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<SEC-DOCUMENT>0000950123-03-003365.txt : 20030327
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<ACCEPTANCE-DATETIME>20030327152442
ACCESSION NUMBER: 0000950123-03-003365
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 20021231
FILED AS OF DATE: 20030327
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ITT INDUSTRIES INC
CENTRAL INDEX KEY: 0000216228
STANDARD INDUSTRIAL CLASSIFICATION: PUMPS & PUMPING EQUIPMENT [3561]
IRS NUMBER: 135158950
STATE OF INCORPORATION: IN
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-05627
FILM NUMBER: 03620813
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: INTERNATIONAL TELEPHONE & TELEGRAPH CORP
DATE OF NAME CHANGE: 19840321
FORMER COMPANY:
FORMER CONFORMED NAME: ITT CORP
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>y82463e10vk.txt
<DESCRIPTION>FORM 10-K
<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, 2002
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]
Indicate by check mark whether the registration is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes.... No....
X
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on June 30, 2002 was approximately $6.5
billion.
As of February 28, 2003, there were outstanding 91,846,834 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 13, 2003, 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......... 14
* Executive Officers of the Registrant........................ 14
PART 5 Market for Registrant's Common Equity and Related
II Stockholder Matters....................................... 15
6 Selected Financial Data..................................... 16
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 39
8 Financial Statements and Supplementary Data................. 39
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 39
PART 10 Directors and Executive Officers of the Registrant.......... 39
III 11 Executive Compensation...................................... 40
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 40
13 Certain Relationships and Related Transactions.............. 40
14 Controls and Procedures..................................... 40
PART 15 Exhibits, Financial Statement Schedules, and Reports on Form
IV 8-K....................................................... 40
</Table>
<Table>
<Caption>
<S> <C>
Signatures.................................................. II-1
Certification by Louis J. Giuliano.......................... II-2
Certification by David J. Anderson.......................... II-3
Exhibit Index............................................... II-4
</Table>
- ------------
* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
PART I
ITEM 1. BUSINESS
ITT Industries, Inc., with 2002 sales of approximately $4.99 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 are Fluid
Technology, Defense Electronics & Services, Motion & Flow Control, and
Electronic Components. Prior to January 1, 2002 these segments were named Pumps
& Complementary Products, Defense Products & Services, Specialty Products and
Connectors & Switches. Also prior to January 1, 2002, Engineered Valves, now
part of our Fluid Technology Segment, reported into Specialty Products (now,
Motion & Flow Control). Material herein is presented on a basis consistent with
those business segment 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 attributable to each of our ongoing lines of
business for the last three years. Operating income percentages for 2001 and
2000 are adjusted to exclude the impact of goodwill amortization:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
--------------------
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
SALES AND REVENUES
Fluid Technology............. 39% 39% 38%
Defense Electronics &
Services................... 30 28 28
Motion & Flow Control........ 19 19 18
Electronic Components........ 12 14 16
Other........................ -- -- --
---- ---- ----
100% 100% 100%
==== ==== ====
OPERATING INCOME
Fluid Technology............. 47% 50% 42%
Defense Electronics &
Services................... 28 30 24
Motion & Flow Control........ 23 26 24
Electronic Components........ 13 6 20
Other........................ (11) (12) (10)
---- ---- ----
100% 100% 100%
==== ==== ====
</Table>
BUSINESS AND PRODUCTS
FLUID TECHNOLOGY
Fluid Technology, with sales and revenues of approximately $1.96, billion,
$1.83 billion, and $1.83 billion for 2002, 2001 and 2000, 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 2002 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, industrial and process market areas and
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.
Building Trades
Through our Fluid Handling Division, which includes leading brands such as
Bell & Gossett(R), McDonnell & Miller(R), Hoffman Specialty(R),
2
<PAGE>
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.
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.
3
<PAGE>
The following table illustrates the percentage of sales and revenues for
the listed categories for the periods specified:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
----------------------
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Water/Wastewater............. 56% 53% 53%
Industrial & Process......... 24 27 28
Building Trades.............. 16 17 17
Bio Pharm.................... 4 3 2
--- --- ---
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 $339.8 million in 2002, compared
with $297.6 million in 2001 and $278.0 million in 2000.
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 11,600
employees and have 300 facilities in 137 countries.
DEFENSE ELECTRONICS & SERVICES
Defense Electronics & Services, with sales and revenues of approximately
$1.51 billion, $1.30 billion, and $1.33 billion for 2002, 2001 and 2000,
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 support services including operations and
maintenance services for surveillance systems, communications electronics
including sensors, radars and command and control, and combat service support,
and base support and range support for government sites around the world.
The Advanced Engineering & Sciences Division designs and manufactures
advanced digital communications and sensor products and systems, and is involved
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.
Defense Electronics
The ITT Aerospace/Communications Division ("A/CD") designs and manufactures
wireless networking products and software 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"), a wideband networking radio which has data transmission capacity
twenty times greater than SINCGARS. A/CD is the provider of the combat net radio
and the high capacity data radio for the UK Bowman program. A/CD is developing a
communications system for the U.S. Army that will provide audio, video and data
networking to soldiers on the battlefield. 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.
4
<PAGE>
The Night Vision Division provides advanced night vision products for
airborne and ground applications enabling United States and allied military
forces 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, supplying high-performance night vision devices to
federal, state and local law enforcement officers in support of Homeland
Security. It also offers night vision products for consumer recreational
applications.
The Avionics Division produces information and electronic warfare
technologies for a broad range of military aircraft to help protect aircraft
from radar-guided weapons. Avionics is developing for the United States Army and
Special Operation Forces the next-generation fully integrated airborne
electronic warfare system for rotary wing aircraft called a Suite of Integrated
Radio Frequency Countermeasures ("SIRFC"). In addition, the company has
developed a SIRFC based system for fixed wing aircraft such as the F-16, and is
also the supplier for 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 ITT Gilfillan Division produces and installs ship and air defense radar
and air traffic control systems both in the United States and internationally.
The following table illustrates the percentage of sales and revenues for
the listed categories for the periods specified:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
----------------------
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Systems and Services
Systems....................... 29% 29% 24%
Advanced Engineering &
Sciences.................... 15 16 13
Defense Electronics
A/CD.......................... 26 26 32
Night Vision.................. 12 13 15
Avionics...................... 12 11 8
ITT Gilfillan................. 6 5 8
--- --- ---
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 97% of 2002 sales and revenues of Defense Electronics & Services
was to governmental and international entities, of which approximately 73% 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 23% and 3%, respectively, of 2002 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 3% in 2002, 4% in
2001 and 3% in 2000. Certain products sold by Defense Electronics & Services
have particular commercial application, including night vision devices. 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 $2.85 billion
in 2002, compared with $2.58 billion in 2001 and $2.41 billion in 2000.
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
9,700 employees and are present in 149 facilities in 21 countries.
MOTION & FLOW CONTROL
Motion & Flow Control, with sales and revenues of approximately $935.5
million,
5
<PAGE>
$898.7 million and $888.9 million, for 2002, 2001 and 2000, 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 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 Daimlar Chrysler, with their respective affiliates,
account for approximately 27%, 14%, and 10%, respectively, of the 2002 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 61% of Galfer's 2002
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,
----------------------
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Fluid Handling Systems....... 50% 49% 48%
Galfer....................... 17 16 16
Jabsco....................... 14 14 16
Koni......................... 8 9 9
Aerospace Controls........... 6 7 6
HydroAir..................... 4 4 4
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 5,800
employees and have 36 facilities located in 10 countries.
ELECTRONIC COMPONENTS
Electronic Components, with sales and revenues of approximately $583.5
million, $647.0 million, $774.6 million, for 2002, 2001, and 2000, 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, industrial, transportation, military/aerospace, commercial
aircraft, computer, and consumer uses.
6
<PAGE>
In the communications area, Electronic Components designs products and
provides services specifically for today's 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,
--------------------
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Communications................. 32% 36% 43%
Industrial..................... 23 19 16
Transportation................. 13 13 10
Military/Aerospace............. 13 12 11
Commercial Aircraft............ 6 8 7
Computer....................... 7 6 7
Consumer....................... 6 6 6
--- --- ---
100% 100% 100%
=== === ===
</Table>
Order backlog for Electronic Components was $143.9 million in 2002 compared
with $154.6 million in 2001 and $207.9 million in 2000.
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 22 facilities located in 9 countries.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and see Note 23, "BUSINESS SEGMENT INFORMATION," in the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for further details with respect to
business segments.
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 2002, we acquired the business and assets of a number of companies
for our Fluid Technology segment. These include the Pure Water division of
Waterlink, Inc. which designs and manufactures commercial, industrial and
municipal water purification systems. We also acquired the assets of PCI
Membranes from Thames Water. PCI Membranes products add chlorination
disinfection and membrane technology to Sanitaire's filtration and disinfection
businesses. In the municipal and wastewater area, we purchased the business and
assets of the
7
<PAGE>
Royce Instrument Corporation relating to manufacture, monitoring and control
instrumentation and sensors for municipal and industrial wastewater treatment.
We also acquired the business and assets of Precision Stainless, Inc. which
provides process vessels for biopharmaceutical companies and we purchased the
business and assets of the Biopharm Manufacturing Division of Martin Petersen
Company, Inc., a manufacturer of process systems for the biopharmaceutical
industry. In wastewater applications, we acquired Svedala Robot B.V., a
manufacturer of high quality submersible pumps and pump systems used in
wastewater applications. We also acquired Flowtronex PSI Inc., a leading global
manufacturer of modular pumping systems for golf courses and other turf
irrigation, sports fields, municipal and commercial properties for our Fluid
Technology segment.
For Defense Electronics & Services, we acquired the business and assets of
Xybion Electronic Systems (XES), a designer and manufacturer of intensified
imaging systems, digital and complimentary metal-oxide semiconductor (CMOS)
cameras on December 12, 2002 and during 2002 we sold a defense related joint
venture
On January 31, 2003 we acquired the VEAM/TEC division of Northrop Grumman's
Component Technologies sector, which manufactures cylindrical, filter and fiber
optic connectors for the military/aerospace, industrial, transit, entertainment
and nuclear markets for our Electronics Components segment.
During 2001, we acquired the business and assets of a number of 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 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.
See Note 4, "RESTRUCTURING AND ASSET IMPAIRMENT CHARGES," in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 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," in the 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 2002,
approximately 56% 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, 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.
8
<PAGE>
The geographic sales base of Defense Electronics & Services is
predominantly the United States, which accounted for approximately 77% of 2002
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 2002, approximately 60% of sales and revenues of
Motion & Flow Control were to customers in North America, and approximately 37%
of sales were to customers in Europe. Management of ITT Industries sees growth
opportunities in North America, Europe and Asia.
The geographic sales base of Electronic Components in Europe accounted for
35% of 2002 sales and revenues, North America accounted for 39% of 2002 sales
and revenues, and the Asia/Pacific region accounted for 24% of 2002 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 23, "BUSINESS SEGMENT INFORMATION," in the 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.
Accordingly, our operating results may be impacted by fluctuations in relative
currency values.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- MARKET RISK EXPOSURES" and Note 18, "FINANCIAL
INSTRUMENTS," in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
9
<PAGE>
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. In the United States 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 $519.1 million in
2002, $424.7 million in 2001 and $391.2 million in 2000. Of those amounts 78.0%
in 2002, 76.4% in 2001 and 74.6% in 2000, 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 aggre-
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gate, 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, 2002, ITT Industries and its subsidiaries employed an
aggregate of approximately 38,000 people. Of this number, approximately 17,961
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 connection 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.
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INTERNET ADDRESS AND INTERNET ACCESS TO CURRENT AND PERIODIC REPORTS
ITT Industries' website address is http:/ /www.itt.com. ITT Industries
makes available free of charge on or through http:/ /www.itt. com/
ir/secfilings frameset.html our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments to those reports as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and
Exchange Commission (the "SEC").
------------------------
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 15, "Leases and Rentals," in the Notes
to Consolidated Financial Statements 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 104 sites in various countries. Of those sites, ITT Industries
has received notice that it is considered a Potentially Responsible Party
("PRP") at a limited number of 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. Under the settlement, the PRPs
including the Company, have constructed and are operating a water treatment
system. The PRPs have agreed to operate the system for an additional 10 years.
ITT operated a facility in Madison County Florida from 1968 until 1991. In
1995, elevated levels of contaminants were detected at the site. Since then, ITT
has been investigating the site in coordination with state and federal
environmental authorities. A remedy for the site has not yet been selected.
ITT has been involved with a number of PRPs regarding property in the City
of Bronson, Michigan operated by a former subsidiary of ITT, Higbie
Manufacturing, prior to the time ITT acquired the company. ITT and other PRPs
are investigating and remediating discharges of industrial waste which occurred
in the 1930's.
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 its environmental liabilities including
the three listed above. 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
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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 appealed and the matter is before the
California Court of Appeals from a decision by the California Superior Court
dismissing claims where the costs incurred were due solely to administrative
(versus judicial) actions. 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.
ITT and its subsidiary Goulds have been joined as defendants with numerous
other industrial companies in product liability lawsuits alleging injury due to
asbestos. These actions against the Company have been managed by our historic
product liability insurance carriers, and all claims, including all defense and
settlement costs, have been covered by those same carriers. These claims stem
primarily from products sold prior to 1985 that contained a part manufactured by
a third party, e.g., a gasket, which allegedly contained asbestos. The asbestos
was encapsulated in the gasket (or other) material and was non-friable. In
certain other cases, it is alleged that ITT companies were distributors for
other manufacturers' products that may have contained asbestos.
Frequently, the plaintiffs are unable to demonstrate any injury or do not
identify any ITT or Goulds product as a source of asbestos exposure. During the
past 12 months, ITT and Goulds resolved approximately 800 cases through
settlement or dismissal. The average amount of settlement per claim has been
nominal.
The Company is involved in two actions, Cannon Electric, Inc. et al. v. Ace
Property & Casualty Company et al. Superior Court, County of Los Angeles, CA,
Case No. BC 290354, and Pacific Employers Insurance Company et al., v. ITT
Industries, Inc., et al., Supreme Court, County of New York, N.Y., Case No.
03600463, both of which commenced after December 31, 2002. The parties in both
cases are seeking an appropriate allocation of responsibility for the Company's
historic asbestos liability exposures among its insurers. The California action
is filed in the same venue where the Company's environmental insurance recovery
litigation has been pending for several years. The Company is continuing to
receive insurance payments during the pendency of these actions. The Company
does not believe that the existence or pendency of these actions will have any
impact on the Company's consolidated financial position, results of operations,
or cash flows.
The Company has received notice of a suit filed in El Paso, Texas relating
to its Gilfillian Division, Bund zur Unterstutzung Radargeschadigter et al. v.
ITT Industries et al., Sup. Ct., El Paso, Texas C.A. No. 2002-4730. This
Complaint, filed by both U.S. and German citizens, alleges that ITT and four
other major companies failed to warn the plaintiffs of the dangers associated
with exposure to x-ray radiation from radar devices. The Complaint also seeks
the certification of a class of similarly injured persons. The Company's insurer
has accepted the defense of this matter.
The Company has received notice of a product liability suit filed in
Superior Court of New York, Danis v. Rule Industries et al., Sup. Ct. N.Y., C.A.
No. 115975-02, seeking damages for injuries sustained in a boat explosion. The
suit contains a number of causes of action against various defendants including
the boat manufacturer, the marina operator, and individuals working at the
marina. As to the Company, the Complaint alleges that a fume detector,
manufactured by ITT's subsidiary Rule Industries, Inc. prior to the date the
Company acquired Rule, malfunctioned. The Company's insurer has accepted the
defense of this matter.
The Company has received a Notice of Claim from Rayonier, Inc., a former
subsidiary of the Company's predecessor ITT Corporation. This claim stems from
the 1994 Distribution Agreement for the spinoff of Rayonier by ITT Corporation
and seeks an allocation of proceeds from certain settlements in connection with
the Company's environmental insurance recovery litigation. The parties are
currently in negotiations.
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 expo-
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sure, or other product liability related matters), employment and pension
matters, government contract issues 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.
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.
Other Legal Proceedings
In 2002, the SEC announced that it would review the annual reports on Form
10-K submitted by all Fortune 500 companies during the year. As a result, the
Company's annual report on Form 10-K for the year ended December 31, 2001 was
reviewed by the SEC and we received a comment letter from the SEC following its
review. The comments in the SEC letter primarily focused on supplemental
disclosure for items related to the divestiture of the majority of our
automotive components business in 1998, an expanded discussion of restructuring
activities, references to non-GAAP measures and further segmentation of revenues
and working capital. The Company submitted detailed responses to the SEC's
initial comment letter and two follow-up letters. Since submitting its last
response on February 10, 2003, the Company has not received further comments
from the SEC and it does not anticipate receiving any further comments.
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 2003 POSITION AS AN OFFICER OFFICERSHIP
---- ---- -------- ------------- -----------
<S> <C> <C> <C> <C>
David J. Anderson................. 53 Senior Vice President and Chief 1999 12/13/99
Financial Officer
Robert L. Ayers................... 57 Senior Vice President, ITT Industries; 1998 12/4/01
President, Fluid Technology
Henry J. Driesse.................. 59 Senior Vice President, ITT Industries; 2000 12/4/01
President, Defense
Donald E. Foley................... 51 Senior Vice President, Treasurer and 1996 2/11/03
Director of Taxes
Scott A. Crum .................... 46 Senior Vice President and Director, 2002 10/29/02
Human Resources
Gerard Gendron.................... 50 Senior Vice President, ITT Industries; 1998 12/4/01
President, Cannon Worldwide
Louis J. Giuliano................. 56 Chairman, President and Chief Executive 1988 2/24/01
Officer and Director
Martin Kamber..................... 54 Senior Vice President, Director of 1995 12/19/95
Corporate Development
Vincent A. Maffeo................. 52 Senior Vice President and General 1995 12/19/95
Counsel
Thomas R. Martin.................. 49 Senior Vice President, Director of 1996 3/9/99
Corporate Relations
Brenda L. Reichelderfer........... 44 Senior Vice President, ITT Industries; 2002 1/1/02
President, Motion & Flow Control
Edward W. Williams................ 64 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 sub-
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<PAGE>
stantially 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. Crum, prior to his election as
Senior Vice President (2002) was Corporate Vice President, Motorola Corporation
Broadband Communications Sector (2000) and Senior Vice President for
Administration and Employee Resources at General Instrument Corporation (1997);
(iv) 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); (v) Mr. Foley, prior to his election as Senior
Vice President, (2003), was Vice President, Treasurer, Director of Taxes. Mr.
Foley was elected Vice President and Treasurer in 1996, and was named to the
position of Director of Taxes in 2001; (vi) Mr. Gendron, prior to his election
as Senior Vice President (2001), was Vice President (1998), and President of
Cannon Worldwide (1997); (viii) 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);
(ix) Mr. Martin, prior to his election as Senior Vice President, Director of
Corporate Relations (1999), was Vice President, Director of Corporate Relations
(1996); (x) Ms. Reichelderfer, prior to her election as Senior Vice President
and President of Motion & Flow Control (2002), was Vice President and President
Motion & Flow Control and held other executive positions with ITT Industries;
and (xi) 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>
2002 2001
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
IN DOLLARS
<S> <C> <C> <C> <C>
Three Months Ended
March 31................................................ $64.50 $45.80 $44.25 $35.55
June 30................................................. $70.85 $62.40 $49.00 37.95
September 30............................................ $70.46 $53.91 $46.20 42.00
December 31............................................. $66.38 $56.90 $52.00 43.19
</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, 2003 through February
28, 2003, the high and low reported market prices of our common stock were
$62.09 and $54.11, respectively.
We declared dividends of $.15 per share of common stock in each of the four
quarters of 2001 and 2002. In the first quarter of 2003, we declared a dividend
of $.16 per share.
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 approximately 33,243 holders of record of our common stock on
February 28, 2003.
ITT Industries common stock is listed on the following exchanges:
Frankfurt, London, Midwest, New York, Pacific, and Paris.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<Table>
<Caption>
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
RESULTS AND POSITION
Sales and revenues....................................... $4,985.3 $4,675.7 $4,829.4 $4,632.2 $4,492.7
Operating income (loss)(a)............................... 537.6 396.8 493.1 415.2 (74.6)
Income (loss) from continuing operations(a).............. 379.9 216.7 264.5 232.9 (97.6)
Net income............................................... 379.9 276.7 264.5 232.9 1,532.5
Additions to plant, property and equipment............... 153.2 174.0 180.6 227.9 212.9
Depreciation and amortization............................ 171.4 212.9 201.8 181.1 195.6
Total assets............................................. 5,389.6 4,508.4 4,611.4 4,459.6 4,978.6
Long-term debt........................................... 492.2 456.4 408.4 478.8 515.5
Total debt............................................... 791.8 973.4 1,038.3 1,088.1 767.1
Cash dividends declared per common share................. 0.60 0.60 0.60 0.60 0.60
EARNINGS PER SHARE
Income from continuing operations
Basic.................................................. $ 4.17 $ 2.46 $ 3.01 $ 2.61 $ (0.86)
Diluted................................................ $ 4.06 $ 2.39 $ 2.94 $ 2.53 $ (0.86)
Net income
Basic.................................................. $ 4.17 $ 3.14 $ 3.01 $ 2.61 $ 13.55
Diluted................................................ $ 4.06 $ 3.05 $ 2.94 $ 2.53 $ 13.55
-------- -------- -------- -------- --------
PRO FORMA RESULTS
Reported net income...................................... $ 379.9 $ 276.7 $ 264.5 $ 232.9 $1,532.5
Add back goodwill amortization net of tax.............. -- 35.9 31.4 24.1 21.3
-------- -------- -------- -------- --------
Adjusted net income.................................... $ 379.9 $ 312.6 $ 295.9 $ 257.0 $1,553.8
======== ======== ======== ======== ========
Adjusted basic earnings per share...................... $ 4.17 $ 3.55 $ 3.37 $ 2.88 $ 13.74
Adjusted diluted earnings per share.................... $ 4.06 $ 3.45 $ 3.29 $ 2.79 $ 13.74
</Table>
- ------------
(a) Operating income (loss) and income (loss) from continuing operations in
2002, 2001, 1999 and 1998 includes income (expense) of $3.5, $(97.7), $4.6
and $(399.4) pretax, respectively, or $2.4, $(63.5), $2.9 and $(243.6),
after-tax, respectively, for restructuring and asset impairment charges. See
Note 4 "Restructuring and Asset Impairment Charges," in the Notes to
Consolidated Financial Statements for additional information on these
topics.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<Table>
<Caption>
DEFENSE MOTION CORPORATE,
FLUID ELECTRONICS & FLOW ELECTRONIC ELIMINATIONS
TECHNOLOGY & SERVICES CONTROL COMPONENTS & OTHER TOTAL
---------- ----------- ------- ---------- ------------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
2002
Sales and revenues............. $1,956.3 $1,513.9 $935.5 $583.5 $(3.9) $4,985.3
Cost of sales and revenues..... 1,283.9 846.5 692.8 393.6 (4.9) 3,211.9
Selling, general and
administrative expenses...... 372.9 99.7 86.1 99.4 62.1 720.2
Research, development and
engineering expenses......... 43.5 414.7 32.7 28.2 -- 519.1
Reversal of restructuring
charge....................... (1.5) (1.0) (1.5) (8.7) (0.4) (13.1)
2002 restructuring charge...... 6.0 -- 3.0 0.6 -- 9.6
-------- -------- ------ ------ ----- --------
Total costs and expenses....... 1,704.8 1,359.9 813.1 513.1 56.8 4,447.7
-------- -------- ------ ------ ----- --------
Operating income (loss)........ 251.5 154.0 122.4 70.4 (60.7) 537.6
Interest expense, net.......... 32.4
Miscellaneous (income)
expense...................... (3.6)
--------
Income from continuing
operations before income tax
expense...................... 508.8
Income tax expense............. 128.9
--------
Net Income..................... $ 379.9
========
</Table>
16
<PAGE>
<Table>
<Caption>
DEFENSE MOTION CORPORATE,
FLUID ELECTRONICS & FLOW ELECTRONIC ELIMINATIONS
TECHNOLOGY & SERVICES CONTROL COMPONENTS & OTHER TOTAL
---------- ----------- ------- ---------- ------------ --------
(IN MILLIONS)
<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
Cost of sales and revenues..... 1,201.3 746.7 666.3 435.4 (5.2) 3,044.5
Selling, general and
administrative expenses...... 352.6 98.1 81.2 87.6 51.8 671.3
Research, development and
engineering expenses......... 39.2 327.9 29.0 28.6 -- 424.7
Restructuring and asset
impairment charges........... 16.0 -- 8.1 69.6 4.0 97.7
-------- -------- ------ ------ ----- --------
Total costs and expenses*...... 1,609.1 1,172.7 784.6 621.2 50.6 4,238.2
-------- -------- ------ ------ ----- --------
Operating income (loss):
Before goodwill amortization
expense.................... 220.6 132.1 114.1 25.8 (55.1) 437.5
Goodwill amortization
expense.................... 18.2 8.5 4.5 9.5 -- 40.7
-------- -------- ------ ------ ----- --------
Operating income (loss)...... 202.4 123.6 109.6 16.3 (55.1) 396.8
Interest expense, net.......... 62.0
Miscellaneous (income)
expense...................... 1.4
--------
Income from continuing
operations before income tax
expense...................... 333.4
Income tax expense............. 116.7
--------
Income from continuing
operations................... 216.7
Income from discontinued
operations................... (60.0)
--------
Net Income..................... $ 276.7
========
2000
Sales and revenues............. $1,834.2 $1,334.6 $888.9 $774.6 $(2.9) $4,829.4
Cost of sales and revenues..... 1,202.9 821.9 654.2 521.7 (5.4) 3,195.3
Selling, general and
administrative expenses...... 363.8 92.0 79.1 122.5 56.2 713.6
Research, development and
engineering expenses......... 43.5 294.9 26.3 26.5 -- 391.2
-------- -------- ------ ------ ----- --------
Total costs and expenses*...... 1,610.2 1,208.8 759.6 670.7 50.8 4,300.1
-------- -------- ------ ------ ----- --------
Operating income (loss):
Before goodwill amortization
expense.................... 224.0 125.8 129.3 103.9 (53.7) 529.3
Goodwill amortization
expense.................... 17.8 8.5 5.0 4.9 -- 36.2
-------- -------- ------ ------ ----- --------
Operating income (loss)........ 206.2 117.3 124.3 99.0 (53.7) 493.1
Interest expense, net.......... 75.2
Miscellaneous (income)
expense...................... (2.0)
--------
Income from continuing
operations before income tax
expense...................... 419.9
Income tax expense............. 155.4
--------
Net Income..................... $ 264.5
========
</Table>
- ---------------
* The Company adopted Statement of Financial Accounting Standards No. 142 and
discontinued the amortization of goodwill as of January 1, 2002 (see Footnote
2, "Changes in Accounting Pronouncements," for further detail). Total costs
and expenses for 2001 and 2000 exclude goodwill amortization expense for
comparative purposes.
17
<PAGE>
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001:
Sales and revenues in 2002 were $4.99 billion, an increase of $309.6
million, or 6.6%, from 2001. Cost of sales and revenues for the year ended
December 31, 2002 increased $167.4, or 5.5% from 2001. The increases were
primarily attributable to increased sales in the Defense Electronics & Services,
Fluid Technology, and Motion & Flow Control segments partially offset by volume
declines in the Electronic Components segment.
Selling, general and administrative ("SG&A") expenses in 2002 were $720.2
million, an increase of $48.9 million, or 7.3%, from 2001. The increase was
primarily attributable to increased marketing expenses in the Fluid Technology
segment and costs associated with process improvement initiatives, increased
information technology spending and increased other administrative expenses
across all businesses.
Research, development and engineering ("RD&E") expenses increased $94.4
million, or 22.2% in 2002 compared to 2001, primarily due to increased spending
in the Defense Electronics & Services segment.
During 2002 management conducted quarterly progress reviews of the
Company's remaining restructuring actions and determined that $13.1 million of
planned cash expenditures would not be incurred. Accordingly, $13.1 million of
restructuring accruals, primarily relating to the 2001 Restructuring Plan, were
reversed into income. Also, during the fourth quarter of 2002, the Company
recorded a restructuring charge of $9.6 million related to the termination of
292 persons and the closure of two facilities. During 2001 the Company recorded
a $97.7 million restructuring and asset impairment charge to reduce structural
costs and improve profitability. Refer to the section entitled "Status of
Restructuring and Asset Impairments" and Note 4, "Restructuring and Asset
Impairment Charges," in the Notes to Consolidated Financial Statements for
additional information regarding these matters.
Operating income of $537.6 million in 2002 was $140.8 million, or 35.5%,
higher than the prior year (excluding goodwill amortization expense the increase
was $100.1 million, or 22.9%). Operating margin of 10.8%, was 230 basis points
higher than the margin for 2001 (approximately 140 basis points higher than
2001, excluding goodwill amortization expense). Excluding goodwill amortization
expense, the increases were primarily due to the $97.7 million restructuring and
asset impairment charge recorded in 2001 and increased segment volume, these
items partially offset by lower operating margins in the Electronic Components
segment, reflecting higher SG&A expenses. Increased corporate expenditures
reflecting the cost of process improvement initiatives, increased information
technology spending, and increased administrative expenses, also offset the
improved margin.
Interest expense of $32.4 million (net of interest income of $11.0 million)
decreased $29.6 million from 2001 primarily due to a favorable change in average
interest rates and lower average debt levels as a result of increased cash from
operations.
The effective income tax rate for 2002 was 25.3% compared to 35.0% for
2001. The decrease in the 2002 effective tax rate is due to approximately $31
million of tax gains related to a capital loss carryback and the benefit of
several foreign tax planning initiatives initiated in 2002 and 2001 to reduce
the structural rate. The elimination of goodwill expense, pursuant to the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets" ("SFAS No. 142") also contributed to the
decline in the effective tax rate.
Income from continuing operations in 2002 was $379.9 million, or $4.06 per
diluted share, compared to $216.7 million, or $2.39 per diluted share. The
increase was due to higher operating income and lower interest expense. These
items were partially offset by higher income tax expense.
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
foreign tax rulings. See the section entitled "Discontinued Operations" and Note
5, "Discontinued Operations," in the Notes to Consolidated Financial Statements
for additional information.
18
<PAGE>
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. Cost of sales and revenues for the year ended
December 31, 2001 decreased $150.8 million, or 4.7% from 2000. The decreases
were 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.
SG&A expenses in 2001 were $671.3 million, a decrease of $42.3 million, or
5.9%, from 2000. The decrease is primarily attributable to lower marketing
expenses at Fluid Technology and Electronic Components and reduced
administrative expenses at Electronic Components. RD&E expenses increased $33.5
million, or 8.6%, in 2001 compared to 2000, primarily due to increased spending
in the Defense Electronics & Services segment.
In December 2001, the Company announced a restructuring program to reduce
structural costs and improve profitability. Accordingly, a charge of $83.3
million was recorded. In addition, based on a review of long lived assets in the
Electronic Components segment, the Company recorded an impairment charge of
$14.4 million. Refer to the section entitled "Status of Restructuring and Asset
Impairments" and Note 4, "Restructuring and Asset Impairment Charges," in the
Notes to Consolidated Financial Statements for additional information on these
topics. There were no restructuring or asset impairment charges recorded in
2000.
Operating income of $396.8 million in 2001 was $96.3 million, or 19.5%,
lower than the prior year due to the $97.7 million restructuring and asset
impairment charges taken in 2001. Operating margin of 8.5%, was approximately
170 basis points lower than the margin for 2000. The decrease is primarily due
to the above mentioned restructuring and asset impairment charges and lower
sales volume. These items were partially offset by cost reduction efforts
related to non-production purchases and savings from headcount reductions,
primarily reflecting normal employee attrition. Improved product mix also
partially offset the decline.
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 35.0% compared to 37.0% for
2000. The decrease in the 2001 effective tax rate was due to several initiatives
taken in 2001 and 2000 to reduce the structural rate.
Income from continuing operations in 2001 was $216.7 million or $2.39 per
diluted share compared to $264.5 million, or $2.94 per diluted share. The
decrease in net income, was primarily due to restructuring and asset impairment
charges discussed above, partially offset by 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
foreign tax rulings. See the section entitled "Discontinued Operations" and Note
5, "Discontinued Operations," in the Notes to Consolidated Financial Statements
for additional information.
BUSINESS SEGMENT INFORMATION
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001:
Fluid Technology sales and revenues of $1.96 billion increased $126.6
million, or 6.9%, from 2001. Cost of sales and revenues increased $82.6 million,
or 6.9%. The increases reflect increased volume in the Water/Wastewater and
Engineered Process Solutions Group businesses, and the contribution of 2002
acquisitions, partially offset by volume declines in the Industrial Pump
business. SG&A expenses increased $20.3 million, or 5.8%, during 2002 primarily
due to increased marketing costs. During 2002, management conducted quarterly
progress reviews of the remaining restructuring actions and reversed $1.5
million of the segment's restructuring accruals that were deemed unnecessary.
Additionally, during the fourth quarter of 2002, the Fluid Technology segment
recorded a restructuring charge of $6.0 million,
19
<PAGE>
primarily for the reduction of 147 employees and the closure of one facility.
During the fourth quarter of 2001, the segment recorded a $16.0 million
restructuring charge. Refer to the section entitled "Status of Restructuring and
Asset Impairments" and Note 4, "Restructuring and Asset Impairment Charges," in
the Notes to Consolidated Financial Statements for additional information on
this topic. Operating income, excluding goodwill amortization expense increased
$30.9 million, or 14.0%, due to the factors discussed above.
Defense Electronics & Services sales and revenues of $1.51 billion
increased $209.1 million, or 16.0%, compared to 2001. Cost of sales and revenues
increased $99.8 million, or 13.4% from 2001. The increases were primarily
attributable to increased volume across all businesses. SG&A expenses were flat
with prior year. RD&E costs increased $86.8 million, or 26.5%, in 2002 due to
the fulfillment of increased expenditures related to customer contracts across
all businesses. During the fourth quarter of 2002, management reviewed the
remaining restructuring actions and reversed $1.0 million of the segment's
restructuring accruals that were deemed unnecessary. Refer to the section
entitled "Status of Restructuring and Asset Impairments" and Note 4,
"Restructuring and Asset Impairment Charges," in the Notes to Consolidated
Financial Statements for additional information on this topic. Operating income
for 2002 was $21.9 million, or 16.6%, greater than 2001 operating income,
excluding goodwill amortization, due to the factors mentioned above. The Defense
Electronics & Services segment's total backlog was $2.8 billion and $2.6 billion
at December 31, 2002 and 2001, respectively. The Company generally records new
contract awards into backlog when funding has been authorized and appropriated
by the customer. Management utilizes the backlog measurement when analyzing the
operations of the Defense Electronics & Services segment and believes that it is
a good indicator of the future performance of our defense businesses.
Motion & Flow Control recorded sales and revenues of $935.5 million and
cost of sales and revenues of $692.8 million for the year, representing
increases of $36.8 million, or 4.1%, and $26.5 million, or 4.0%, respectively,
over 2001. The increases were primarily due to increased volume in the
automotive fluid handling systems business due to higher North American build
rates in 2002, market share gains in the friction materials business and market
growth in the leisure marine business, partially offset by declines at Aerospace
Controls. SG&A expenses increased $4.9 million, or 6.0%, due to higher marketing
expense and fixed asset losses during 2002, partially offset by decreased
administrative expenses. During the second half of 2002, management reviewed the
remaining restructuring actions and reversed $1.5 million of the segment's
restructuring accruals that were deemed unnecessary. Additionally, during the
fourth quarter of 2002, the Motion & Flow Control segment recorded a
restructuring charge of $3.0 million, primarily for the reduction of 140
employees, the closure of one facility, and the consolidation of selected
functions. During the fourth quarter of 2001, the segment recorded a
restructuring charge of $8.1 million. Refer to the section entitled "Status of
Restructuring and Asset Impairments" and Note 4, "Restructuring and Asset
Impairment Charges," in the Notes to Consolidated Financial Statements for
additional information on this topic. Excluding goodwill amortization expense,
operating income of $122.4 million increased $8.3 million, or 7.3%, from 2001
due to the above mentioned factors.
Electronic Components sales and revenues and cost of sales and revenues
declined $63.5 million, or 9.8%, and $41.8 million, or 9.6%, respectively, from
2001. The declines reflect general softness in all of the segment's markets.
SG&A expenses increased $11.8 million, or 13.5%, during 2002 due to increased
general and administrative costs. During the second half of 2002, management
reviewed the remaining restructuring actions and reversed $8.7 million of the
segment's restructuring accruals that related to favorable completion of planned
actions and the determination that certain planned actions were not economically
feasible. Additionally, during the fourth quarter of 2002, the segment recorded
a restructuring charge of $0.6 million. During 2001, the Company recorded
restructuring and asset impairment charges of $55.2 million and $14.4 million,
respectively. Refer to the section entitled "Status of Restructuring and Asset
Impairments" and Note 4, "Restructuring and Asset Impairment Charges," in the
Notes to Consolidated Financial Statements for additional information on these
topics. Excluding goodwill amortization expense, operating income of $70.4
million was up $44.6 million from 2001 due to the above mentioned factors.
20
<PAGE>
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000:
Fluid Technology sales and revenues of $1.83 billion declined $4.5 million,
or 0.2%, from 2000. Cost of sales and revenues declined $1.6 million, or 0.1%.
The decreases reflect the impact of foreign currency translation and continued
weakness in the industrial pump markets partially offset by higher volume within
the water and wastewater markets. SG&A expenses decreased $11.2 million, or
3.1%, during 2001 due to cost reduction initiatives, and lower marketing
expense. Additionally, during the fourth quarter of 2001, the Fluid Technology
segment recorded a restructuring charge of $16.0 million. Refer to the section
entitled "Status of Restructuring and Asset Impairments" and Note 4,
"Restructuring and Asset Impairment Charges," in the Notes to Consolidated
Financial Statements for additional information on this topic. Operating income
decreased $3.8 million, or 1.8%, due to the factors discussed above.
Defense Electronics & Services sales and revenues of $1.30 billion
decreased $29.8 million, or 2.2%, compared to 2000. The decline was primarily
due to the scheduled wind down of certain large contracts partially offset by
the contribution of new contract revenue. Cost of sales and revenues decreased
$75.2 million, or 9.1%, from 2000 due to lower sales volume, improved margins on
certain mature contracts and higher profitability on new contracts. SG&A
expenses of $98.1 million increased $6.1 million, or 6.6% due to higher
administrative costs. RD&E costs increased $33.0 million, or 11.2%, in 2001 due
to increased spending in most businesses. Operating income for 2001 was $6.3
million, or 5.4%, greater than 2000 operating income due to the factors
mentioned above. The Defense Electronics & Services segment's total backlog was
$2.6 billion and $2.4 billion at December 31, 2001 and 2000, respectively. The
Company generally records new contract awards into backlog when funding has been
authorized and appropriated by the customer. Management utilizes the backlog
measurement when analyzing the operations of the Defense Electronics & Services
segment and believes that it is a good indicator of the future performance of
our defense businesses.
Motion & Flow Control recorded sales and revenues of $898.7 million in
2001, 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 currency translation. During 2001, cost of
sales and revenues increased $12.1 million, or 1.8%, due to increased volume and
start-up costs associated with new European programs at Fluid Handling Systems
partially offset by process improvements at North American Fluid Handling
Systems. SG&A expenses increased $2.1 million, or 2.7%, due to increased
administrative expenses. During 2001, the segment recorded an $8.1 million
restructuring charge. Refer to the section entitled "Status of Restructuring and
Asset Impairments" and Note 4, "Restructuring and Asset Impairment Charges," in
the Notes to Consolidated Financial Statements for additional information on
this topic. Operating income of $109.6 million declined $14.7 million, or 11.8%,
from 2000 due to the above mentioned factors.
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 currency translation partially offset by revenues
from acquisitions made in 2000 (which combined added approximately $64 million
of incremental sales). Cost of sales and revenues decreased $86.3 million, or
16.5%, during 2001 due to lower sales volume. SG&A expenses declined $34.9
million, or 28.5%, during 2001 due to cost reduction actions and headcount
reductions resulting from normal employee attrition. RD&E expenses of $28.6
million in 2001 increased $2.1 million, or 7.9% due to increased spending. Also,
during 2001, the Company recorded restructuring and asset impairment charges of
$55.2 million and $14.4 million, respectively. Refer to the section entitled
"Status of Restructuring and Asset Impairments" and Note 4, "Restructuring and
Asset Impairment Charges," in the Notes to Consolidated Financial Statements for
additional information on these topics. Operating income of $16.3 million was
down $82.7 million, or 83.5%, from 2000 due to the above mentioned factors.
21
<PAGE>
STATUS OF RESTRUCTURING
AND ASSET IMPAIRMENTS
2002 RESTRUCTURING ACTIVITIES
During the fourth quarter of 2002 the Company recorded a $9.6 million
restructuring charge primarily for the closure of two facilities and the
severance of 292 persons. Severance of $8.5 million represents a majority of the
charge and lease payments and other costs represent the remainder.
Listed below, by business segment, is background information on the 2002
restructuring plan (in millions).
<Table>
<Caption>
CASH CHARGES
----------------------------------------
LEASE
PAYMENTS/
SEVERANCE TERMINATIONS OTHER TOTAL
--------- ------------ ----- -----
<S> <C> <C> <C> <C>
Fluid Technology..... $5.4 $0.4 $0.2 $6.0
Motion & Flow
Control............ 2.5 - 0.5 3.0
Electronic
Components......... 0.6 - - 0.6
---- ---- ---- ----
Total 2002 Charges... $8.5 $0.4 $0.7 $9.6
==== ==== ==== ====
</Table>
The actions within the Fluid Technology segment represent a reduction of
its cost structure that management deemed necessary in response to continued
weakness within certain of the segment's markets. Planned measures include the
closure of one facility in Fairfield, N.J. and the termination of 147 persons,
comprised of 78 office workers, 65 factory workers and four management
employees.
The restructuring plan within the Motion & Flow Control segment was driven
by the anticipated loss of certain platforms in the automotive fluid handling
systems business during 2003 and the resulting excess capacity. Planned actions
include the closure of one facility in Rochester, N.Y., the consolidation of
manufacturing and administrative processes, and the termination of 140
employees, comprised of 40 office workers, 97 factory workers and three
management employees.
The actions within the Electronic Components segment represent cost control
actions required by continuing difficult market conditions. These actions
include the termination of five employees, comprised of three office workers and
two management employees.
The following table displays a rollforward of the restructuring accruals
for the 2002 restructuring program (in millions):
<Table>
<Caption>
CASH CHARGES
---------------------------------------
LEASE
SEVERANCE COMMITMENTS OTHER TOTAL
--------- ----------- ----- -----
<S> <C> <C> <C> <C>
Establishment of 2002
Plan............... $ 8.5 $0.4 $0.7 $ 9.6
Payments............. (0.9) -- -- (0.9)
----- ---- ---- -----
Balance December 31,
2002............... $ 7.6 $0.4 $0.7 $ 8.7
===== ==== ==== =====
</Table>
As of December 31, 2002, remaining actions under restructuring activities
announced during 2002 were to close two facilities, and reduce headcount by 232
persons. All of the actions contemplated by the 2002 restructuring program will
be completed in 2003. Some severance run-off payments will occur in 2004 and
closed facility costs will continue through 2007. Future restructuring
expenditures will be funded with cash from operations, supplemented, as
required, with commercial paper borrowings.
The projected future cash savings from the 2002 restructuring plan are
approximately $7 million in 2003 and approximately $46 million between 2004 and
2007. The savings represents lower salary and wage expenditures and decreased
facility operating costs. The impact will be reflected in cost of sales and
revenues and selling, general and administrative expenses.
2001 RESTRUCTURING ACTIVITIES
On December 14, 2001, the Company announced a restructuring program to
reduce structural costs and improve profitability whereby the Company recorded a
charge of $83.3 million related to the closure of five facilities, the
discontinuance of 21 products (10 in the Switch product group and 11 in the
Connectors group), the severance of 3,400 persons and other asset impairments.
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 $22.3 million
primarily relates to machinery and equipment that became impaired as a result of
the announced plans.
22
<PAGE>
Listed below, by business segment, is background information on the 2001
restructuring plan (in millions).
<Table>
<Caption>
CASH CHARGES
--------------------------------
LEASE
PAYMENTS/ ASSET
SEVERANCE TERMINATIONS OTHER IMPAIRMENTS TOTAL
--------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
Electronic Components........................ $33.0 $1.5 $2.5 $18.2 $55.2
Fluid Technology............................. 10.5 1.8 0.8 2.9 16.0
Motion & Flow Control........................ 4.9 2.1 0.3 0.8 8.1
Corporate and Other.......................... 3.5 - 0.1 0.4 4.0
----- ---- ---- ----- -----
Total 2001 Charges........................... $51.9 $5.4 $3.7 $22.3 $83.3
===== ==== ==== ===== =====
</Table>
In 2001, sales in the Electronic Components segment decreased $127.6
million, or 16.5%, and operating income, excluding restructuring, decreased
$13.1 million, or 13.2%. Excluding the contribution of acquisitions made in
2001, sales decreased approximately $192 million. The decrease was primarily due
to a downturn in the communication and industrial markets. In addition,
management expected further sales declines in 2002, specifically in the
communications, industrial, and commercial aircraft markets.
The combination of the downturn in these markets and the businesses
acquired in 2000 and late 1999 resulted in excess capacity and prompted
management to seek opportunities to reduce costs. As a result of this review,
management decided to consolidate manufacturing functions as well as other
administrative tasks throughout the segment. These planned actions included the
outsourcing of production operations from Weinstadt, Germany to third party
suppliers in Poland and Hungary, the transfer of ten product lines from five
locations in North America and Europe (Loveland, Colorado; Santa Ana,
California; Weinstadt, Germany; Basingstoke, UK; and Dole, France) to two
locations in China (Shenzhen and Tianjin), the consolidation of European
administrative functions, the transfer of production operations from Santa Ana,
California to Nogales, Mexico, the closure of manufacturing facilities in Eden
Prairie, Minnesota and Watertown, Massachusetts and other smaller actions
consisting primarily of the elimination of administrative functions. In
addition, management also decided to discontinue 21 older connector and switch
products. Revenue in 2001 from these products totaled $29.3 million.
The above planned actions included the termination of 2,753 persons,
comprised of 2,395 factory workers, 348 office workers and 10 management
employees, and resulted in a cash charge of $37.0 million (which included $33.0
million for severance) and an asset impairment charge of $18.2 million
(primarily for machinery and equipment that will be disposed of as a result of
the restructuring activities).
Actions within the Fluid Technology segment, the Motion & Flow Control
segment and Corporate Headquarters were identified as cost improvement
opportunities. Processes and functions were identified that could be outsourced,
performed at other existing facilities, or eliminated as redundant. These
measures were prompted primarily by management's efforts to reduce costs and
their projections of no recovery in the Industrial Pumps businesses and
anticipated declines in worldwide automotive build rates.
The planned actions within the Fluid Technology segment included the
outsourcing of manufacturing functions in City of Industry, California, Seneca
Falls, New York and Ashland, Pennsylvania to third party suppliers in the United
States, Mexico and China, the consolidation of tasks throughout the segment and
the closure of a foundry in Nanjing, China. These actions incorporated the
termination of 436 persons, comprised of 236 factory workers, 189 office workers
and 11 management employees, and resulted in a cash charge of $13.1 million
(which included $10.5 million for severance) and asset impairment charges of
$2.9 million (primarily for machinery and equipment that was scrapped).
The planned actions in the Motion & Flow Control segment included the
closure of a manufacturing facility in Costa Mesa, California, where the
operations were to be consolidated into three existing facilities, the closure
of a
23
<PAGE>
manufacturing facility in Saffron Walden, England, where the operations were to
be consolidated into a facility in Denmark, the closure of a sales office in
Germany and the consolidation of other administrative tasks. These actions
included the projected termination of 183 persons comprised of 144 factory
workers, 28 office workers and 11 management employees and resulted in a cash
charge of $7.3 million (which included $4.9 million for severance) and asset
impairment charges of $0.8 million (primarily for machinery and equipment that
was discarded).
The planned actions at the Company's corporate headquarters and other
shared service facilities consisted of the consolidation of administrative tasks
which included the termination of 28 persons comprised of 26 office workers and
two management employees and resulted in a cash charge of $3.6 million (which
included $3.5 million for severance) and an asset impairment charge of $0.4
million.
During 2002 and 2001 the Company funded restructuring activities with cash
from operations. The Company plans to fund future cash requirements for
restructuring activities with cash from operations, supplemented, as required,
by commercial paper borrowings.
The following table displays a rollforward of the restructuring accruals
for the 2001 restructuring program (in millions):
<Table>
<Caption>
CASH CHARGES
-------------------------------
LEASE ASSET
SEVERANCE COMMITMENTS OTHER IMPAIRMENTS TOTAL
--------- ----------- ----- ----------- ------
<S> <C> <C> <C> <C> <C>
Establishment of 2001 Plan............. $ 51.9 $ 5.4 $ 3.7 $ 22.3 $ 83.3
Payments............................... (11.5) - (0.1) - (11.6)
Asset Write-Offs....................... - - - (22.3) (22.3)
------ ----- ----- ------ ------
Balance December 31, 2001.............. $ 40.4 $ 5.4 $ 3.6 $ - $ 49.4
------ ----- ----- ------ ------
Payments and other..................... (26.7) (2.9) (0.4) - (30.0)
Reversals.............................. (8.7) (1.2) (1.9) - (11.8)
------ ----- ----- ------ ------
Balance December 31, 2002.............. $ 5.0 $ 1.3 $ 1.3 $ - $ 7.6
====== ===== ===== ====== ======
</Table>
During the third and fourth quarters of 2002, $1.7 million and $10.1
million of restructuring accruals were reversed into income as a result of
quarterly reviews of the Company's remaining restructuring actions,
respectively. The reversals primarily reflect less than anticipated severance
costs on completed actions at each of the segments, the decision not to transfer
five product lines (from Santa Ana, California; Weinstadt, Germany; Dole,
France, and Basingstoke, UK, to Shenzhen and Tianjin, China), as supply chain
issues eliminated the financial viability of the transfers, and the decision to
continue partial operations at one of the Electronic Component's facilities. In
addition, management determined that one facility within the Fluid Technology
segment would remain operational as a suitable outsource supplier could not be
identified.
During 2002, the Company reduced headcount by 855 persons and closed three
facilities. As of December 31, 2002, remaining actions under the 2001
restructuring program include the closure of one facility and the termination of
24 persons. Severance run-off payments will occur in 2003 and closed facility
expenditures will continue to be incurred through 2004. Revised future cash and
non-cash savings are projected to be approximately $281 million and $25 million,
respectively, for the period from 2003 to 2006.
OTHER ASSET IMPAIRMENTS
In the fourth quarter of 2001, the Company initiated a full review of
long-lived assets in the Electronic Components segment because of significant
volume declines and pricing pressures in the business and because management
expected further volume declines in 2002, specifically in the communications
market and the industrial and commercial aircraft markets. As a result of this
review, the Company recorded impairments on machinery and equipment of $13.9
million and an impairment of $0.5 million on a cost based investment. The
applicable assets were written down to their fair values based on management's
comparison of projected future discounted cash flows generated
24
<PAGE>
by each asset to the applicable asset's carrying value. These impairments were
unrelated to the Company's restructuring activities.
SUMMARY OF 2001 RESTRUCTURING ACTIVITIES AND OTHER ASSET IMPAIRMENTS
The total impact of the restructuring initiative and the asset impairment
review was a charge of $97.7 million, or $63.5 million after-tax recorded in
2001. The revised projected aggregate future cash and non-cash savings of the
above mentioned actions are approximately $281 million and $25 million,
respectively, for the period from 2003 to 2006. These figures include total
savings of $78.6 million in 2003. The savings will be reflected primarily in
cost of sales and revenues and selling, general and administrative expenses.
Actual savings approximated plan in 2002. During the second half of 2002
management reviewed the progress of the Company's remaining restructuring
actions and determined that $11.8 million of cash expenditures would not be
incurred. Accordingly, $11.8 million of restructuring accruals relating to the
2001 Restructuring Plan were reversed into the restructuring and asset
impairments line of the Consolidated Income Statements.
In connection with the restructuring activities and the asset impairment
charge, the Company identified assets with a total book value of $26.2 million,
primarily machinery and equipment, for disposal. The Electronic Components
segment identified $22.0 million, the Fluid Technology segment identified $3.4
million and the Motion & Flow Control segment identified $0.8 million for
disposal. All assets will be disposed of by the end of 2003.
1999 RESTRUCTURING ACTIVITIES
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. Listed below, by business segment, is
background information on the 1999 restructuring plan (in millions).
<Table>
<Caption>
CASH CHARGES
--------------------------------
LEASE
PAYMENTS/ ASSET
SEVERANCE TERMINATIONS OTHER IMPAIRMENTS TOTAL
--------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
Fluid Technology......................... $ 5.1 $0.6 $1.2 $3.2 $10.1
Electronic Components.................... 5.4 - 0.3 1.1 6.8
Defense Electronics & Services........... 0.3 - - - 0.3
Motion & Flow Control.................... 1.3 0.2 0.4 1.1 3.0
----- ---- ---- ---- -----
Total 1999 Charges....................... $12.1 $0.8 $1.9 $5.4 $20.2
===== ==== ==== ==== =====
</Table>
In the fourth quarter of 1999 management in the Fluid Technology segment
concluded that continued weakness in the industrial markets represented more
than a temporary decline. As a result, to reduce excess capacity, factories in
Guelph, Canada and Maracay, Venezuela were closed, along with related sales
offices, with the functions moved to existing facilities. In addition, a
warehouse in Nottingham, England was closed and consolidated into other European
warehouses. Other positions were also determined redundant and were eliminated.
These actions resulted in the termination of 175 persons comprised of 80 factory
workers, and 95 office workers and resulted in a cash charge of $6.9 million
(which included $5.1 million for severance) and an asset impairment charge of
$3.2 million (primarily to reduce the building and related equipment to their
fair market value).
In the Electronic Components segment, a facility was closed in Meaux,
France with the operations consolidated into existing facilities or outsourced.
The closure decision was based on sales declines of two of the major products
manufactured at the facility and management's determination that it would be
more cost effective to transfer the product line to a third party.
The closure of the Meaux facility resulted in the termination of 103
persons, comprised of 76 factory workers, 26 office workers and one management
employee, and resulted in a cash charge of $5.7 million (which included $5.4
million for severance) and an asset impairment charge of $1.1 million (primarily
for machinery
25
<PAGE>
and equipment that will be disposed of as a result of the restructuring
activities).
The restructuring actions at Defense Electronics & Services segment amount
to $0.3 million and related to severance of five individuals whose positions
were deemed redundant and were eliminated.
The actions within the Motion & Flow Control segment primarily related to
headcount reductions at the Hockenheim, Germany factory and other headcount
reductions. The decisions were part of an ongoing effort to reduce costs through
consolidation of functions. The actions resulted in the termination of 43
persons comprised of 42 factory workers, and one office worker and resulted in a
cash charge of $1.9 million (which included $1.3 million for severance) and an
asset impairment charge of $1.1 million.
The following table displays a rollforward of the restructuring accruals
for the 1999 restructuring program (in millions):
<Table>
<Caption>
CASH CHARGES
--------------------------------
LEASE
PAYMENTS/ ASSET
SEVERANCE TERMINATIONS OTHER IMPAIRMENTS TOTAL
--------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
Establishment of 1999 Plan.............. $12.1 $ 0.8 $ 1.9 $ 5.4 $20.2
Payments................................ -- -- (0.1) -- (0.1)
Asset Write-Offs........................ -- -- -- (5.4) (5.4)
----- ----- ----- ----- -----
Balance December 31, 1999............... $12.1 $ 0.8 $ 1.8 $ -- $14.7
----- ----- ----- ----- -----
Payments................................ (7.0) (0.2) (1.3) -- (8.5)
Other................................... 0.1 -- (0.2) -- (0.1)
----- ----- ----- ----- -----
Balance December 31, 2000............... $ 5.2 $ 0.6 $ 0.3 $ -- $ 6.1
----- ----- ----- ----- -----
Payments................................ (5.1) (0.3) -- -- (5.4)
Other................................... -- 0.1 -- -- 0.1
----- ----- ----- ----- -----
Balance December 31, 2001............... $ 0.1 $ 0.4 $ 0.3 $ -- $ 0.8
----- ----- ----- ----- -----
Payments and other...................... (0.1) (0.4) -- -- (0.5)
Reversals............................... -- -- (0.3) -- (0.3)
----- ----- ----- ----- -----
Balance December 31, 2002............... $ -- $ -- $ -- $ -- $ --
===== ===== ===== ===== =====
</Table>
As of December 31, 2002, the 1999 restructuring plan was completed.
OTHER ASSET IMPAIRMENTS
During the fourth quarter of 1999 the Company recorded $20.0 million of
goodwill impairments at the Fluid Technology and Defense Electronics & Services
segments. The goodwill impairments at the Fluid Technology segment related to an
unprofitable Far East operation. The goodwill impairments at the Defense
Electronics & Services segment related to a product line sold in January 2000.
Both impairments were calculated based on management's future cash flow
projections of the businesses.
SUMMARY OF 1999 RESTRUCTURING AND ASSET IMPAIRMENT ACTIVITIES
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 326 persons. The Company also recorded $20.0 million
of goodwill write-offs at the Fluid Technology and Defense Electronics &
Services segments.
In the fourth quarter of 1999, the Company determined that $44.8 million of
accruals relating to 1998 restructuring plans was not going to be utilized and
should be reversed into income during the quarter. The major components of the
reversal amounts consisted of savings related to severance payments ($14.9
million), asset disposal costs ($15.4 million), and professional fees ($10.3
million) and other ($4.2 million). In the fourth quarter of 2002 the Company
reversed $0.3 million and $1.0 million related to the 1999 and 1998
restructuring plans, respectively, as it was determined that these expenditures
would not be incurred. As of
26
<PAGE>
December 31, 2002 the 1999 and 1998 restructuring plans were complete.
DISCONTINUED OPERATIONS
In September of 1998, the Company completed the sales of its automotive
Electrical Systems business to Valeo SA for approximately $1,700 million and its
Brake and Chassis unit to Continental AG of Germany for approximately $1,930
million. These dispositions were treated as discontinued operations. In
connection with the sale of these businesses, the Company established accruals
for taxes of $972.7 million, representation and warranty and contract purchase
price adjustments of $148.8 million, direct costs and other accruals of $102.0
million and environmental obligations of $16.1 million. In addition, the Company
recorded a purchase price adjustment due from Valeo SA of approximately $70
million that related to a purchase price adjustment mechanism in the contract
that called for the Company to pay or receive additional cash consideration
depending upon the actual net assets sold as compared to a target of net assets
specified in the contract.
In 1998 and 1999, 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. The Company
assessed the claims and determined that the probable outcome was reflected in
the Company's original estimate recorded at time of sale. During 1999, those
claims were submitted to arbitration.
The following tables display a rollforward of the automotive discontinued
operations accruals from January 1, 1999 to December 31, 2002 (in thousands):
<Table>
<Caption>
AUTOMOTIVE DISCONTINUED BEGINNING BALANCE 1999 1999 1999 ENDING BALANCE
OPERATIONS ACCRUALS JANUARY 1, 1999 SPENDING SETTLEMENTS OTHER ACTIVITY DECEMBER 31, 1999
- ----------------------- ----------------- --------- ----------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Direct Costs/Other...... $ 22,274 $ (17,875) $ -- $ -- $ 4,399
Representation &
Warranty.............. 83,818 -- (3,013) -- 80,805
Environmental........... 15,000 -- -- -- 15,000
Income Tax.............. 479,486 (243,170) -- -- 236,316
-------- --------- ------- ----- --------
Total................... $600,578 $(261,045) $(3,013) $ -- $336,520
======== ========= ======= ===== ========
</Table>
In 1999, the Company disbursed $261.0 million primarily on federal and
foreign tax obligations. The Company also paid $3.0 million to settle two
automotive product recall issues.
<Table>
<Caption>
AUTOMOTIVE DISCONTINUED BEGINNING BALANCE 2000 2000 2000 ENDING BALANCE
OPERATIONS ACCRUALS JANUARY 1, 2000 SPENDING SETTLEMENTS OTHER ACTIVITY DECEMBER 31, 2000
- ----------------------- ----------------- -------- ----------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Direct Costs/Other........ $ 4,399 $(4,347) $ -- $ -- $ 52
Representation &
Warranty................ 80,805 (2,914) -- (70,931) 6,960
Environmental............. 15,000 (253) -- -- 14,747
Income Tax................ 236,316 -- -- -- 236,316
-------- ------- ----- -------- --------
Total..................... $336,520 $(7,514) $ -- $(70,931) $258,075
======== ======= ===== ======== ========
</Table>
In 2000, the Company made payments of $7.5 million for direct costs
incurred in conjunction with the sale of the automotive businesses and for
defense costs related to the claims filed by the buyers.
During the fourth quarter of 2000, with assistance from outside counsel,
the Company determined that it was no longer probable that it would collect
approximately $70 million from Valeo SA. The Company also determined that it was
probable that it would not have to make payments to settle any outstanding Valeo
SA claim. As a result, the Company reversed approximately $70 million of
automotive discontinued operations accruals coincident with the reversal of the
Valeo SA receivable. The net of these actions had no impact to the Consolidated
Income Statement and resulted in the reduction of other liabilities and
receivables, net, in the Consolidated Balance Sheet.
27
<PAGE>
<Table>
<Caption>
AUTOMOTIVE DISCONTINUED BEGINNING BALANCE 2001 2001 2001 ENDING BALANCE
OPERATIONS ACCRUALS JANUARY 1, 2001 SPENDING SETTLEMENTS OTHER ACTIVITY DECEMBER 31, 2001
- ----------------------- ----------------- -------- ----------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Direct Costs/Other........ $ 52 $ -- $ -- $ 755 $ 807
Representation &
Warranty................ 6,960 (9,827) (5,793) 18,160 9,500
Environmental............. 14,747 (135) -- -- 14,612
Income Tax................ 236,316 -- -- (82,165) 154,151
-------- ------- ------- -------- --------
Total..................... $258,075 $(9,962) $(5,793) $(63,250) $179,070
======== ======= ======= ======== ========
</Table>
In 2001, the Company disbursed approximately $10 million primarily for
legal defense costs related to the claims filed by the buyers. In the second
quarter of 2001, the Company settled the Continental AG claim.
In the fourth quarter of 2001, the arbitration hearing with Valeo SA
concluded. The Company also reassessed its obligations related to the disposal
of the automotive businesses and determined that it would spend $63.3 million
less on the disposition, primarily due to favorable foreign tax rulings. Based
on this assessment, $63.3 million was reversed into the 2001 Consolidated Income
Statement under income from discontinued operations.
<Table>
<Caption>
AUTOMOTIVE DISCONTINUED BEGINNING BALANCE 2002 2002 2002 ENDING BALANCE
OPERATIONS ACCRUALS JANUARY 1, 2002 SPENDING SETTLEMENTS OTHER ACTIVITY DECEMBER 31, 2002
- ----------------------- ----------------- -------- ----------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Other Deferred
Liabilities............. $ 807 $ (46) $ -- $ -- $ 761
Accrued Expenses.......... 9,500 (909) -- 12,007 20,598
Environmental............. 14,612 (75) -- -- 14,537
Income Tax................ 154,151 -- -- -- 154,151
-------- ------- ----- ------- --------
Total..................... $179,070 $(1,030) $ -- $12,007 $190,047
======== ======= ===== ======= ========
</Table>
In the first quarter of 2002, the arbitrator ruled that Valeo SA must pay
the Company monies to settle the claim related to the sale of the Electrical
Systems business.
At December 31, 2002, the Company has automotive discontinued operations
accruals of $190.0 million that primarily relate to the following: taxes $154.2
million -- which are related to the original transaction and are recorded in
accrued taxes; product recalls $8.0 million -- related to nine potential product
recall issues which are recorded in accrued expenses; environmental obligations
$14.5 million -- for the remediation and investigation of groundwater and soil
contamination at 13 sites which are recorded in other liabilities; employee
benefits $11.5 million -- for workers compensation issues which are recorded in
accrued expenses; and other $1.9 million -- for professional fees of which $0.8
million are recorded in other liabilities and $1.1 million are recorded in
accrued expenses. In 2002, the Company has spent approximately $1 million of the
automotive discontinued operations accruals. The Company expects that it will
cash settle $154.2 million of tax obligations in 2004 or 2005, when the IRS
audit for the applicable year is concluded. The Company projects between $3.0
million and $4.0 million of annual spending related to its remaining automotive
obligations.
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 2003 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 for the Company's commercial paper
program. Commercial paper borrowings at December 31, 2002 were $264.8 million.
There were no borrowings under the credit agreement at December 31, 2002. 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, 2002, the Company's
interest coverage ratio was well in excess of the minimum requirement.
28
<PAGE>
CASH FLOWS:
Cash flows from operating activities were $594.8 million in 2002, an
increase of $118.2 million, or 24.8%, from $476.6 million generated in 2001. The
increase is largely attributable to lower tax payments and reduced spending of
accrued expenses and accounts payable, partially offset by lower cash generated
from accounts receivable and increased pension payments.
STATUS OF RESTRUCTURING ACTIVITIES:
Restructuring payments during 2002 totaled $32.2 million and were comprised
primarily of expenditures related to the 2001 restructuring plan. The Company
forecasts restructuring payments of $14.9 million in 2003, $1.3 million in 2004
and $0.1 million thereafter. All payments are projected to be made with future
cash from operations supplemented, as required by commercial paper borrowings.
See Note 4, "Restructuring and Asset Impairment Charges," in the Notes to
Consolidated Financial Statements for a detailed discussion.
ADDITIONS TO PLANT, PROPERTY AND EQUIPMENT:
Capital expenditures during 2002 were $153.2 million, a decrease of $20.8
million from 2001. Approximately 30% of the 2002 spending occurred at Fluid
Technology primarily related to the expansion of existing product lines, new
product lines and custodial replacement. Approximately 26% was incurred at
Motion & Flow Control for process improvements and custodial replacement.
Approximately 20% was spent at Electronic Components for new product
introductions and manufacturing cost reduction initiatives. Defense Electronics
& Services expended approximately 24% of the 2002 total, primarily related to
the expansion of new and existing product lines, as well as custodial
replacements. At December 31, 2002, contractual commitments have been made for
future expenditures totaling approximately $33 million.
ACQUISITIONS:
During 2002, the Company spent $159.2 million primarily for the acquisition
of nine entities. Eight of the entities were additions to the Fluid Technology
segment and one was within the Defense Electronics & Services segment. The
Company does not believe the acquisitions are material individually or in the
aggregate to its results of operation or financial condition; however the larger
of the acquisitions were as follows:
- - Flowtronex PSI Inc. ("Flowtronex"), a manufacturer of modular pumping systems
for golf courses and other turf irrigation, sports fields, municipal and
commercial properties.
- - PCI Membranes, a provider of membrane filtration and chlorine disinfection
systems for water treatment and industrial water reuse.
- - The Biopharm Manufacturing Division of Martin Petersen Company, Inc., a
leading manufacturer of process systems for the biopharmaceutical industry.
All of 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 $117.2 million
was recorded as goodwill. The purchase price allocations for the 2002
acquisitions were based on preliminary data and changes are expected as
evaluations are completed and as additional information becomes available.
Additionally, the Company also finalized purchase price allocations related to
the 2001 acquisitions, which resulted in a decrease in goodwill of $9.2 million.
During 2001, the Company spent approximately $91 million for several small
acquisitions and investments, which were not considered material individually or
in the aggregate. The acquisitions were accounted for as purchases and the
excess of the purchase price over the fair values of net assets acquired of
$72.1 million was recorded as goodwill. Additionally during 2001, the Company
completed purchase price allocations related to acquisitions made during 2000,
which resulted in an increase of goodwill of $18.3 million.
During 2000, the Company acquired C&K Components, Inc., Man-Machine
Interface 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
depending on the appropriate life.
29
<PAGE>
Effective January 1, 2002, the Company ceased recording goodwill
amortization in accordance with the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). Acquisitions made during the second half of 2001 had no
goodwill amortization in accordance with SFAS No. 142. Goodwill associated with
acquisitions made in the first half of 2001 was amortized over periods up to 40
years (See "Accounting Pronouncements" for further discussion of the impact of
SFAS No. 142). Refer to Note 2, "Changes in Accounting Pronouncements," in the
Notes to Consolidated Financial Statements for further discussion on the impacts
of this statement.
DIVESTITURES:
During 2002, the Company sold its interest in a defense-related joint
venture for approximately $6 million and other property and equipment for $5.6
million. 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. 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.
SHARE REPURCHASE:
In 2002, 2001 and 2000, 0.7 million, 3.5 million and 1.7 million shares,
respectively, were repurchased to offset the dilutive effect of exercised stock
options.
DEBT AND CREDIT FACILITIES:
Debt at December 31, 2002 was $791.8 million, compared to $973.4 million at
December 31, 2001. The decrease in debt of $181.6 million was due to strong cash
flows from operating activities partially offset by the increase in the fair
value of the Company's interest rate swaps during 2002.
CONTRACTUAL OBLIGATIONS:
The Company has entered into contractual obligations and commercial
commitments, including long-term debt, capital and operating lease obligations
and lines of credit. The Company leases certain offices, manufacturing
buildings, land, machinery, automobiles, aircraft, computers, and other
equipment. Such leases expire at various dates and may include renewals and
escalations and often require the payment of maintenance, insurance, and tax
expense. Future minimum operating lease payments under long-term operating
leases as of December 31, 2002 are shown below (in millions).
<Table>
<S> <C>
2003.......................................... $ 61.3
2004.......................................... 54.0
2005.......................................... 45.6
2006.......................................... 37.1
2007.......................................... 31.7
2008 and thereafter........................... 169.6
------
Total minimum lease payments.................. $399.3
======
</Table>
The Company is also required to make principal payments on long-term debt
over the next five years as follows (in millions):
<Table>
<Caption>
2003 2004 2005 2006 2007
- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$17.8 $1.6 $3.7 $3.6 $2.2
===== ==== ==== ==== ====
</Table>
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, 2002, 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.
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
Company's policies and procedures. See Note 1,
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"Accounting Policies," and Note 18, "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.
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 the three-month LIBOR. The carrying value of
these swaps at December 31, 2002 and 2001 was $97.0 million and $46.2 million,
including $4.0 million and $3.7 million of accrued interest, respectively.
At December 31, 2002 and 2001, the Company's short-term and long-term debt
obligations were $791.8 million and $973.4 million, respectively. In addition,
the Company's cash balances at December 31, 2002 and 2001 were $202.2 million
and $121.3 million, respectively. Based on these positions and the Company's
overall exposure to interest rates, changes of 15 and 21 basis points
(equivalent to 10% of the Company's weighted average short-term interest rates,
including the rates associated with the Company's interest rate swaps, at
December 31, 2002 and 2001, respectively) on the Company's cash and marketable
securities, and on its floating rate debt obligations and related interest rate
derivatives, would have a $0.8 million and $1.7 million effect on the Company's
pretax earnings for the years ended December 31, 2002 and 2001, respectively.
Increases of 78 and 79 basis points in long-term interest rates (equivalent to
10% of the Company's weighted average long-term interest rates at December 31,
2002 and 2001, respectively) would have a $2.8 million and $3.6 million effect
on the fair value of the Company's fixed rate debt for the years ended December
31, 2002 and 2001, respectively.
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 2002, 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,
2002, the Company had nine foreign currency derivatives outstanding for a total
notional amount of $109.1 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, 2002, would have an
impact of approximately $4.3 million on the fair value of such instruments.
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. 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, 2002 for income taxes paid in foreign jurisdictions.
DEFERRED TAX ASSETS:
The Company had net deferred tax assets of $532.9 million and $297.6
million at December 31, 2002 and 2001, 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
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from temporary differences between assets and liabilities for financial
reporting and tax purposes and primarily relate to the timing of accrual
payments, 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.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported value of assets and liabilities and the
disclosure of contingent assets and liabilities.
The Company has identified three accounting policies where estimates are
used that require assumptions or factors that are of an uncertain nature, or
where a different estimate could have been reasonably utilized or changes in the
estimate are reasonably likely to occur from period to period.
ENVIRONMENTAL:
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 can be
reasonably estimated. The Company calculates the liability by utilizing a cost
estimating and weighting matrix that separates costs into recurring and
non-recurring categories. The Company then uses internal and external experts to
assign confidence levels based on the site's development stage, type of
contaminant found, applicable laws, existing technologies and the identification
of other potentially responsible parties. This methodology produces a range of
estimates, including a best estimate. At December 31, 2002, the Company's best
estimate is $113 million, which approximates the accrual, related to the
remediation of ground water and soil. The low range estimate for environmental
liabilities is $85 million and the high range estimate is $174 million. On an
annual basis the Company spends between $11 million and $14 million on its
environmental remediation liabilities. These estimates are reviewed periodically
and updated for progress of remediation efforts and changes in facts and legal
circumstances. Liabilities for environmental expenditures are recorded on an
undiscounted basis.
The Company is currently involved in the environmental investigation and
remediation of 104 sites, including certain instances where it is considered to
be a potentially responsible party by the United States Environmental Protection
Agency ("EPA") or similar state agency.
At present, the Company is involved in litigation against its insurers for
reimbursement of environmental response costs. Recoveries from insurance
companies or other third parties are recognized in the financial statements when
it is probable that they will be realized.
In the event that future remediation expenditures are in excess of the
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.
See Note 21, "Commitments and Contingencies," in the Notes to Consolidated
Financial Statements for additional details on environmental matters.
EMPLOYEE BENEFIT PLANS:
The Company sponsors numerous employee pension and welfare benefit plans.
These plans utilize various assumptions in the determination of projected
benefit obligations and expense recognition related to pension and other
postretirement obligations. These assumptions include: discount rates, expected
rates of return on plan assets, rate of future compensation increases,
mortality, termination and health care inflation trend rates, some of which are
disclosed in Note 19, "Employee Benefit Plans," in the Notes to Consolidated
Financial Statements.
Key Pension Assumptions:
Management develops each assumption by using relevant Company experience in
conjunction with market related data for each individual country in which such
plans exist. All assumptions are reviewed periodically with third party
actuarial consultants and adjusted as necessary.
At December 31, 2002, the Company lowered the discount rate on all of its
domestic pension plans, which represent about 92% of the Company's total pension
obligations, from 7.25% to 6.50%. The Company's weighted average discount rate
for all pension plans, including foreign affiliate plans, at December 31, 2002,
is 6.44%.
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<PAGE>
Reflecting lower future expected return on assets, the Company revised
downward its estimate of the long-term rate of return on assets for domestic
pension plans to 9.0%, from 9.75% at December 31, 2002. The revised estimate of
9.0% incorporates downward adjustments from historical levels of the risk-free
rate of return and of the equity risk premium. For reference, the Company's
average annual return on plan assets for domestic pension plans stood at 9.3%,
10.4%, 11.3% and 11.9%, for the past 10, 15, 20, and 25 year periods,
respectively. The Company's weighted average expected return on plan assets for
all pension plans, including foreign affiliate plans, at December 31, 2002, is
8.86%.
<Table>
<Caption>
ASSUMPTION 2001 2002
- ---------- ---- ----
<S> <C> <C>
Discount Rate........................... 7.14% 6.44%
Long-Term Rate of Return on Assets...... 9.61% 8.86%
==== ====
</Table>
Pension Funding:
The Company contributed $50.0 million to the U.S. Master Trust in the
fourth quarter of 2002, and contributed $200 million in the first quarter of
2003. As a result, the Company will not face substantial mandatory contributions
in 2004, under current IRS contribution rules.
Depending on market conditions, and assuming that current IRS contribution
rules continue to apply in the future, the Company estimates that it may be
required to contribute an additional $200 million to $400 million in the 2005 to
2006 timeframe.
The Company's Defense Electronics & Services segment represents
approximately 50% of the active U.S. Salaried Plan participants. As a result,
the Company will seek reimbursement from the Department of Defense for a portion
of its pension costs, in accordance with government regulations.
Funded Status:
Funded status is derived by subtracting the value of the projected benefit
obligations at December 31, 2002 from the end of year fair value of plan assets.
During 2002, the Company's U.S. Salaried Pension Plan assets declined by
$446.7 million to $2,341.8 million at the end of 2002. This decline reflected
primarily a negative return on assets of $291.5 million, payments to plan
beneficiaries of $202.3 million and Company contributions of $50.0 million. In
addition, the projected plan obligation for the U.S. Salaried Pension Plan
increased substantially due to the 75 basis point decrease in the discount rate
at year-end. As a result, funded status for the Company's total pension
obligation, including affiliate plans, deteriorated from $(383.5) million at the
end of 2001 to $(1,323.9) million at the end of 2002.
Funded status at the end of 2003 will depend primarily on the actual return
on assets during the year and the discount rate at the end of the year. The
Company estimates that every 25 basis points change in the discount rate impacts
the funded status of the U.S. Salaried Pension Plan, which represents about 81%
of the Company's pension obligations, by approximately $90 million. Similarly,
every five percentage points in the 2003 rate of return on assets impacts the
same plan by approximately $130 million.
Assuming a range of return on assets of -5% to +5% for 2003, and a range of
the discount rate of 6.25% to 6.75%, the Company estimates that the total
projected benefit obligations will be underfunded by approximately $1.2 billion
to $1.7 billion at December 31, 2003.
Minimum Pension Liability:
SFAS No. 87, "Employers Accounting for Pension," requires that a minimum
pension liability be recorded if a plan's market value of assets falls below the
plan's accumulated benefit obligation. In 2002, the combination of a decline in
assets and a decline in the discount rate caused several of the Company's plans
to show such a deficit. As a result, during 2002, the Company recorded a total
after-tax reduction of $765.5 million to its total shareholders' equity. It is
important to note that this reduction in total equity did not cause a default in
any of the Company's debt covenants. Future recognition of additional minimum
pension liabilities will depend primarily on the rate of return on assets and
the prevailing discount rate.
Pension Expense:
The Company recorded $10.4 million of pension income into its Consolidated
Income Statement in 2002. The Company expects to incur approximately $20 million
of pension expense that will be recorded into its Consolidated Income Statement
in 2003.
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<PAGE>
REVENUE RECOGNITION:
The Company recognizes revenue as services are rendered and when title
transfers for products, subject to any special terms and conditions of specific
contracts. For the majority of the Company's sales, title transfers when
products are shipped. Under certain circumstances, title passes when products
are delivered. In the Defense Electronics & Services segment, certain contracts
require the delivery, installation, testing, certification and customer
acceptance before revenue can be recorded. Further, some sales are recognized
when the customer picks up the product.
The Defense Electronics & Services segment typically recognizes revenue and
anticipated profits under long-term, fixed-price contracts based on units of
delivery or the completion of scheduled performance milestones. Estimated
contract costs and resulting margins are recorded in proportion to recorded
sales. During the performance of such contracts, estimated final contract prices
and costs (design, manufacturing, and engineering and development costs) are
periodically reviewed and revisions are made when necessary. The effect of these
revisions to estimates is included in earnings in the period in which revisions
are made. There were no material revisions to estimates in the covered periods.
Accruals for estimated expenses related to warranties are made at the time
products are sold or services are rendered. These accruals are established using
historical information on the nature, frequency and average cost of warranty
claims and estimates of future costs. Management believes the warranty accruals
are adequate; however, actual warranty expenses could differ from estimated
amounts. The accrual for product warranties at December 31, 2002 and 2001 was
$40.4 million and $37.7 million, respectively. See Note 22, "Guarantees,
Indemnities and Warranties," in the Notes to Consolidated Financial Statements
for additional details.
ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 141, "Business Combinations" ("SFAS No. 141"),
effective July 1, 2001. 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
intangibles are required to be amortized over their economic useful lives. The
adoption of SFAS No. 141, in 2001, did not have a material impact on the
Company's results of operations or financial position.
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 ceased 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 existed.
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. The Company adopted SFAS No. 143 effective
January 1, 2003. The adoption of the pronouncement did not have a material
impact on the Company's results of operations or financial position.
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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured at its fair value in the period it is
incurred and applies prospectively to such activities that are initiated after
December 31, 2002. The provisions of this standard are not expected to have a
material effect on the Company's future results, results of operations or
financial condition.
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<PAGE>
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS No. 148"). SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. The Statement also requires prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method on
reported results. The Company adopted the disclosure requirements of SFAS No.
148 effective December 2002 and continues to account for its plans under the
intrinsic value recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issues to Employees."
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the
recognition of liabilities for guarantees that are issued or modified subsequent
to December 31, 2002. The liabilities should reflect the fair value, at
inception, of the guarantors' obligations to stand ready to perform, in the
event that the specified triggering events or conditions occur. The Company is
currently evaluating the provisions of this interpretation; however, it does not
believe they will have a material effect on the Company's future results of
operations or financial condition. The Interpretation also requires disclosure
of accounting policies and methodologies with respect to warranty accruals, as
well as a reconciliation of the change in these accruals for the reporting
period. Refer to Note 22, "Guarantees, Indemnities and Warranties," in the Notes
to Consolidated Financial Statements for additional information.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires unconsolidated variable
interest entities to be consoli-dated by their primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership among
their owners and other parties involved. The provisions of FIN 46 are applicable
immediately to all variable interest entities created after January 31, 2003 and
variable interest entities in which an enterprise obtains an interest after that
date, and for variable interest entities created before this date, the
provisions are effective July 1, 2003. The Company is currently evaluating the
provisions of this interpretation; however, we do not believe they will have a
material impact on the Company's results of operations or financial position.
RISKS AND UNCERTAINTIES
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 included in other assets when it is
probable that a claim will be realized. Although the outcome of the Company's
various remediation efforts presently cannot be predicted with a high level of
certainty, management does not expect that these matters will have a material
adverse effect on the Company's consolidated financial position, results of
operations, or cash flows. For disclosure of the Company's commitments and
contingencies, see Note 21, "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements.
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<PAGE>
EURO CONVERSION:
The Company successfully implemented its Euro conversion plans and has not
experienced any problems related to the conversion.
2003 OUTLOOK:
The Company does not expect improvement in overall economic conditions in
2003 due to continued low growth and overcapacity, which will continue to dampen
capital spending. Moreover, the Company anticipates continued pricing pressure
in its major commercial segments. The Company believes that Defense spending in
the United States will increase. Overall, the Company expects 2003 revenue to
increase 3% to 5% over 2002 revenue, partially as a result of acquisitions
completed in 2002. Operating margin is expected to be flat with the 2002
operating margin reflecting the increased contribution of the Defense
Electronics & Services segment and the challenging market conditions described
above. Higher taxes, including the absence of a $61.2 million tax refund, are
the primary reason that the Company anticipates lower EPS in 2003 of $3.70 to
$3.90. The Company further expects cash from operating activities to be at least
$370 million, reflecting the $200 million pre-funding of pension obligations.
In the Fluid Technology business, the Company expects continued growth in
its Water & Wastewater businesses and weakness in Industrial Pumps will
translate to revenue growth of 5% to 7% over 2002. In the Defense Electronics &
Services business, the Company believes that its record backlog and program
ramp-up will translate into revenue growth of 5% to 7% over 2002. In the Motion
& Flow Control business, the Company expects that declines in worldwide
automotive and airplane build rates, automotive platform losses and weakness in
the aerospace controls market will translate into a revenue decline of 4% to 6%
from 2002. In the Electronic Components business, the Company believes that
pricing pressures and softness in most end markets will continue. To address
these conditions, the Company will continue shifting its production footprint to
low cost regions. It is anticipated that this will entail restructuring actions
and associated period costs. Despite the challenging conditions, the Company
believes the affect of new products and market penetration will result in
revenue growth of flat to 3% from 2002.
The Company expects to receive tax refunds in 2003, some of which will
favorably impact the effective tax rate and interest expense lines of the
Consolidated Income Statements. The affect of these tax refunds are not included
in the EPS guidance provided above.
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," "Critical Accounting Policies" 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
seg-
36
<PAGE>
ments 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; 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 its major markets, the success of new products 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.
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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
In April 2002, the Company engaged Deloitte & Touche LLP (Deloitte &
Touche) to serve as ITT's independent auditor for 2002. Prior to that date,
Arthur Andersen LLP (Andersen) had served as the Company's independent public
accountants.
The reports by Andersen on the Company's consolidated financial statements
for the past two years did not contain an adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles. Andersen's report on ITT's consolidated financial
statements for 2001 was issued on an unqualified basis in conjunction with the
publication of ITT's 2001 Annual Report to Shareowners and the filing of ITT's
Annual Report on Form 10-K.
During the Company's two most recent fiscal years, and through the date of
the change, there were no disagreements with Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures which, if not resolved to Andersen's satisfaction, would
have caused them to make reference to the subject matter in connection with
their report on the Company's consolidated financial statements for such years;
and there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K.
The decision to change accountants was recommended by the Audit Committee
and approved by the Board of Directors on March 22, 2002.
During 2002, there were no disagreements with Deloitte & Touche on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures which, if not resolved to Deloitte & Touche's
satisfaction, would have caused them to make reference to the subject matter in
connection with their report on the Company's consolidated financial statements
for 2002 and there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K.
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."
ITT Industries has adopted a written code of ethics, "Code of Corporate
Conduct," which is applicable to all ITT directors, officers and employees,
including the Company's Chief Executive Officer, Chief Financial Officer, and
Principal Accounting Officer and Controller and other executive officers
identified pursuant to this Item 10 (collectively, the "Selected Officers"). In
accordance with the Securities and Exchange Commission's rules and regulations a
copy of the code has been filed as an exhibit to this Form 10-K and has been
posted on our website. ITT Industries intends to disclose any changes in or
waivers from its
38
<PAGE>
code of ethics applicable to any Selected Officer or director on its website at
http://www.itt.com.
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 under the
captions "Beneficial Ownership of ITT Industries Common Stock" and "Equity
Compensation Plan Information".
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.
ITEM 14. CONTROLS AND PROCEDURES
(a) The Chief Executive Officer and Chief Financial Officer of the Company
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date
within 90 days prior to the filing date of this annual report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are effective
in identifying, on a timely basis, material information required to be disclosed
in our reports filed or submitted under the Exchange Act.
(b) There have been no significant changes in our internal controls or in
other factors that could significantly affect such controls since the Evaluation
Date.
PART IV
ITEM 15. 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.
39
<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, 2002......................................... F-6
Consolidated Statements of Comprehensive Income for the
three years ended December 31, 2002....................... F-7
Consolidated Balance Sheets as of December 31, 2002 and
2001...................................................... F-8
Consolidated Statements of Cash Flows for the three years
ended December 31, 2002................................... F-9
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 2002............... F-10
Notes to Consolidated Financial Statements.................. F-11
Business Segment Information................................ F-34
Geographical Information.................................... F-34
Sales and Revenues by Product Category...................... F-35
Quarterly Results for 2002 and 2001......................... F-36
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 Deloitte &
Touche LLP, independent auditors, whose appointment is ratified by the
shareholders. Management has made ITT Industries' financial records and related
data available to Deloitte & Touche LLP, and believes that the representations
made to the independent auditors 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 auditors also consider internal controls and
perform tests of 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.
Within the past year ITT Industries established a Disclosure Committee with
responsibility for considering and evaluating the materiality of information and
reviewing disclosure obligations on a timely basis. The Disclosure Committee
meets regularly, reports to the General Counsel and the Chief Financial Officer
and assists the Chief Executive Officer and the Chief Financial Officer in
designing, establishing, reviewing and evaluating the Company's disclosure
controls and procedures.
The Audit Committee of the Board of Directors, composed of independent,
non-employee directors, meets periodically with management and, also separately
and privately, with the independent auditors and contracted auditors to evaluate
the effectiveness of the work performed by them in discharging their respective
responsibilities.
<Table>
<S> <C>
/s/ Louis J. Giuliano /s/ David J. Anderson
Louis J. Giuliano David J. Anderson
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
</Table>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
ITT INDUSTRIES, INC. AND SUBSIDIARIES
To Board of Directors and Shareholders of ITT Industries, Inc., White Plains,
New York
We have audited the accompanying consolidated balance sheet of ITT
Industries, Inc. and subsidiaries ("the Company") as of December 31, 2002, and
the related consolidated statements of income, comprehensive income, changes in
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of the Company as of December
31, 2001 and for each of the years ended December 31, 2001 and 2000 were audited
by other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements in their report dated January
23, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such 2002 consolidated financial statements present fairly,
in all material respects, the financial position of ITT Industries, Inc. and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002 the Company changed its method of accounting for goodwill to
conform to Statement of Financial Accounting Standards (SFAS) No. 142.
As discussed above, the consolidated financial statements of ITT
Industries, Inc. and subsidiaries as of December 31, 2001, and for each of the
years ended December 31, 2001 and 2000 were audited by other auditors who have
ceased operations. Notes 6, 13 and 17 of these financial statements include
additional disclosures related to 2001 and 2000. The additional disclosures and
the audit procedures performed by us on those additional disclosures are
described below.
Note 6 to the consolidated financial statements for the years ended
December 31, 2001 and 2000 includes additional disclosures relating to the
components comprising sales and revenues and costs of sales and revenues. Our
audit procedures with respect to the disclosures in Note 6 with respect to 2001
and 2000 included (i) agreeing the previously reported sales and revenues and
costs of sales and revenues to previously issued financial statements (ii)
agreeing the product sales, service revenues, costs of product sales and costs
of service revenues to the Company's underlying sales and revenues and costs of
sales and revenues records obtained from management, (iii) agreeing the service
revenues and costs of service revenues by segment to the Company's underlying
service revenues and costs of service revenues records obtained from management,
and (iv) testing the mathematical accuracy of the reconciliation of the product
sales, service revenues, costs of product sales and costs of service revenues.
In our opinion, the disclosures for 2001 and 2000 in Note 6 are appropriate.
As discussed in Note 13 to the consolidated financial statements, the
consolidated financial statements for the years ended December 31, 2001 and 2000
have been revised to include the transitional disclosures required by SFAS No.
142, which was adopted by the Company as of January 1, 2002. Our audit
procedures with respect to the disclosures on the consolidated income statement
and in Note 13 with respect to 2001 and 2000 included (i) agreeing the
previously reported net income to the previously issued financial statements and
the adjustments to reported net income, representing amortization expense
(including any related tax effects) recognized in
F-3
<PAGE>
those periods related to goodwill and intangible assets that are no longer being
amortized, to the Company's underlying records obtained from management, (ii)
testing the mathematical accuracy of the reconciliation of reported net income
to adjusted net income, and the related earnings per share amounts, (iii)
agreeing goodwill by reportable segment, as of December 31, 2001, to the
Company's underlying records obtained from management, (iv) agreeing amortized
intangibles, including patents and other intangibles, and accumulated
amortization, and unamortized intangibles, including brands, trademarks, and
pension related intangibles, to the Company's underlying records obtained from
management, and (v) testing the mathematical accuracy of the reconciliation of
amortized intangibles and unamortized intangibles. In our opinion, the
disclosures for 2001 and 2000 on the consolidated income statement and in Note
13 are appropriate.
Note 17 to the consolidated financial statements for the years ended
December 31, 2001 and 2000 includes additional disclosures relating to the cash
flow components comprising the individual changes in receivables, inventories,
and accounts payable and accrued expenses. Our audit procedures with respect to
the disclosures in Note 17 with respect to 2001 and 2000 included (i) agreeing
the previously reported cumulative change in accounts receivables, inventories,
and accounts payable and accrued expenses to previously issued financial
statements (ii) agreeing the change in receivables, change in inventories, and
change in accounts payable and accrued expenses to the Company's underlying
records obtained from management, and (iii) testing the mathematical accuracy of
the reconciliation of the change in receivables, inventories, and accounts
payable and accrued expenses. In our opinion, the disclosures for 2001 and 2000
in Note 17 are appropriate.
We were not engaged to audit, review, or apply any procedures to the 2001
and 2000 consolidated financial statements of the Company other than with
respect to such disclosures mentioned above and, accordingly, we do not express
an opinion or any other form of assurance on the 2001 or 2000 consolidated
financial statements taken as a whole.
Our audit was conducted for the purpose of forming an opinion on the basic
2002 financial statements taken as a whole. The supplemental schedule listed in
the table of contents on page S-1 is presented for the purpose of additional
analysis and is not a required part of the basic financial statements. This
schedule is the responsibility of the Company's management. Such 2002 schedule
has been subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects when considered in relation to the basic financial statements taken as
a whole. The 2001 and 2000 schedules were subjected to auditing procedures by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statement schedules in their report dated
January 23, 2002.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
January 22, 2003
F-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ITT INDUSTRIES, INC. AND SUBSIDIARIES
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
This is a copy of the audit report previously issued by Arthur Andersen LLP
in connection with the Company's 2001 annual report on Form 10-K. This audit
report has not been reissued by Arthur Andersen LLP. Refer to Exhibit 23.2
regarding the implications of the lack of an updated consent from Arthur
Andersen LLP to the use of this audit report.
F-5
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<Table>
<Caption>
Year ended December 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
(in millions, except per share amounts)
<S> <C> <C> <C>
Sales and revenues................................ $4,985.3 $4,675.7 $4,829.4
-------- -------- --------
Costs of sales and revenues....................... 3,211.9 3,044.5 3,195.3
Selling, general and administrative expenses...... 720.2 671.3 713.6
Research, development and engineering expenses.... 519.1 424.7 391.2
Goodwill amortization expense..................... -- 40.7 36.2
Restructuring and asset impairments............... (3.5) 97.7 --
-------- -------- --------
Total costs and expenses.......................... 4,447.7 4,278.9 4,336.3
-------- -------- --------
Operating income.................................. 537.6 396.8 493.1
Interest expense, net............................. 32.4 62.0 75.2
Miscellaneous (income) expense.................... (3.6) 1.4 (2.0)
-------- -------- --------
Income from continuing operations before income
taxes........................................... 508.8 333.4 419.9
Income tax expense................................ 128.9 116.7 155.4
-------- -------- --------
Income from continuing operations................. 379.9 216.7 264.5
Discontinued operations:
Income from discontinued operations, including
tax benefit of $50.7......................... -- (60.0) --
-------- -------- --------
Net income........................................ $ 379.9 $ 276.7 $ 264.5
======== ======== ========
EARNINGS PER SHARE
Income from continuing operations:
Basic........................................ $ 4.17 $ 2.46 $ 3.01
Diluted...................................... $ 4.06 $ 2.39 $ 2.94
Discontinued operations:
Basic........................................ $ -- $ 0.68 $ --
Diluted...................................... $ -- $ 0.66 $ --
Net income:
Basic........................................ $ 4.17 $ 3.14 $ 3.01
Diluted...................................... $ 4.06 $ 3.05 $ 2.94
PRO FORMA RESULTS
Reported net income............................. $ 379.9 $ 276.7 $ 264.5
Add back goodwill amortization, net of tax...... -- 35.9 31.4
-------- -------- --------
Adjusted net income............................. $ 379.9 $ 312.6 $ 295.9
======== ======== ========
Adjusted basic earnings per share............... $ 4.17 $ 3.55 $ 3.37
Adjusted diluted earnings per share............. $ 4.06 $ 3.45 $ 3.29
AVERAGE COMMON SHARES -- BASIC.................... 91.0 88.1 87.9
AVERAGE COMMON SHARES -- DILUTED.................. 93.6 90.6 90.0
-------- -------- --------
</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 COMPREHENSIVE INCOME
<Table>
<Caption>
Year ended December 31, 2002
---------------------------------
(in millions)
PRETAX TAX
INCOME (EXPENSE) AFTER-TAX
(EXPENSE) BENEFIT AMOUNT
--------- --------- ---------
<S> <C> <C> <C>
Net income................................................. $ 379.9
Other income (loss):
Foreign currency translation:
Adjustments arising during period..................... $ 99.0 $ -- 99.0
Unrealized (loss) gain on investment securities.......... (0.1) -- (0.1)
Minimum pension liability................................ (1,172.2) 406.7 (765.5)
--------- ------ -------
Total other loss................................. $(1,073.3) $406.7 (666.6)
--------- ------ -------
Comprehensive loss......................................... $(286.7)
=======
</Table>
<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 (loss) gain 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>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-7
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
December 31,
-------------------------------
2002 2001
------------- -------------
(in millions, except share and
per share amounts)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 202.2 $ 121.3
Receivables, net.......................................... 868.3 774.3
Inventories, net.......................................... 552.9 496.3
Other current assets...................................... 77.1 66.9
-------- --------
Total current assets................................. 1,700.5 1,458.8
Plant, property and equipment, net.......................... 841.2 791.0
Deferred income taxes....................................... 546.3 310.9
Goodwill, net............................................... 1,550.5 1,415.0
Other intangible assets, net................................ 74.4 42.9
Other assets................................................ 676.7 489.8
-------- --------
Total non-current assets.................................. 3,689.1 3,049.6
-------- --------
TOTAL ASSETS.............................................. $5,389.6 $4,508.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 484.0 $ 400.5
Accrued expenses.......................................... 725.3 727.9
Accrued taxes............................................. 221.3 251.2
Notes payable and current maturities of long-term debt.... 299.6 517.0
-------- --------
Total current liabilities.............................. 1,730.2 1,896.6
Pension benefits............................................ 1,430.3 199.0
Postretirement benefits other than pensions................. 198.7 195.9
Long-term debt.............................................. 492.2 456.4
Other liabilities........................................... 400.9 384.7
-------- --------
Total non-current liabilities.......................... 2,522.1 1,236.0
-------- --------
TOTAL LIABILITIES...................................... 4,252.3 3,132.6
Shareholders' Equity:
Common stock: Authorized -- 200,000,000 shares, $1 par
value per share outstanding -- 91,824,515 shares and
88,786,701 shares...................................... 91.8 88.8
Retained earnings......................................... 1,939.1 1,514.0
Accumulated other comprehensive loss:
Unrealized loss on minimum pension liability........... (784.7) (19.2)
Other comprehensive loss............................... (108.9) (207.8)
-------- --------
Total accumulated other comprehensive loss............. (893.6) (227.0)
-------- --------
Total shareholders' equity............................. 1,137.3 1,375.8
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $5,389.6 $4,508.4
======== ========
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-8
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
Year ended December 31,
------------------------
2002 2001 2000
------ ------ ------
(in millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $379.9 $276.7 $264.5
Income from discontinued operations......................... -- (60.0) --
------ ------ ------
Income from continuing operations........................... 379.9 216.7 264.5
Adjustments to income from continuing operations:
Depreciation and amortization............................. 171.4 212.9 201.8
Restructuring and asset impairments....................... (3.5) 97.7 --
Payments for restructuring.................................. (32.2) (27.1) (25.9)
Change in receivables, inventories, accounts payable, and
accrued expenses.......................................... 34.2 (68.5) (26.9)
Change in accrued and deferred taxes........................ 125.2 27.3 44.2
Change in other current and non-current assets.............. (56.7) 20.7 (2.0)
Change in other non-current liabilities..................... (33.3) (5.1) (34.2)
Other, net.................................................. 9.8 2.0 (6.9)
------ ------ ------
Net Cash -- operating activities.......................... 594.8 476.6 414.6
------ ------ ------
INVESTING ACTIVITIES
Additions to plant, property and equipment.................. (153.2) (174.0) (180.6)
Acquisitions................................................ (159.2) (90.9) (192.0)
Proceeds from sale of assets and businesses................. 11.6 42.5 47.6
Other, net.................................................. (3.2) 2.4 (1.3)
------ ------ ------
Net Cash -- investing activities.......................... (304.0) (220.0) (326.3)
------ ------ ------
FINANCING ACTIVITIES
Short-term debt, net........................................ (235.8) (32.4) (43.5)
Long-term debt repaid....................................... (3.3) (77.2) (21.1)
Long-term debt issued....................................... 0.7 6.4 0.9
Repurchase of common stock.................................. (32.3) (150.9) (54.0)
Proceeds from issuance of common stock...................... 93.3 104.3 27.4
Dividends paid.............................................. (54.3) (52.9) (52.9)
Other, net.................................................. -- 0.9 (0.8)
------ ------ ------
Net Cash -- financing activities.......................... (231.7) (201.8) (144.0)
------ ------ ------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS.......... 5.3 (3.8) (28.0)
NET CASH -- DISCONTINUED OPERATIONS......................... 16.5 (18.4) (9.3)
------ ------ ------
Net change in cash and cash equivalents..................... 80.9 32.6 (93.0)
Cash and cash equivalents -- beginning of year.............. 121.3 88.7 181.7
------ ------ ------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $202.2 $121.3 $ 88.7
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.................................................. $ 51.5 $ 77.6 $ 82.3
Income taxes.............................................. $ 22.9 $ 84.6 $108.6
------ ------ ------
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-9
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<Table>
<Caption>
Shares Outstanding Dollars
------------------ ------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000 2002 2001 2000
- ----------------------- ---- ---- ---- -------- -------- --------
(amounts in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Beginning balance........................... 88.8 87.9 87.9 $ 88.8 $ 87.9 $ 87.9
Stock incentive plans..................... 3.7 4.4 1.7 3.7 4.4 1.7
Repurchases............................... (0.7) (3.5) (1.7) (0.7) (3.5) (1.7)
---- ---- ---- -------- -------- --------
Ending balance............................ 91.8 88.8 87.9 $ 91.8 $ 88.8 $ 87.9
---- ---- ---- -------- -------- --------
RETAINED EARNINGS
Beginning balance........................... $1,514.0 $1,306.9 $1,113.8
Net income................................ 379.9 276.7 264.5
Common stock dividend declared -- $.60,
$.60 and $.60.......................... (54.8) (52.9) (52.9)
Issuances (repurchases)................... 100.0 (16.7) (18.5)
-------- -------- --------
Ending balance............................ $1,939.1 $1,514.0 $1,306.9
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
Unrealized Loss on Minimum Pension
Liability:
Beginning balance...................... $ (19.2) $ (12.9) $ --
Recognition of minimum pension
liability............................ (765.5) (6.3) (12.9)
-------- -------- --------
Ending balance......................... $ (784.7) $ (19.2) $ (12.9)
-------- -------- --------
Unrealized Loss on Investment Securities:
Beginning balance...................... $ (1.6) $ (2.3) $ (0.7)
Unrealized gain (loss)................. (0.1) 0.7 (1.6)
-------- -------- --------
Ending balance......................... $ (1.7) $ (1.6) $ (2.3)
-------- -------- --------
Cumulative Translation Adjustments:
Beginning balance...................... $ (206.2) $ (168.4) $ (101.9)
Translation of foreign currency
financial statements................. 99.0 (37.8) (66.5)
-------- -------- --------
Ending balance......................... $ (107.2) $ (206.2) $ (168.4)
-------- -------- --------
Other comprehensive loss.................. $ (108.9) $ (207.8) $ (170.7)
-------- -------- --------
Total accumulated other comprehensive
loss................................... $ (893.6) $ (227.0) $ (183.6)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY.................. $1,137.3 $1,375.8 $1,211.2
======== ======== ========
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-10
<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. 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 intercompany transactions have
been eliminated. See Note 23, "Business Segment Information," for a description
of the Company's segments.
SALES AND REVENUE RECOGNITION:
The Company recognizes revenues as services are rendered and when title
transfers for products, subject to any special terms and conditions of specific
contracts. 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.
For 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 recorded 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 78.0%, 76.4% and
74.6% of total RD&E costs were expended pursuant to customer contracts for each
of the three years ended December 31, 2002, 2001 and 2000, 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 policy is employed using standard cost
techniques that are periodically reviewed and adjusted when required. Potential
losses from obsolete and slow-moving inventories are recorded when identified.
Domestic inventories valued under the last-in, first-out ("LIFO") method
represent 11.4% and 13.2% of total 2002 and 2001 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 were recorded in restructuring and asset impairments.
See Note 4, "Restructuring and
F-11
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Asset Impairment Charges," 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. 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 -- five to 40 years, machinery and equipment -- two to 10 years,
furniture and office equipment -- three to seven years, and other -- five 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:
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill, the
excess of cost over the fair value of net assets acquired, and indefinite-lived
intangible assets are tested for impairment on an annual basis, or more
frequently if circumstances warrant. As of January 1, 2002, pursuant to SFAS No.
142, the Company ceased amortization of all goodwill and indefinite-lived
assets. During 2001 and 2000, goodwill was amortized on a straight-line basis
over periods not exceeding 40 years, and purchased intangible assets including
patents, trademarks and non-compete agreements were amortized on a straight-line
basis over their economic useful lives not to exceed 40 years. 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 (income) expense 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. Net gains from foreign currency
transactions are reported currently in selling, general and administrative
expenses and were $0.3, $2.9 and $2.5 in 2002, 2001, and 2000, 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.
Additionally, all derivative instruments are recorded on the balance sheet
at fair value as derivative assets or derivative liabilities. Subject to certain
specific qualifying conditions in SFAS
F-12
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), a derivative instrument may be designated either as a hedge of the
fair value of an asset or liability (fair value hedge), or as a hedge of the
variability of cash flows of an asset or liability or forecasted transaction
(cash flow hedge). For a derivative instrument qualifying as a fair value hedge,
fair value gains or losses on the derivative instrument are reported in net
income, together with offsetting fair value gains or losses on the hedged item
that are attributable to the risk being hedged. For a derivative instrument
qualifying as a cash flow hedge, fair value gains or losses associated with the
risk being hedged are reported in other comprehensive income and released to net
income in the period(s) in which the effect on net income of the hedged item is
recorded. Fair value gains and losses on a derivative instrument not qualifying
as a hedge are reported in net income.
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.
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.
STOCK-BASED EMPLOYEE COMPENSATION:
At December 31, 2002, the Company has two stock-based employee compensation
plans and one stock-based non-employee director's compensation plan, which are
described more fully in Note 20, "Shareholders' Equity." The Company accounts
for these plans under the intrinsic value recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Had compensation cost for these plans been determined based on
the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:
<Table>
<Caption>
2002 2001 2000
------ ------ ------
<S> <C> <C> <C>
Net income
As reported........................ $379.9 $276.7 $264.5
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for awards not reflected in net
income -- net of tax............... (21.4) (27.1) (12.0)
------ ------ ------
Pro forma net income............... 358.5 249.6 252.5
Basic earnings per share
As reported........................ $ 4.17 $ 3.14 $ 3.01
Pro forma.......................... 3.94 2.83 2.87
Diluted earnings per share
As reported........................ $ 4.06 $ 3.05 $ 2.94
Pro forma.......................... 3.83 2.75 2.81
------ ------ ------
</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 2002, 2001 and 2000: dividend yield of 1.65%, 1.89%
and 1.99%, respectively; expected volatility of 28.30%, 27.61% and 26.79%,
respectively; expected life of six years; and risk-free interest rates of 4.78%,
4.91% and 6.73%, respectively.
F-13
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The value of stock based compensation that was recognized in selling,
general and administrative expenses within the Consolidated Income Statements
during the periods ended December 31, 2002, 2001 and 2000 were $0.6, $0.9, and
$1.2, respectively.
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 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.
The Company adopted SFAS No. 141, "Business Combinations" ("SFAS No. 141"),
effective July 1, 2001. 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
intangibles are 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.
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 ceased 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 existed.
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. The Company adopted SFAS No. 143 effective
January 1, 2003. The adoption of the pronouncement did not have a material
impact on the Company's results of operations or financial position.
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
F-14
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured at its fair value in the period it is
incurred and applies prospectively to such activities that are initiated after
December 31, 2002. The provisions of this standard are not expected to have a
material effect on the Company's future results, results of operations or
financial condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS No. 148"). SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also requires prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method on
reported results. The Company adopted the disclosure requirements of SFAS No.
148 effective December 2002 and continues to account for its plans under the
intrinsic value recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issues to Employees."
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
flows of the Company.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the
recognition of liabilities for guarantees that are issued or modified subsequent
to December 31, 2002. The liabilities should reflect the fair value, at
inception, of the guarantors' obligations to stand ready to perform, in the
event that the specified triggering events or conditions occur. The Company is
currently evaluating the provisions of this interpretation; however, does not
believe they will have a material effect on the Company's future results of
operations or financial condition. FIN 45 also requires disclosure of accounting
policies and methodologies with respect to warranty accruals, as well as a
reconciliation of the change in these accruals for the reporting period. Refer
to Note 22, "Guarantees, Indemnities and Warranties," for additional
information.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership among
their owners and other parties involved. The provisions of FIN 46 are applicable
immediately to all variable interest entities created after January 31, 2003 and
variable interest entities in which an enterprise obtains an interest in after
that date, and for variable interest entities created before this date, the
provisions are effective July 1, 2003. The Company is currently evaluating the
provisions of this interpretation; however, we do not believe they will have a
material impact on the Company's results of operations or financial position.
F-15
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3
ACQUISITIONS
During 2002, the Company spent $159.2 primarily for the acquisition of nine
entities. Eight of the entities were additions to the Fluid Technology segment
and one was within the Defense Electronics & Services segment. The Company does
not believe the acquisitions are material individually or in the aggregate to
its results of operations or financial condition; however the larger of the
acquisitions were as follows:
- - Flowtronex PSI Inc. ("Flowtronex"), a manufacturer of modular pumping systems
for golf courses and other turf irrigation, sports fields, municipal and
commercial properties.
- - PCI Membranes, a provider of membrane filtration and chlorine disinfection
systems for water treatment and industrial water reuse.
- - The Biopharm Manufacturing Division of Martin Petersen Company, Inc., a
leading manufacturer of process systems for the biopharmaceutical industry.
The Company recognized $117.2 of goodwill from these acquisitions, of which
approximately $69 was tax deductible. The Fluid Technology segment was assigned
$116.6 of goodwill and the Defense Electronics & Services segment was assigned
the remaining $0.6.
In addition, in 2002, the Company finalized purchase price allocations
associated with a 2001 acquisition which reduced goodwill by $9.2.
During 2001, the Company completed several small acquisitions for a total
of $90.9, none of which exceeded $50.0. 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 the Company completed acquisitions for a combined total of
$192.0. 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.
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.
All acquisitions were accounted for using the purchase method and
accordingly, the results of operations of each acquired company are included in
the consolidated income statement from the date of acquisition. The purchase
price allocations for the 2002 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.
F-16
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
Restructuring charges for the year ended December 31, 2002 are detailed in
the following table:
<Table>
<Caption>
CASH
RESTRUCTURING
-------------
<S> <C>
Electronic Components......................... $0.6
Fluid Technology.............................. 6.0
Motion & Flow Control......................... 3.0
----
TOTAL 2002 CHARGES............................ $9.6
====
</Table>
During the fourth quarter of 2002, the Company recorded a $9.6
restructuring charge primarily for the closure of two facilities and the
severance of 292 persons. Severance of $8.5 represents a majority of the charge
and lease payments and other costs represent the remainder. The actions
primarily occurred in Fluid Technology and Motion & Flow Control segments.
The actions within the Fluid Technology segment represent a reduction of
its cost structure that management deemed necessary in response to continued
weakness within certain of the segment's markets. Planned measures include the
closure of the Fairfield, NJ facility and the termination of 147 persons,
comprised of 78 office workers, 65 factory workers and four management
employees.
The restructuring plan within the Motion & Flow Control segment was driven
by the anticipated loss of certain contracts in the Fluid Handling business
during 2003 and the resulting excess capacity. Planned actions include the
closure of the Rochester, NY facility, the consolidation of manufacturing and
administrative processes, and the termination of 140 employees, comprised of 40
office workers, 97 factory workers and three management employees.
The actions within the Electronic Components segment represent cost control
actions and include the termination of five employees, comprised of three office
workers and two management employees.
The projected cash savings from the 2002 restructuring plan total
approximately $53 over the next five years, comprised of approximately $7 in
2003 and approximately $46 between 2004 and 2007. The savings represent lower
salary and wage expenditures and decreased facility operating costs. Savings
will be reflected in "Cost of Sales and Revenues" and "Selling, General and
Administrative Expenses."
During 2003 the Company anticipates $8.2 of restructuring payments
associated with the 2002 restructuring plan and $0.5 thereafter. Future
restructuring payments will be funded with cash from operations, supplemented as
required with commercial paper borrowings.
Restructuring and asset impairment charges 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 program primarily
impacted the Electronic Components segment where a significant decline in sales
volume occurred from 2000 to 2001 and where management expected a further sales
decline in 2002. The restructuring actions at the other locations primarily
related to process improvements. The planned restructuring activities involved
the closure of five facilities, the discontinuance of 21 products and the
termination of approximately 3,400 persons. In the Electronic Components
segment, the planned actions included the closure of two facilities, the
discontinuance of 21 older products, and workforce terminations of 2,753 persons
through the consolidation and outsourcing of functions. Activities in the Fluid
Technology segment consisted of the closure of one facility, and workforce
reductions of 436 persons through the consolidation and outsourcing of
functions. In the Motion & Flow Control segment, planned actions included the
F-17
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
closure of two facilities and workforce reductions of 183 through the
consolidation of functions. In addition, 28 Corporate and shared services
positions were to 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 restructuring charge included 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.
Revised future cash savings projections for the period 2003 to 2006 are
approximately $281 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 $25 and primarily consist of decreased depreciation and
amortization expense.
Restructuring and asset impairment charges 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-18
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table displays a rollforward of the cash restructuring
accruals:
<Table>
<Caption>
DEFENSE MOTION CORPORATE
FLUID ELECTRONICS & FLOW ELECTRONIC AND
YEAR ENDED DECEMBER 31, TECHNOLOGY & SERVICES CONTROL COMPONENTS 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
Payments and other related to
prior charges.................. (9.2) - (4.1) (15.6) (2.3) (31.2)
Reversals of prior charges....... (1.5) (1.0) (1.5) (8.7) (0.4) (13.1)
2002 charge...................... 6.0 - 3.0 0.6 - 9.6
Payments related to the 2002
charge......................... (0.3) - - (0.6) - (0.9)
------ ----- ------ ------ ----- ------
Balance December 31, 2002........ $ 6.5 $ - $ 4.5 $ 4.4 $ 0.9 $ 16.3
====== ===== ====== ====== ===== ======
</Table>
During the third and fourth quarters of 2002, $13.1 of restructuring
accruals were reversed into income as a result of quarterly reviews of the
Company's remaining restructuring actions. The reversals applicable to 2001
planned restructuring actions totaled $11.8 and primarily reflect less than
anticipated severance costs on completed actions at each of the segments, the
decision not to transfer five product lines (from Santa Ana, California;
Weinstadt, Germany; Dole, France, and Basingstoke, UK, to Shenzhen and Tianjin,
China), as supply chain issues eliminated the financial viability of the
transfers, and the decision to continue partial operations at one of the
Electronic Component's facilities. In addition, management determined that one
facility within the Fluid Technology segment would remain operational as a
suitable outsource supplier could not be identified. The remaining $1.3 of
restructuring reversals represents accruals under the 1998 and 1999
restructuring plans that management determined will not be incurred.
As of December 31, 2002, remaining actions announced during 2001 were to
close one facility and the termination of 24 persons. Some severance run-off
will occur in 2003 and closed facility expenditures will continue through 2004.
As of December 31, 2002, the restructuring actions announced in 1998 and
1999 were complete.
NOTE 5
DISCONTINUED OPERATIONS
In September of 1998, the Company completed 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
dispositions were treated as discontinued operations. In 1998, the Company
received notifications of claims from the buyers of the automotive business
requesting post-closing adjustments to the purchase prices under the provisions
of the sales agreements. In
F-19
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999, those claims were submitted to arbitration. In 2001 and early in 2002,
both claims were favorably resolved.
During the fourth quarter of 2001 the Company reassessed its automotive
discontinued operations accruals and determined that it had excess accruals on
an after-tax basis of approximately $60. The Company reversed these accruals
into the Consolidated Income Statements under income from discontinued
operations. The excess was primarily related to the favorable foreign tax
rulings.
At December 31, 2002, the Company had automotive discontinued operations
accruals of $190.0 that primarily related to taxes ($154.2), product recalls
($8.0), environmental obligations ($14.5), employee benefits ($11.5) and other
($1.9). In 2002, the Company spent approximately $1.0. The Company expects that
it will cash settle $154.2 of tax obligations in 2004 or 2005.
NOTE 6
SALES AND REVENUES AND
COSTS OF SALES AND REVENUES
Sales and revenues and costs of sales and revenues consist of the
following:
<Table>
<Caption>
For the years ended
December 31,
------------------------------
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
Product sales.................. $4,277.1 $4,056.8 $4,309.0
Service revenues............... 708.2 618.9 520.4
-------- -------- --------
Total sales and revenues....... $4,985.3 $4,675.7 $4,829.4
======== ======== ========
Costs of product sales......... $2,765.8 $2,651.3 $2,871.8
Costs of service revenues...... 446.1 393.2 323.5
-------- -------- --------
Total costs of sales and
revenues...................... $3,211.9 $3,044.5 $3,195.3
======== ======== ========
</Table>
The Defense Electronics & Services segment comprises $627.8, $540.5 and
$451.2 of total service revenues for the years ended December 31, 2002, 2001 and
2000, respectively, and $374.0, $325.2 and $264.9 of total costs of service
revenues, respectively, during the same period. The Fluid Technology segment
comprises the majority of the remaining balances of service revenues and costs
of service revenues.
NOTE 7
INCOME TAXES
Income tax data from continuing operations is as follows:
<Table>
<Caption>
For the years ended
December 31,
------------------------
2002 2001 2000
------ ------ ------
<S> <C> <C> <C>
Pretax income
U.S. .............................. $309.2 $190.0 $171.2
Foreign............................ 199.6 143.4 248.7
------ ------ ------
$508.8 $333.4 $419.9
====== ====== ======
Provision (benefit) for income tax
Current
U.S. federal....................... $(48.0) $ (9.8) $ 58.1
State and local.................... 0.9 5.2 8.3
Foreign............................ 44.7 32.7 93.2
------ ------ ------
(2.4) 28.1 159.6
------ ------ ------
Deferred
U.S. federal....................... 104.0 71.1 (3.1)
State and local.................... - - -
Foreign............................ 27.3 17.5 (1.1)
------ ------ ------
131.3 88.6 (4.2)
------ ------ ------
Total income tax expense............ $128.9 $116.7 $155.4
====== ====== ======
</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,
---------------------
2002 2001 2000
----- ----- -----
<S> <C> <C> <C>
Tax provision at U.S. statutory rate..... 35.0% 35.0% 35.0%
Foreign tax rate differential............ 0.4 2.1 1.5
Effect of repatriation of foreign
earnings................................ (1.6) (4.6) (0.3)
State income taxes, net of federal
benefit................................. 0.1 1.0 1.3
Goodwill................................. - 2.7 1.9
Research & development credit............ - (0.9) (1.5)
Tax benefit of foreign sales
corporation............................. (0.9) (1.7) (0.6)
Capital loss carryback................... (6.0) - -
Other.................................... (1.7) 1.4 (0.3)
---- ---- ----
Effective income tax expense rate........ 25.3% 35.0% 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.
F-20
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities), for which no valuation allowances have
been provided, include the following:
<Table>
<Caption>
December 31,
---------------
2002 2001
------ ------
<S> <C> <C>
Employee benefits............................ $379.2 $ 26.0
Accelerated depreciation..................... (42.1) (31.2)
Nondeductible accruals....................... 146.9 250.3
Long-term contracts.......................... 1.1 6.8
Uniform capitalization....................... 9.8 9.3
Loss carryforward............................ - 13.6
Other........................................ 38.0 22.8
------ ------
$532.9 $297.6
====== ======
</Table>
No provision was made for U.S. taxes payable on accumulated undistributed
foreign earnings of certain subsidiaries amounting to approximately $48.6, since
these amounts are permanently reinvested.
As of December 31, 2002, the Company had approximately $23 of foreign tax
credit carryforwards. The credit carryforwards will expire as follows: $0.5 on
December 31, 2003, $0.2 on December 31, 2004, $10.2 on December 31, 2005 and
$12.1 on December 31, 2006.
Shareholders' equity at December 31, 2002 and 2001 reflects tax benefits
related to the stock options exercised in 2002 and 2001 of approximately $40.2
and $30.8, respectively.
The IRS is currently examining the federal consolidated tax returns of the
Company for the years ended December 31, 1996 and December 31, 1997. The IRS has
completed its examination of all years through 1995. As of December 31, 2002,
the Company believes the accrual for income taxes payable is sufficient to cover
potential liabilities arising from these examinations.
NOTE 8
EARNINGS PER SHARE
A reconciliation of the data used in the calculation of basic and diluted
earnings per share computations for income from continuing operations is as
follows:
<Table>
<Caption>
For the years ended
December 31,
------------------------
2002 2001 2000
------ ------ ------
<S> <C> <C> <C>
Basic Earnings Per Share
Income from continuing operations
available to common
shareholders..................... $379.9 $216.7 $264.5
Average common shares outstanding.. 91.0 88.1 87.9
------ ------ ------
Basic earnings per share............ $ 4.17 $ 2.46 $ 3.01
====== ====== ======
Diluted Earnings Per Share
Income from continuing operations
available to common
shareholders..................... $379.9 $216.7 $264.5
Average common shares outstanding.. 91.0 88.1 87.9
Add: Impact of stock options....... 2.6(1) 2.5(2) 2.1(3)
------ ------ ------
Average common shares outstanding
on a diluted basis............... 93.6 90.6 90.0
------ ------ ------
Diluted earnings per share.......... $ 4.06 $ 2.39 $ 2.94
====== ====== ======
</Table>
- ------------
(1) Options to purchase 49,240 shares of common stock at an average price of
$65.60 per share were outstanding at December 31, 2002 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 2012.
(2) 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.
(3) 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.
NOTE 9
RECEIVABLES, NET
Receivables consist of the following:
<Table>
<Caption>
December 31,
---------------
2002 2001
------ ------
<S> <C> <C>
Trade........................................ $811.2 $766.7
Other........................................ 84.8 29.3
Less -- allowance for doubtful accounts...... (27.7) (21.7)
------ ------
$868.3 $774.3
====== ======
</Table>
F-21
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10
INVENTORIES, NET
Inventories consist of the following:
<Table>
<Caption>
December 31,
---------------
2002 2001
------ ------
<S> <C> <C>
Finished goods....................... $147.6 $151.1
Work in process...................... 195.9 142.2
Raw materials........................ 280.3 270.4
Less -- progress payments............ (70.9) (67.4)
------ ------
$552.9 $496.3
====== ======
</Table>
NOTE 11
OTHER CURRENT ASSETS
At December 31, 2002 and 2001, other current assets consist primarily of
advance payments on contracts, prepaid expenses and capitalized tooling costs.
NOTE 12
PLANT, PROPERTY AND EQUIPMENT, NET
Plant, property and equipment consist of the following:
<Table>
<Caption>
December 31,
---------------------
2002 2001
--------- ---------
<S> <C> <C>
Land and improvements........... $ 60.3 $ 55.3
Buildings and improvements...... 409.9 366.1
Machinery and equipment......... 1,481.5 1,340.2
Furniture, fixtures and office
equipment..................... 235.5 214.3
Construction work in progress... 73.3 92.9
Other........................... 44.3 32.7
--------- ---------
2,304.8 2,101.5
Less -- accumulated depreciation
and amortization.............. (1,463.6) (1,310.5)
--------- ---------
$ 841.2 $ 791.0
========= =========
</Table>
NOTE 13
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 141 and SFAS No. 142. SFAS No. 141
eliminates the pooling of interests method of accounting for all business
combinations initiated after June 30, 2001 and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. The Company adopted SFAS No. 141 as of July 1, 2001.
As of January 1, 2002, the Company adopted SFAS No. 142 which addresses the
financial accounting and reporting standards for the acquisition of intangible
assets outside of a business combination and for goodwill and other intangible
assets subsequent to their acquisition. This accounting standard requires that
goodwill and indefinite-lived intangible assets be tested for impairment on an
annual basis, or more frequently if circumstances warrant, and that they no
longer be amortized. The provisions of the standard also require the completion
of a transitional impairment test in the year of adoption, with any impairments
identified treated as a cumulative effect of a change in accounting principle.
In connection with the adoption of SFAS No. 142, the Company completed a
transitional goodwill impairment test at its 12 identified reporting units and
determined that no impairment exists.
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 ceased on
January 1, 2002. A reconciliation of previously reported net income and earnings
per share to the amounts adjusted for the exclusion of goodwill amortization is
reflected on the face of the consolidated income statements included herein.
F-22
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the carrying amount of goodwill for the year ended December 31,
2002 by operating segment are as follows:
<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 as of December 31,
2001......................... $627.2 $303.0 $173.6 $306.2 $5.0 $1,415.0
Goodwill acquired during the
period....................... 116.6 0.6 -- -- -- 117.2
Other, including foreign
currency translation......... 26.1 0.1 2.5 (10.4) -- 18.3
------ ------ ------ ------ ---- --------
Balance as of December 31,
2002......................... $769.9 $303.7 $176.1 $295.8 $5.0 $1,550.5
====== ====== ====== ====== ==== ========
</Table>
Information regarding the Company's other intangible assets follows:
<Table>
<Caption>
December 31,
--------------
2002 2001
----- -----
<S> <C> <C>
Amortized intangibles --
Patents and other................... $32.1 $29.4
Accumulated amortization............ (5.7) (4.8)
Unamortized intangibles --
Brands and trademarks............... 12.7 12.5
Pension related..................... 35.3 5.8
----- -----
Net intangibles..................... $74.4 $42.9
===== =====
</Table>
Amortization expense related to intangible assets for the year ended
December 31, 2002 was $0.9. Amortization expense for each of the five succeeding
years will be approximately $1 per year.
NOTE 14
OTHER ASSETS
At December 31, 2002 and 2001, other assets primarily consist of prepaid
pension expense, employee benefit plan costs, investments in unconsolidated
companies, assets held in trusts and other receivables. Assets held in trusts
are restricted for specified reasons, primarily environmental remediation costs
and employee benefits and totaled $44.6 and $57.1 at December 31, 2002 and 2001,
respectively.
Investments in unconsolidated companies consist of the following:
<Table>
<Caption>
December 31,
--------------
2002 2001
----- -----
<S> <C> <C>
Investments accounted for under the
equity method:
Motion & Flow Control 50% ownership
of HiSAN joint venture............ $ 9.3 $ 8.5
Fluid Technology 40% ownership in
Sam McCoy, Malaysia............... 3.0 3.1
Fluid Technology other
investments....................... 2.9 2.6
Investments accounted for under the
cost method:
Defense Electronics & Services
investment in DigitalGlobe Inc.
securities........................ 43.5 38.7
Defense Electronics & Services
investment in Mesh Networks....... 8.9 5.9
Other............................... 2.9 4.0
----- -----
$70.5 $62.8
===== =====
</Table>
During 2002, 2001 and 2000, the Company recorded sales to unconsolidated
affiliates totaling $24.2, $22.6 and $23.4, respectively. In addition, the
Company provided services to unconsolidated affiliate companies in 2002, 2001
and 2000 and received $0.5, $0.4 and $0.4, 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 Asian
transplant OEM's in the United States. Annual sales of HiSAN are approximately
$117. Digital Globe Inc. (formerly known as EarthWatch, Inc.) is a developmental
stage company that recently launched a satellite capable of collecting
high-resolution digital
F-23
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
imagery of the Earth's surface, as well as a comprehensive image collection,
enhancement and digital archive system.
NOTE 15
LEASES AND RENTALS
The Company leases certain offices, manufacturing buildings, land,
machinery, automobiles, aircraft, computers and other equipment. Such leases
expire at various dates and may include renewals and escalations. The Company
often pays maintenance, insurance and tax expense related to leased assets.
Rental expenses under operating leases were $60.2, $50.1 and $55.5 for 2002,
2001 and 2000, respectively. Future minimum operating lease payments under
long-term operating leases as of December 31, 2002 are shown below.
<Table>
<S> <C>
2003................................ $ 61.3
2004................................ 54.0
2005................................ 45.6
2006................................ 37.1
2007................................ 31.7
2008 and thereafter................. 169.6
------
Total minimum lease payments........ $399.3
======
</Table>
NOTE 16
DEBT
Debt consists of the following:
<Table>
<Caption>
December 31,
---------------
2002 2001
------ ------
<S> <C> <C>
Commercial paper..................... $264.8 $441.3
Short-term loans..................... 17.0 73.0
Current maturities of long-term
debt............................... 17.8 2.7
------ ------
Notes payable and current maturities
of long-term debt.................. $299.6 $517.0
====== ======
</Table>
<Table>
<Caption>
INTEREST
LONG-TERM DEBT MATURITY RATE 2002 2001
- -------------- -------- -------- ------ ------
<S> <C> <C> <C> <C>
Notes and
debentures:........ 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................ 2002 - 2014 (2) 22.2 23.6
Interest rate swaps.......................... 93.0 42.5
------ ------
Subtotal notes and debentures................ 534.7 485.6
Less - unamortized discount.................. (24.7) (26.5)
------ ------
Long-term debt............................... 510.0 459.1
Less - current maturities.................... (17.8) (2.7)
------ ------
Net long-term debt........................... $492.2 $456.4
====== ======
</Table>
- ------------
(1) The interest rate for the note/debenture was 1.28% and 2.04% at December 31,
2002 and 2001, respectively.
(2) The weighted average interest rate was 5.24% and 5.50% at December 31, 2002
and 2001, respectively.
Principal payments required on long-term debt for the next five years are:
<Table>
<Caption>
2003 2004 2005 2006 2007
- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$17.8 $1.6 $3.7 $3.6 $2.2
===== ==== ==== ==== ====
</Table>
The weighted average interest rate for short-term borrowings was 1.73% and
2.69% at December 31, 2002 and 2001, 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, 2002, the fair value of
long-term debt was $517.9, compared to the fair value of $493.1 at December 31,
2001. The year over year increase in fair value reflects the impact of the
decline in interest rates experienced during 2002.
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"),
F-24
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2002, 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 amounted to $39.9 as of December 31,
2002.
NOTE 17
CASH FLOW INFORMATION
The change in receivables, inventories, payables and accrued expenses
listed on the Consolidated Statements of Cash Flows for the twelve months ended
December 31, 2002, 2001 and 2000 consist of the following:
<Table>
<Caption>
TWELVE MONTHS ENDED
DECEMBER 31, 2002 2001 2000
- ------------------- ----- ------- ------
<S> <C> <C> <C>
Change in accounts
receivable................ $ 3.7 $ 69.1 $(87.4)
Change in inventories....... (3.5) (2.4) 41.3
Change in accounts payable
and accrued expenses...... 34.0 (135.2) 19.2
----- ------- ------
Change in receivables,
inventories, accounts
payable and accrued
expenses.................. $34.2 $ (68.5) $(26.9)
===== ======= ======
</Table>
NOTE 18
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, 2002 and 2001, the Company had interest rate swaps
outstanding with notional values totaling $349.4. The carrying value of the
swaps at December 31, 2002 and 2001 were $97.0 and $46.2, including $4.0 and
$3.7 of accrued interest, respectively. 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 16 above from fixed to variable rate borrowings. The variable
interest rates are based on three-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 1.51%
and 7.45% at December 2002. 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
F-25
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ensures that hedge contract amounts do not exceed the amounts of the underlying
exposures.
There were no foreign currency cash flow hedges outstanding as of December
31, 2002. As of December 31, 2001, the Company had one foreign currency cash
flow hedge that had appreciations of less than $0.1 during 2001. There were no
changes in the forecasted transactions during 2002 or 2001 regarding their
probability of occurring, which would require amounts to be reclassified to
earnings.
The notional amount of the foreign currency forward contract utilized to
hedge cash flow exposures was $1.1 at December 31, 2001. The applicable fair
value at December 31, 2001 was $1.1. There was no ineffective portion of changes
in fair values of cash flow hedge positions reported in earnings for the twelve
month periods ended December 31, 2002 and 2001 and no amounts were excluded from
the measure of effectiveness reported in earnings during the twelve month
periods ended December 31, 2002 and 2001.
At December 31, 2002 and 2001, the Company had foreign forward contracts
with notional amounts of $109.1 and $50.3, respectively, to hedge the value of
recognized assets, liabilities and firm commitments. The fair values of the
contracts were net short positions of $42.3 and $11.5 at December 31, 2002 and
2001, respectively. The ineffective portion of changes in fair values of such
hedge positions reported in operating income during 2002 and 2001 amounted to
$0.1 and $0.6, respectively. 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 19
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, $0.4 and $1.5
for the years ended 2002, 2001 and 2000, 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 $25.3, $23.9 and
$19.1 for the years ended 2002, 2001 and 2000, respectively.
F-26
<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 2002, 2001 and 2000 were as follows:
<Table>
<Caption>
PENSION OTHER BENEFITS
---------------------- -------------------
2002 2001 2002 2001
--------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year...................... $ 3,617.0 $3,442.3 $ 496.6 $ 470.5
Service cost................................................. 61.9 58.9 4.9 5.0
Interest cost................................................ 251.2 246.2 37.7 34.7
Amendments made during the year.............................. 4.0 26.7 -- --
Actuarial (gain) loss........................................ 332.6 96.1 90.3 25.1
Benefits paid................................................ (246.7) (238.7) (41.4) (38.7)
Effect of currency translation............................... 38.7 (14.5) -- --
--------- -------- ------- -------
Benefit obligation at end of year............................ $ 4,058.7 $3,617.0 $ 588.1 $ 496.6
========= ======== ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............... $ 3,233.5 $3,652.1 $ 213.3 $ 241.1
Actual return on plan assets................................. (338.5) (189.6) (20.9) (6.5)
Employer contributions....................................... 56.3 12.5 -- --
Employee contributions....................................... 0.9 0.6 -- --
Benefits paid................................................ (231.8) (225.5) (14.6) (21.3)
Effect of currency translation............................... 14.4 (16.6) -- --
--------- -------- ------- -------
Fair value of plan assets at end of year..................... $ 2,734.8 $3,233.5 $ 177.8 $ 213.3
========= ======== ======= =======
Funded status................................................ $(1,323.9) $ (383.5) $(410.3) $(283.3)
Unrecognized net transition asset............................ 0.5 0.8 -- --
Unrecognized net actuarial (gain) loss....................... 1,463.1 444.8 225.3 106.3
Unrecognized prior service cost.............................. 30.4 35.5 (13.7) (18.9)
Minimum pension liability adjustment......................... (1,237.5) (35.8) -- --
--------- -------- ------- -------
Prepaid (accrued) benefit cost recognized in the balance
sheet...................................................... $(1,067.4) $ 61.8 $(198.7) $(195.9)
========= ======== ======= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount rate................................................ 6.44% 7.14% 6.50% 7.25%
Expected return on plan assets............................... 8.86% 9.61% 9.00% 9.75%
Rate of future compensation increase......................... 4.88% 4.89% 5.00% 5.00%
</Table>
<Table>
<Caption>
PENSION OTHER BENEFITS
--------------------------- ------------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost........................................... $ 61.9 $ 58.9 $ 56.7 $ 4.9 $ 5.0 $ 4.3
Interest cost.......................................... 251.2 246.2 241.4 37.7 34.7 33.2
Expected return on plan assets......................... (335.0) (325.2) (302.8) (19.8) (22.5) (24.0)
Amortization of transitional asset..................... 0.3 (0.3) (5.8) -- -- --
Amortization of net actuarial (gain) loss.............. 3.2 2.3 1.7 8.4 2.1 (0.7)
Amortization of prior service cost..................... 8.0 9.0 8.6 (5.2) (5.9) (5.9)
------- ------- ------- ------ ------ ------
Net periodic benefit cost.............................. $ (10.4) $ (9.1) $ (0.2) $ 26.0 $ 13.4 $ 6.9
------- ------- ------- ------ ------ ------
</Table>
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 10.0% for 2002. The rate was assumed to be 9.0%
for 2003, decreasing 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 $33.8 and the aggregate service and interest cost
components by $2.4. A decrease of one percent in the trend rate would
F-27
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reduce the benefit obligation by $29.8 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 20
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 non-transferable. 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, 2002 and 2001, 53,323,493 and 56,361,307 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-28
<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, 2002, 2001 and 2000, and changes during the years then ended is
presented below (shares in thousands):
<Table>
<Caption>
2002 2001 2000
------------------------- ------------------------- -------------------------
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....................... 9,426 $29.21 11,856 $26.15 11,752 $23.95
Granted...................... 2,114 51.06 2,077 37.14 1,938 33.13
Exercised.................... (3,628) 27.93 (4,415) 24.72 (1,737) 18.89
Canceled or expired.......... (25) 48.33 (92) 28.88 (97) 29.06
------ ------ ------ ------ ------ ------
Outstanding at end of year... 7,887 $35.59 9,426 $29.21 11,856 $26.15
====== ====== ====== ====== ====== ======
Options exercisable at
year-end................... 7,834 $35.39 8,636 $28.22 8,721 $22.81
====== ====== ====== ====== ====== ======
Weighted-average fair value
of options granted during
the year................... $15.77 $11.04 $10.78
====== ====== ======
</Table>
The following table summarizes information about the Company's stock
options at December 31, 2002 (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.......... 466 1.7 years $15.69 466 $15.69
20.32 - 28.38.......... 1,569 3.3 years 23.70 1,569 23.70
30.31 - 36.88.......... 3,027 7.0 years 34.30 3,027 34.30
37.50 - 46.04.......... 1,059 6.1 years 39.76 1,059 39.76
50.65 - 69.11.......... 1,766 9.0 years 51.12 1,713 50.67
----- -----
7,887 7,834
----- -----
</Table>
As of December 31, 2002, 5,866,875 shares were available for future grants.
Effective January 1, 2003, option shares available for future grants increased
by 2,394,942 as a result of the annual limitation formulas established in the
1994 ITT Industries Incentive Stock Plan and the 2002 ITT Industries Stock
Option Plan for Non-Employee Directors. The 1994 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 10,000 restricted
shares awarded in 2002 and no restricted shares awarded in 2001 and 2000.
During 2002, 2001 and 2000, pursuant to the ITT Industries 1996 Restricted
Stock Plan for Non-Employee Directors, the Company awarded 6,098, 7,469 and
13,626 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 21
COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are from time to time 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,
government contract issues and commercial or contractual disputes,
F-29
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sometimes related to acquisitions or divestitures. The Company will continue to
vigorously defend itself against all claims. Accruals have been established
where the outcome of the matter is probable and can be reasonably estimated.
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.
ENVIRONMENTAL:
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 amount 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 conditions,
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.
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. The Company has received
notice that it is considered a potentially responsible party ("PRP") at a
limited number of 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. As of December 31, 2002, the Company is responsible, or is alleged
to be responsible, for 104 environmental investigation and remediation sites in
various countries. In many of these proceedings, the Company's liability is
considered de minimis. At December 31, 2002, the Company calculated a best
estimate of $113.0, which approximates its accrual, related to the cleanup of
soil and ground water. The low range estimate for its environmental liabilities
is $85 and the high range estimate for those liabilities is $174. On an annual
basis the Company spends between $11 and $14 on its environmental remediation
liabilities.
The Company has been involved in an environmental proceeding in Glendale,
California 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 incurred in
connection with the foregoing. In May 1999, the EPA and the PRPs, including the
Company and Lockheed Martin, reached a settlement, embodied in a consent decree,
requiring the PRPs to perform additional remedial activities. Pursuant to the
settlement, the PRPs, including the Company, have constructed and are operating
a water treatment system. The PRPs have agreed to operate the system for an
additional 10 years. ITT and the other PRPs continue to pay their respective
allocated costs of the operation of the water treatment system. Accordingly, at
this time, ITT does not anticipate a default by any of the PRPs which would
increase the Company's allocated share of the liability. As of December 31,
2002, the Company's accrual for this liability was $11.3 representing its best
estimate; its low estimate for the liability is $7.4 and its high estimate is
$16.4.
ITT operated a facility in Madison County, Florida from 1968 until 1991. In
1995, elevated levels of contaminants were detected at the site. Since then, ITT
has been investigating the
F-30
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
site in coordination with state and federal environmental authorities. A remedy
for the site has not yet been selected. Currently, the estimated range for the
costs of the additional investigation and the anticipated remediation is between
$5.6 and $20.1 with a best estimate of $11.9. The Company has accrued $11.9 for
this matter.
ITT has been involved with a number of PRPs regarding property in the City
of Bronson, Michigan operated by a former subsidiary of ITT, Higbie
Manufacturing, prior to the time ITT acquired the company. ITT and other PRPs
are investigating and remediating discharges of industrial waste which occurred
in the 1930's. The Company's current estimates for its exposure are between $3.2
and $6.6. It has an accrual for this matter of $4.6 which represents its best
estimate of its current liabilities. ITT does not anticipate a default on the
part of the other PRPs.
In a suit filed in 1991 by the Company, in the California Superior Court,
Los Angeles County, ITT Corporation, et al. v. Pacific Indemnity Corporation et
al., against its insurers, the Company is seeking recovery of costs it incurred
in connection with its environmental liabilities including the three listed
above. Discovery, procedural matters, changes in California law, and various
appeals have prolonged this case. Currently, the matter is before the California
Court of Appeals from a decision by the California Superior Court dismissing
certain claims of the Company. The dismissed claims were claims where the costs
incurred were solely due to administrative (versus judicial) actions. A hearing
is expected in early 2003. In the event the appeal is successful, the Company
will pursue the administrative claims against its excess insurers. During the
course of the litigation the Company has negotiated settlements with certain
defendant insurance companies and is prepared to pursue its legal remedies where
reasonable negotiations are not productive. A portion of the recoveries from the
insurance settlements have been placed in a trust and are used to reimburse the
Company for its environmental costs.
PRODUCT LIABILITY:
ITT and its subsidiary Goulds Pumps, Inc. ("Goulds") have been joined as
defendants with numerous other industrial companies in product liability
lawsuits alleging injury due to asbestos. These actions against the Company have
been managed by our historic product liability insurance carriers, and all
claims, including all defense and settlement costs, have been covered by those
same carriers. These claims stem primarily from products sold prior to 1985 that
contained a part manufactured by a third party, e.g., a gasket, which allegedly
contained asbestos. The asbestos was encapsulated in the gasket (or other)
material and was non-friable. In certain other cases, it is alleged that ITT
companies were distributors for other manufacturers' products that may have
contained asbestos.
Frequently, the plaintiffs are unable to demonstrate any injury or do not
identify any ITT or Goulds product as a source of asbestos exposure. During the
past 12 months, ITT and Goulds resolved approximately 800 cases through
settlement or dismissal. The average amount of settlement per claim has been
nominal. Based upon past claims experience, available insurance coverage, and
after consultation with counsel, management believes that these matters will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
The Company is involved in two actions, Cannon Electric, Inc. et al. v. Ace
Property & Casualty Company et al. Superior Court, County of Los Angeles, CA.,
Case No. BC 290354, and Pacific Employers Insurance Company et al., v. ITT
Industries, Inc., et al., Supreme Court, County of New York, N.Y., Case No.
03600463, both of which commenced after December 31, 2002. The parties in both
cases are seeking an appropriate allocation of responsibility for the Company's
historic asbestos liability exposure among its insurers. The California action
is filed in the same venue where the Company's environmental insurance recovery
litigation has been pending for several years. The Company is continuing to
receive insurance payments during the pendency of these actions. The Company
F-31
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
does not believe that the existence or pendency of these actions will have any
impact on the Company's consolidated financial position, results of operations
or cash flows.
The Company has received notice of a suit filed in El Paso, Texas relating
to its Gilfillian Division, Bund zur Unterstutzung Radargeschadigter et al. v.
ITT Industries et al., Sup. Ct., El Paso, Texas, C.A. No. 2002-4730. This
Complaint, filed by both U.S. and German citizens, alleges that ITT and four
other major companies failed to warn the plaintiffs of the dangers associated
with exposure to x-ray radiation from radar devices. The Complaint also seeks
the certification of a class of similarly injured persons. The Company's insurer
has accepted the defense of this matter. Management believes that this matter
will not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
The Company has received notice of a product liability suit filed in
Superior Court of New York, Danis v. Rule Industries et al., Sup.Ct. N.Y., C.A.
No. 115975-02, seeking damages for injuries sustained in a boat explosion. The
suit contains a number of causes of action against various defendants including
the boat manufacturer, the marina operator, and individuals working at the
marina. As to the Company, the Complaint alleges that a fume detector,
manufactured by ITT's subsidiary Rule Industries, Inc. prior to the date the
Company acquired Rule, malfunctioned. The Company's insurer has accepted the
defense of this matter. Management believes that this matter will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
OTHER:
The Company has received a Notice of Claim from Rayonier, Inc., a former
subsidiary of the Company's predecessor ITT Corporation. This claim stems from
the 1994 Distribution Agreement for the spin-off of Rayonier by ITT Corporation
and seeks an allocation of proceeds from certain settlements in connection with
the Company's environmental insurance recovery litigation. The parties are
currently in negotiations. The Company believes the claim is grossly overstated,
has little merit and will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
NOTE 22
GUARANTEES, INDEMNITIES AND WARRANTIES
GUARANTEES & INDEMNITIES:
In September of 1998, the Company completed the sale of its automotive
electrical systems business to Valeo SA for approximately $1,700. As part of the
sale, the Company provided Valeo SA with representations and warranties with
respect to the operations of the Business, including: Conveyance of Title,
Employee Benefits, Tax, Product Liability, Product Recall, Contracts,
Environmental, Intellectual Property, etc. The Company also indemnified Valeo SA
for losses related to a misrepresentation or breach of the representations and
warranties. With a few limited exceptions, the indemnity periods within which
Valeo SA may assert new claims have expired. Under the terms of the sales
contract, the original maximum potential liability to Valeo SA on an
undiscounted basis is $680. However, because of the lapse of time, or the fact
that the parties have resolved certain issues, at December 31, 2002 the Company
has an accrual of $8 which is its best estimate of the potential exposure.
In September of 1998, the Company completed the sale of its brake and
chassis unit to Continental AG for approximately $1,930. As part of the sale,
the Company provided Continental AG with representations and warranties with
respect to the operations of the Business, including: Conveyance of Title,
Employee Benefits, Tax, Product Liability, Product Recall, Contracts,
Environmental, Intellectual Property, etc. The Company also indemnified
Continental AG for losses related to a misrepresentation or breach of the
representations and warranties. With a few limited exceptions, the indemnity
periods within which Continental AG may assert new claims have expired. Under
the terms of the sales contract, the original maximum potential liability
F-32
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to Continental AG on an undiscounted basis is $950. However, because of the
lapse of time, or the fact that the parties have resolved certain issues, at
December 31, 2002 the Company has an accrual of $14.5 which is its best estimate
of the potential exposure.
Since its incorporation in 1920, the Company has acquired and disposed of
numerous entities. The related acquisition and disposition agreements contain
various representation and warranty clauses and may provide indemnities for a
misrepresentation or breach of the representations and warranties by either
party. The indemnities address a variety of subjects; the term and monetary
amounts of each such indemnity are defined in the specific agreements and may be
affected by various conditions and external factors. Many of the indemnities
have expired either by operation of law or as a result of the terms of the
agreement. The Company does not have a liability recorded for the historic
indemnifications and is not aware of any claims or other information that would
give rise to material payments under such indemnities. The Company has
separately discussed material indemnities provided within the last seven years.
The Company provided three guarantees with respect to its real estate
development activities in Flagler County, Florida. Two of these guarantee bonds
were issued by the Dunes Community Development District (the District). The bond
issuances were used primarily for the construction of infrastructure, such as
water and sewage utilities and a bridge. The Company would be required to
perform under these guarantees if the District failed to provide interest
payments or principal payments due to the bond holders. The maximum amount of
the undiscounted future payments on these guarantees equal $28.9. At December
31, 2002, the Company does not believe that a loss contingency is probable for
these guarantees and therefore does not have an accrual recorded in its
financial statements. The third guaranty is a performance bond in the amount of
$10.0 in favor of Flagler County, Florida. The Company would be required to
perform under this guarantee if certain parties did not satisfy all aspects of
the development order, the most significant aspect being the expansion of a
bridge. The maximum amount of the undiscounted future payments on the third
guarantee equals $10.0. At December 31, 2002, the Company has an accrual related
to the expansion of a bridge in the amount of $10.0.
In December of 2002, the Company entered into a sales-type lease agreement
for its corporate aircraft and then leased the aircraft back under an operating
lease agreement. The Company has provided, under the agreement, a residual value
guarantee to the counterparty in the amount of $46.8, which is the maximum
amount of undiscounted future payments. The Company would have to make payments
under the residual value guarantee only if the fair value of the aircraft was
less than the residual value guarantee upon termination of the agreement. At
December 31, 2002, the Company does not believe that a loss contingency is
probable and therefore does not have an accrual recorded in its financial
statements.
PRODUCT WARRANTIES:
Accruals for estimated expenses related to warranties are made at the time
products are sold or services are rendered. These accruals are established using
historical information on the nature, frequency, and average cost of warranty
claims. The Company warrants numerous products, the terms of which vary widely.
In general, the Company warrants its products against defect and specific non-
performance. In the automotive businesses, liability for product defects could
extend beyond the selling price of the product and could be significant if the
defect shuts down production or results in a recall. At December 31, 2002, the
Company has a product warranty accrual in the amount of $40.4.
PRODUCT WARRANTY LIABILITIES
<Table>
<Caption>
ACCRUALS FOR CHANGES IN PRE-EXISTING
BEGINNING BALANCE PRODUCT WARRANTIES WARRANTIES INCLUDING ENDING BALANCE
JANUARY 1, 2002 ISSUED IN THE PERIOD CHANGES IN ESTIMATES (PAYMENTS) DECEMBER 31, 2002
- ----------------- -------------------- ----------------------- ---------- -----------------
<S> <C> <C> <C> <C>
$37.7 $21.1 $0.1 ($18.5) $40.4
</Table>
F-33
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23
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>
2002
Sales and revenues..................... $1,956.3 $1,513.9 $935.5 $583.5 $ (3.9) $4,985.3
Operating income (loss)................ 251.5 154.0 122.4 70.4 (60.7) 537.6
Net interest expense................... 32.4
Miscellaneous (income) expense......... (3.6)
--------
Income from continuing operations
before income tax expense............ $ 508.8
========
Long-lived assets...................... 342.3 153.4 209.6 131.7 4.2 841.2
Investments in unconsolidated
companies............................ 7.3 53.9 9.3 -- -- 70.5
Total assets........................... 1,867.5 850.1 661.3 685.7 1,325.0 5,389.6
Gross plant additions.................. 45.8 36.7 39.7 30.3 0.7 153.2
Depreciation........................... 57.6 26.8 39.5 27.2 0.9 152.0
Amortization........................... 5.3 -- 4.6 5.6 3.9 19.4
-------- -------- ------ ------ -------- --------
2001
Sales and revenues..................... $1,829.7 $1,304.8 $898.7 $647.0 $ (4.5) $4,675.7
Operating income (loss):
Before goodwill amortization
expense............................ 220.6 132.1 114.1 25.8 (55.1) 437.5
Goodwill amortization expense........ 18.2 8.5 4.5 9.5 -- 40.7
-------- -------- ------ ------ -------- --------
Operating income (loss).............. 202.4 123.6 109.6 16.3 (55.1) 396.8
--------
Net interest expense................... 62.0
Miscellaneous (income) expense......... 1.4
--------
Income from continuing operations
before income tax expense............ $ 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 (loss):
Before goodwill amortization
expense............................ 224.0 125.8 129.3 103.9 (53.7) 529.3
Goodwill amortization expense........ 17.8 8.5 5.0 4.9 -- 36.2
-------- -------- ------ ------ -------- --------
Operating income (loss).............. 206.2 117.3 124.3 99.0 (53.7) 493.1
Net interest expense................... 75.2
Miscellaneous (income) expense......... (2.0)
--------
Income from continuing operations
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
-------- -------- ------ ------ -------- --------
</Table>
<Table>
<Caption>
NET SALES AND REVENUES* LONG-LIVED ASSETS
------------------------------ ------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
GEOGRAPHICAL INFORMATION
United States........................................ $2,868.6 $2,781.8 $2,830.4 $462.9 $453.9 $497.3
Western Europe....................................... 1,229.2 1,179.5 1,216.2 315.7 268.1 297.2
Asia Pacific......................................... 355.2 295.1 362.1 43.7 43.5 46.7
Other................................................ 532.3 419.3 420.7 18.9 25.5 24.2
-------- -------- -------- ------ ------ ------
Total Segments....................................... $4,985.3 $4,675.7 $4,829.4 $841.2 $791.0 $865.4
======== ======== ======== ====== ====== ======
</Table>
- ---------------
* Net sales to external customers are attributed to individual regions based
upon the destination of product or service delivery.
F-34
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sales and revenues by product category, net of intercompany balances, is as
follows:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
Sales and Revenues by
Product Category
Pumps & Complementary
Products........... $1,956.3 $1,829.6 $1,834.0
Defense Products..... 885.9 764.4 883.4
Defense Services..... 627.8 540.5 451.2
Connectors &
Switches........... 560.2 609.4 734.0
Fluid Handling....... 470.3 437.3 425.6
Flow Control......... 156.1 166.5 159.1
Brakes............... 153.6 146.6 140.0
Marine Products...... 76.7 68.1 78.2
Shock Absorbers...... 75.8 77.0 82.6
Network Systems &
Services........... 22.6 36.3 40.6
Other................ -- -- 0.7
-------- -------- --------
Total................ $4,985.3 $4,675.7 $4,829.4
======== ======== ========
</Table>
Defense Electronics & Services had sales and revenues from the United
States government of $1,105.3, $1,104.9 and $1,023.6 for 2002, 2001 and 2000,
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 comprises
approximately 39% of the Company's sales and revenues and approximately 42% of
its segment operating income for 2002.
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 41% 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 73%, 85% and 77%
of 2002, 2001 and 2000 Defense Electronics & Services sales and revenues,
respectively, were to the U.S. government. The Defense Electronics & Services
segment comprises about 30% of the Company's sales and revenues and 26% of its
segment operating income in 2002.
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), Flojet(R) and Danforth(R), fluid
handling materials such as tubing systems and connectors for various automotive
and industrial markets, specialty shock absorbers under the brand KONI and brake
components for the transportation industry. The Motion & Flow Control segment
comprises approximately 19% of the Company's sales and revenues and
approximately 20% of its segment operating income for 2002.
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 comprises about 12% of the Company's sales and
revenues and 12% of its segment operating income for 2002.
CORPORATE AND OTHER:
This primarily includes the operating results and assets of Corporate
Headquarters.
F-35
<PAGE>
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 24
QUARTERLY RESULTS FOR 2002 AND 2001
<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>
2002
Sales and revenues....................................... $1,185.8 $1,320.1 $1,235.1 $1,244.3 $4,985.3
Costs of sales and revenues.............................. 770.6 866.0 798.8 776.5 3,211.9
Income from continuing operations........................ 71.5 92.9 120.4 95.1 379.9
Net income............................................... 71.5 92.9 120.4 95.1 379.9
Income from continuing operations per share
-- Basic............................................... $ 0.80 $ 1.02 $ 1.31 $ 1.04 $ 4.17
-- Diluted(a).......................................... $ 0.77 $ 0.99 $ 1.28 $ 1.01 $ 4.06
Net income per share
-- Basic............................................... $ 0.80 $ 1.02 $ 1.31 $ 1.04 $ 4.17
-- Diluted(a).......................................... $ 0.77 $ 0.99 $ 1.28 $ 1.01 $ 4.06
Common stock information
Price range:
High................................................... $ 64.50 $ 70.85 $ 70.46 $ 66.38 $ 70.85
Low.................................................... $ 45.80 $ 62.40 $ 53.91 $ 56.90 $ 45.80
Close.................................................. $ 63.04 $ 70.60 $ 62.33 $ 60.69 $ 60.69
Dividends per share...................................... $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.60
-------- -------- -------- -------- --------
2001
Sales and revenues....................................... $1,186.0 $1,184.3 $1,123.6 $1,181.8 $4,675.7
Costs of sales and revenues.............................. 771.7 773.3 736.3 763.2 3,044.5
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(a)............................................ $ 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(a)............................................ $ 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
-------- -------- -------- -------- --------
</Table>
- ------------
(a) 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 2002 and 2001. 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, 2003 through February 28, 2003, the high
and low reported market prices of the Company's common stock were $62.09 and
$54.11, respectively. The Company declared dividends of $0.16 per common share
in the first quarter of 2003. There were approximately 33,243 holders of record
of the Company's common stock on February 28, 2003.
F-36
<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, 2002
Trade Receivables -- Allowance for
doubtful accounts................ $ 21.7 $ 5.8 $ 1.4 $ (6.2) $ 22.7
Restructuring...................... 51.9 9.6 -- (45.2) 16.3
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
</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 27, 2003
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 11, 2003
- ------------------------------------------ Executive Officer and Director
LOUIS J. GIULIANO
(PRINCIPAL EXECUTIVE OFFICER)
/s/ DAVID J. ANDERSON Senior Vice President and Chief March 11, 2003
- ------------------------------------------ Financial Officer
DAVID J. ANDERSON
(PRINCIPAL FINANCIAL OFFICER)
/s/ RAND V. ARASKOG Director March 11, 2003
- ------------------------------------------
RAND V. ARASKOG
/s/ CURTIS J. CRAWFORD Director March 11, 2003
- ------------------------------------------
CURTIS J. CRAWFORD
/s/ CHRISTINA A. GOLD Director March 11, 2003
- ------------------------------------------
CHRISTINA A. GOLD
/s/ /S/ RALPH F. HALE Director March 11, 2003
- ------------------------------------------
RALPH F. HALE
/s/ JOHN J. HAMRE Director March 11, 2003
- ------------------------------------------
JOHN J. HAMRE
/s/ RAYMOND W. LEBOEUF Director March 11, 2003
- ------------------------------------------
RAYMOND W. LEBOEUF
/s/ FRANK T. MACINNIS Director March 11, 2003
- ------------------------------------------
FRANK T. MACINNIS
/s/ LINDA S. SANFORD Director March 11, 2003
- ------------------------------------------
LINDA S. SANFORD
/s/ MARKOS I. TAMBAKERAS Director March 11, 2003
- ------------------------------------------
MARKOS I. TAMBAKERAS
</Table>
II-1
<PAGE>
CERTIFICATIONS
I, Louis J. Giuliano certify that:
1. I have reviewed this annual report on Form 10-K for the year ended
December 31, 2002 of ITT Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
By: /s/ LOUIS J. GIULIANO
------------------------------------
Name: Louis J. Giuliano
Title: Chairman, President and
Chief Executive Officer
(Principal executive
officer)
Date: March 27, 2003
II-2
<PAGE>
I, David J. Anderson, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended
December 31, 2002 of ITT Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
By: /s/ DAVE J. ANDERSON
------------------------------------
Name: Dave J. Anderson
Title: Senior Vice President and
Chief Financial Officer
(Principal financial
officer)
Date: March 27, 2003
II-3
<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 December 3, 2002............ Attached.
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-4
<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-5
<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..................................
14 ITT Industries, Inc. Code of Corporate Attached
Conduct..................................
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.
23.1 Consent of Deloitte & Touche LLP........... Filed herewith.
23.2 Consent of Arthur Andersen LLP............. Filed herewith.
24 Power of attorney.......................... None.
99.1 Certification Pursuant to 18. U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of Attached.
2002.....................................
99.2 Certification Pursuant to 18. U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of Attached.
2002.....................................
</Table>
II-6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.C
<SEQUENCE>3
<FILENAME>y82463exv3wc.txt
<DESCRIPTION>BY-LAWS, AS AMENDED
<TEXT>
<PAGE>
[ITT INDUSTRIES LOGO]
BY-LAWS
<PAGE>
BY-LAWS
OF
ITT INDUSTRIES, INC.
1. SHAREHOLDERS.
1.1 Place of Shareholders' Meetings. All meetings of the shareholders of
the Corporation shall be held at such place or places, within or outside the
state of Indiana, as may be fixed by the Corporation's Board of Directors (the
"Board", and each member thereof a "Director") from time to time or as shall be
specified in the respective notices thereof.
1.2 Day and Time of Annual Meetings of Shareholders. An annual meeting of
shareholders shall be held at such place (within or outside the state of
Indiana), date and hour as shall be determined by the Board and designated in
the notice thereof. Failure to hold an annual meeting of shareholders at such
designated time shall not affect otherwise valid corporate acts or work a
forfeiture or dissolution of the Corporation.
1.3 Purposes of Annual Meetings. (a) At each annual meeting, the
shareholders shall elect the members of the Board for the succeeding term. At
any such annual meeting any business properly brought before the meeting may be
transacted.
(b) To be properly brought before an annual meeting, business must be
(i) specified in the notice of the meeting (or any supplement thereto) given by
or at the direction of the Board, (ii) otherwise properly brought before the
meeting by or at the direction of the Board or (iii) otherwise properly brought
before the meeting by a shareholder. For business to be properly brought before
an annual meeting by a shareholder, the shareholder must have given written
notice thereof, either by personal delivery or by United States mail, postage
prepaid, to the Secretary, received at the principal executive offices of the
Corporation, not less than 120 calendar days prior to the date of the
Corporation's proxy statement released to shareholders in connection with the
previous year's annual meeting; provided, however, that in the event that no
annual meeting was held in the previous year or the date of the annual meeting
was changed by more than 30 days from the anniversary date of the previous
year's annual meeting, notice by the shareholder must be so received not later
than 120 calendar days prior to such annual meeting or 10 calendar days
following the date on which public announcement of the date of the meeting is
first made. Any such notice shall set forth as to each matter the shareholder
proposes to bring before the annual meeting (i) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting and, in the event that such business includes a
proposal to amend either the Articles of Incorporation or By-laws of the
Corporation, the language of the proposed amendment, (ii) the name and address
of the shareholder proposing such business, (iii) a representation that the
shareholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
propose such business, (iv) any material interest of the shareholder in such
business and (v) if the shareholder intends to solicit proxies in support of
such shareholder's proposal, a representation to that effect. The foregoing
notice requirements shall be deemed satisfied by a shareholder if the
shareholder has notified the Corporation of his or her intention to present a
proposal at an annual meeting and such shareholder's proposal has been included
in a proxy statement that has been prepared by management of the Corporation to
solicit proxies for such annual meeting; provided, however, that, if such
shareholder does not appear or send a qualified representative to present such
proposal at such annual meeting, the Corporation need not present such proposal
for a vote at such meeting, notwithstanding that proxies in respect of such vote
may have been received by the Corporation. No business shall be conducted at an
annual meeting of shareholders except in accordance with this Section 1.3(b),
and the chairman of any annual meeting of shareholders may refuse to permit any
business to be brought before an annual meeting without compliance with the
foregoing procedures or if the shareholder solicits proxies in support of such
shareholder's proposal without such shareholder having made the representation
required by clause (v) of the preceding sentence.
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1.4 Special Meetings of Shareholders. Except as otherwise expressly
required by applicable law, special meetings of the shareholders or of any class
or series entitled to vote may be called for any purpose or purposes by the
Chairman or by a majority vote of the entire Board, to be held at such place
(within or outside the state of Indiana), date and hour as shall be determined
by the Board and designated in the notice thereof. Only such business as is
specified in the notice of any special meeting of the shareholders shall come
before such meeting.
1.5 Notice of Meetings of Shareholders. Except as otherwise expressly
required or permitted by applicable law, not less than ten days nor more than
sixty days before the date of every shareholders' meeting the Secretary shall
give to each shareholder of record entitled to vote at such meeting written
notice stating the place, day and time of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. Except
as provided in Section 1.6(d) or as otherwise expressly required by applicable
law, notice of any adjourned meeting of shareholders need not be given if the
time and place thereof are announced at the meeting at which the adjournment is
taken. Any notice, if mailed, shall be deemed to be given when deposited in the
United States mail, postage prepaid, addressed to the shareholder at the address
for notices to such shareholder as it appears on the records of the Corporation.
1.6 Quorum of Shareholders. (a) Unless otherwise expressly required by
applicable law, at any meeting of the shareholders, the presence in person or by
proxy of shareholders entitled to cast a majority of votes thereat shall
constitute a quorum. Shares of the Corporation's stock belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in an election of the directors of such other corporation is held by the
Corporation, shall neither be counted for the purpose of determining the
presence of a quorum nor entitled to vote at any meeting of the shareholders.
(b) At any meeting of the shareholders at which a quorum shall be present,
a majority of those present in person or by proxy may adjourn the meeting from
time to time without notice other than announcement at the meeting. In the
absence of a quorum, the officer presiding thereat shall have power to adjourn
the meeting from time to time until a quorum shall be present. Notice of any
adjourned meeting other than announcement at the meeting shall not be required
to be given, except as provided in Section 1.6(d) below and except where
expressly required by applicable law.
(c) At any adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting
originally called, but only those shareholders entitled to vote at the meeting
as originally noticed shall be entitled to vote at any adjournment or
adjournments thereof unless a new record date is fixed by the Board.
(d) If a new date, time and place of an adjourned meeting is not announced
at the original meeting before adjournment, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given in the manner specified in Section 1.5 to each
shareholder of record entitled to vote at the meeting.
1.7 Chairman and Secretary of Meeting. The Chairman or, in his or her
absence, another officer of the Corporation designated by the Chairman, shall
preside at meetings of the shareholders. The Secretary shall act as secretary of
the meeting, or in the absence of the Secretary, an Assistant Secretary shall so
act, or if neither is present, then the presiding officer may appoint a person
to act as secretary of the meeting.
1.8 Voting by Shareholders. (a) Except as otherwise expressly required by
applicable law, at every meeting of the shareholders each shareholder shall be
entitled to the number of votes specified in the Articles of Incorporation, in
person or by proxy, for each share of stock standing in his or her name on the
books of the Corporation on the date fixed pursuant to the provisions of Section
5.6 of these By-laws as the record date for the determination of the
shareholders who shall be entitled to receive notice of and to vote at such
meeting.
(b) When a quorum is present at any meeting of the shareholders, action on
a matter (other than the election of directors) by a voting group is approved if
the votes cast within the voting group favoring the action exceed the votes cast
opposing the action, unless express provision of law or the Articles of
Incorporation require a greater number of affirmative votes.
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(c) Except as required by applicable law, the vote at any meeting of
shareholders on any question need not be by ballot, unless so directed by the
chairman of the meeting. On a vote by ballot, each ballot shall be signed by the
shareholder voting, or by his or her proxy, if there be such proxy, and shall
state the number of shares voted.
1.9 Proxies. Any shareholder entitled to vote at any meeting of
shareholders may vote either in person or by proxy. A shareholder may authorize
a person or persons to act for the shareholder as proxy by (i) the shareholder
or the shareholder's designated officer, director, employee or agent executing a
writing by signing it or by causing the shareholder's signature or the signature
of the designated officer, director, employee or agent of the shareholder to be
affixed to the writing by any reasonable means, including by facsimile
signature; (ii) the shareholder transmitting or authorizing the transmission of
an electronic submission which may be by any electronic means, including data
and voice telephonic communications and computer network to (a) the person who
will be the holder of the proxy; (b) a proxy solicitation firm; or (c) a proxy
support service organization or similar agency authorized by the person who will
be the holder of the proxy to receive the electronic submission, which
electronic submission must either contain or be accompanied by information from
which it can be determined that the electronic submission was transmitted by or
authorized by the shareholder; or (iii) any other method allowed by law.
1.10 Inspectors. (a) The election of Directors and any other vote by
ballot at any meeting of the shareholders shall be supervised by at least two
inspectors. Such inspectors may be appointed by the Chairman before or at the
meeting. If the Chairman shall not have so appointed such inspectors or if one
or both inspectors so appointed shall refuse to serve or shall not be present,
such appointment shall be made by the officer presiding at the meeting. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability.
(b) The inspectors shall (i) ascertain the number of shares of the
Corporation outstanding and the voting power of each, (ii) determine the shares
represented at any meeting of shareholders and the validity of the proxies and
ballots, (iii) count all proxies and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, and (v) certify their determination of the
number of shares represented at the meeting, and their count of all proxies and
ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of their duties.
1.11 List of Shareholders. (a) At least five business days before every
meeting of shareholders, the Corporation shall cause to be prepared and made a
complete list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order by voting group, if any, and showing the address of each
shareholder and the number of shares registered in the name of each shareholder.
(b) During ordinary business hours for a period of at least five business
days prior to the meeting, such list shall be open to examination by any
shareholder for any purpose germane to the meeting, either at the Corporation's
principal office or a place identified in the meeting notice in the city where
the meeting will be held.
(c) The list shall also be produced and kept at the time and place of the
meeting, and it may be inspected during the meeting by any shareholder or the
shareholder's agent or attorney authorized in writing.
(d) The stock ledger shall be the only evidence as to who are the
shareholders entitled to examine the stock ledger, the list required by this
Section 1.11 or the books of the Corporation, or to vote in person or by proxy
at any meeting of shareholders.
1.12 Confidential Voting. (a) Proxies and ballots that identify the votes
of specific shareholders shall be kept in confidence by the tabulators and the
inspectors of election unless (i) there is an opposing solicitation with respect
to the election or removal of Directors, (ii) disclosure is required by
applicable law, (iii) a shareholder expressly requests or otherwise authorizes
disclosure, or (iv) the Corporation concludes in good faith that a bona fide
dispute exists as to the authenticity of one or
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more proxies, ballots or votes, or as to the accuracy of any tabulation of such
proxies, ballots or votes.
(b) The tabulators and inspectors of election and any authorized agents or
other persons engaged in the receipt, count and tabulation of proxies and
ballots shall be advised of this By-law and instructed to comply herewith.
(c) The inspectors of election shall certify, to the best of their
knowledge based on due inquiry, that proxies and ballots have been kept in
confidence as required by this Section 1.12.
2. DIRECTORS.
2.1 Powers of Directors. The business and affairs of the Corporation
shall be managed by or under the direction of the Board, which may exercise all
the powers of the Corporation except such as are by applicable law, the Articles
of Incorporation or these By-laws required to be exercised or performed by the
shareholders.
2.2 Number, Method of Election, Terms of Office of Directors. The number
of Directors which shall constitute the whole Board shall be such as from time
to time shall be determined by resolution adopted by a majority of the entire
Board, but the number shall not be less than three nor more than twenty-five,
provided that the tenure of a Director shall not be affected by any decrease in
the number of Directors so made by the Board. Each Director shall hold office
until the next annual meeting of shareholders and until his or her successor is
elected and qualified or until his or her earlier death, retirement, resignation
or removal. Directors need not be shareholders of the Corporation or citizens of
the United States of America.
Nominations of persons for election as Directors may be made by the Board
or by any shareholder who is a shareholder of record at the time of giving of
the notice of nomination provided for in this Section 2.2 and who is entitled to
vote for the election of Directors. Any shareholder of record entitled to vote
for the election of Directors at a meeting may nominate a person or persons for
election as Directors only if written notice of such shareholder's intent to
make such nomination is given in accordance with the procedures for bringing
business before the meeting set forth in Section 1.3(b) of these By-Laws, either
by personal delivery or by United States mail, postage prepaid, to the
Secretary, received at the principal executive offices of the Corporation, not
later than (i) with respect to an election to be held at an annual meeting of
shareholders, not less than 120 calendar days prior to the date of the
Corporation's proxy statement released to shareholders in connection with the
previous year's annual meeting; provided, however, that in the event that no
annual meeting was held in the previous year or the date of the annual meeting
was changed by more than 30 days from the anniversary date of the previous
year's annual meeting, notice by the shareholder must be so received not later
than 120 calendar days prior to such annual meeting or 10 calendar days
following the date on which public announcement of the date of the meeting is
first made, and (ii) with respect to an election to be held at a special meeting
of shareholders for the election of Directors, not later than 120 calendar days
prior to such special meeting or 10 calendar days following the date on which
public announcement of the date of the special meeting is first made and of the
nominees to be elected at such meeting. Each such notice shall set forth: (a)
the name and address of the shareholder who intends to make the nomination and
of the person or persons to be nominated; (b) a representation that the
shareholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (d) such other
information regarding each nominee proposed by such shareholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had each nominee been nominated,
or intended to be nominated, by the Board; (e) the consent of each nominee to
serve as a Director if so elected and (f) if the shareholder intends to solicit
proxies in support of such shareholder's nominee(s), a representation to that
effect. The chairman of any meeting of shareholders to elect Directors and the
Board may refuse to acknowledge the nomination of any person not made in
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compliance with the foregoing procedure or if the shareholder solicits proxies
in support of such shareholder's nominee(s) without such shareholder having made
the representation required by (f) of the preceding sentence.
At each meeting of the shareholders for the election of Directors at which
a quorum is present, the persons receiving the greatest number of votes, up to
the number of Directors to be elected, shall be the Directors.
2.3 Vacancies on Board. (a) Any Director may resign from office at any
time by delivering a written resignation to the Chairman or the Secretary. The
resignation will take effect at the time specified therein, or, if no time is
specified, at the time of its receipt by the Corporation. The acceptance of a
resignation shall not be necessary to make it effective, unless expressly so
provided in the resignation.
(b) Any vacancy and any newly created Directorship resulting from any
increase in the authorized number of Directors may be filled by vote of a
majority of the Directors then in office, though less than a quorum, and any
Director so chosen shall hold office until the next annual election of Directors
by the shareholders and until a successor is duly elected and qualified or until
his or her earlier death, retirement, resignation or removal. If there are no
Directors in office, then an election of Directors may be held in the manner
provided by applicable law.
2.4 Meetings of the Board. (a) The Board may hold its meetings, both
regular and special, either within or outside the state of Indiana, at such
places as from time to time may be determined by the Board or as may be
designated in the respective notices or waivers of notice thereof.
(b) Regular meetings of the Board shall be held at such times and at such
places as from time to time shall be determined by the Board.
(c) The first meeting of each newly elected Board shall be held as soon as
practicable after the annual meeting of the shareholders and shall be for the
election of officers and the transaction of such other business as may come
before it.
(d) Special meetings of the Board shall be held whenever called by
direction of the Chairman or at the request of Directors constituting one-third
of the number of Directors then in office.
(e) Members of the Board or any Committee of the Board may participate in a
meeting by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
such participation shall constitute presence in person at such meeting.
(f) The Secretary shall give notice to each Director of any meeting of the
Board by mailing the same at least two days before the meeting or by
telegraphing or delivering the same not later than the day before the meeting.
Such notice need not include a statement of the business to be transacted at, or
the purpose of, any such meeting. Any and all business may be transacted at any
meeting of the Board. No notice of any adjourned meeting need be given. No
notice to or waiver by any Director shall be required with respect to any
meeting at which the Director is present.
2.5 Quorum and Action. Except as otherwise expressly required by
applicable law, the Articles of Incorporation or these By-laws, at any meeting
of the Board, the presence of at least one-third of the entire Board shall
constitute a quorum for the transaction of business; but if there shall be less
than a quorum at any meeting of the Board, a majority of those present may
adjourn the meeting from time to time. Unless otherwise provided by applicable
law, the Articles of Incorporation or these By-laws, the vote of a majority of
the Directors present (and not abstaining) at any meeting at which a quorum is
present shall be necessary for the approval and adoption of any resolution or
the approval of any act of the Board.
2.6 Presiding Officer and Secretary of Meeting. The Chairman or, in the
absence of the Chairman, a member of the Board selected by the members present,
shall preside at meetings of the Board. The Secretary shall act as secretary of
the meeting, but in the Secretary's absence the presiding officer may appoint a
secretary of the meeting.
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2.7 Action by Consent without Meeting. Any action required or permitted
to be taken at any meeting of the Board or of any Committee thereof may be taken
without a meeting if all members of the Board or Committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of their proceedings.
2.8 Standing Committees. By resolution adopted by a majority of the
entire Board, the Board shall elect, from among its members, individuals to
serve on the Standing Committees established by this Section 2.8. Each Standing
Committee shall be comprised of such number of Directors, not less than three,
as shall be elected to such Committee. Each Committee shall keep a record of all
its proceedings and report the same to the Board. One-third of the members of a
Committee, but not less than two, shall constitute a quorum, and the act of a
majority of the members of a Committee present at any meeting at which a quorum
is present shall be the act of the Committee. Each Standing Committee shall meet
at the call of its chairman or any two of its members. The chairmen of the
various Committees shall preside, when present, at all meetings of such
Committees, and shall have such powers and perform such duties as the Board may
from time to time prescribe. The Standing Committees of the Board, and functions
of each, are as follows:
(a) Compensation and Personnel Committee. The Compensation and Personnel
Committee shall exercise the power of oversight of the compensation and benefits
of the employees of the Corporation, and shall be charged with evaluating
management performance, and establishing executive compensation. This Committee
shall have access to its own independent outside compensation counsel and shall
consist of a majority of independent directors. For purposes of this Section
2.8(a), "independent director" shall mean a Director who: (i) has not been
employed by the Corporation in an executive capacity within the past five years;
(ii) is not, and is not affiliated with a company or firm that is, an advisor or
consultant to the Corporation; (iii) is not affiliated with a significant
customer or supplier of the Corporation; (iv) has no personal services
contract(s) with the Corporation; (v) is not affiliated with a tax-exempt entity
that receives significant contributions from the Corporation; and (vi) is not a
familial relative of any person described by Clauses (i) through (v). This
By-law shall not be amended or repealed except by a majority of the voting power
of the shareholders present in person or by proxy and entitled to vote at any
meeting at which a quorum is present.
(b) Audit Committee. The Audit Committee and the Board shall be the bodies
to whom the independent auditors of the Corporation shall be ultimately
accountable and shall have ultimate authority and responsibility to select,
evaluate and, where appropriate, replace the independent auditors (or to
nominate the independent auditors to be proposed for shareholder approval). The
Audit Committee shall be responsible for assessing the objectivity and
independence of said auditors; confirming the scope of audits to be performed by
said auditors; reviewing audit results, internal accounting and control
procedures and policies, fees paid to said auditors, and expense accounts of
senior executives; reviewing and recommending approval of the audited financial
statements of the Corporation and the annual reports to shareholders; and
otherwise complying with the responsibilities and obligations of the Securities
and Exchange Commission and the New York Stock Exchange applicable from time to
time to audit committees. The Audit Committee shall consist entirely of
"independent directors" as provided for in Section 2.12 of these By-Laws and
shall be in compliance with the requirements of the Securities and Exchange
Commission and the New York Stock Exchange applicable from time to time to audit
committee members.
(c) Corporate Responsibility Committee. The Corporate Responsibility
Committee shall review and define social responsibilities and shall review and
consider major claims and litigation and legal, regulatory, intellectual
property and related governmental policy matters affecting the Corporation and
its subsidiaries. The Corporate Responsibility Committee shall also review and
approve management policies and programs relating to compliance with legal and
regulatory requirements and business ethics.
(d) Nominating and Governance Committee. The Nominating and Governance
Committee shall consider and make recommendations as to the composition,
structure, organization and future requirements of the Board and Committees
thereof and as to other corporate governance issues relating to the Corporation;
administer the Board evaluation process; propose nominees for election to
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the Board and Committees thereof; consider shareholder nominees for election to
the Board; and consider matters concerning the qualifications, compensation and
retirement of Directors. The Nominating and Governance Committee shall consist
entirely of "independent directors" as provided for in Section 2.12 of these
By-Laws.
2.9 Other Committees. By resolution passed by a majority of the entire
Board, the Board may also appoint from among its members such other Committees,
Standing or otherwise, as it may from time to time deem desirable and may
delegate to such Committees such powers of the Board as it may consider
appropriate, consistent with applicable law, the Articles of Incorporation and
these By-laws.
2.10 Limitations on Committees. (a) Notwithstanding any other provision
of these By-laws, and except as otherwise expressly required by applicable law,
no Standing Committee created by Section 2.8, nor any other committee hereafter
established, may:
(1) authorize dividends or other distributions, except a committee may
authorize or approve a reacquisition of shares if done according to a
formula or method prescribed by the Board of Directors;
(2) approve or propose to shareholders action that is required to be
approved by shareholders;
(3) fill vacancies on the Board of Directors or on any of its
committees;
(4) except as permitted under Section 2.10(a)(7) below, amend the
Corporation's Articles of Incorporation under IC 23-1-38-2;
(5) adopt, amend, repeal or waive provisions of these By-laws;
(6) approve a plan of merger not requiring shareholder approval; or
(7) authorize or approve the issuance or sale or a contract for sale
of shares, or determine the designation and relative rights, preferences,
and limitations of a class or series of shares, except the Board of
Directors may authorize a committee (or an executive officer of the
Corporation designated by the Board of Directors) to take action described
in this Section 2.10(a)(7) within limits prescribed by the Board of
Directors.
(b) Except to the extent inconsistent with the resolutions creating a
Standing Committee, Sections 2.2 to 2.7 and Section 10 of these By-laws, which
govern meetings, action without meetings, notice and waiver of notice, quorum
and voting requirements and telephone participation in meetings of the Board of
Directors, apply to each committee and its members as well.
2.11 Compensation of Directors. Unless otherwise restricted by the
Articles of Incorporation or these By-laws, Directors shall receive for their
services on the Board or any Committee thereof such compensation and benefits,
including the granting of options, together with expenses, if any, as the Board
may from time to time determine. The Directors may be paid a fixed sum for
attendance at each meeting of the Board or Committee thereof and/or a stated
annual sum as a Director, together with expenses, if any, of attendance at each
meeting of the Board or Committee thereof. Nothing herein contained shall be
construed to preclude any Director from serving the Corporation in any other
capacity and receiving compensation therefor.
2.12 Independent Directors. (a) Independence of Nominees for Election as
Directors at the Annual Meeting. The persons nominated by the Board for
election as Directors at any annual meeting of the shareholders of the
Corporation shall include a sufficient number of persons who have been, on the
date of their nomination, determined by the Board to be eligible to be
classified as independent directors such that if all such nominees are elected,
the majority of all Directors holding office would be independent directors.
(b) Directors Elected to Fill Vacancies on the Board. If the Board elects
Directors between annual meetings of shareholders to fill vacancies or newly
created Directorships, the majority of all Directors holding office immediately
after such elections shall be independent directors.
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(c) Definition of Independent Director. For purposes of this Section 2.12,
"independent director" shall mean a Director who: (i) has not been employed by
the Corporation in an executive capacity within the past five years; (ii) is
not, and is not affiliated with a company or a firm that is, an adviser or
consultant to the Corporation; (iii) is not affiliated with a significant
customer or supplier of the Corporation; (iv) has no personal services
contract(s) with the Corporation; (v) is not affiliated with a tax-exempt entity
that receives significant contributions from the Corporation; (vi) is not a
familial relative of any person described by Clauses (i) through (v); and (vii)
is free of any other relationship which would interfere with the exercise of
independent judgment by such Director.
3. OFFICERS.
3.1 Officers, Titles, Elections, Terms. (a) The Board may from time to
time elect a Chairman, a Vice Chairman, a President, one or more Executive Vice
Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a
Chief Financial Officer, a Controller, a Treasurer, a Secretary, a General
Counsel, one or more Assistant Controllers, one or more Assistant Treasurers,
one or more Assistant Secretaries, and one or more Associate or Assistant
General Counsels, to serve at the pleasure of the Board or otherwise as shall be
specified by the Board at the time of such election and until their successors
are elected and qualified or until their earlier death, retirement, resignation
or removal.
(b) The Board may elect or appoint at any time such other officers or
agents with such duties as it may deem necessary or desirable. Such other
officers or agents shall serve at the pleasure of the Board or otherwise as
shall be specified by the Board at the time of such election or appointment and,
in the case of such other officers, until their successors are elected and
qualified or until their earlier death, retirement, resignation or removal. Each
such officer or agent shall have such authority and shall perform such duties as
may be provided herein or as the Board may prescribe. The Board may from time to
time authorize any officer or agent to appoint and remove any other such officer
or agent and to prescribe such person's authority and duties.
(c) No person may be elected or appointed an officer who is not a citizen
of the United States of America if such election or appointment is prohibited by
applicable law or regulation.
(d) Any vacancy in any office may be filled for the unexpired portion of
the term by the Board. Each officer elected or appointed during the year shall
hold office until the next annual meeting of the Board at which officers are
regularly elected or appointed and until his or her successor is elected or
appointed and qualified or until his or her earlier death, retirement,
resignation or removal.
(e) Any officer or agent elected or appointed by the Board may be removed
at any time by the affirmative vote of a majority of the entire Board.
(f) Any officer may resign from office at any time. Such resignation shall
be made in writing and given to the President or the Secretary. Any such
resignation shall take effect at the time specified therein, or, if no time is
specified, at the time of its receipt by the Corporation. The acceptance of a
resignation shall not be necessary to make it effective, unless expressly so
provided in the resignation.
3.2 General Powers of Officers. Except as may be otherwise provided by
applicable law or in Article 6 or Article 7 of these By-laws, the Chairman, any
Vice Chairman, the President, any Executive Vice President, any Senior Vice
President, any Vice President, the Chief Financial Officer, the General Counsel,
the Controller, the Treasurer and the Secretary, or any of them, may (i) execute
and deliver in the name of the Corporation, in the name of any Division of the
Corporation or in both names any agreement, contract, instrument, power of
attorney or other document pertaining to the business or affairs of the
Corporation or any Division of the Corporation, including without limitation
agreements or contracts with any government or governmental department, agency
or instrumentality, and (ii) delegate to any employee or agent the power to
execute and deliver any such agreement, contract, instrument, power of attorney
or other document.
3.3 Powers and Duties of the Chairman. The Chairman shall be the Chief
Executive of the Corporation and shall report directly to the Board. Except in
such instances as the Board may confer powers in particular transactions upon
any other officer, and subject to the control and direction of the
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Board, the Chairman shall manage and direct the business and affairs of the
Corporation and shall communicate to the Board and any Committee thereof
reports, proposals and recommendations for their respective consideration or
action. He or she may do and perform all acts on behalf of the Corporation and
shall preside at meetings of the Board and the shareholders.
3.4 Powers and Duties of a Vice Chairman. A Vice Chairman shall have such
powers and perform such duties as the Board or the Chairman may from time to
time prescribe or as may be prescribed in these By-laws.
3.5 Powers and Duties of the President. The President shall have such
powers and perform such duties as the Board or the Chairman may from time to
time prescribe or as may be prescribed in these By-laws.
3.6 Powers and Duties of Executive Vice Presidents, Senior Vice Presidents
and Vice Presidents. Executive Vice Presidents, Senior Vice Presidents and Vice
Presidents shall have such powers and perform such duties as the Board or the
Chairman may from time to time prescribe or as may be prescribed in these
By-laws.
3.7 Powers and Duties of the Chief Financial Officer. The Chief Financial
Officer shall have such powers and perform such duties as the Board, the
Chairman or any Vice Chairman may from time to time prescribe or as may be
prescribed in these By-laws. The Chief Financial Officer shall cause to be
prepared and maintained (i) a stock ledger containing the names and addresses of
all shareholders and the number of shares of each class and series held by each
and (ii) the list of shareholders for each meeting of the shareholders as
required by Section 1.11 of these By-laws. The Chief Financial Officer shall be
responsible for the custody of all stock books and of all unissued stock
certificates.
3.8 Powers and Duties of the Controller and Assistant Controllers. (a)
The Controller shall be responsible for the maintenance of adequate accounting
records of all assets, liabilities, capital and transactions of the Corporation.
The Controller shall prepare and render such balance sheets, income statements,
budgets and other financial statements and reports as the Board or the Chairman
may require, and shall perform such other duties as may be prescribed or
assigned pursuant to these By-laws and all other acts incident to the position
of Controller.
(b) Each Assistant Controller shall perform such duties as from time to
time may be assigned by the Controller or by the Board. In the event of the
absence, incapacity or inability to act of the Controller, then any Assistant
Controller may perform any of the duties and may exercise any of the powers of
the Controller.
3.9 Powers and Duties of the Treasurer and Assistant Treasurers. (a) The
Treasurer shall have the care and custody of all the funds and securities of the
Corporation except as may be otherwise ordered by the Board, and shall cause
such funds (i) to be invested or reinvested from time to time for the benefit of
the Corporation as may be designated by the Board, the Chairman, any Vice
Chairman, the President, the Chief Financial Officer or the Treasurer or (ii) to
be deposited to the credit of the Corporation in such banks or depositories as
may be designated by the Board, the Chairman, any Vice Chairman, the President,
the Chief Financial Officer or the Treasurer, and shall cause such securities to
be placed in safekeeping in such manner as may be designated by the Board, the
Chairman, any Vice Chairman, the President, the Chief Financial Officer or the
Treasurer.
(b) The Treasurer, any Assistant Treasurer or such other person or persons
as may be designated for such purpose by the Board, the Chairman, any Vice
Chairman, the President, the Chief Financial Officer or the Treasurer may
endorse in the name and on behalf of the Corporation all instruments for the
payment of money, bills of lading, warehouse receipts, insurance policies and
other commercial documents requiring such endorsement.
(c) The Treasurer, any Assistant Treasurer or such other person or persons
as may be designated for such purpose by the Board, the Chairman, any Vice
Chairman, the President, the Chief Financial Officer or the Treasurer (i) may
sign all receipts and vouchers for payments made to the Corporation, (ii) shall
render a statement of the cash account of the Corporation to the Board as often
as it shall require the same; and (iii) shall enter regularly in books to be
kept for that purpose
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full and accurate account of all moneys received and paid on account of the
Corporation and of all securities received and delivered by the Corporation.
(d) The Treasurer shall perform such other duties as may be prescribed or
assigned pursuant to these By-laws and all other acts incident to the position
of Treasurer. Each Assistant Treasurer shall perform such duties as may from
time to time be assigned by the Treasurer or by the Board. In the event of the
absence, incapacity or inability to act of the Treasurer, then any Assistant
Treasurer may perform any of the duties and may exercise any of the powers of
the Treasurer.
3.10 Powers and Duties of the Secretary and Assistant Secretaries. (a)
The Secretary shall keep the minutes of all proceedings of the shareholders, the
Board and the Committees of the Board. The Secretary shall attend to the giving
and serving of all notices of the Corporation, in accordance with the provisions
of these By-laws and as required by applicable law. The Secretary shall be the
custodian of the seal of the Corporation. The Secretary shall affix or cause to
be affixed the seal of the Corporation to such contracts, instruments and other
documents requiring the seal of the Corporation, and when so affixed may attest
the same and shall perform such other duties as may be prescribed or assigned
pursuant to these By-laws and all other acts incident to the position of
Secretary.
(b) Each Assistant Secretary shall perform such duties as may from time to
time be assigned by the Secretary or by the Board. In the event of the absence,
incapacity or inability to act of the Secretary, then any Assistant Secretary
may perform any of the duties and may exercise any of the powers of the
Secretary.
4. INDEMNIFICATION.
4.1(a) Right to Indemnification. The Corporation, to the fullest extent
permitted by applicable law as then in effect, shall indemnify any person who is
or was a Director or officer of the Corporation and who is or was involved in
any manner (including, without limitation, as a party or a witness) or is
threatened to be made so involved in any threatened, pending or completed
investigation, claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative (including, without limitation, any action, suit
or proceeding by or in the right of the Corporation to procure a judgment in its
favor) (a "Proceeding") by reason of the fact that such person is or was a
Director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee, fiduciary or
agent of another corporation, partnership, joint venture, trust or other
enterprise (including, without limitation, any employee benefit plan) (a
"Covered Entity"), against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such Proceeding; provided, however, that the foregoing
shall not apply to a Director or officer of the Corporation with respect to a
Proceeding that was commenced by such Director or officer prior to a Change in
Control (as defined in Section 4.4(e)(i) of this Article 4). Any Director or
officer of the Corporation entitled to indemnification as provided in this
Section 4.1(a) is hereinafter called an "Indemnitee". Any right of an Indemnitee
to indemnification shall be a contract right and shall include the right to
receive, prior to the conclusion of any Proceeding, payment of any expenses
incurred by the Indemnitee in connection with such Proceeding, consistent with
the provisions of applicable law as then in effect and the other provisions of
this Article 4.
(b) Effect of Amendments. Neither the amendment or repeal of, nor the
adoption of a provision inconsistent with, any provision of this Article 4
(including, without limitation, this Section 4.1(b)) shall adversely affect the
rights of any Director or officer under this Article 4 (i) with respect to any
Proceeding commenced or threatened prior to such amendment, repeal or adoption
of an inconsistent provision or (ii) after the occurrence of a Change in
Control, with respect to any Proceeding arising out of any action or omission
occurring prior to such amendment, repeal or adoption of an inconsistent
provision, in either case without the written consent of such Director or
officer.
4.2 Insurance, Contracts and Funding. The Corporation may purchase and
maintain insurance to protect itself and any indemnified person against any
expenses, judgments, fines and amounts paid in settlement as specified in
Section 4.1(a) or Section 4.5 of this Article 4 or incurred by any indemnified
person in connection with any Proceeding referred to in such Sections, to the
fullest
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extent permitted by applicable law as then in effect. The Corporation may enter
into contracts with any Director, officer, employee or agent of the Corporation
or any director, officer, employee, fiduciary or agent of any Covered Entity in
furtherance of the provisions of this Article 4 and may create a trust fund or
use other means (including, without limitation, a letter of credit) to ensure
the payment of such amounts as may be necessary to effect indemnification as
provided in this Article 4.
4.3 Indemnification; Not Exclusive Right. The right of indemnification
provided in this Article 4 shall not be exclusive of any other rights to which
any indemnified person may otherwise be entitled, and the provisions of this
Article 4 shall inure to the benefit of the heirs and legal representatives of
any indemnified person under this Article 4 and shall be applicable to
Proceedings commenced or continuing after the adoption of this Article 4,
whether arising from acts or omissions occurring before or after such adoption.
4.4 Advancement of Expenses; Procedures; Presumptions and Effect of
Certain Proceedings; Remedies. In furtherance, but not in limitation, of the
foregoing provisions, the following procedures, presumptions and remedies shall
apply with respect to the advancement of expenses and the right to
indemnification under this Article 4:
(a) Advancement of Expenses. All reasonable expenses incurred by or on
behalf of the Indemnitee in connection with any Proceeding shall be advanced to
the Indemnitee by the Corporation within 20 days after the receipt by the
Corporation of a statement or statements from the Indemnitee requesting such
advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Any such statement or statements shall
reasonably evidence the expenses incurred by the Indemnitee and shall include
any written affirmation or undertaking required by applicable law in effect at
the time of such advance.
(b) Procedures for Determination of Entitlement to Indemnification. (i) To
obtain indemnification under this Article 4, an Indemnitee shall submit to the
Secretary of the Corporation a written request, including such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification (the "Supporting Documentation"). The determination of the
Indemnitee's entitlement to indemnification shall be made not later than 60 days
after receipt by the Corporation of the written request for indemnification
together with the Supporting Documentation. The Secretary of the Corporation
shall, promptly upon receipt of such a request for indemnification, advise the
Board in writing that the Indemnitee has requested indemnification.
(ii) The Indemnitee's entitlement to indemnification under this Article 4
shall be determined in one of the following ways: (A) by a majority vote of the
Disinterested Directors (as hereinafter defined), if they constitute a quorum of
the Board; (B) by a written opinion of Independent Counsel as hereinafter
defined) if (x) a Change in Control (as hereinafter defined) shall have occurred
and the Indemnitee so requests or (y) a quorum of the Board consisting of
Disinterested Directors is not obtainable or, even if obtainable, a majority of
such Disinterested Directors so directs; (C) by the shareholders of the
Corporation (but only if a majority of the Disinterested Directors, if they
constitute a quorum of the Board, presents the issue of entitlement to
indemnification to the shareholders for their determination); or (D) as provided
in Section 4.4(c) of this Article 4.
(iii) In the event the determination of entitlement to indemnification is
to be made by Independent Counsel pursuant to Section 4.4(b)(ii), a majority of
the Disinterested Directors shall select the Independent Counsel, but only an
Independent Counsel to which the Indemnitee does not reasonably object;
provided, however, that if a Change in Control shall have occurred, the
Indemnitee shall select such Independent Counsel, but only an Independent
Counsel to which a majority of the Disinterested Directors does not reasonably
object.
(c) Presumptions and Effect of Certain Proceedings. Except as otherwise
expressly provided in this Article 4, if a Change in Control shall have
occurred, the Indemnitee shall be presumed to be entitled to indemnification
under this Article 4 (with respect to actions or failures to act occurring prior
to such Change in Control) upon submission of a request for indemnification
together with the Supporting Documentation in accordance with Section 4.4(b) of
this Article 4, and thereafter the Corporation shall have the burden of proof to
overcome that presumption in reaching a contrary
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determination. In any event, if the person or persons empowered under Section
4.4(b) of this Article 4 to determine entitlement to indemnification shall not
have been appointed or shall not have made a determination within 60 days after
receipt by the Corporation of the request therefor together with the Supporting
Documentation, the Indemnitee shall be deemed to be, and shall be, entitled to
indemnification unless (A) the Indemnitee misrepresented or failed to disclose a
material fact in making the request for indemnification or in the Supporting
Documentation or (B) such indemnification is prohibited by law. The termination
of any Proceeding described in Section 4.1 of this Article 4, or of any claim,
issue or matter therein, by judgment, order, settlement or conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, adversely
affect the right of the Indemnitee to indemnification or create a presumption
that the Indemnitee did not act in good faith and in a manner which the
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Corporation or, with respect to any criminal Proceeding, that the Indemnitee
had reasonable cause to believe that his or her conduct was unlawful.
(d) Remedies of Indemnitee. (i) In the event that a determination is made
pursuant to Section 4.4(b) of this Article 4 that the Indemnitee is not entitled
to indemnification under this Article 4, (A) the Indemnitee shall be entitled to
seek an adjudication of his or her entitlement to such indemnification either,
at the Indemnitee's sole option, in (x) an appropriate court of the state of
Indiana or any other court of competent jurisdiction or (y) an arbitration to be
conducted by a single arbitrator pursuant to the rules of the American
Arbitration Association; (B) any such judicial proceeding or arbitration shall
be de novo and the Indemnitee shall not be prejudiced by reason of such adverse
determination; and (C) if a Change in Control shall have occurred, in any such
judicial proceeding or arbitration the Corporation shall have the burden of
proving that the Indemnitee is not entitled to indemnification under this
Article 4 (with respect to actions or failures to act occurring prior to such
Change in Control).
(ii) If a determination shall have been made or deemed to have been made,
pursuant to Section 4.4(b) or (c) of this Article 4, that the Indemnitee is
entitled to indemnification, the Corporation shall be obligated to pay the
amounts constituting such indemnification within five days after such
determination has been made or deemed to have been made and shall be
conclusively bound by such determination unless (A) the Indemnitee
misrepresented or failed to disclose a material fact in making the request for
indemnification or in the Supporting Documentation or (B) such indemnification
is prohibited by law. In the event that (x) advancement of expenses is not
timely made pursuant to Section 4.4(a) of this Article 4 or (y) payment of
indemnification is not made within five days after a determination of
entitlement to indemnification has been made or deemed to have been made
pursuant to Section 4.4(b) or (c) of this Article 4, the Indemnitee shall be
entitled to seek judicial enforcement of the Corporation's obligation to pay to
the Indemnitee such advancement of expenses or indemnification. Notwithstanding
the foregoing, the Corporation may bring an action, in an appropriate court in
the state of Indiana or any other court of competent jurisdiction, contesting
the right of the Indemnitee to receive indemnification hereunder due to the
occurrence of an event described in Subclause (A) or (B) of this Clause (ii) (a
"Disqualifying Event"); provided, however, that in any such action the
Corporation shall have the burden of proving the occurrence of such
Disqualifying Event.
(iii) The Corporation shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section 4.4(d) that the
procedures and presumptions of this Article 4 are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Corporation is bound by all the provisions of this Article 4.
(iv) In the event that the Indemnitee, pursuant to this Section 4.4(d),
seeks a judicial adjudication of or an award in arbitration to enforce his or
her rights under, or to recover damages for breach of, this Article 4, the
Indemnitee shall be entitled to recover from the Corporation, and shall be
indemnified by the Corporation against, any expenses actually and reasonably
incurred by the Indemnitee if the Indemnitee prevails in such judicial
adjudication or arbitration. If it shall be determined in such judicial
adjudication or arbitration that the Indemnitee is entitled to receive part but
not all of the indemnification or advancement of expenses sought, the expenses
incurred by the Indemnitee in connection with such judicial adjudication or
arbitration shall be prorated accordingly.
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(e) Definitions. For purposes of this Article 4:
(i) "Change in Control" means a change in control of the Corporation of a
nature that would be required to be reported in response to Item 6(e) (or any
successor provision) of Schedule 14A of Regulation 14A (or any amendment or
successor provision thereto) promulgated under the Securities Exchange Act of
1934 (the "Act"), whether or not the Corporation is then subject to such
reporting requirement; provided that, without limitation, such a change in
control shall be deemed to have occurred if (A) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of
securities of the Corporation representing 20% or more of the voting power of
all outstanding shares of stock of the Corporation entitled to vote generally in
an election of Directors without the prior approval of at least two-thirds of
the members of the Board in office immediately prior to such acquisition; (B)
the Corporation is a party to any merger or consolidation in which the
Corporation is not the continuing or surviving corporation or pursuant to which
shares of the Corporation's common stock would be converted into cash,
securities or other property, other than a merger of the Corporation in which
the holders of the Corporation's common stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, (C) there is a sale, lease, exchange
or other transfer (in one transaction or a series of related transactions) of
all, or substantially all, the assets of the Corporation, or liquidation or
dissolution of the Corporation; (D) the Corporation is a party to a merger,
consolidation, sale of assets or other reorganization, or a proxy contest, as a
consequence of which members of the Board in office immediately prior to such
transaction or event constitute less than a majority of the Board thereafter; or
(E) during any period of two consecutive years, individuals who at the beginning
of such period constituted the Board (including for this purpose any new
Director whose election or nomination for election by the shareholders was
approved by a vote of at least two-thirds of the Directors then still in office
who were Directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Board.
(ii) "Disinterested Director" means a Director who is not or was not a
party to the proceeding in respect of which indemnification is sought by the
Indemnitee.
(iii) "Independent Counsel" means a law firm or a member of a law firm that
neither presently is, nor in the past five years has been, retained to
represent: (a) the Corporation or the Indemnitee in any matter material to
either such party or (b) any other party to the Proceeding giving rise to a
claim for indemnification under this Article 4. Notwithstanding the foregoing,
the term "Independent Counsel" shall not include any person who, under
applicable standards of professional conduct, would have a conflict of interest
in representing either the Corporation or the Indemnitee in an action to
determine the Indemnitee's rights under this Article 4.
4.5 Indemnification of Employees and Agents. Notwithstanding any other
provision of this Article 4, the Corporation, to the fullest extent permitted by
applicable law as then in effect, may indemnify any person other than a Director
or officer of the Corporation who is or was an employee or agent of the
Corporation and who is or was involved in any manner (including, without
limitation, as a party or a witness) or is threatened to be made so involved in
any threatened, pending or completed Proceeding by reasons of the fact that such
person is or was an employee or agent of the Corporation or, at the request of
the Corporation, a director, officer, employee, fiduciary or agent of a Covered
Entity against all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such Proceeding. The Corporation may also advance expenses
incurred by such employee, fiduciary or agent in connection with any such
Proceeding, consistent with the provisions of applicable law as then in effect.
4.6 Severability. If any of this Article 4 shall be held to be invalid,
illegal or unenforceable for any reason whatsoever: (i) the validity, legality
and enforceability of the remaining provisions of this Article 4 (including,
without limitation, all portions of any Section of this Article 4 containing any
such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or unenforceable) shall not in any way be affected
or impaired thereby; and (ii) to the fullest extent possible, the provisions of
this Article 4 (including, without limitation, all portions of any Section of
this Article 4 containing any such provision held to be invalid, illegal or
unenforceable, that are not
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themselves invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
5. CAPITAL STOCK.
5.1 Stock Certificates. (a) Every holder of stock in the Corporation
shall be entitled to have a certificate, which shall state on its face the name
of the Corporation and that it is organized under the laws of the State of
Indiana, the name of the person to whom the certificate was issued, and the
number and class of shares and the designation of the series, if any, the
certificate represents, and shall state conspicuously on its front or back that
the Corporation will furnish the shareholder, upon his written request and
without charge, a summary of the designations, relative rights, preferences, and
limitations applicable to each class and the variations in rights, preferences,
and limitations determined for each series (and the authority of the Board of
Directors to determine variations for future series), which certificate shall
otherwise be in such form as the Board shall prescribe and as provided in
Section 5.1(d). Each such certificate shall be signed by, or in the name of, the
Corporation by the Chairman or any Vice Chairman or the President or any Vice
President, and by the Treasurer or any Assistant Treasurer or the Secretary or
any Assistant Secretary.
(b) If such certificate is countersigned by a transfer agent other than the
Corporation or its employee, or by a registrar other than the Corporation or its
employee, the signatures of the officers of the Corporation may be facsimiles,
and, if permitted by applicable law, any other signature on the certificate may
be a facsimile.
(c) In case any officer who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer at the date of issue.
(d) Certificates of stock shall be issued in such form not inconsistent
with the Articles of Incorporation. They shall be numbered and registered in the
order in which they are issued. No certificate shall be issued until fully paid.
(e) All certificates surrendered to the Corporation shall be cancelled
(other than treasury shares) with the date of cancellation and shall be retained
by or under the control of the Chief Financial Officer, together with the powers
of attorney to transfer and the assignments of the shares represented by such
certificates, for such period of time as such officer shall designate.
5.2 Record Ownership. A record of the name of the person, firm or
corporation and address of such holder of each certificate, the number of shares
of each class and series represented thereby and the date of issue thereof shall
be made on the Corporation's books. The Corporation shall be entitled to treat
the holder of record of any share of stock as the holder in fact thereof, and
accordingly shall not be bound to recognize any equitable or other claim to or
interest in any share on the part of any person, whether or not it shall have
express or other notice thereof, except as required by applicable law.
5.3 Transfer of Record Ownership. Transfers of stock shall be made on the
books of the Corporation only by direction of the person named in the
certificate or such person's attorney, lawfully constituted in writing, and only
upon the surrender of the certificate therefor and a written assignment of the
shares evidenced thereby. Whenever any transfer of stock shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer if, when the certificates are presented to the Corporation for
transfer, both the transferor and transferee request the Corporation to do so.
5.4 Lost, Stolen or Destroyed Certificates. Certificates representing
shares of the stock of the Corporation shall be issued in place of any
certificate alleged to have been lost, stolen or destroyed in such manner and on
such terms and conditions as the Board from time to time may authorize in
accordance with applicable law.
5.5 Transfer Agent; Registrar; Rules Respecting Certificates. The
Corporation shall maintain one or more transfer offices or agencies where stock
of the Corporation shall be transferable. The Corporation shall also maintain
one or more registry offices where such stock shall be registered. The Board may
make such rules and regulations as it may deem expedient concerning the issue,
transfer and registration of stock certificates in accordance with applicable
law.
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5.6 Fixing Record Date for Determination of Shareholders of Record. (a)
The Board may fix, in advance, a date as the record date for the purpose of
determining the shareholders entitled to notice of, or to vote at, any meeting
of the shareholders or any adjournment thereof, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board, and which record date shall not be more than sixty days nor less than
ten days before the date of a meeting of the shareholders. If no record date is
fixed by the Board, the record date for determining the shareholders entitled to
notice of or to vote at a shareholders' meeting shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of shareholders of record entitled to
notice of or to vote at a meeting of shareholders shall apply to any adjournment
of the meeting; provided, however, that the Board may fix a new record date for
the adjourned meeting and shall fix a new record date if such adjourned meeting
is more than 120 days after the date of the original meeting.
(b) The Board may fix, in advance, a date as the record date for the
purpose of determining the shareholders entitled to receive payment of any
dividend or other distribution or the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or in order to make a determination of the shareholders for the purpose of any
other lawful action, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board, and which record date
shall not be more than sixty calendar days prior to such action. If no record
date is fixed by the Board, the record date for determining the shareholders for
any such purpose shall be at the close of business on the day on which the Board
adopts the resolution relating thereto.
6. SECURITIES HELD BY THE CORPORATION.
6.1 Voting. Unless the Board shall otherwise order, the Chairman, any
Vice Chairman, the President, any Executive Vice President, any Senior Vice
President, any Vice President, the Chief Financial Officer, the Controller, the
Treasurer or the Secretary shall have full power and authority, on behalf of the
Corporation, (i) to attend, act and vote at any meeting of the shareholders of
any corporation in which the Corporation may hold stock and at such meeting to
exercise any or all rights and powers incident to the ownership of such stock,
and to execute on behalf of the Corporation a proxy or proxies empowering
another or others to act as aforesaid, and (ii) to delegate to any employee or
agent such power and authority.
6.2 General Authorization to Transfer Securities Held by the
Corporation. (a) Any of the following officers, to wit: the Chairman, any Vice
Chairman, the President, any Executive Vice President, any Senior Vice
President, any Vice President, the Chief Financial Officer, the Controller, the
Treasurer, any Assistant Controller, any Assistant Treasurer, and each of them,
hereby is authorized and empowered (i) to transfer, convert, endorse, sell,
assign, set over and deliver any and all shares of stock, bonds, debentures,
notes, subscription warrants, stock purchase warrants, evidences of
indebtedness, or other securities now or hereafter standing in the name of or
owned by the Corporation and to make, execute and deliver any and all written
instruments of assignment and transfer necessary or proper to effectuate the
authority hereby conferred, and (ii) to delegate to any employee or agent such
power and authority.
(b) Whenever there shall be annexed to any instrument of assignment and
transfer executed pursuant to and in accordance with the foregoing Section
6.2(a), a certificate of the Secretary or any Assistant Secretary in office at
the date of such certificate setting forth the provisions hereof, stating that
they are in full force and effect, setting forth the names of persons who are
then officers of the corporation, and certifying as to the employees or agents,
if any, to whom any such power and authority have been delegated, all persons to
whom such instrument and annexed certificate shall thereafter come shall be
entitled, without further inquiry or investigation and regardless of the date of
such certificate, to assume and to act in reliance upon the assumption that (i)
the shares of stock or other securities named in such instrument were
theretofore duly and properly transferred, endorsed, sold, assigned, set over
and delivered by the Corporation, and (ii) with respect to such securities, the
authority of these provisions of these By-laws and of such officers, employees
and agents is still in full force and effect.
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7. DEPOSITARIES AND SIGNATORIES.
7.1 Depositaries. The Chairman, any Vice Chairman, the President, the
Chief Financial Officer, and the Treasurer are each authorized to designate
depositaries for the funds of the Corporation deposited in its name or that of a
Division of the Corporation, or both, and the signatories with respect thereto
in each case, and from time to time, to change such depositaries and
signatories, with the same force and effect as if each such depositary and the
signatories with respect thereto and changes therein had been specifically
designated or authorized by the Board; and each depositary designated by the
Board or by the Chairman, any Vice Chairman, the President, the Chief Financial
Officer, or the Treasurer shall be entitled to rely upon the certificate of the
Secretary or any Assistant Secretary of the Corporation or of a Division of the
Corporation setting forth the fact of such designation and of the appointment of
the officers of the Corporation or of the Division or of both or of other
persons who are to be signatories with respect to the withdrawal of funds
deposited with such depositary, or from time to time the fact of any change in
any depositary or in the signatories with respect thereto.
7.2 Signatories. Unless otherwise designated by the Board or by the
Chairman, any Vice Chairman, the President, the Chief Financial Officer or the
Treasurer, each of whom is authorized to execute any of such items individually,
all notes, drafts, checks, acceptances, orders for the payment of money and all
other negotiable instruments obligating the Corporation for the payment of
money, including any form of guaranty by the Corporation with respect to any
such item entered into by any direct or indirect subsidiary of the Corporation,
shall be (a) signed by any Assistant Treasurer and (b) countersigned by the
Controller or any Assistant Controller, or (c) either signed or countersigned by
any Executive Vice President, any Senior Vice President or any Vice President in
lieu of either the officers designated in Clause (a) or the officers designated
in Clause (b) of this Section 7.2.
8. SEAL.
The seal of the Corporation shall be in such form and shall have such
content as the Board shall from time to time determine.
9. FISCAL YEAR.
The fiscal year of the Corporation shall end on December 31 in each year,
or on such other date as the Board shall determine.
10. WAIVER OF OR DISPENSING WITH NOTICE.
(a) Whenever any notice of the time, place or purpose of any meeting of the
shareholders is required to be given by applicable law, the Articles of
Incorporation or these By-laws, a written waiver of notice, signed by a
shareholder entitled to notice of a shareholders' meeting, whether by telegraph,
cable or other form of recorded communication, whether signed before or after
the time set for a given meeting, shall be deemed equivalent to notice of such
meeting. The waiver must be included in the minutes or filed with the corporate
records. Attendance of a shareholder in person or by proxy at a shareholders'
meeting shall constitute a waiver of notice to such shareholder of such meeting,
except when (i) the shareholder attends the meeting for the express purpose of
objecting at the beginning of the meeting to the transaction of any business
because the meeting was not lawfully called or convened, or (ii) the shareholder
objects to consideration of a particular matter at the meeting at the time such
matter is presented because it is not within the purpose or purposes described
in the meeting notice.
(b) Whenever any notice of the time or place of any meeting of the Board or
Committee of the Board is required to be given by applicable law, the Articles
of Incorporation or these By-laws, a written waiver of notice signed by a
Director, whether by telegraph, cable or other form of recorded communication,
whether signed before or after the time set for a given meeting, shall be deemed
equivalent to notice of such meeting. Unless the Director is deemed to have
waived notice by attending the meeting, the waiver must be in writing, signed by
the Director entitled to the notice and filed with the minutes or corporate
records. Attendance of a Director at a meeting shall constitute a waiver of
notice to such Director of such meeting, unless the Director at the beginning of
the meeting (or promptly upon the Director's arrival) objects to holding the
meeting or transacting business at the meeting and does not thereafter vote for
or assent to action taken at the meeting.
16
<PAGE>
(c) No notice need be given to any person with whom communication is made
unlawful by any law of the United States or any rule, regulation, proclamation
or executive order issued under any such law.
11. POLITICAL NONPARTISANSHIP OF THE CORPORATION.
The Corporation shall not make, directly or indirectly, any contributions
or expenditures in connection with the election of any candidate for federal,
state or local political office, or any committee campaigning for such a
candidate, except to the extent necessary to permit in the United States the
expenditure of corporate assets for the payment of expenses for establishing,
registering and administering any political action committee and of soliciting
contributions thereto, all as may be authorized by federal or state laws.
12. AMENDMENT OF BY-LAWS.
Except as otherwise provided in Section 2.8(a) of these By-laws, these
By-laws, or any of them, may from time to time be supplemented, amended or
repealed, or new By-laws may be adopted, by the Board at any regular or special
meeting of the Board, if such supplement, amendment, repeal or adoption is
approved by a majority of the entire Board. These By-laws, or any of them, may
from time to time be supplemented, amended or repealed, or new By-laws may be
adopted, by the shareholders at any regular or special meeting of the
shareholders at which a quorum is present, if such supplement, amendment, repeal
or adoption is approved by the affirmative vote of the holders of at least a
majority of the voting power of all outstanding shares of stock of the
Corporation entitled to vote generally in an election of directors.
13. OFFICES AND AGENT.
(a) Registered Office and Agent. The registered office of the Corporation
in the State of Indiana shall be One North Capitol Avenue, Suite 1180,
Indianapolis, Indiana 46204. The name of the registered agent is The Corporation
Trust Company. Such registered agent has a business office identical with such
registered office.
(b) Other Offices. The Corporation may also have offices at other places,
either within or outside the State of Indiana, as the Board of Directors may
from time to time determine or as the business of the Corporation may require.
17
<PAGE>
CERTIFICATION
I hereby certify that the foregoing is a true and complete copy of the
By-laws of ITT Industries, Inc., an Indiana corporation, as in effect on the
date hereof.
WITNESS my hand and the seal of the Corporation.
Dated: March 27, 2003.
/s/ Kathleen S. Stolar
--------------------------------------
Secretary
ADOPTED
12/3/02
18
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>4
<FILENAME>y82463exv12.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,
-----------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) from continuing
operations............................ $379.9 $216.7 $264.5 $232.9 $ (97.6)
Add (deduct):
Adjustment for distributions in excess
of (less than) undistributed equity
earnings and losses(a)............. (7.0) (2.5) (3.5) (3.1) 1.1
Income taxes (benefits)............... 128.9 116.7 155.4 136.8 (62.4)
------ ------ ------ ------ -------
501.8 330.9 416.4 366.6 (158.9)
------ ------ ------ ------ -------
Fixed Charges:
Interest and other financial
charges............................ 36.9 68.8 93.1 84.8 125.8
Interest factor attributable to
rentals(b)......................... 20.0 16.7 18.5 17.3 15.1
------ ------ ------ ------ -------
57.8 85.5 111.6 102.1 140.9
------ ------ ------ ------ -------
Earnings, as adjusted, from continuing
operations............................ $559.6 $416.4 $528.0 $468.7 $ (18.0)
====== ====== ====== ====== =======
Fixed Charges:
Fixed charges above................... $ 57.8 $ 85.5 $111.6 $102.1 $ 140.9
Interest capitalized.................. -- -- -- -- --
------ ------ ------ ------ -------
Total fixed charges................ 57.8 85.5 111.6 102.1 140.9
Dividends on preferred stock
(pre-income tax basis)................ -- -- -- -- --
------ ------ ------ ------ -------
Total fixed charges and preferred
dividend requirements............ $ 57.8 $ 85.5 $111.6 $102.1 $ 140.9
====== ====== ====== ====== =======
Ratios:
Earnings, as adjusted, from continuing
operations to total fixed
charges(c)......................... 9.68 4.87 4.73 4.59 --
====== ====== ====== ====== =======
Earnings, as adjusted, from continuing
operations to total fixed charges
and preferred dividend
requirements(c).................... 9.68 4.87 4.73 4.59 --
====== ====== ====== ====== =======
</Table>
- ---------------
Notes:
a) The adjustment for distributions in excess of (less than) undistributed
equity earnings and losses represents the adjustment to income for companies
in which 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-14
<SEQUENCE>5
<FILENAME>y82463exv14.txt
<DESCRIPTION>CODE OF CORPORATE CONDUCT
<TEXT>
<PAGE>
ITT INDUSTRIES
CODE OF CORPORATE CONDUCT
DOING THE RIGHT THING --ALWAYS
LETTER FROM THE CHAIRMAN
Dear Fellow Employees:
We have prepared this Code of Corporate Conduct to help you understand ITT
Industries' standards of ethical business practice. This Code applies not only
to all employees, officers and directors, but also to all consultants, agents
and other representatives retained by ITT Industries.
The principles set forth in this Code describe how we should behave. ITT
Industries will conduct its worldwide operations consistent with the highest
business, legal and ethical considerations. Compliance with these principles is
vital to maintain ITT Industries' global reputation as a responsible corporate
citizen, and to achieve our goal of becoming the best and most respected
diversified manufacturing company in the world. Personal responsibility is at
the core of our principles and culture. We expect everyone associated with ITT
Industries not only to know right from wrong, but also to always choose right
over wrong. In every business decision we make, we must follow the ethics and
compliance principles set forth in this booklet and in the ITT Industries
Corporate Policy Manual. It is also our responsibility to report anything we
observe or know about that might violate these principles.
No Code could ever anticipate every ethical decision we may face in
business. So whenever you are in doubt about any matter that may have ethical
implications, you should seek guidance within ITT Industries, your Company or
individual business unit. This Code identifies the channels and procedures that
we have established to help answer your questions.
Violation of this Code is a serious matter and could subject you or ITT
Industries to civil liability or even criminal prosecution. It is important that
you read this Code carefully and ask questions about anything you do not
understand. Each of us must understand and accept our personal responsibility in
preserving and enhancing ITT Industries' exceptional reputation for integrity. I
know you and your colleagues will take pride in always doing the right thing.
BASIC PRINCIPLES
At ITT Industries, we are committed to always doing the right thing. That is why
we have an ethics and compliance program and why we publish this Code. The Code
is specifically designed to be part of an effective program to prevent and
detect violations of law as set forth in the Organizational Sentencing
Guidelines of the U.S. Sentencing Commission. Before you review specific
principles, you should have a general sense of ITT Industries' basic principles
reflected in this Code. These principles are:
1) We will always be truthful.
<PAGE>
2) We will strictly adhere to the letter and spirit of all laws.
3) We will provide high-quality products and services.
4) We will be a good corporate citizen. We will obey the laws and conform
to locally accepted standards of good corporate citizenship in each
country in which we do business.
5) We will promote and sustain a work environment that fosters mutual
respect, openness and individual integrity.
6) We will be fair in all aspects of our business.
When faced with a business decision that seems to have ethical overtones,
here are several questions you should ask yourself to determine if your actions
are proper:
1) Am I adhering to the spirit, as well as the letter, of any law or ITT
Industries policy that may be involved?
2) Would I want my actions reported on the front page of a newspaper?
3) What would my family, friends or neighbors think of my actions?
4) Will there be any direct or indirect negative consequences for ITT
Industries?
5) Are my actions consistent with the overall values set forth in this
Code and the ITT Industries Corporate Policy Manual?
This Code is not just for our employees. All consultants, sales agents and
representatives must be informed about the ITT Industries Code of Corporate
Conduct. In some cases, U.S. or other countries' laws may impose on our business
associates, including consultants, sales agents and representatives, an
obligation to obey and to help us obey certain laws. Also, where the actions of
our consultants, agents or representatives may be attributable to us, we must
insist that they conduct themselves in accordance with this Code in carrying out
those actions, and help us comply with applicable laws.
If you remain uncertain about what to do, stop and ask for help. Refer to
the relevant section of this Code. Speak with your supervisor or, if you prefer,
communicate with any of the other points of contact indicated in this Code.
IF YOU HAVE ANY DOUBT, ASK FOR HELP.
ACCURACY OF RECORDS
We rely on our employees to maintain accurate books and records to efficiently
manage our business. As in all other aspects of our business, we expect our
employees to adhere to the highest standards of honesty. At ITT Industries, we
do not engage in inaccurate, false or misleading record keeping. If you are ever
tempted or asked to make a representation - either in a document or in oral
communication - that is other than fully accurate, do not do it. This applies to
each and every detail of our business. It applies even in circumstances where
one might believe that the consequences of the inaccuracy would be harmless.
ITT Industries' funds or assets will be utilized solely for a lawful and
proper purpose and no transfer or expenditure of such funds or assets will be
undertaken unless the stated purpose is, in fact, the actual purpose, and the
transfer or expenditure is authorized in writing and within ITT Industries
policy. No undisclosed or unrecorded fund or asset of ITT Industries shall be
established for any purpose.
No false or artificial entries shall be made in the books and records of
ITT Industries or any of its subsidiaries or companies for any reason, and no
employee shall engage in any arrangement that results in such a prohibited act.
It is also ITT Industries' policy that no employee shall take or approve
actions that result in incurring, or paying, the cost of anything from corporate
funds if such an expenditure, when properly
<PAGE>
and accurately reported, is not authorized or not reimbursable to the employee
under ITT Industries' rules.
Questions regarding this policy should be addressed to your Company's
Controller.
ANTITRUST
ITT Industries energetically competes both in the United States and in the
global marketplace. However, we will only do business according to the letter
and spirit of all laws that govern and promote free and fair competition. That
means we will strictly comply with the antitrust laws of the U.S. and, where
applicable, the antitrust or related laws of any other country.
A violation of the antitrust laws is a serious offense. In the U.S., IT IS
NOT UNCOMMON FOR INDIVIDUALS TO BE CRIMINALLY PROSECUTED.
The antitrust laws are complicated and voluminous, and cannot be covered
here in their entirety. The ITT Industries Corporate Policy Manual identifies
certain activities prohibited by U.S. antitrust laws and by the corresponding
laws of many other countries. Prohibited activities include, for example,
agreements with competitors to fix prices, boycotts of customers or third
parties, or other agreements to restrain or restrict competition. Also, we may
not fix the price at which a customer resells products or services, or enter
into an unlawful tying arrangement with a customer.
If you have any questions regarding compliance with the antitrust laws,
contact your Company Legal Department immediately. The pamphlet "Guidelines for
Compliance with the U.S. Antitrust Laws" supplements these basic rules and is
available to assist you in understanding and adhering to the law.
BUSINESS COURTESIES
A business courtesy is a gift (whether in money or in kind) provided to a
business associate. In certain situations, the exchange of limited, non-cash
business courtesies may be appropriate. We do not seek, however, to improperly
influence the decisions of our customers or suppliers by offering business
courtesies, just as we require that the decisions of employees at ITT Industries
not be affected by having received a business courtesy. THERE ARE VERY STRINGENT
RULES THAT APPLY TO OUR GOVERNMENT CUSTOMERS, WITH WHOM, IN MANY CASES, ANY
BUSINESS COURTESY IS ABSOLUTELY PROHIBITED.
DEFINITION OF SUPPLIER OR VENDOR
A supplier or vendor is any business that furnishes, or is in a position to
furnish, materials, equipment, supplies or services of any kind to ITT
Industries or any of its Companies or Units. Services include, but are not
limited to, banking, insurance, advertising, transportation, construction,
auditing, engineering, consulting, testing and legal counsel.
GOVERNMENT BUSINESS
- - The U.S. government has a number of laws and regulations regarding
offering business courtesies to government officials, or offering or
receiving courtesies from subcontractors on a government contract. State
and local governments, as well as foreign governments, may have similar
rules. These rules are complex and frequently change. Sometimes there are
differences between applicable foreign and U.S. laws. Your Company Legal
Department can provide guidance in this area.
- - Do not offer anything of value - including gifts (even token gifts or
Company-identified items), food or beverages (limited on-site food and
beverages, such as coffee and donuts, are permissible), restaurant meals,
special favors, payments, gratuities, transportation, lodging or services
- to any U.S. federal, state or local employee, or to any subcontractor
on a government
<PAGE>
contract, without the prior approval of your Legal Department. (Some
government agencies permit gifts under $20 to cover small courtesies such
as meals and beverages. Please check with your Company Legal Department
so that you are sure of the rules.) You may not accept any such item from
any subcontractor on a government contract without the prior approval of
your Company Legal Department.
For purposes of this rule, members of Congress and their staffs are
considered U.S. federal government employees. Prior approval for giving
anything of value to a member of Congress or staff member must be
provided by your Company Legal Department.
- - You must immediately report any offer of a fee or kickback to the Company
Legal Department. Asking for or accepting a fee or kickback may be a
criminal act. (Make sure you also read the specific rules under the
Government Procurement section of this Code.)
NON-GOVERNMENT BUSINESS
- - Do not accept a gift related to Company business of more than token
value. Even if the gift is less than token value, you should only accept
it if it is consistent with common business practices. It is our policy
to discourage receipt of business gifts of even token value. Any business
gift offered that may exceed token value must be reported to your
supervisor immediately.
- - Any business gift given must not exceed $200 in value unless prior
approval is received as provided by ITT Industries Finance Policy 30-10.
Sales or marketing representatives may make business gifts of their
regular ITT Industries products or promotional items valued under $200
for the purpose of generating business goodwill. Moreover, when
practical, any gift given by you as a business courtesy should include
the ITT Industries name or other similar identification.
- - Regarding meals and entertainment, you may offer or receive infrequent,
reasonable and appropriate meals or simple entertainment (which shall not
involve travel or overnight lodging) provided that business is discussed
and that the activity has a clear business purpose. Any activity that
might be considered lavish or extravagant is not permitted. The guideline
for reasonable and appropriate shall be normal industry practice in your
locality consistent with local legal requirements. While the gift value
limitations described above do not strictly apply in the case of meals
and entertainment, those limitations are an indication of the
reasonableness of the meals or entertainment.
- - You should also not accept any money or cash equivalents, or allow any
member of your immediate family to accept anything from any person with
whom ITT Industries has a business relationship.
- - Any offer to you of a gift or other business courtesy that exceeds $50 in
value, or that seems inconsistent with common business practices, should
be immediately reported to your supervisor. Employees must also
immediately report any offers of cash, a fee or kickback to the Company
Legal Department.
Common sense and good judgment must be exercised when accepting
business-related meals or anything of token value to avoid any perception
of impropriety or conflict of interest.
COMPUTER SOFTWARE AND EMAIL
COMPUTER SOFTWARE
Copyrights protect most computer programs in countries in which we operate.
Our policy is to respect such copyrights and to strictly adhere to all relevant
laws and regulations regarding the use
<PAGE>
and copying of computer software. Therefore, do not make copies of any part of a
third-party computer program unless the copy is an authorized back-up copy or
the computer software license specifically permits the copy to be made. If you
are uncertain about this, you may consult with your Company's Information
Technology Department. If you are engaged in writing computer programs, do not
copy or refer to any lines of code written by a third party without the advice
of the Company Legal Department or the written consent of the third party.
E-MAIL AND INTERNET
E-mail systems are not entirely secure and may be susceptible to
interception. Unlike a spoken conversation, e-mail creates a permanent record.
Any e-mail you send may be printed by the recipient and forwarded by the
recipient to others, and is probably retained on company computers for a
substantial period of time. Therefore, ITT Industries' employees should exercise
the same care, caution and etiquette in sending an e-mail message as they would
in normal written business communications.
Make sure your ITT Industries e-mail is professional and appropriate to the
circumstances. Specifically, ITT Industries will not tolerate abusive, obscene,
offensive or profane e-mail. In addition, because the e-mail system is an ITT
Industries resource, ITT Industries may, in certain circumstances, have a need
to examine and, therefore, reserves the right to read all e-mail communications.
Anyone who has been provided a connection to the Internet is provided such
connection primarily for business use. Do not download any data that is not in
the public domain or that is unprofessional, inflammatory or inappropriate for
business use. Employees should not abuse access to the Internet for personal
purposes. Corporate computer systems are increasingly capable of reviewing all
Internet activity. ITT Industries may conduct such a review, and evidence of
abuse of ITT Industries-provided Internet facilities may result in termination
of the Internet connection and disciplinary action.
CONFIDENTIAL INFORMATION
Confidential ITT Industries information and trade secrets are important
corporate assets that merit the same protection as our physical assets. All
employees, agents, consultants and representatives must be careful not to
disclose such information to unauthorized persons, either within or outside ITT
Industries, and must exercise care to protect the confidentiality of such
information received from another party.
Confidential information refers to information that is not already in the
public domain, that a company would normally expect to be non-public and that
might affect the company's competitive position. It includes information
sometimes referred to as trade secrets.
Some examples of confidential information are:
- - Technical information about current or planned products and/or processes.
- - Procurement plans, vendor lists or purchase prices.
- - Cost, pricing, marketing or service strategies.
- - Non-public earnings reports and other financial reports.
- - Information related to divestitures, mergers and acquisitions.
SPECIFIC GUIDELINES
1) Employees, consultants, agents and representatives must be careful about
where they discuss ITT Industries matters. It is inappropriate to discuss
confidential matters in the presence or
<PAGE>
within hearing range of unauthorized persons. Use care, since even family
and friends may inadvertently convey such confidential information to
others.
2) In instances where it is appropriate for business reasons to disclose ITT
Industries confidential information to third parties, the Company Legal
Department must be contacted before the disclosure for preparation of an
appropriate agreement that includes the necessary safeguards.
3) No employee, consultant, agent or representative shall disclose or use
any confidential information gained during ITT Industries employment or
any other ITT Industries relationship for personal profit or to the
advantage of the employee or any other person.
4) Obtaining confidential information from a third party without adequate
legal safeguards is improper and may expose ITT Industries to legal
risks. Accordingly, no employee may accept such information without the
advice of the Company Legal Department and until an agreement in writing
has been reached with the offeror. After such information is obtained,
its confidentiality must be protected as provided in the agreement.
5) No prospective employee shall be hired in order to obtain the person's
specific knowledge of a former employer's confidential information, nor
shall any new employee be placed in a position that would inevitably
require the individual to disclose or use a former employer's
confidential information. If you are thinking of offering a job to an
executive of a direct competitor, the approval of the Human Resources
Department, Legal Department and the President of the ITT Industries
Company is required before any active negotiations are undertaken.
Concerns with respect to confidential information may arise in the
securities area as well. Please make sure to review the Securities section in
this Code as well as the ITT Industries Corporate Policy Manual regarding
confidential corporate information.
CONFLICTS OF INTEREST
A conflict of interest occurs when personal interests interfere with your
ability to exercise your judgment objectively, or to do your job at ITT
Industries in a way that is certain to be in the best interests of ITT
Industries. Employees, consultants, agents and representatives must avoid actual
or potential conflicts of interest. If an employee considers undertaking any
activity that may create a conflict of interest, the employee must seek approval
of the activity in advance from his or her supervisor or from the Corporate,
Company or Unit Director of Human Resources.
EXAMPLES OF POTENTIAL CONFLICTS INVOLVING EMPLOYEES
1) Contracting with a supplier managed by a close friend or family member.
2) Working independently as a consultant to a supplier or customer.
3) Having a private business on your own time if you perform work that is
similar to work that you perform at ITT Industries or that ITT Industries
might be interested in performing.
Consult the ITT Industries Corporate Policy Manual for specific information
on dealing with conflicts of interest.
CONSULTANTS
All consultants shall be approved in accordance with the ITT Industries
Corporate Policy Manual, and consulting agreements shall be controlled to
protect ITT Industries' confidential information.
<PAGE>
No consultant may be retained to perform work for ITT Industries, its Companies
or Units without a formal written agreement prepared by the Company Legal
Department. These agreements must contain a detailed statement of work, a clear
description of all amounts to be paid, and all specific provisions required by
the Legal Department covering conflicts of interest, standards of conduct,
government business ethics, confidentiality obligations, ownership of
intellectual property and special provisions in foreign agency agreements. The
use of consultants or lobbyists in the government relations area shall only be
undertaken in consultation with the ITT Industries Corporate Relations
Department.
Unless specifically approved by the Company Legal Department, all payment
for services or products must be paid in the name of the consultant, agent or
representative named as a party on the agreement, paid in the location where the
services are performed and paid in local currency. All consultants must be
informed about and agree to follow the ITT Industries Code of Corporate Conduct
with respect to activities that affect ITT Industries' domestic and foreign
businesses, employees or capital and securities markets.
DRUG & ALCOHOL POLICY AND EMPLOYEE ASSISTANCE
To remain competitive in today's business environment, it is essential that we
make the best decisions. We expect that all our employees' judgments will be
clear and unimpaired by drugs or alcohol.
SPECIFIC GUIDELINES
1) Employees shall not distribute, possess or use illegal or unauthorized
drugs or alcohol on ITT Industries property, on ITT Industries time, in
connection with ITT Industries business or in a manner that may affect
performance of ITT Industries responsibilities.
2) Employees whose behavior, judgment or performance is impaired by drugs or
alcohol will be prohibited from entering the ITT Industries premises or
engaging in ITT Industries business. Violations of this policy are
serious and will result in appropriate discipline, including possible
termination.
3) Employee Assistance Programs (EAPs) are available to help employees with
behavioral or medical problems that adversely affect job performance.
Contact your Human Resources Department for additional information.
EMPLOYMENT AND MEDICAL RECORDS
Employment records of ITT Industries employees can only be disclosed to ITT
Industries employees having a substantial and legitimate need to know the
information in an employee's file or in response to appropriate legal process.
ITT Industries employees with access to these files must take reasonable steps
to keep them confidential in accordance with the ITT Industries Corporate Policy
Manual.
ITT Industries employees' medical records are confidential and private.
These medical records are kept separate from all other ITT Industries employee
records and will not be released to any person unless required by law or based
upon a written release from the ITT Industries employee concerned.
EMPLOYMENT OF CLOSELY RELATED PERSONS
ITT Industries wants to make sure that our workplace is fair and untainted by
any possible perception of favoritism. We encourage the tradition of family
service but have certain rules about employing closely related persons. Our
policy is not to employ persons closely related to an ITT
<PAGE>
Industries Officer without required approvals.
Other closely related persons cannot be employed in jobs where one ITT
Industries employee has effective control over any aspect of the related ITT
Industries employee's job. Related ITT Industries employees may not share
responsibility for control or audit of significant ITT Industries assets.
ENVIRONMENT, SAFETY AND HEALTH
ITT Industries is committed to maintaining a leadership role in protecting human
health and the environment. We will promote and protect the health and safety of
our employees, the environment and the communities around the world in which we
operate. Therefore, we will strictly adhere to all applicable laws and
regulations relating to environmental protection and workplace health and
safety. These principles are set forth in the ITT Industries Environment, Safety
and Health Mission Statement.
Many environmental, safety and health laws and regulations are complex. If
your work involves these fields, it is your responsibility to familiarize
yourself with the requirements of relevant laws and regulations, including
record keeping.
We have a publication entitled "ITT Industries Environment, Safety & Health
(ESH) Manual" to assist you. If you have any questions, contact your Company's
ESH Director or Company Legal Department.
Incidents that involve 1) a fatality, 2) environmental contamination or 3)
a health or safety circumstance that is likely to subject ITT Industries or its
employees to adverse consequences, must be immediately reported to your
Company's senior management, to the ITT Industries, Inc. Vice President, ESH and
to the ITT Industries, Inc. Corporate Relations Department. Such reports must be
made as soon as possible and, in all cases, not later than 24 hours after the
occurrence. Of course, federal, state or local laws and regulations regarding
reporting requirements must be complied with within the appropriate time frames.
Company senior management receiving any such report shall follow the ITT
Industries Corporate Policy Manual in making further reports.
EQUAL OPPORTUNITY
It is ITT Industries' policy to ensure equal employment and advancement
opportunity for all qualified individuals without distinction or discrimination
because of age, color, national origin, race, religion, sex, physical or mental
disability or veteran status.
This policy applies to all employees and applicants for employment and to
all aspects of the employment relationship, including recruitment, hiring,
compensation, benefits, training, transfer, and any other terms and conditions
of employment. Equal employment opportunity principles must be communicated
periodically to all employees and reaffirmed each year. ITT Industries
businesses not subject to U.S. law shall apply the intent and provisions of this
policy consistent with national or local laws in other countries.
Your Company President is responsible for implementing our equal
opportunity policy. Your Company or unit has an EEO coordinator to whom you can
address any concerns regarding any potential violations of this policy. ITT
Industries, Inc. also has an EEO coordinator to whom concerns can be addressed.
FRAUDS AND THEFTS
It is ITT Industries' policy to ensure that incidents of fraud and theft
relating to ITT Industries are promptly investigated, reported and, where
appropriate, prosecuted.
Any suspected incident should be immediately reported to the ITT Industries
Headquarters
<PAGE>
Committee on Frauds and Thefts. The Committee will review the incident and
advise regarding prosecution, if appropriate. No one may sign a criminal
complaint on behalf of ITT Industries without prior written approval of the ITT
Industries Headquarters Committee on Frauds and Thefts. The Committee also has
jurisdiction over related personnel actions and civil litigation. To report an
incident, please contact your Company Director of Human Resources or the Legal
Department. Refer to the ITT Industries Corporate Policy Manual for further
information.
GOVERNMENT INVESTIGATIONS
It is our policy to fully cooperate with any appropriate government
investigation. If you or someone you supervise learns about a possible
government investigation or inquiry, inform your Company Legal Department
immediately.
SPECIFIC GUIDELINES
1) Never destroy any ITT Industries documents in anticipation of a request
for those documents from ITT Industries or Company investigators, any
government agency or a court. Documents include electronic media such as
disks, computer-stored information and e-mail transmissions.
2) Never alter any historical ITT Industries document or record.
3) Never make any untrue or misleading statement to any government
investigator.
4) Never try to influence any other ITT Industries employee or any other
person to provide untruthful information to any ITT Industries or Company
investigator or government investigator, or to provide any incomplete,
false or misleading information.
5) If any government inquiry arises through a written subpoena or a written
request for information (such as a Civil Investigative Demand), you must
submit the subpoena or written request to your Company Legal Department
immediately, before any action is taken or promised.
6) If you are approached outside the workplace by a government investigator,
you have the right, if you wish, to consult with the Company Legal
Department (or, if you prefer, your own private legal counsel) before
speaking with the investigator.
GOVERNMENT PROCUREMENT
In many instances, conduct that is commonplace and legal in the commercial
sector may violate laws and regulations that pertain to U.S. federal government
contracts. Such violations may result in penalties and fines, as well as
debarment or suspension from government contracting, or possible criminal
prosecution of individual employees or ITT Industries.
Although this Code lists many specific guidelines, employees, consultants,
sales agents and marketing representatives must be aware that federal government
contracts are subject to numerous rules and regulations too detailed to be fully
addressed by this Code. Therefore, if your work involves federal government
contracts and you have any questions, you should contact your supervisor or your
Company Legal Department to ensure that you are aware of all relevant laws and
regulations.
SPECIFIC GUIDELINES
1) Employees must strictly adhere to the Anti-Kickback Act of 1986, which
prohibits government contractors and subcontractors from giving or
receiving anything of value in order to receive favorable treatment.
Employees involved with government contracts should never give anything
of value to or receive anything of value from a supplier, customer or
<PAGE>
subcontractor without receiving prior approval from their supervisors.
2) Employees must strictly adhere to all laws and regulations regarding the
protection of classified information, which should only be made available
to individuals who have a need to know and who hold the proper government
security clearance. Violations may result in imprisonment or fines. If
you are aware of a potential violation, you must immediately report it to
the head of security at your facility, as well as to your supervisor.
3) Employees shall not attempt to obtain or use confidential information of
other companies or source selection information of the government. Source
selection information is information that the government uses in
evaluating bids or proposals. If you think that you have received either
confidential information or source selection information, you should
immediately contact your supervisor and your Company Legal Department.
You should not examine the information or copy it.
4) There are detailed rules regarding employment of current or former
government officials. Before initiating employment discussions with any
present or former government official, you must contact your Company
Director of Human Resources or your Legal Department.
5) There are many other requirements with which ITT Industries must comply.
In particular, we must:
a) Bill labor and material costs correctly;
b) Submit cost and pricing data correctly in accordance with the
Truth in Negotiations Act, as well as comply with all other
requirements of this Act;
c) Not submit any fraudulent claims within the meaning of the False
Claims Act;
d) Fully comply with all contract specifications and requirements;
e) Correctly account for research and development costs and report
inventions made under contract; and
f) Maintain appropriate records, such as inspection and testing
records, invoices and time cards.
This list is by no means exhaustive. If you have any questions regarding
any of these special requirements for government contractors, contact your
Company Legal Department immediately.
INTERNATIONAL BUSINESS: GENERAL
ITT Industries is a global company. Many of the countries in which we operate
have significantly different laws than those of the U.S. We must know and comply
with the letter and spirit of the laws of all countries where we do business and
that affect our international operations. We will also be sensitive to the
cultures and customs of the countries where we operate and respect the
communities and environment where we do business.
THE U.S. FOREIGN CORRUPT PRACTICES ACT
Many U.S. laws are applicable to ITT Industries' non-U.S. businesses and to
the conduct of our U.S. businesses outside the U.S. In particular, our employees
should be familiar with the U.S. Foreign Corrupt Practices Act. This Act
prohibits giving anything of value to officials of foreign governments in order
to obtain or retain business. Any proposed incentive to be given to government
personnel to secure an improper advantage is not permitted. Contact your Company
Legal Department before any incentive is offered or if you have questions. (1)
ITT Industries, its employees, agents, consultants and marketing
representatives, in their relations with governmental agencies or customers,
will not directly or indirectly engage in bribery, kickbacks,
<PAGE>
payoffs or other corrupt business practices.
The U.S. Foreign Corrupt Practices Act applies to our consultants,
marketing representatives and agents, as well as our employees. Compliance with
this Act requires our constant vigilance. Specifically, if an employee,
consultant, marketing representative or agent suspects that any payment is being
used for improper purposes, he or she must immediately report the situation to
his or her ITT Industries supervisor and to the Company Legal Department for
investigation.
All sales agents, consultants or marketing representatives must work under
an approved prior written agreement. The ITT Industries Corporate Policy Manual
outlines the requirements for retaining sales agents or marketing
representatives. Refer to that Manual for additional guidance.
FOREIGN MILITARY SALES
We will strictly adhere to all laws and regulations that deal with
government-to-government and commercial foreign military sales. Because the laws
and regulations that govern these transactions are complex, consult with your
Company Legal Department before pursuing such transactions.
BOYCOTTS
Certain countries are engaged in a boycott of Israel. Some countries try to
enforce this boycott in their contracts with U.S. companies. U.S. anti-boycott
regulations are directed at the boycott of Israel and any other secondary
boycott of a country friendly to the U.S. No ITT Industries business shall agree
to a contract, document or oral request containing language that could be
interpreted as an attempt by any country to enforce a boycott. Even providing
information may constitute a violation of U.S. law, which requires that boycott
requests be immediately reported to the government even when a response is not
provided, and calls for the imposition of fines and other penalties on U.S.
parent companies in cases where their non-U.S. subsidiaries violate U.S.
anti-boycott regulations. Therefore, any request for information or receipt of
boycott-related documentation must be immediately reported to your Company Legal
Department. Refer to the ITT Industries Corporate Policy Manual for specific
guidance.
EXPORT CONTROLS
It is ITT Industries' policy to fully comply with all applicable U.S.
export, customs and trade control laws and regulations, licensing requirements,
relevant non-U.S. laws and international sanctions. The ITT Industries policy
regarding customs compliance can be found in ITT Industries Financial Policies
Number 60-06. Each ITT Industries Company is responsible for customs, export and
trade control compliance, and shall establish licensing and compliance programs
to attain this objective. To the extent feasible, each ITT Industries Company is
expected to perform due diligence and know its customer (including the end use
and end user) in any business transaction. Your Company Legal Department is
available to assist units about trade control policy and procedures. Any
investigation or inquiry by a U.S. government organization regarding alleged
trade control violations or irregularities should be immediately reported to the
Company Legal Department prior to taking any action. The ITT Industries
Corporate Policy Manual provides specific guidance in this area.
If you need advice about customs, export licensing and trade controls, ITT
Industries has resources available to answer your questions. Your Company Legal
Department and Controller are available to provide information and assistance to
units, and should be consulted as the need arises.
- ----------
1 In certain instances, the U.S. Foreign Corrupt Practices Act does allow what
are referred to as "facilitating payments." Typically, these are nominal
payments given to relatively low-ranking government personnel to hasten the
inspection of goods or the performance of other basic administrative tasks.
Nonetheless, ITT Industries strongly discourages such payments, and in any case,
the payment must also be consistent with applicable laws of the host country.
Therefore, if you are ever faced with or anticipate a situation that may involve
a facilitating payment, contact your Company Legal Department before you take
any action.
<PAGE>
POLITICAL ACTIVITIES
ITT Industries is firmly committed to following all federal, state and local
laws that govern elections and campaign contributions in the U.S. and abroad.
ITT Industries does not discourage its employees from appropriate involvement in
the political process that reflects individual beliefs and commitments. However,
unless pursuant to a Company-managed grassroots initiative involving issues of
importance to ITT Industries, any political activity must take place on an
employee's own time. The resources and reputation of ITT Industries cannot be
used for any political activities unless specifically permitted by law and
approved by the ITT Industries Office of the General Counsel.
No assets of ITT Industries, its subsidiaries or companies, will be used
directly or indirectly, at home or abroad, for political purposes, including the
support of any candidate or party, even in those countries where it may be
traditional, customary and legal to do so. ITT Industries is not to become
involved in the internal political affairs of host countries. This should not be
construed to prohibit legitimate and authorized expression of ITT Industries'
opinion on issues that may have an economic effect on ITT Industries after
consultation with the Office of the General Counsel.
SPECIFIC GUIDELINES
1) Do not allow your status as an employee to be used in support of a
particular candidate or issue. An employee cannot act as a
representative of ITT Industries or any of its businesses regarding
political issues without specific approval from the ITT Industries
Office of the General Counsel and the ITT Industries Director of
Corporate Relations.
2) Employees must not pressure, either directly or indirectly, other
employees to make political contributions or to participate in support
of a political party, issue or candidate. An employee cannot act as a
representative of ITT Industries or any of its businesses regarding
political issues without specific approval from the ITT Industries
Office of the General Counsel and the ITT Industries Director of
Corporate Relations.
3) Corporate funds or assets cannot be used to support a political party,
an elected official, or the campaign of any candidate for local, state
or federal elected office. Also, you should advise the ITT Industries
Corporate Relations Department and your Company Legal and Public
Relations Departments of any planned visits to an ITT Industries
facility by an elected official, political party member or candidate for
elected office.
4) Non-U.S. companies are not permitted to contribute to U.S. political
candidates, elected officials, parties or campaigns. Non-U.S. citizens
(unless they are "green card" holders) are not permitted to contribute
to U.S. political candidates, elected officials, parties or campaigns.
If you have any questions or need guidance, contact your Company Legal
Department or the ITT Industries Office of the General Counsel.
5) ITT Industries encourages its managers and executives to develop
appropriate working relationships with members of Congress and their
staffs, particularly those who represent localities in which ITT
Industries has facilities. It is essential, however, to inform your
Company Legal Department and the Corporate Relations Department of any
proposed visits that take place either in Washington, D.C. or in the
local district. The Company Legal Department and the Corporate Relations
Department must also be advised of any written submissions or other
significant contacts with federal legislators or their staffs. Other
government relations activities, including communications with offices
of federal government departments, either regional or in Washington,
D.C., as well as contacts with high-ranking state officials (such as
governors), should also be coordinated with your Company Legal
Department and the Corporate Relations Department. (Different rules may
apply outside the U.S. Please consult with your Company Legal Department
for guidance.)
6) The Corporate Relations Department and the Company Legal Department must
be informed of any request to testify on behalf of ITT Industries before
any federal, state, local or other
<PAGE>
regulatory or legislative body.
PUBLIC STATEMENTS
Generally, employees must refrain from making public statements regarding issues
or matters about which they are not authorized spokespersons. If an employee is
contacted by the media about an ITT Industries matter, the employee should refer
the media contact to the ITT Industries Director of Corporate Relations or the
Director of Public Relations for one of the ITT Industries Companies or Units.
SALES AGENTS/MARKETING REPRESENTATIVES
You must contact your Company Legal Department before retaining any sales agents
or marketing representatives. There are extensive rules and ITT Industries
procedures regarding the retention of sales agents or marketing representatives,
particularly those operating outside the U.S.
Where sales agents or marketing representatives are retained, ITT
Industries will retain such representatives only pursuant to a written agreement
that fully describes all services to be performed and all consideration to be
paid. ITT Industries will retain only those representatives who are
independently engaged in carrying out sales or marketing functions in a
commercial manner. Compensation for the services of such representatives shall
be comparable to customary compensation for such services in the locale in which
the sales are made, considering the nature and scope of the contract or
activity.
Unless specifically approved by the Company Legal Department, all payment
for services or products must be paid in the name of the agent or marketing
representative named as a party in the agreement, paid in the location where the
services are performed and paid in local currency. ITT Industries Financial
Policy 30-07 has specific guidelines for relationships with sales agents and
representatives outside the U.S.
Without approval from your Company Legal Department, no sales agent or
marketing representative shall be retained if the sales agent or marketing
representative, or any person employed by the sales agent or marketing
representative or financially interested in the sales agent's or marketing
representative's business, is an employee or official of a customer, a potential
customer of ITT Industries or is a close relative of such an employee or
official.
SECURITIES
Our employees may have the opportunity to learn or gain access to information
about ITT Industries or companies with whom we do business that is unavailable
to the public. Such information may be "insider information" within the meaning
of U.S. federal securities law. Consultants and other persons we hire to perform
services for ITT Industries may also learn or gain access to "inside
information." The U.S. federal securities laws apply to those persons as well if
inside information is used to make investment decisions.
Our employees are prohibited from using any such inside information when
they make personal investment decisions or investment decisions for others
regarding our stock or the stock of companies with whom we do business. In
addition, no employee may inform persons outside ITT Industries of such
information. This includes communications with family and friends. Refer to the
ITT Industries Corporate Policy Manual for specific guidelines. If you have any
questions regarding compliance with these laws and principles, please contact
your Company Legal Department immediately.
<PAGE>
SEXUAL HARASSMENT
ITT Industries will not tolerate sexual harassment, which involves the
solicitation of sexual favors or the initiation of any unwelcome sexual advance
by one employee toward another. It may also involve other sexually related
physical or verbal conduct. The creation of a work environment that is hostile,
intimidating or offensive to an individual or group because of gender may also
constitute sexual harassment.
Men and women throughout ITT Industries should treat one another with
courtesy, dignity and respect, regardless of gender. All employees should
recognize that there has been rapid social change as to appropriate conduct in
the workplace, and workplace behavior should always reflect our principles of
COURTESY, DIGNITY and RESPECT.
ITT Industries managers, supervisors and executives must be alert to the
possible presence of sexual harassment in the workplace. Appropriate steps must
be taken to prevent sexual harassment. Complaints about sexual harassment can be
made to your supervisor, your ITT Industries Unit or Company Human Resources
Department, the ITT Industries or Company Legal Department, anyone else in
management or the Ombudsman. Any complaints must be promptly, fairly and
thoroughly investigated. There will be no retaliation for truthfully reporting
sexual harassment or participating in the Company's investigation of a
complaint.
If sexual harassment occurs, there will be a prompt disciplinary
consequence ranging from a warning to dismissal.
WORKPLACE VIOLENCE
Employees should have a safe place in which to work. Workplace violence,
including threats, threatening behavior, harassment, intimidation, assaults and
similar conduct, will not be tolerated. Any threats or concerns about your
safety or the safety of others should be immediately reported to your manager.
Firearms are not permitted on any ITT Industries facility without prior written
approval from the Company Human Resources and Legal Departments.
QUESTIONS AND ANSWERS
GENERAL
Q: To whom should I direct questions or problems regarding ethical matters?
A: In most cases, you should contact your supervisor. In some instances, we
realize that this may not be possible, would be impractical, or for some reason
might be uncomfortable. Therefore, you can also contact your Company Legal
Department, your Company Director of Human Resources or your Company Controller.
You can also address your concerns to a Company Ombudsman or to the ITT
Industries Director of Corporate Policy Compliance at ITT Industries
Headquarters in White Plains, New York. Telephone numbers for the ITT Industries
Ombudsman and the Director of Corporate Policy Compliance are provided on the
inside back cover of this booklet. If you would like to make your inquiry or
report anonymously, an Ombudsman should be your first point of contact.
Q: What should I do if I am faced with a situation where the correct ethical
decision would mean that ITT Industries loses money? Should I be ethical even if
we are going to lose business?
A: Yes. We want our employees to act ethically in every circumstance - even if
it means that we will lose business. We value ITT Industries' long-term
reputation. Employees should never compromise our long-term well-being and
reputation in order to meet short-term financial targets.
<PAGE>
Q: Will I get in trouble if I report something that I think is wrong but am not
entirely sure about?
A: No. It is your duty to report any possible violation of the Code. If you are
unsure, but have a good faith suspicion that something is wrong, you will not be
subject to any discipline.
Q: My supervisor has asked me to do something that I think violates this Code or
the law. What should I do?
A: Express your concerns to your supervisor, or, if you prefer, to one of the
other contact points identified, such as your Company Legal Department, Human
Resources Department or the Company Ombudsman. Do not go ahead without receiving
an explanation through one of these Company channels.
Q: Does this Code apply to consultants?
A: Yes. Consultants, sales agents and marketing representatives are given a copy
of the Code and agree to abide by applicable sections. In some circumstances,
U.S. laws underlying our Code of Corporate Conduct impose on our business
associates an obligation to obey and to help us obey those laws. Even beyond
that, however, where the actions of our consultants, agents or marketing
representatives may be attributable to us, we must insist that in carrying out
those actions, they conduct themselves in accordance with the Code.
ACCURACY OF BOOKS AND RECORDS
Q: I was on a long business trip. Although I usually keep good track of my
receipts for all reimbursable expenses, this time I lost one. Can I still be
reimbursed?
A: You need to correctly account for all business expenses. In the rare case
where you have lost a receipt and cannot obtain a replacement, you should
contact your supervisor to discuss how the expenditure can be documented.
Q: On a recent business trip, I stayed overnight with an old friend. Can I
include the equivalent cost of a hotel room on my travel voucher, since I took
my friend and his wife out to dinner and paid for it myself?
A: No. All vouchers, time cards and other ITT Industries documents must always
be completed in a correct and accurate manner. It is never proper to knowingly
create a false, misleading or erroneous ITT Industries document or entry on an
expense voucher.
Q: My buddy asked me to punch in his time card because he is going to be a few
minutes late. What should I do?
A: Even though your buddy said he will only be a few minutes late, do not punch
his time card. All records, including time cards, must be accurate.
ANTITRUST
Q: At a trade association meeting, I played golf with a Vice President from a
competing firm. We are old friends from college. While sitting in the cart, we
started talking about how business was going. He indicated that his firm was
looking very closely at raising prices next month. I quickly broke in and said
that I did not think it was appropriate to be discussing that sort of
information. Since we had just finished the last hole, I returned to my hotel
room and left a message for someone in our Company Legal Department to call me.
Now I am thinking that I was too quick to act. After all, everything was very
informal. What do you think? Was I too harsh on my friend?
A: You did the right thing. Even informal discussions among competitors about
price may be potential antitrust violations with possible criminal penalties.
When the Company Legal Department lawyer reaches you, explain e