage the interest rate exposure associated with certain long-term debt. The
swaps mature at various dates through 2025 and effectively convert much of the
long-term debt mentioned in Note 15 above from fixed to variable rate
borrowings. The variable interest rates are based on 3-month LIBOR rates plus a
spread, which reflects the Company's debt rating, and the coupon of the
underlying long-term obligations. The weighted average variable and fixed
interest rates were 2.01% and 7.45% at December 2001. There were no ineffective
portions of the interest rate swaps and no amounts were excluded from the
assessment of effectiveness.
FOREIGN CURRENCY RISK MANAGEMENT:
The Company has significant foreign operations and conducts business in
various foreign currencies. The Company may periodically hedge net investments
in currencies other than its own functional currency and non-functional currency
cash flows and obligations, including intercompany financings. Changes in the
spot rate of debt instruments designated as hedges of the net investment in a
foreign subsidiary are reflected in the cumulative translation adjustment
component of shareholders' equity. The Company regularly monitors its foreign
currency exposures and ensures that hedge contract amounts do not exceed the
amounts of the underlying exposures.
As of December 31, 2001, the Company had one foreign currency cash flow
hedge that had an appreciation of less than $0.1 during 2001. The appreciation
in the hedge is expected to be reclassified into earnings during
F-20
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002, but may vary from 2001 results due to changes in market conditions. There
were no changes in the forecasted transactions during 2001 regarding their
probability of occurring, which would require amounts to be reclassified to
earnings.
The notional amounts of the foreign currency forward contract utilized to
hedge cash flow exposures was $1.1 at December 31, 2001. There were no foreign
currency forward contracts utilized to hedge cash flow exposures as of December
31, 2000. The applicable fair value of the 2001 contract at December 31, 2001
was $1.1. This contract will mature during the first quarter of 2002. There was
no ineffective portion of changes in fair values of cash flow hedge positions
reported in earnings for the twelve months ended December 31, 2001 and no
amounts were excluded from the measure of effectiveness reported in earnings
during the twelve months ended December 31, 2001.
At December 31, 2001 and 2000, the Company had foreign forward contracts
with notional amounts of $50.3 and $60.0, respectively, to hedge the value of
recognized assets, liabilities and firm commitments. The fair values of the
contracts were net short positions of $11.5 and $0.6 at December 31, 2001 and
2000, respectively. The ineffective portion of changes in fair values of such
hedge positions reported in operating income during 2001 amounted to $0.6. There
were no amounts excluded from the measure of effectiveness.
The fair values associated with the foreign currency contracts have been
valued using the net position of the contracts and the applicable spot rates and
forward rates as of the reporting date.
NOTE 17
EMPLOYEE BENEFIT PLANS
PENSION PLANS:
The Company sponsors numerous defined benefit pension plans. The Company
funds employee pension benefits, except in some countries outside the U.S. where
funding is not required. 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 $0.4, $1.5, and
$1.3 for the years ended 2001, 2000, and 1999, respectively.
POSTRETIREMENT HEALTH AND LIFE INSURANCE PLANS:
The Company provides health care and life insurance benefits for certain
eligible retired employees. The Company has pre-funded a portion of the health
care and life insurance obligations, where such pre-funding can be accomplished
on a tax effective basis. 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 $23.9, $19.1, $18.2
for the years ended 2001, 2000, and 1999, respectively.
F-21
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the benefit obligations, changes in plan assets, the weighted
average assumptions and the components of net periodic benefit cost for the
years ended 2001, 2000, and 1999 were as follows:
<Table>
<Caption>
PENSION OTHER BENEFITS
--------------------- -------------------
2001 2000 2001 2000
-------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.......................... $3,442.3 $3,091.0 $ 470.5 $ 425.1
Service cost................................................... 58.9 56.7 5.0 4.3
Interest cost.................................................. 246.2 241.4 34.7 33.2
Amendments made during the year................................ 26.7 0.9 -- (10.3)
Actuarial (gain) loss.......................................... 96.1 280.3 25.1 54.9
Obligations of acquired companies.............................. -- 19.8 -- --
Benefits paid.................................................. (238.7) (232.4) (38.7) (36.7)
Effect of currency translation................................. (14.5) (15.4) -- --
-------- -------- ------- -------
Benefit obligation at end of year.............................. $3,617.0 $3,442.3 $ 496.6 $ 470.5
======== ======== ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year................. $3,652.1 $3,859.5 $ 241.1 $ 255.7
Actual return on plan assets................................... (189.6) (9.8) (6.5) (0.7)
Assets of acquired companies................................... -- 23.3 -- --
Employer contributions......................................... 12.5 6.9 -- --
Employee contributions......................................... 0.6 0.7 -- --
Benefits paid.................................................. (225.5) (218.4) (21.3) (13.9)
Effect of currency translation................................. (16.6) (10.1) -- --
-------- -------- ------- -------
Fair value of plan assets at end of year....................... $3,233.5 $3,652.1 $ 213.3 $ 241.1
======== ======== ======= =======
Funded status.................................................. $ (383.5) $ 209.8 $(283.3) $(229.4)
Unrecognized net transition asset.............................. 0.8 0.7 -- --
Unrecognized net actuarial (gain) loss......................... 444.8 (188.0) 106.3 58.8
Unrecognized prior service cost................................ 35.5 42.1 (18.9) (24.8)
Minimum pension liability adjustment........................... (35.8) (25.2) -- --
-------- -------- ------- -------
Prepaid (accrued) benefit cost recognized in the balance
sheet........................................................ $ 61.8 $ 39.4 $(195.9) $(195.4)
======== ======== ======= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount rate.................................................. 7.14% 7.39% 7.25% 7.50%
Expected return on plan assets................................. 9.61% 9.73% 9.75% 9.75%
Rate of future compensation increase........................... 4.89% 4.90% 5.00% 5.00%
</Table>
<Table>
<Caption>
PENSION OTHER BENEFITS
------------------------------- ----------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................. $ 58.9 $ 56.7 $ 70.9 $ 5.0 $ 4.3 $ 5.1
Interest cost................................ 246.2 241.4 216.7 34.7 33.2 30.6
Expected return on plan assets............... (325.2) (302.8) (270.8) (22.5) (24.0) (19.4)
Amortization of transitional asset........... (0.3) (5.8) (5.8) -- -- --
Amortization of net actuarial (gain) loss.... 2.3 1.7 9.8 2.1 (0.7) 0.2
Amortization of prior service cost........... 9.0 8.6 8.3 (5.9) (5.9) (4.7)
Effect of plan curtailment................... -- -- -- -- -- (3.1)
------- ------- ------- ------ ------ ------
Net periodic benefit cost.................... $ (9.1) $ (0.2) $ 29.1 $ 13.4 $ 6.9 $ 8.7
------- ------- ------- ------ ------ ------
</Table>
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 8.0% for 2001. The rate was assumed to be 10.0%
for 2002, decreasing
F-22
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ratably to 5.0% in 2007. Increasing the table of health care trend rates by one
percent per year would have the effect of increasing the benefit obligation by
$26.9 and the aggregate service and interest cost components by $2.4. A decrease
of one percent in the trend rate would reduce the benefit obligation by $23.0
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.
The determination of the assumptions shown in the table above and the
discussion of health care trend rates is based on the provisions of the
applicable Financial Accounting Standards, the review of various indexes,
discussion with our consulting actuaries and the review of competitive surveys
in the geographic areas where the plans are sited. Changes in these assumptions
would affect the financial condition and results of operations of the Company.
NOTE 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
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, 2001 and 2000, 56,361,307 and 57,243,719 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, except
in certain instances of death, retirement or disability. Certain options become
exercisable upon the earlier of the attainment of specified market price
appreciation of the Company's common shares or at nine years after the date of
grant. Other options become exercisable upon the earlier of the attainment of
specified market price appreciation of the Company's common shares or over a
three-year period commencing with the date of grant. The exercise price per
share is the fair market value on the date each option is granted. The Company
makes shares available for the exercise of stock options by purchasing shares in
the open market or by issuing shares from treasury.
F-23
<PAGE>
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, 2001, 2000, and 1999, and changes during the years then ended is
presented below (shares in thousands):
<Table>
<Caption>
2001 2000 1999
------------------------- ------------------------- -------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................. 11,856 $26.15 11,752 $23.95 12,175 $21.24
Granted................... 2,077 37.14 1,938 33.13 1,835 39.22
Exercised................. (4,415) 24.72 (1,737) 18.89 (2,166) 21.06
Canceled or expired....... (92) 28.88 (97) 29.06 (92) 38.23
------ ------ ------ ------ ------ ------
Outstanding at end of
year.................... 9,426 $29.21 11,856 $26.15 11,752 $23.95
====== ====== ====== ====== ====== ======
Options exercisable at
year-end................ 8,636 $28.22 8,721 $22.81 10,030 $21.34
====== ====== ====== ====== ====== ======
Weighted-average fair
value of options granted
during the year......... $11.04 $10.78 $ 9.50
====== ====== ======
</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" ("SFAS No. 123"), the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:
<Table>
<Caption>
2001 2000 1999
------ ------ ------
<S> <C> <C> <C>
Net income
As reported............................................... $276.7 $264.5 $232.9
Pro forma................................................. 249.6 252.5 221.8
Basic earnings per share
As reported............................................... $ 3.14 $ 3.01 $ 2.61
Pro forma................................................. 2.83 2.87 2.49
Diluted earnings per share
As reported............................................... $ 3.05 $ 2.94 $ 2.53
Pro forma................................................. 2.75 2.81 2.41
------ ------ ------
</Table>
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 2001, 2000, and 1999: dividend yield of 1.89%, 1.99%,
and 2.01% respectively; expected volatility of 27.61%, 26.79%, and 21.06%,
respectively; expected life of six years; and risk-free interest rates of 4.91%,
6.73%, and 4.82%, respectively.
F-24
<PAGE>
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, 2001 (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>
$15.69 - 15.72.......... 1,535 2.3 years $15.71 1,535 $15.71
20.32 - 28.38.......... 2,442 4.1 years 23.15 2,442 23.15
30.31 - 34.81.......... 2,342 7.2 years 32.35 2,342 32.35
35.25 - 46.04.......... 3,107 8.1 years 38.27 2,317 37.69
----- -----
9,426 8,636
----- -----
</Table>
As of December 31, 2001, 4,175,776 shares were available for future grants.
Effective January 1, 2002, option shares available for future grants increased
by 2,177,220 as a result of the annual limitation formula established in the
1994 ITT Industries 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. There were no restricted stock amounts in
2001 or 2000. In 1999, 30,000 shares of restricted stock were awarded under this
plan.
During 2001, 2000, and 1999, pursuant to the ITT Industries 1996 Restricted
Stock Plan for Non-Employee Directors, the Company awarded 7,469, 13,626, and
10,248 restricted shares with five-year restriction periods, respectively, in
payment of the annual retainer for such directors. Restrictions may lapse
earlier depending on certain circumstances.
NOTE 19
COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions including, among other
things, those related to government contracts and environmental matters. Some of
these actions include claims for substantial amounts. Accruals 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, 2001,
the Company is responsible, or is 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 a settlement, and a
consent decree requiring the PRPs to perform additional remedial activities was
entered in August 2000.
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,
F-25
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company is seeking recovery of costs it incurred in connection with the
Glendale case and other environmental matters. In April 1999, the California
Superior Court granted partial summary judgment under California law, dismissing
certain claims in the California action. The California Court of Appeals
accepted the Company's petition for review of the California Superior Court's
order and in March 2001, dismissed the petition without prejudice, allowing the
Company to reassert two of its arguments in the California Superior Court. ITT
presented those arguments to the Court, and in January 2002, the Court dismissed
a number of sites from the California case. The Company is considering whether
to appeal. 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.
The Company and its subsidiaries from time to time are involved in legal
proceedings that are incidental to the operation of their businesses. Some of
these proceedings allege damages against the Company relating to environmental
liabilities (including toxic tort, property damage and remediation),
intellectual property matters (including patent, trademark and copyright
infringement, and licensing disputes), personal injury claims (including
injuries due to product failure, design or warnings issues, asbestos exposure,
or other product liability related matters), employment and pension matters, and
commercial or contractual disputes, sometimes related to acquisitions or
divestitures. The Company will continue to vigorously defend itself against all
claims. Although the ultimate outcome of any legal matter cannot be predicted
with certainty, based on present information including the Company's assessment
of the merits of the particular claim, as well as its current reserves and
insurance coverage, the Company does not expect that such legal proceedings will
have any material adverse impact on the cash flow, results of operations, or
financial condition of the Company on a consolidated basis in the foreseeable
future.
F-26
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20
BUSINESS SEGMENT INFORMATION
<Table>
<Caption>
DEFENSE MOTION CORPORATE,
FLUID ELECTRONICS & FLOW ELECTRONIC ELIMINATIONS
TECHNOLOGY & SERVICES CONTROL COMPONENTS & OTHER TOTAL
---------- ----------- ------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
2001
Sales and revenues.......................... $1,829.7 $1,304.8 $898.7 $ 647.0 $ (4.5) $4,675.7
Operating income:
Before restructuring and other special
items................................... 218.4 123.6 117.7 85.9 (51.1) 494.5
Restructuring and other special items..... (16.0) -- (8.1) (69.6) (4.0) (97.7)
-------- -------- ------ ------- ------- --------
After restructuring and other special
items................................... 202.4 123.6 109.6 16.3 (55.1) 396.8
Earnings (loss) of unconsolidated
companies................................. 0.1 1.4 1.0 -- -- 2.5
-------- -------- ------ ------- ------- --------
Total segment profit (loss)................. 202.5 125.0 110.6 16.3 (55.1) 399.3
Net interest expense........................ (62.0)
Miscellaneous expense(a).................... (3.9)
--------
Income from continuing operations before
income tax................................ $ 333.4
========
Long-lived assets........................... 321.6 141.8 199.0 123.6 5.0 791.0
Investments in unconsolidated companies..... 6.9 47.4 8.5 -- -- 62.8
Total assets................................ 1,616.4 793.7 635.6 714.1 748.6 4,508.4
Gross plant additions....................... 55.6 31.0 43.1 44.0 0.3 174.0
Depreciation................................ 54.5 24.9 33.8 38.2 1.8 153.2
Amortization................................ 22.3 8.7 8.7 14.8 5.2 59.7
-------- -------- ------ ------- ------- --------
2000
Sales and revenues.......................... $1,834.2 $1,334.6 $888.9 $ 774.6 $ (2.9) $4,829.4
Operating income............................ 206.2 117.3 124.3 99.0 (53.7) 493.1
Earnings (loss) of unconsolidated
companies................................. (0.5) 2.2 1.8 -- -- 3.5
-------- -------- ------ ------- ------- --------
Total segment profit (loss)................. 205.7 119.5 126.1 99.0 (53.7) 496.6
Net interest expense........................ (75.2)
Miscellaneous expense(a).................... (1.5)
--------
Income before income tax expense............ $ 419.9
========
Long-lived assets........................... 343.3 138.8 198.1 160.9 24.3 865.4
Investments in unconsolidated companies..... 6.9 37.2 7.6 0.4 -- 52.1
Total assets................................ 1,656.8 861.0 676.3 751.8 665.5 4,611.4
Gross plant additions....................... 55.6 35.1 44.6 45.8 (0.5) 180.6
Depreciation................................ 55.1 26.1 31.4 35.7 2.3 150.6
Amortization................................ 18.4 8.5 8.3 10.0 6.0 51.2
-------- -------- ------ ------- ------- --------
1999
Sales and revenues.......................... $1,814.3 $1,413.9 $877.9 $ 516.0 $ 10.1 $4,632.2
Operating income:
Before restructuring and other special
items................................... 173.6 108.8 123.7 62.1 (57.6) 410.6
Restructuring and other special items..... (6.0) 3.9 (3.0) 9.7 -- 4.6
-------- -------- ------ ------- ------- --------
After restructuring and other special
items................................... 167.6 112.7 120.7 71.8 (57.6) 415.2
Earnings (loss) of unconsolidated
companies................................. (0.2) 2.1 1.2 -- -- 3.1
-------- -------- ------ ------- ------- --------
Total segment profit (loss)................. 167.4 114.8 121.9 71.8 (57.6) 418.3
Net interest expense........................ (46.8)
Miscellaneous expense(a).................... (1.8)
--------
Income before income tax expense............ $ 369.7
========
Long-lived assets........................... 346.0 146.0 190.7 137.0 27.3 847.0
Investments in unconsolidated companies..... 8.5 29.9 6.2 0.5 -- 45.1
Total assets................................ 1,712.0 839.1 700.0 463.6 744.9 4,459.6
Gross plant additions....................... 73.3 55.7 42.4 55.7 0.8 227.9
Depreciation................................ 56.3 26.0 31.5 28.1 2.4 144.3
Amortization................................ 18.6 3.1 6.8 0.8 7.5 36.8
-------- -------- ------ ------- ------- --------
</Table>
- ------------
(a) Excludes earnings of companies on an equity basis.
F-27
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
NET SALES AND REVENUES LONG-LIVED ASSETS
-------------------------------- --------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
GEOGRAPHICAL INFORMATION
United States................................... $2,781.8 $2,830.4 $2,696.1 $453.9 $497.3 $504.1
Western Europe.................................. 1,179.5 1,216.2 1,194.7 268.1 297.2 282.0
Asia Pacific.................................... 295.1 362.1 339.7 43.5 46.7 48.5
Other........................................... 419.3 420.7 401.7 25.5 24.2 12.4
-------- -------- -------- ------ ------ ------
Total Segments.................................. $4,675.7 $4,829.4 $4,632.2 $791.0 $865.4 $847.0
======== ======== ======== ====== ====== ======
</Table>
Sales and revenue by product category, net of intercompany balances, is as
follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Sales and Revenues by
Product Category
Pumps & Complementary
Products.............. $1,727.5 $1,750.3 $1,732.0
Defense Services........ 713.4 588.4 554.5
Connectors & Switches... 609.4 734.0 476.2
Defense Products........ 583.2 730.3 844.4
Fluid Handling.......... 437.3 425.6 429.4
Flow Control............ 166.5 159.1 117.0
Engineered Valves....... 102.1 83.7 81.9
Brakes.................. 146.6 140.0 157.4
Shock Absorbers......... 77.0 82.6 90.3
Marine Products......... 68.1 78.2 79.7
Network Systems &
Services.............. 36.3 40.6 39.8
Other................... 8.3 16.6 29.6
-------- -------- --------
Total................... $4,675.7 $4,829.4 $4,632.2
======== ======== ========
</Table>
Defense Electronics & Services had sales and revenues from the United
States government of $1,104.9, $1,023.6, and $1,054.0, for 2001, 2000, and 1999,
respectively. Apart from the United States government, no other government or
commercial customer accounted for 10% or more of sales and revenues for the
Company.
FLUID TECHNOLOGY:
This segment contains the Company's pump businesses, including brands such
as Flygt(R), Goulds(R), Bell & Gossett(R), A-C Pump(R), Lowara(R), Vogel(R), and
Richter(TM), making the Company the world's largest pump producer. Businesses
within this segment also supply mixers, heat exchangers, engineered valves 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 39% of the Company's sales and revenues and approximately 40% of
its segment operating income for 2001, excluding restructuring and other special
items.
DEFENSE ELECTRONICS & SERVICES:
The businesses in this segment are those that directly serve the military
and government agencies with products and services. These include air traffic
control systems, jamming devices that guard military planes against radar guided
missiles, digital combat radios, night vision devices and satellite instruments.
Approximately 44% 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 85%, 77%, and 75%
of 2001, 2000, and 1999 Defense Electronics & Services sales and revenues,
respectively, were to the U.S. government. The Defense Electronics & Services
segment represents about 28% of the Company's sales and revenues and 23% of its
segment operating income in 2001, excluding restructuring and other special
items.
MOTION & FLOW CONTROL:
Businesses in the Motion & Flow Control segment produce switches and valves
for industrial and aerospace applications, products for the marine and leisure
markets under the brands Jabsco(R), Rule(R) and Danforth(R), fluid handling
materials such as tubing systems and connectors for various automotive and
industrial markets, and specialty shock absorbers under the brand Koni(R), and
brake friction materials for the transportation industry. The Motion & Flow
Control segment accounts for approximately 19% of the Company's sales and
revenues and approximately 21% of its segment operating income for 2001,
excluding restructuring and other special items.
F-28
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ELECTRONIC COMPONENTS:
This business consists of the Company's products marketed under the
Cannon(R) brand. These products include connectors, switches and cabling used in
communications, computing, aerospace and industrial applications as well as
network services. This segment represents about 14% of the Company's sales and
revenues and 16% of its segment operating income for 2001, excluding
restructuring and other special items.
CORPORATE AND OTHER:
This primarily includes the operating results and assets of Corporate
Headquarters.
F-29
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21
QUARTERLY RESULTS FOR 2001 AND 2000
<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>
2001
Sales and revenues....................................... $1,186.0 $1,184.3 $1,123.6 $1,181.8 $4,675.7
Costs of sales and revenues(a)........................... 878.8 875.9 837.3 877.2 3,469.2
Income from continuing operations........................ 59.1 76.1 67.5 14.0 216.7
Net income............................................... 59.1 76.1 67.5 74.0 276.7
Income from continuing operations per share
-- Basic(b)............................................ $ 0.67 $ 0.87 $ 0.77 $ 0.16 $ 2.46
-- Diluted............................................. $ 0.65 $ 0.84 $ 0.75 $ 0.15 $ 2.39
Net income per share
-- Basic(b)............................................ $ 0.67 $ 0.87 $ 0.77 $ 0.84 $ 3.14
-- Diluted............................................. $ 0.65 $ 0.84 $ 0.75 $ 0.81 $ 3.05
Common stock information
Price range:
High................................................... $ 44.25 $ 49.00 $ 46.20 $ 52.00 $ 52.00
Low.................................................... $ 35.55 $ 37.95 $ 42.00 $ 43.19 $ 35.55
Close.................................................. $ 38.75 $ 44.25 $ 44.80 $ 50.50 $ 50.50
Dividends per share...................................... $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.60
-------- -------- -------- -------- --------
2000
Sales and revenues....................................... $1,210.0 $1,227.5 $1,176.7 $1,215.2 $4,829.4
Costs of sales and revenues(a)........................... 911.0 915.9 873.5 886.1 3,586.5
Income from continuing operations........................ 51.3 70.2 64.9 78.1 264.5
Net income............................................... 51.3 70.2 64.9 78.1 264.5
Income from continuing operations per share
-- Basic............................................... $ 0.58 $ 0.80 $ 0.74 $ 0.89 $ 3.01
-- Diluted............................................. $ 0.57 $ 0.78 $ 0.72 $ 0.87 $ 2.94
Net income per share
-- Basic............................................... $ 0.58 $ 0.80 $ 0.74 $ 0.89 $ 3.01
-- Diluted............................................. $ 0.57 $ 0.78 $ 0.72 $ 0.87 $ 2.94
Common stock information
Price range:
High................................................... $ 34.94 $ 36.19 $ 34.94 $ 39.63 $ 39.63
Low.................................................... $ 22.38 $ 28.63 $ 29.63 $ 29.75 $ 22.38
Close.................................................. $ 31.06 $ 30.38 $ 32.44 $ 38.75 $ 38.75
Dividends per share...................................... $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.60
-------- -------- -------- -------- --------
</Table>
- ------------
(a) Includes research, development, and engineering expenses.
(b) The sum of the quarters' earnings per share does not equal the full year
amounts due to rounding.
The above table reflects the range of market prices of the Company's common
stock for 2001 and 2000. The prices are as reported in the consolidated
transaction reporting system of the New York Stock Exchange, the principal
market in which the Company's common stock is traded, under the symbol "ITT."
The Company's common stock is listed on the following exchanges: Frankfurt,
London, Midwest, New York, Pacific, and Paris.
During the period from January 1, 2002 through February 28, 2002, the high
and low reported market prices of the Company's common stock were $59.85 and
$45.80, respectively. The Company declared dividends of $0.15 per common share
in the first quarter of 2002. There were approximately 34,869 holders of record
of the Company's common stock on February 28, 2002.
F-30
<PAGE>
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, 2001
Trade Receivables -- Allowance for
doubtful accounts................ $ 21.0 $ 5.9 $(0.7) $ (4.5) $ 21.7
Restructuring...................... 18.5 61.0 -- (27.6) 51.9
YEAR ENDED DECEMBER 31, 2000
Trade Receivables -- Allowance for
doubtful accounts................ $ 22.1 $ 9.0 $(0.9) $ (9.2) $ 21.0
Restructuring...................... 44.7 -- -- (26.2) 18.5
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
</Table>
S-1
<PAGE>
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
SENIOR VICE PRESIDENT AND
CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
March 26, 2002
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/ LOUIS J. GIULIANO Chairman, President and Chief March 5, 2002
- ------------------------------------------ Executive Officer and Director
LOUIS J. GIULIANO
(PRINCIPAL EXECUTIVE OFFICER)
/s/ DAVID J. ANDERSON Senior Vice President and Chief March 5, 2002
- ------------------------------------------ Financial Officer
DAVID J. ANDERSON
(PRINCIPAL FINANCIAL OFFICER)
/s/ RAND V. ARASKOG Director March 5, 2002
- ------------------------------------------
RAND V. ARASKOG
/s/ CURTIS J. CRAWFORD Director March 5, 2002
- ------------------------------------------
CURTIS J. CRAWFORD
/s/ CHRISTINA A. GOLD Director March 5, 2002
- ------------------------------------------
CHRISTINA A. GOLD
/s/ JOHN J. HAMRE Director March 5, 2002
- ------------------------------------------
JOHN J. HAMRE
/s/ RAYMOND W. LEBOEUF Director March 5, 2002
- ------------------------------------------
RAYMOND W. LEBOEUF
/s/ FRANK T. MACINNIS Director March 5, 2002
- ------------------------------------------
FRANK T. MACINNIS
/s/ LINDA S. SANFORD Director March 5, 2002
- ------------------------------------------
LINDA S. SANFORD
/s/ MARKOS I. TAMBAKERAS Director March 5, 2002
- ------------------------------------------
MARKOS I. TAMBAKERAS
</Table>
II-1
<PAGE>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION LOCATION
<C> <C> <S> <C>
3
(a) ITT Industries, Inc.'s Restated
Articles of Incorporation........... Incorporated by reference to Exhibit
3(i) to ITT Industries' Form 10-Q for
the quarterly period ended June 30,
1997 (CIK No. 216228, File No.
1-5627).
(b) Form of Rights Agreement between ITT
Indiana, Inc. and The Bank of New
York, as Rights Agent............... Incorporated by reference to Exhibit 1
to ITT Industries' Form 8-A dated
December 20, 1995 (CIK No. 216228,
File No. 1-5627).
(c) ITT Industries, Inc.'s By-laws, as
amended............................. Incorporated by reference to Exhibit
3(c) to ITT Industries' Form 10-K for
the fiscal year ended December 31,
1999 (CIK No. 216228, File No.
1-5627).
4 Instruments defining the rights of security
holders, including indentures.............. Not required to be filed. The
Registrant hereby agrees to file with
the Commission a copy of any
instrument defining the rights of
holders of long-term debt of the
Registrant and its consolidated
subsidiaries upon request of the
Commission.
9 Voting Trust Agreement..................... None.
10 Material contracts
(a) ITT Industries 1997 Long-Term
Incentive Plan...................... Incorporated by reference to Appendix
II to ITT Industries' Proxy Statement
dated March 26, 1997 (CIK No.
216228, File No. 1-5627).
(b) ITT Industries 1997 Annual Incentive
Plan for Executive Officers......... Incorporated by reference to Appendix
I to ITT Industries' Proxy Statement
dated March 26, 1997 (CIK No.
216228, File No. 1-5627).
(c) Form of 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 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>
<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 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 1996 Restricted Stock
Plan for Non-Employee Directors, as
amended............................. Incorporated by reference to Exhibit
10(a) to ITT Industries' Form 10-Q
for the quarterly period ended
September 30, 2000 (CIK No. 216228,
File No. 1-5627).
(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, 2000....... Incorporated by reference to Exhibit
10 to ITT Industries' Form 8-K Current
Report dated November 20, 2000 (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>
<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).
(r) ITT Industries Deferred Compensation
Plan................................ Incorporated by reference to Exhibit
10(r) to ITT Industries' Form 10-K
for the fiscal year ended December
31, 2000 (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 Incorporated by reference to Exhibit
accountant................................. 16 to ITT Industries' From 8-K Current
Report dated March 26, 2002 (CIK No.
216228, File No. 1-5627).
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.
99 Additional exhibits........................
99.1 Letter to the Securities and Exchange
Commission regarding letter of
representations from Arthur Andersen LLP
concerning December 31, 2001 audit......... Filed herewith.
</Table>
II-4
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>3
<FILENAME>y55533ex12.txt
<DESCRIPTION>STATEMENT RE COMPUTATION OF RATIOS
<TEXT>
<PAGE>
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,
-----------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) from continuing
operations............................ $216.7 $264.5 $232.9 $ (97.6) $ 11.9
Add (deduct):
Adjustment for distributions in excess
of (less than) undistributed equity
earnings and losses(a)............. (2.5) (3.5) (3.1) 1.1 2.1
Income taxes (benefits)............... 116.7 155.4 136.8 (62.4) 7.6
------ ------ ------ ------- ------
330.9 416.4 366.6 (158.9) 21.6
------ ------ ------ ------- ------
Fixed Charges:
Interest and other financial
charges............................ 68.8 93.1 84.8 125.8 133.2
Interest factor attributable to
rentals(b)......................... 16.7 18.5 17.3 15.1 17.7
------ ------ ------ ------- ------
85.5 111.6 102.1 140.9 150.9
------ ------ ------ ------- ------
Earnings, as adjusted, from continuing
operations............................ $416.4 $528.0 $468.7 $ (18.0) $172.5
====== ====== ====== ======= ======
Fixed Charges:
Fixed charges above................... $ 85.5 $111.6 $102.1 $ 140.9 $150.9
Interest capitalized.................. -- -- -- -- 1.1
------ ------ ------ ------- ------
Total fixed charges................ 85.5 111.6 102.1 140.9 152.0
Dividends on preferred stock
(pre-income tax basis)................ -- -- -- -- --
------ ------ ------ ------- ------
Total fixed charges and preferred
dividend requirements............ $ 85.5 $111.6 $102.1 $ 140.9 $152.0
====== ====== ====== ======= ======
Ratios:
Earnings, as adjusted, from continuing
operations to total fixed
charges(c)......................... 4.87 4.73 4.59 -- 1.13
====== ====== ====== ======= ======
Earnings, as adjusted, from continuing
operations to total fixed charges
and preferred dividend
requirements(c).................... 4.87 4.73 4.59 -- 1.13
====== ====== ====== ======= ======
</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 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) 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.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>y55533ex21.txt
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>
<PAGE>
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
ELECTRONIC COMPONENTS
C & K Components, Inc. ........................ Massachusetts
C & K Components (Hong Kong) Ltd. ............. Hong Kong
C & K Components SA ........................... Costa Rica
C & K Holdings, Inc. .......................... Massachusetts
C & K Holdings (Hong Kong) Ltd. ............... Hong Kong
C & K Holdings (United Kingdom) Ltd. .......... United Kingdom
C & K Switches Ltd. ........................... United Kingdom
Cablecom Electronics (Shenzhen) Co., Ltd. ..... Taiwan
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) Ltd..................... 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 Datacommunications Limited................. United Kingdom ITT Cannon Network Systems
& Services
ITT Industries SAS............................. France
ITT Industries (Tianjin) Co. Ltd. ............. China
ITT Schadow Division........................... N/A
Man Machine Interface Division................. N/A
Nantong San Teh Xing Electronic Industry Co.
Ltd. ........................................ China
Nantong San Teh Xing Precision Mechanical
Engineering Co. Ltd. ........................ China
Rudolf Schadow GmbH............................ Germany
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
STX PTE. LTD. ................................. Singapore
Xiamen San Teh Precision Mechanical Engineering
Co. Ltd. .................................... China
Xiamen San Teh Xing Electronic & Science
Technology Industry Co. ..................... China
DEFENSE ELECTRONICS & SERVICES
Advanced Engineering & Sciences Division....... N/A
Felec Services, Inc. .......................... Delaware
</Table>
<PAGE>
<Table>
<Caption>
JURISDICTION IN NAME UNDER WHICH
NAME WHICH ORGANIZED DOING BUSINESS
---- --------------- ----------------
<S> <C> <C>
Gilcron Corporation............................ Delaware
ITT Aerospace/Communications Division.......... N/A
ITT Antarctic Services, Inc. .................. Delaware
ITT Arctic Services, Inc. ..................... Delaware
ITT Avionics Division.......................... N/A
ITT Avionics Systems International, Inc. ...... Delaware
ITT Commercial Services, Inc. ................. Delaware
ITT Defence Ltd. .............................. United Kingdom
ITT Defense Division........................... 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 GmbH...................... Germany
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 Division......................... N/A
ITT Gilfillan Inc. ............................ Delaware
ITT Job Training Services, Inc. ............... Delaware
ITT Night Vision Division...................... N/A
ITT Systems Division........................... N/A
ITT Systems & Sciences Corporation............. Delaware
K and M Electronics, Inc. ..................... Massachusetts
FLUID TECHNOLOGY
AC Custom Pumps Division....................... N/A
AGJ Holding AB................................. Sweden
A.G. Johansons Metallfabrik AB................. Sweden
Anadolu Flygt Pompa Sanayi Ve Ticaret.......... Turkey
Avis Werberg GmbH.............................. Austria
Bombas Goulds de Argentina..................... Argentina Goulds
Bombas Goulds de Mexico S. de R.L. de C.V. .... Mexico Goulds
Bombas Goulds de Venezuela, C.A. .............. Venezuela Goulds
Distribuidora Arbos, C.A. ..................... Venezuela
Flygt Argentina SA............................. Argentina Flygt
Flygt do Brazil................................ Brazil Flygt
Flygt Chile.................................... Chile Flygt
Flygt Hellas SA................................ Greece Flygt
Flygt Huolto OY................................ Finland Flygt
Flygt Korea Ltd................................ Korea Flygt
Flygt Peru S.A. ............................... Peru Flygt
Flygt Portugal Technologia Agua do Ambiente.... Portugal Flygt
Goulds Pumps Administration, Inc. ............. New York Goulds
Goulds Pumps Canada, Inc. ..................... Canada Goulds
Goulds Pumps Co., Ltd. ........................ Korea Goulds
Goulds Pumps Delaware Inc. .................... Delaware Goulds
Goulds Pumps Financial Services Ltd. .......... Ireland Goulds
Goulds Pumps Holdings Inc. .................... Delaware Goulds
Goulds Pumps, Incorporated..................... Delaware Goulds
</Table>
<PAGE>
<Table>
<Caption>
JURISDICTION IN NAME UNDER WHICH
NAME WHICH ORGANIZED DOING BUSINESS
---- --------------- ----------------
<S> <C> <C>
Goulds Pumps (IPG) Inc. ....................... Delaware Goulds
Goulds Pumps (Ireland) Limited................. Ireland Goulds
Goulds Pumps (NY) Inc. ........................ New York Goulds
Goulds Pumps (PA) Inc. ........................ Delaware Goulds
Goulds Pumps (Philippines), Inc. .............. Philippines Goulds
Goulds Pumps Polska Co. Ltd. .................. Poland Goulds
Goulds Pumps (TX), L.P. ....................... Texas Goulds
Goulds Pumps World Sales (VI) Ltd. ............ Virgin Islands Goulds
Grindex AB..................................... Sweden
ITT Bell & Gossett Division.................... N/A Bell & Gossett
ITT Engineered Valves Division................. N/A
ITT Fluid Technology Asia Pte Ltd. ............ Singapore
ITT Fluid Technology Division.................. N/A
ITT Fluid Technology International............. Delaware
ITT Fluid Technology International Asia Pacific
Pte Ltd. .................................... Singapore
ITT Fluid Technology International (Hong Kong),
Ltd. ........................................ Hong Kong
ITT Fluid Technology International, (Australia)
Pty Ltd...................................... Australia
ITT Fluid Technology International (Thailand),
Ltd. ........................................ Thailand
ITT Fluid Technology SA........................ Chile
ITT Flygt AB................................... Sweden Flygt
ITT Flygt ApS.................................. Denmark Flygt
ITT Flygt A/S.................................. Norway Flygt
ITT Flygt B.V. ................................ The Netherlands Flygt
ITT Flygt BVBA................................. Belgium Flygt
ITT Flygt Corporation.......................... Delaware Flygt
ITT Flygt GmbH................................. Austria Flygt
ITT Flygt HK Ltd. ............................. Hong Kong Flygt
ITT Flygt Kft.................................. Hungary Flygt
ITT Flygt Limited.............................. Australia Flygt
ITT Flygt Lituanica............................ Lithuania Flygt
ITT Flygt Ltd. ................................ Ireland Flygt
ITT Flygt Ltd. ................................ United Kingdom Flygt
ITT Flygt Pumpen GmbH.......................... Germany Flygt
ITT Flygt (PTY) Ltd. .......................... S. Africa Flygt
ITT Flygt SAS.................................. France Flygt
ITT Flygt SDC SAS.............................. France Flygt
ITT Flygt Srl.................................. Italy Flygt
ITT Flygt sp zoo............................... Poland Flygt
ITT Flygt (Shenyang) Pumps Ltd................. China Flygt
ITT Flygt Werk GmbH............................ Germany Flygt
ITT Goulds Benelux BV.......................... The Netherlands Goulds
ITT Grindex Pumps Division..................... N/A
ITT Heat Transfer Division..................... N/A
ITT Industrieholding GmbH & Co. Kg............. Germany
ITT Industries Holding AB...................... Sweden
ITT McDonnell & Miller Division................ N/A McDonnell & Miller
ITT Pure-Flo (UK) Ltd. ........................ United Kingdom
Lowara Deutschland GmbH........................ Germany Lowara
Lowara France S.A.S. .......................... France Lowara
</Table>
<PAGE>
<Table>
<Caption>
JURISDICTION IN NAME UNDER WHICH
NAME WHICH ORGANIZED DOING BUSINESS
---- --------------- ----------------
<S> <C> <C>
Lowara (Ireland) Limited....................... Ireland Lowara
Lowara Nederland B.V. ......................... The Netherlands Lowara
Lowara Portugal................................ Portugal Lowara
Lowara Srl .................................... 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
Sam McCoy Engineering Pte Ltd. ................ Singapore
Sam McCoy Engineering SDN BHD.................. Malaysia
Sam McCoy Manufacturing SDN BHD................ Malaysia
Sanitaire Division............................. N/A Sanitaire
Shanghai Goulds Pumps Co. Ltd. ................ China
Tecnicas de Filtracion Bombeo SA............... Spain
Trimate Industries Ltd. ....................... New Zealand
Vogel Pumpen Drv............................... Hungary
1448170 Ontario Limited........................ Canada McIntyre Industrial
MOTION & FLOW CONTROL
Flojet Division................................ N/A
Flojet (Europe) Limited........................ England
Fulton-Rohr GmbH & Co. KG ..................... Germany
Hisan do Brasil LTDA........................... Brazil
Hisan, Inc. ................................... Michigan
Hisan of Canada, Ltd. ......................... Canada
Hydro Air Industries Division.................. N/A
ITT Aerospace Controls 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 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 Specialty Products Division................ N/A
Jabsco GmbH.................................... Germany Jabsco
Koni B.V....................................... The Netherlands Koni
Koni France SARL............................... France Koni
NHK Jabsco..................................... Japan Jabsco
Rule Industries, Inc. ......................... Massachusetts Rule
OTHER
Admiral Corporation............................ Florida Admiral
Carbon Industries, Inc. ....................... West Virginia Carbon
Computer & Equipment Leasing Corporation....... Wisconsin
Corporp A&F, Inc. ............................. Delaware
Howard Corporation............................. North Carolina
International Standard Electric Corporation.... Delaware
ITT AES Enterprises, Inc. ..................... Delaware
</Table>
<PAGE>
<Table>
<Caption>
JURISDICTION IN NAME UNDER WHICH
NAME WHICH ORGANIZED DOING BUSINESS
---- --------------- ----------------
<S> <C> <C>
ITT Automotive 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 Industriebeteiligungsgesellschaft mbH...... Germany
ITT Industries (China) Investment Company,
Limited...................................... China
ITT Industries Holding SARL.................... Luxembourg
ITT Industries Limited......................... United Kingdom
ITT Industries Luxembourg SARL................. Luxembourg
ITT Industries NV.............................. Belgium
ITT Industries SARL............................ Luxembourg
ITT Industries World Sales Limited............. Bermuda
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
Paul N. Howard Company......................... North Carolina
Sunsport Recreation, Inc. ..................... Florida
Winifrede Railroad Corporation................. West Virginia
138197 Canada Limited.......................... Canada
3099415 Canada, Inc. .......................... Canada
</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.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>y55533ex23.txt
<DESCRIPTION>CONSENT OF ARTHUR ANDERSEN LLP
<TEXT>
<PAGE>
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, 333-84917, 333-41806, and
333-41808).
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 25, 2002
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>6
<FILENAME>y55533ex99-1.txt
<DESCRIPTION>LETTER FROM ARTHUR ANDERSEN LLP
<TEXT>
<PAGE>
Exhibit 99.1
ITT Industries, Inc.
4 West Red Oak Lane
White Plains, NY 10604
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0408
Re: SEC TEMPORARY NOTE 3T
Ladies and Gentlemen:
Pursuant to Temporary Note 3T to Article 3 of Regulation S-X, ITT Industries,
Inc. has obtained a letter of representation from Arthur Andersen LLP
("Andersen") stating that the December 31, 2001 audit was subject to their
quality control system for the U.S. accounting and auditing practice to provide
reasonable assurance that the engagement was conducted in compliance with
professional standards, that there was appropriate continuity of Andersen
personnel working on the audit, availability of national office consultation,
and availablity of personnel at foreign affiliates of Andersen to conduct the
relevant portions of the audit.
Very truly yours,
/s/ David J. Anderson
David J. Anderson
Senior Vice President and Chief Financial Officer
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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