ITT Corporation (NYSE: ITT) is a global manufacturer and top 10 U.S. defense contractor specializing in electronics and fluids with annual revenues of about $11 billion. As the largest supplier of pumps and systems in the transport and treatment of water, ITT offers its services to local governments in the U.S. and to the governments of developing nations. ITT also manufactures electronics such as night vision goggles and communication systems for the U.S. military.
About 58% of ITT's revenue is generated by its defense and information solutions business segment. As a result, a significant proportion of ITT's revenues come directly from U.S. government contracts. Since the September 11, 2001 terrorist attacks, U.S. defense spending has risen over 35%, reaching $896.2 billion in 2010.
The future of ITT's fluids business depends on the global demand for clean water, especially in developing countries such as China and India. The growth in agriculture, increasingly wealthy populations, and widespread pollution in these developing countries have contributed to the rising demand for clean water. ITT is just one of many competitors working to bring clean water to developing nations.
ITT manufactures defense electronics and systems (through contracts with the U.S. government), manufactures and services fluid pumps and systems (used by municipal communities, oil refineries, and chemical plants), and manufactures specialty components for aerospace, transportation, and industrial markets.
First Quarter 2010 Summary
ITT reported revenue of $2.6 billion, an increase of 3% from the year-ago quarter. ITT's segment operating income was $292 million, an increase of 12%, and its segment operating margin increased to 11.1%. Excluding special items, income from continuing operations totaled $156 million for the quarter. Special items in the first quarter of 2009 included a $54 million tax gain, compared to a $10 million expense in the first quarter of 2010 related to U.S. healthcare reform legislation. ITT announced an 18% increase in dividends to $0.25 per share during the first quarter, compared to a 17% increase from 2008 to 2009 and a 29% increase from 2007 to 2008.
In February, ITT acquired Nova Analytics, a Massachusetts-based manufacturer of lab and field equipment for electrochemical measurements. The acquisition gives ITT one of the world's largest selections of sensors for monitoring wastewater and other fluids and also extends ITT's global leadership in the fluid, industrial, and beverage sectors.
In 2007, ITT spent $2.01 billion in the acquisition of six different companies. The acquisitions of EDO within ITT's Defense Electronics & Services business segment and IMC within its Motion & Flow Control business segment comprised most of the total spending.
The purchase of EDO (EDO) for $1.7 billion in December 2007 is a significant change in the company's product emphasis. EDO specializes in small, light, and intelligent defense equipment such as the Counter Improvised Explosive Device program (C-IED). The U.S. military has increasingly shifted from spending on conventional military units like tanks to these types of programs to combat Improvised Explosive Devices (IED) and other such weapons used in urban warfare.
ITT also acquired IMC, a producer of shock absorbers and controls for aviation, for $390.5 million. The addition of IMC into Motion & Flow Control continues the segment's sales of highly engineered key products.
ITT consists of three business segments: Defense Electronics & Services, Fluid Technology, and Motion & Fluid Control.
Generating $6.3 billion in 2009, Defense Electronics & Services specializes in sensing and surveillance, communications, space, and advanced engineering and integrated services. The defense electronics segment manufactures equipment ranging from tactical attack and defense telecommunication systems to night vision goggles. 98% of 2007 sales were to government entities and 94% of sales were to the U.S. government. The following are the subdivisions of Defense Electronics & Services:
Generating $3.4 billion in revenue in 2009, Fluid Technology specializes in the management, treatment, transport, usage, and purification of water and other fluids. For example, ITT manufactures pumps used by municipal communities to pump sewage and water, by oil refineries to move oil and refined products, and by chemical plants to pump liquid chemicals. The sector also produces mixers and controls that are used to regulate the quality and flow of the fluid. ITT owns the Flygt brand which is recognized to have the largest market share for municipal submersible pumps in terms of total sales. The following are the subdivisions of Fluid Technology:
Generating $1.2 in revenue in 2009, Motion & Flow Control specializes in interconnect, flow control, motion control, energy absorption, and friction. Motion & Flow Control manufactures products which deal with absorbing or transferring energy such as friction pads used in the braking systems of large trucks and shock absorbers and struts used in airplanes. The segment's products also deal with controlling the flow of liquids such as jets and pumps used in hot tubs and valves and actuators used in chemical plants. The following are the subdivisions of Motion & Flow Control in 2009:
ITT's defense segment relies heavily on the U.S. Department of Defense budget related to electronic and network-centric warfare. 94% of Defense Electronics & Services' revenue comes from contracts with the U.S. government, and 43% of the company's total revenue comes from U.S. military contracts. Since the September 11, 2001 terrorist attacks, U.S. defense spending has risen over 35%, reaching $896 billion in 2010.
There remains a high degree of uncertainty in the future of the U.S. defense budget, especially given anticipated U.S. troop withdrawals in Iraq. The military's share of the federal budget has been restricted by recession, demand for spending in infrastructure, health care, education, and the retirement of the baby boom generation. After the Vietnam War, the defense budge was cut by 31%, and at the end of the Cold War the budget was cut by 36%. Though Congress has approved the highest defense budget in history for 2010 ($896.2 billion), the budget in future years is uncertain given the growing demands on the federal budget.
In the U.S., many of the water treatment facilities built after World War II are being replaced, and ITT is the leading supplier of waste water treatment and handling equipment. However, short term shortfalls in municipal spending can delay the replacement of water treatment facilities, and raising taxes or water bills to fund capital improvements is not politically popular. Though federal funding for water projects has been declining since the 1960s, the Council of State Governments projects that population shifts to the semi-arid states of the West and Southeast will increase the overall demand for water. For example, the populations of Florida, California, and Texas are projected to increase by 12 million by 2030.
Globally, the growth of ITT's fluid technology business is driven by urbanization in developing countries such as China and India. Factors that are contributing to increasing demand for water in developing countries include rocketing agriculture and increasingly wealthy populations. Meanwhile, pollution has reduced the amount of available drinking water. A study by the Asian Development Bank reported that 60% of China’s 669 cities suffer water shortages, and nearly half of the country’s 800 million farmers have no access to safe drinking water. Moreover, nearly half of China’s cities lacked wastewater treatment facilities in 2005. While there is a pressing need for water facilities in developing countries, lack of funding to improve the water infrastructure in emerging markets can delay new water projects.
ITT estimates that it spends between $8.0 and $13.0 per year on environmental investigation and remediation. As of December 31, 2009, ITT's estimate for environmental liabilities was $139.7 million. The cleanups are associated with ITT's former automotive segment and poorly discharged industrial waste going as far back as 1930.
ITT is subject to environmental laws and regulations concerning air emissions, water discharges and waste disposal. In the U.S. these 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. Environmental requirements are significant factors affecting ITT's operations.
ITT is ensnared in product liability lawsuits resulting from personal injuries caused by asbestos in its products. These claims allege that some of ITT's products prior to 1985 contained a part manufactured by a third party that contained asbestos. ITT estimates that insurance will cover only 69% of the asbestos costs (defense and settlement costs) for pending claims. Such litigation could have an adverse effect on ITT's financial performance.
In March 2007, ITT failed to comply with International Traffic in Arms Regulations on the sale of night vision goggles and paid $50 million in fees and fines due to the improper handling of sensitive documents. ITT is not legally permitted to release information about its products used by the U.S. military. However, from 1980 to 2005, ITT was involved in a "regular pattern of export violations and misrepresentation" to the U.S. government by exporting classified or sensitive technical data to China, Singapore, and Britain without authorization (in violation of the Arms Export Control Act). ITT transferred this information because laser gear is manufactured more cheaply overseas. ITT's $100 million fine was structured such that $50 million was to be spent by ITT in developing the next-generation night vision system and the remaining $50 million was to be paid in criminal fines, forfeited revenue from a U.S. government contract, and penalty fees to the U.S. State Department.
ITT competes with a number of companies for government contracts and private and industrial consumers. Each of the three segments faces a distinct group of competitors, but the following companies are most closely in competition with ITT.
|ITT Corporation (ITT)||General Electric Company (GE)||Siemens AG (SI)||Pentair (PNR)||Textron (TXT)||Emerson Electric Company (EMR)||Flowserve (FLS)||3M Company (MMM)||United Technologies (UTX)||Honeywell International (HON)|
|2009 Total Revenue (billions)||$11||$155||$107||$2.77||$10.2||$20.6||$4.3||$24.4||$52.8||$31.1|
|2009 Net Income (millions)||$606||$9,820||$4,320||$134||($125)||$1,720||$416||$3,610||$4,060||$2,150|
|Net Profit Margin (2009)||5.6%||7%||4.4%||4.9%||(1.2)%||8.5%||9.7%||14.8%||7.7%||6.9%|