ITT Industries Third Quarter Results
ITT Industries, Inc. announced third quarter 2004 net income of $109.8 million, even with the period last year, and up 21 percent when excluding the net benefit of special items recorded in the third quarter 2003.
Diluted earnings per share (EPS) for the quarter was $1.16. Third quarter revenue was $1.67 billion, up 21 percent due to increased sales in all business units, the completion of recent acquisitions and the positive impact of foreign currency translation. Segment operating income rose 23 percent to $188 million on higher volume and improved efficiencies in all segments.
"Our strong third quarter is reflective of the momentum we've seen throughout the year, extending our track record of double-digit growth in operating income and revenue," said Steve Loranger, President and Chief Executive Officer of ITT Industries. "This marks the fourth consecutive quarter we've recorded double-digit organic growth in our core business portfolio. Revenue growth continues in the Defense business, with innovative new products and technical services meeting the priorities of our primary customers; we are beginning to see synergy sales effects with the addition of our recently acquired Remote Sensing business. The water and wastewater businesses of our Fluid Technology segment continue to perform well with substantial water treatment contract wins and robust order activity. The Electronic Components business continues to grow revenues, streamline its operations and grow market share through new product introductions, and our Motion & Flow Control businesses are finding success through new product introductions and extending existing products into new markets."
"Across the company, we saw our best order activity of the year, and coupled with our robust performance, we are confident that we will realize full year EPS at the top end of the $4.45- $4.50 range."
Third Quarter Financial Highlights
Third quarter 2004 revenues rose 21 percent to $1.67 billion, fueled by organic sales increases in all four segments, acquisitions and the positive impact of foreign currency translation. Organic revenue, which excludes the impact of foreign exchange and acquisitions, grew 12 percent, marking the fourth consecutive quarter the company has registered double-digit organic revenue growth.
Segment operating income grew 23 percent over the third quarter 2003 to $188 million on higher volume and operational improvements.
The company's 2004 year-to-date cash from operations was $249.6 million, off $19.6 million from the first nine months of 2003, due primarily to an increased investment in working capital as a result of higher revenues. Continuing improvement in working capital and planned fourth quarter sales levels are expected to yield the company's full year 2004 cash targets.
The company completed its acquisition of the Remote Sensing Systems (RSS) business of Kodak, combining it with its existing space imaging businesses to create the Space Systems division, a full-spectrum satellite payload provider with the latest visible and infrared satellite imaging technology to serve the $6 billion remote sensing market.
Third Quarter Segment Highlights
Third quarter 2004 Fluid Technology revenues were $619.2 million, up $55.1 million or 10 percent from the third quarter 2003, driven by higher sales in the Water Technology and Fluid Handling units, recent acquisitions and the positive impact of foreign currency translation. Segment operating income was $77 million, and margins declined 80 basis points, with operational improvements more than offset by the impact of foreign exchange transactions, acquisitions and restructuring expenses.
Order activity strengthened within the water and wastewater businesses of Fluid Technology, with orders in the Advanced Water Treatment group up more than 200 percent. The group has seen success from its market expansion strategy with a significant contract to design, supply and build an industry-leading energy efficient reverse osmosis desalination plant in the Middle East, providing 30 million gallons of drinking water per day. The plant is due to begin operations by early 2006.
The Industrial Products group saw a significant increase in orders for replacement parts. The group is also benefiting from an increase in mining activity. The company was awarded a $3 million mining order for high alloy vertical turbines in South America.
Defense Electronics & Services
Defense Electronics & Services revenues for the third quarter were $630.2 million, up $184.3 million or 41 percent, due to stronger sales in nearly all of the divisions in the Defense segment and the acquisition of RSS. Excluding the impact of the acquisition, revenues rose 30 percent. Operating income rose $23.7 million or 49 percent to $71.8 million, and operating margin grew 60 basis points.
Orders in Defense rose 41 percent, and grew 37 percent excluding the impact of the RSS acquisition. With orders from the Space Systems division and additional contracts won during the quarter, the Defense backlog now stands at a record $3.3 billion.
The company continues its heritage of providing payloads for all of the U.S. weather satellites. In September the company won a $359 million contract to develop, manufacture and test an advanced imager for the next generation of geostationary weather satellites operated and funded by the National Oceanic and Atmospheric Administration (NOAA).
The Space Systems division field tested and introduced Airborne Natural Gas Emission Lidar (ANGEL) that will allow natural gas pipeline monitoring that is 100 times faster and provides 30 times more right- of-way survey coverage than traditional inspection methods. ANGEL technology has applications with pipelines carrying a broad array of hydrocarbons, and is expected to be commercially available in 2005.
Motion & Flow Control
Motion & Flow Control revenues for the third quarter were $242.8 million, up $19.8 million or 9 percent on higher volume in the Motion Control and Leisure Marine businesses and the positive impact of foreign currency translation. Organic revenue growth was 4 percent, due to strong sales in the spa/whirlpool and friction materials businesses. Operating income was up 12 percent to $32 million, and operating margin increased 30 basis points, with operational improvements offset by an increase in raw materials costs and restructuring expenses.
The company's fluid handling business is successfully extending its product lines to new regions and new applications. It has begun bidding on automotive opportunities in China, seeking greater participation in global production platforms. The unit's Quick Connect technology is now found on nearly 200 plumbing-related products with Moen, and it booked its first computer cooling contract in the third quarter.
ITT's friction materials business continues to grow market share through new platform wins, primarily in Europe, winning contracts with original equipment manufacturers such as Audi, Porsche, Volkswagen and BMW.
Electronic Components third quarter revenues rose $34.3 million or 24 percent to $178.1 million. Organic revenue grew 20 percent in the quarter, on strong growth in communication, transportation and military/aerospace.
Orders were up 15 percent, primarily in the transportation, industrial and commercial aerospace markets. Operating income rose $5.7 million to $7.2 million with a corresponding 300 basis point increase in operating margin. Excluding the impact of restructuring, operating income grew $6.6 million to $8.3 million, and operating margin increased 350 basis points.
The company is executing its strategy to streamline operations, increase global sourcing and to target its resources to high technology applications. As part of its plan to reduce its exposure to low volume, high mix product lines, the company expects to discontinue the manufacture of approximately 1,000 part numbers related to the keypad business between mid-2004 and the end of the first quarter 2005.
Electronic Components management is taking steps to focus on higher- margin end markets. In the third quarter, the company initiated a strategic review of its non-core Network Systems & Services (NS&S) business, which provides high-speed cabling and harnesses for building applications.
About ITT Industries
ITT Industries, Inc. supplies advanced technology products and services in key markets including: electronic interconnects and switches; defense communication, opto-electronics, information technology and services; fluid and water management and other specialty products. Headquartered in White Plains, NY, the company generated $5.63 billion in 2003 sales.
In addition to the New York Stock Exchange, ITT Industries stock is traded on the Midwest, Pacific, London, Paris and Frankfurt exchanges.
Certain material presented herein consists of forward-looking statements which involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed in, or implied from, such forward-looking statements. Such factors include general economic conditions, foreign currency exchange rates, competition and other factors all as more thoroughly set forth in Item 1. Business and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements in the ITT Industries, Inc. Form 10-K Annual Report for the fiscal year ended December 31, 2003, and other of its filings with the Securities and Exchange Commission.
NOTE: ITT Industries believes that investors' understanding of the company's operating performance is enhanced by the use of certain non-GAAP financial measures, including adjusted GAAP net income and adjusted GAAP EPS, which Management considers useful in providing insight into operating performance, as it excludes the impact of special items that cannot be expected to recur on a quarterly basis. Management also believes that investors can better analyze the company's revenue growth by utilizing an organic revenue growth measure that excludes the effect of foreign exchange translation and the effect of recent acquisitions. In addition, Management considers the use of free cash flow to be an important indication of the company's ability to make acquisitions, fund pension obligations, buy back outstanding shares and service debt. Free cash flow, adjusted net income, adjusted EPS and organic revenue are not financial measures under GAAP, should not be considered as substitutes for cash from operating activities, EPS, net income or revenue as defined by GAAP, and may not be comparable to similarly titled measures reported by other companies. A reconciliation to the GAAP equivalents of these non-GAAP measures is set forth in the attached unaudited financial information.
Source: ITT Inc.