ITT Reports Strong Fourth Quarter and Full Year 2005 Operating Results

Excluding special items, earnings from continuing operations grew 17 percent to $1.43 per share. Fourth quarter 2005 revenue was $1.95 billion, up 6 percent over the fourth quarter last year.

"The fourth quarter capped a very good year, with full year results including 17 percent revenue growth, 20 percent growth in operating earnings (excluding special items), and higher margins and cash flow," said Steve Loranger, Chairman, President and Chief Executive Officer. "The year's per-formance reflects the strength of our portfolio and attractiveness of our core businesses. Our Fluid Technology businesses grew revenues more than 9 percent in the year, and our Defense businesses increased full year sales by 34 percent, with organic revenue growth of 21 percent. Both businesses boosted their operating margins considerably. The ITT Management System is working, and we will continue to focus our resources on growth, margin improvement and sustained predictable perform-ance as we aggressively expand our global presence and lean initiatives."

Full Year 2005 Results

Reported net income for 2005 was $359.5 million and full year GAAP EPS was $3.81, including the impact of special items. Excluding special items, earnings from continuing operations were $493.9 million or $5.24 per share, up 20 percent over 2004. Full year 2005 revenues were $7.4 billion, up 17 percent from the prior year. Organic revenue, which excludes the impact of acquisitions and currency translation, grew 12 percent in 2005. Cash from operations was $745.8 million, which includes a $100 million voluntary pre- funding of the company's U.S. salaried pension plan. Free cash flow (defined as cash from operations before pension pre-funding, minus capital spending) was $666.6 million, up from $441.3 million in 2004, with the increase due to operating improvements, as well as the favorable im-pact of tax and interest rate swap settlements.

2006 Outlook

"We expect to realize greater benefits from ongoing improvement initiatives and we see outstanding business opportunities in the year ahead," Loranger said. "We remain confident in our full year 2006 EPS outlook of $5.78-$5.92, including the estimated ($0.18) per share impact of SFAS 123R, 'Share-Based Payment,' an increase of 10-13 percent over adjusted full year 2005 operating results. Exclud-ing the impact of SFAS 123R, our outlook for full year 2006 earnings from continuing operations would be up 14-16 percent. We expect Q1 2006 EPS of $1.18-$1.22." All figures are calculated prior to the impact of a pending 2-for-1 stock split, scheduled to take place in February.

Primary Business Results

Fluid Technology

• Fourth quarter 2005 Fluid Technology revenue was $758.9 million, up $9.8 million or 1 per-cent from the previous year, exceeding previous guidance; organic revenues grew 4 percent over the period in 2004. Full year revenues were up 9 percent to $2.84 billion. Fourth quarter segment operat-ing income was up 22 percent to $98.0 million; full-year operating income was up 14 percent to $324.5 million.
• Segment operating margin in the quarter increased 220 basis points over the period last year, reflecting improved performance in the company's WEDECO unit, global sourcing, higher volumes and a favorable product mix. The company anticipates continued margin improvement in Fluid Technology through 2006.
• The company's water and wastewater businesses continue to grow organically, with fourth quarter revenue growth particularly strong in the Middle East, Spain, Asia and the U.S. ITT remains very well positioned to grow in nearly every segment of the $50 billion global water equipment market, and the company continues to pursue projects of larger scale and scope.

Defense Electronics & Services

• ITT's Defense Electronics & Services segment reported fourth quarter revenues of $862.3 million, up 16 percent, with full year revenues of $3.22 billion, up 34 percent. Organic revenue growth for Defense for the fourth quarter and full year was 15 percent and 21 percent, respectively. Operating income for the segment was up 34 percent in the quarter to $104.2 million, and up 43 percent for the full year to $363.7 million.
• Higher volume, better yields and contract performance drove Defense operating margin up 170 basis points in the fourth quarter, and 80 basis points in the full year over the comparable periods in 2004.
• Revenue growth was driven by continued strong demand in Tactical Communications, Night Vision and ITT's defense systems and services businesses. Contracts won during the fourth quarter include the 5-year $681 million follow-on communications support contract for the U.S. Army in Asia and Af-rica. Both Night Vision and Tactical Communications continue to execute superbly on higher produc-tion rates. Demand for the company's Defense products and services remains robust.

Motion & Flow Control

• Fourth quarter revenues for ITT's Motion & Flow Control segment were $148.4 million, down 7 percent from the fourth quarter a year earlier. Full year segment revenues rose 6 percent to $670 million. Fourth quarter operating income for the segment was $23.5 million, down $6.2 million from the comparable period in 2004, reflecting both higher raw material prices and production start up costs in the friction materials business, and softness in the marine accessories market in the aftermath of an active hurricane season; the company is seeing early signs of recovery in this sector.
• The company's Aerospace Controls business is benefiting from order growth and strong aftermar-ket demand. Fourth quarter revenues for this business were up 17 percent; full year revenues for this business were up 15 percent.

Electronic Components

• Fourth quarter revenues for the Electronic Components segment were $183.2 million, up 3 percent over the period in 2004. Full year revenues were up 2 percent to $708.9 million. Operating income for the fourth quarter was ($215.2) million, reflecting the impact of the asset impairment charge. Excluding the impact of this charge, operating income for the fourth quarter was $8.9 million.
• Demand for the popular Motorola RAZR phone drove higher sales of the company's mobile hand-set connectors, which together with automotive connectors contributed to fourth quarter organic reve-nue growth of 5 percent in the segment.
• The company has begun the process to divest the switches business within the Electronic Compo-nents segment.